FOCUS Report Goldman Sachs & Co. Llc

X-17A-5 [Paper] - FOCUS Report

Published: 2003-02-04 14:05:33
Submitted: 2003-01-28
Period Ending In: 2002-11-29
scanned.pdf Scanned paper document


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                                  SECURITIES AND EXCHANGE COMMISSION                                    OMB Number:             3235—0123
h                                               Washington, D.C. 20549                                  Expires:
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                                             ANNUAL AUDITED REPORT                                      hours per response......... 12.00
                                                         FORM X—17A—5
  03002099                                                   PART I!I                                                  SEC FILE NUMBER
                                                         FACING PAGE                                                   8—      129
                    Information Required of Brokers and Dealers Pursuant to Section 17 of the
                           Securities Exchange Act of 1934 and Rule 17a—5 Thereunder

REPORT FOR THE PERIOD BEGINNING                                       12/01/01             AND ENDING             11/29/02
                                                                      MM/DDYY                                     MM/DD/YY



NAME OF BROKER—DEALER:
             Goldman, Sachs & Co.                                                                                    OFFICIAL USE ONLY
                                                                                                                            13—5108880
ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (                                                                                   FIRM ID NO.

             85 Broad Street
                                                         (No. and Street)

             New York                                    New York                          |      10004
             (City)                                      (State)                                 (Zip Code)

NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT

             John Chartres                                                           (212) 855—9652
                                                                                     (Area Code —Telephone No.)



                                          B. ACCOUNTANT IDENTIFICATION

INDEPENDENT PUBLIC ACCOUNTANT whose opinion is contained in this Report*

              PricewaterhouseCoopers LLP
                                       (Name — if individual, state last, first, middle name)


             1177 Avenue of the Americas                 New York                    New York                     10036
             (Address)                                   (City)                      (State)                      (Zip Code)


CHECK ONE:

             B]     Certified Public Accountant
             [] Public Accountant                                                                       EH@CESSED
             [:]    Accountant not resident in United States or any of its possessions.                       +
                                                                                                              | FEB 0 6 2003
                                               FOR OFFICIAL USE ONLY                                              THOMSON
                                                                                                                  FINANCIAL
                                                                                                                                      tre 48


*Claims for exemption from the requirement that the annual report be covered by the opinion of an independent public accountant
must be supported by a statement of facts and circumstances relied on as the basis for the exemption. See secti

                                         Persons who to respond to the collection of information contained
                                         in this form are not required to respond unless the form displays
                                         a currently valid OMB control number
SEC 1410 (7—00)


«




                                             OATH OR AFFIRMATION

    January 28, 2003




    State of New York
                    ss:
    County of New York


    We, the undersigned, Managing Directors of Goldman, Sachs & Co., affirm that, to the best of
    our knowledge           and   belief,   the     accompanying          consolidated   financial   statements   and
    supplemental schedules pertaining to the firm of Goldman, Sachs & Co. as of November 29,
    2002, are true and correct. We further affirm that neither the partnership nor any Executive
    Officer (defined for purposes of this oath as members of the Board of Directors, members of the
    Management Committee, executive officers, and Chief Accounting Officer) has any proprietary
    interest in any account classified solely as that of a customer except as follows:

           Payables to customers and counterparties includes $29,422,103 payable
           to Executive Officers. Additionally, the account balances of certain
           affiliates are included in receivables from customers and counterparties or
           payables to customers and counterparties for purposes of financial
           presentation.

    In addition, pursuant to New York Stock Exchange Rule 418, we affirm that the attached
    consolidated financial statements and supplemental schedules as of November 29, 2002, have
    been or will be made available to Executive Officers of the firm.




      ZAy_
    B(afid A. Viniar
                                                    cefi (
                                                  ’V’?}
      a naging   Director




        Q;é%tift‘                       |           7
    Sarah Smith                                   RK /: ;‘J,]
    Managing Director




    Subscribed and sworn before me;                       WW
    This 2§¢**~day of January, 2003
                                                                         SARAH WALRAND
                                                                NOTARY PUBLIC. STATE OF NEW YORK
                                                                         NO. O1WA6023955
                                                                    QUALIFIED IN BRONX COUNTY
                                                                  cOMMISSION EXPIRES MaAY 3, 2003


                                    LETTER OF ATTESTATION




                                                                                      January 28, 2003




1, the undersigned, hereby certify that, to the best of my knowledge and belief, the accompanying
Financial Report for the month/quarter/year (cirele as appropriate) ending November 29, 2002,
submitted pursuant to the requirements of the Chicago Board of Trade, presents fairly and
accurately in all material respects the financial condition of:



                              Goldman, Sachs & Co.                  {(Name of Firm)




l further certify that a copy of the accompanying Financial Report has been made available to: (a)
each member of the Chicago Board of Trade whose membership is registered for the firm; (b) each
individual designated by the firm in accordance with CBOT Regulation 230.03(a); and (c) each
general partner in the case of the partnership.



                    // ; ,//V/ Sz                                     (Signature)} 5@


                           David A. Viniar, Managing Director         (Type Name and Title)




NOTE:          This Letter of Attestation must be signed by the Chief Financial Officer, or the
               person who has these responsibilities. If a partnership, the signatory must also
               be a general partner.


The firm submitting this Form and its attachments and the person whose signature appears above
represent that, to the best of their knowledge, all information contained therein is true, correct and
complete. It is understood that all required items, statements and schedules are integral parts of
this Form and that the submission of any amendment represents that all unamended items,
statements and schedules remain true, correct and complete as previously submitted. It is further
understood that any intentional misstatements or omissions of facts constitute a felony under the
Commodity Exchange Act (See 7 U.S.C. § 13) as well as a violation of Exchange Rules and
Regulations.


GOLDMAN, SACHS & CO. and SUBSIDIARIES

         Consolidated Statement
                    of
           Financial Condition
        As of November 29, 2002


— PricewAlernousE[Corces ®
                                                                             PricewaterhouseCoopers LLP
                                                                             1177 Avenue of the Americas
                                                                             New York NY 10036
                                                                             Telephone (646) 471 4000
                                                                             Facsimile   (813) 286 6000



 Report of Independent Accountants


  To the Partners of
— Goldman, Sachs & Co.:

 In our opinion, the accompanying consolidated statement of financial condition presents fairly, in
 all material respects, the financial position of Goldman, Sachs & Co. and Subsidiaries (the
 "Firm") at November 29, 2002 in conformity with accounting principles generally accepted in
 the United States of America. This financial statement is the responsibility of the Firm‘s
 management; our responsibility is to express an opinion on this financial statement based on our
 audit. We conducted our audit of this statement in accordance with auditing standards generally
 accepted in the United States of America, which require that we plan and perform the audit to
 obtain reasonable assurance about whether this financial statement is free of material
 misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
 and disclosures in the financial statement, assessing the accounting principles used and
 significant estimates made by management, and evaluating the overall financial statement
 presentation. We believe that our audit provides a reasonable basis for our opinion.



        mtecveaf ukcualbgrere —tb
 January 27, 2003


                                   GOLDMAN, SACHS & CO. and SUBSIDIARIES

                            CONSOLIDATED STATEMENT of FINANCIAL CONDITION

                                                   November 29, 2002
                                                      (in thousands)




                                                          Assets


Cash and cash equivalents                                                            $     2,816,419
Cash and securities segregated in compliance with U.S. federal
       and other regulations                                                              16,568,223
Receivables from brokers, dealers and clearing organizations                               3,964,833
Receivables from customers and counterparties                                             10,265,518
Securities borrowed                                                                      105,727,985
Securities purchased under agreements to resell                                           32,394,689

Financial instruments owned, at fair value                                               32,047,940
Financial instruments owned and pledged as collateral, at fair value                      8,480,307
       Total financial instruments owned, at fair value                                  40,528,247

Other assets                                                                               1,716,894
                                                                                     213,952.808_
                                             Liabilities and Partners‘ Capital


Short—term borrowings                                                                $    34,352,002
Payables to brokers, dealers and clearing organizations                                    3,122,873
Payables to customers and counterparties                                                  51,008,246
Securities loaned                                                                         48,018,517
Securities sold under agreements to repurchase                                            48,863,919
Financial instruments sold, but not yet purchased, at fair value                          15,173,432
Other liabilities and accrued expenses                                                     2,483,230
Long—term borrowings                                                                         386,380
                                                                                         203,408,599

Commitments and contingencies

Subordinated borrowings                                                                    6,522,936

Partners‘ capital
       Partners‘ capital                                                                   4,029,610
       Accumulated other comprehensive income                                                 21,663
                                                                                           4,051,273
                                                                                      $ 213,982,808




                                    The accompanying notes are an integral part of
                                         this consolidated financial statement.

                                                          2


                                  GOLDMAN, SACHS & CO. and SUBSIDIARIES

                     NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION




Note 1. Description of Business

Goldman, Sachs & Co. (GS&Co), a limited partnership registered as a U.S. broker—dealer and futures
commission merchant, together with its consolidated subsidiaries (collectively, the firm), is a subsidiary of The
Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation. The firm is a leading global investment
banking, securities and investment management firm that provides a wide range of services worldwide to a
substantial and diversified client base that includes corporations, financial institutions, governments and high—
net—worth individuals.

    The firm‘s activities are divided into three segments:

    e   Investment Banking. This segment comprises Financial Advisory and Underwriting;

    s   Trading. This segment comprises Fixed Income, Currencies and Equities; and

    e   Asset Management and Securities Services.                This segment comprises Asset Management,
        Securities Services and Commissions.

Note 2. Significant Accounting Policies

Basis of Presentation

The consolidated statement of financial condition includes the accounts of GS&Co and all other entities in
which the firm has a controlling financial interest. The usual condition for a controlling financial interest in an
entity is ownership of a majority of the voting interest. Accordingly, the firm consolidates entities in which it has
all, or a majority of, the voting interest. When the firm does not have a controlling financial interest in an entity
but exerts significant influence over the entity‘s operating and financial policies (generally defined as owning a
voting or economic interest of 20% to 50%), the firm accounts for its investment under the equity method of
accounting in accordance with Accounting Principal Board (APB) Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." If the firm does not have a controlling financial interest in, or
exert significant influence over the entity, the firm accounts for its investment at fair value. All material
transactions and balances with and between subsidiaries have been eliminated.

This consolidated financial statement has 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 statement of financial condition
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.

Unless otherwise stated herein, all references to 2002 refer to the firm‘s fiscal year ended or the date, as the
context requires, November 29, 2002.

Repurchase Agreements and            Collateralized   Financing Arrangements. Securities purchased under
agreements to resell and securities sold under agreements to repurchase, principally U.S. government, federal
agency and investment—grade non—U.S. sovereign obligations, represent short—term collateralized financing
transactions and are carried in the consolidated statement of financial condition at their contractual amounts
plus accrued interest. These amounts are presented on a net—by—counterparty basis when the requirements of
Financial Accounting Standards Board (FASB) Interpretation No. 41 are satisfied. The firm takes possession of
securities purchased under agreements to resell, monitors the market value of these securities on a daily basis
and obtains additional collateral as appropriate.


                                  GOLDMAN, SACHS & CO. and SUBSIDIARIES

              NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)




Securities borrowed and loaned are recorded based on the amount of cash collateral advanced or received.
These transactions are generally collateralized by either cash, securities or letters of credit. The firm takes
possession of securities borrowed, monitors the market value of securities loaned and obtains additional
collateral as appropriate.

Financial Instruments. The consolidated statement of financial condition generally reflects purchases and
sales of financial instruments on a trade—date basis.

"Financial instruments owned" and "Financial instruments sold, but not yet purchased" in the consolidated
statement of financial condition are carried at fair value or amounts that approximate fair value. The fair value
of a financial instrument is the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.

Quoted market prices in active markets are the best evidence of fair value and the firm uses them when
available. If quoted prices in active markets are not available, management‘s estimate of fair value is based
on, if available, quoted prices or recent transactions in less active markets, and/or prices of similar instruments.

If prices are not readily available either through quoted market prices in active markets or alternative pricing
sources or if liquidating a position is reasonably expected to affect market prices, fair value is based on
valuation models or management‘s estimate, using the best information available, of amounts that could be
realized under current market conditions, assuming an orderly liquidation over a reasonable period of time.
The firm‘s valuation models consider, among other inputs, contractual and market prices, correlations, time
value, credit, yield curves, volatility factors and/or prepayment rates of the underlying positions.

The inputs used in the firm‘s valuation models are based on quoted market prices in active markets, if available
or, if not, from quoted market prices or recent transactions in less active markets, and prices of similar
instruments. Where such data is not readily available, inputs are derived from other market data taking into
account observable market movements that could reasonably be expected to affect the derived input. Different
valuation models and assumptions could produce materially different estimates of fair value,

in generat, transfers of financial assets are accounted for as sales under 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," when the firm has relinguished control over the
transferred assets. Transfers that are not accounted for as sales are accounted for as repurchase agreements
and collateralized financing arrangements.

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business.

Property, Leasehold Improvements and Equipment

Property, leasehold improvements and equipment, net of accumulated depreciation and amortization, are
included in "Other assets" in the consolidated statement of financial condition. Effective December 1, 2001, the
firm changed to the straight—line method of depreciation for certain property, leasehold improvements and
equipment placed in service after November 2001.


                                     GOLDMAN, SACHS & CO. and SUBSIDIARIES

              NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)




The firm‘s depreciation and amortization is generally computed using the methods set forth below:

                               Property and                                                             Certain Internal Use
                                Equipment                   Leasehold Improvements                        Software Costs

                                                  Term of lease greater       Term of lease less
                                                     than useful life           than useful life

    Placed in service        Accelerated cost     Accelerated cost           Straight—line over the     Straight—line over
    prior to December 1,     recovery             recovery                   term of the lease          useful life of the
    2001                                                                                                asset

    Placed in service on     Straight—line over   Straight—line over         Straight—line over the     Straight—line over
    or after December 1,     useful life of the   useful life of the asset   term of the lease          useful life of the
    2001                     asset                                                                      asset


Goodwill

The cost in excess of the fair value of net assets acquired is recorded as goodwill, and through November
2001, was amortized over a period of 15 years on a straight—line basis. On December 1, 2001, the firm adopted
SFAS No. 142, "Goodwill and Other Intangible Assets" and, consequently, goodwill is no longer amortized but,
instead, tested at least annually for impairment.

Transactions with Related Parties

The firm enters into transactions with Group Inc. and affiliates in the normal course of business as part of its
trading, financing and general operations. Amounts outstanding to/from such affiliates are reflected in the
consolidated statement of financial condition as set forth below (in millions):


              Assets
               Receivables from brokers, dealers and clearing organizations                      $ 1,802
               Receivables from customers and counterparties                                         382
               Securities borrowed                                                                    9,400
               Securities purchased under agreements to resel!                                        6,179
               Financial instruments owned, at fair value (derivatives)                                 950
               Other assets                                                                            205

               Liabilities
               Short—term borrowings                                                             $33,712
               Payables to brokers, dealers and clearing organizations                             1,938
               Payables to customers and counterparties                                             5,680
               Securities loaned                                                                   45,496
               Securities sold under agreements to repurchase                                      18,459
               Financial instruments sold, but not yet purchased (derivatives)                      1,335
               Other liabilities and accrued expenses                                                   231
               Subordinated borrowings                                                                6,523



Income Taxes

Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and
tax bases of the firm‘s assets and liabilities. Valuation allowances are established to reduce any resulting
deferred tax assets to the amount that more likely than not will be realized. As a partnership, the firm is
primarily subject to unincorporated business taxes on income earned, or losses incurred, by conducting

                                                                5


                                                  GOLDMAN, SACHS & CO. and SUBSIDIARIES

                NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)




business in New York City and taxes in foreign jurisdictions on certain of its operations. No additional income
tax provision is required on the earnings of the firm as it is a partnership, and therefore the remaining tax
effects of its activities accrue directly to its partners. The firm‘s tax assets and liabilities are presented as a
component of "Other assets" and "Other liabilities and accrued expenses," respectively, in the consolidated
statement of financial condition.

Foreign Currency Translation

Assets and liabilities denominated in non—U.S. currencies are translated at rates of exchange prevailing on the
date of the consolidated statement of financial condition. Gains or losses on translation of the financial
statements of a non—U.S. operation, when the functional currency is other than the U.S. dollar, are reflected as
a separate component of "Partners‘ capital" in "Accumulated other comprehensive income."

Note 3. Financial Instruments

Financial instruments, including both cash instruments and derivatives, are used to manage market risk,
facilitate customer transactions, engage in proprietary transactions and meet financing objectives.                   These
instruments can be either executed on an exchange or negotiated in the OTC market.

Transactions involving financial instruments sold, but not yet purchased, generally entail an obligation to
purchase a financial instrument at a future date. The firm may incur a loss if the market value of the financial
instrument subsequently increases prior to the purchase of the instrument.

Fair Value of Financial Instruments

The following table sets forth the firm‘s financial instruments owned, including those pledged as collateral, at
fair vaiue, and financial instruments sold, but not yet purchased, at fair value {in millions):



                                                                                         As of November 2002
                                                                                         Assets     Liabilities

        Commercial paper, certificates of deposit
          aNd timMme ABDOSIE§ 2..2.....0.0.0000 ce e e                               $      367      $            —
        U.S. government, federal agency and
          SOvergeign ODIig@tiOMS ...,............c e es                                  19,088           5,702
        COFPOFAt@ U&@Dt ......22.000220000 00e en e e e e en en                           9,664           3,279
        Equities and convertible debentures ......c.c.ccl.                                7,216           2,348
        State, municipal and provincial obligations.........                                536                —
        DerIvative CONfFACES .........2....c ce ie e en e e es                             3,657          3,844
        TOLAh, .202 c2 2c vevevev e en en en e e en e en en rere n en e e en en es   $ 40,528            15173




Credit Concentrations

Credit concentrations may arise from trading, underwriting and securities borrowing activities and may be
impacted by changes in economic, industry or political factors. As of November 2002, U.S. government and
federal agency obligations represented approximately 10.5% of the firm‘s total assets. In addition, most of the
firm‘s securities purchased under agreements to resell are collateralized by U.S. government, federal agency
and other sovereign obligations.


                                       GOLDMAN, SACHS & CO. and SUBSIDIARIES

             NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)




Derivative Activities

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 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 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.

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 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 "Financial instruments owned" and "Financial
instruments sold, but not yet purchased" in the consolidated statement of financial condition.

Derivative contracts are reported on a net—by—counterparty basis in the firm‘s consolidated statement of
financial condition when 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 (in millions):

                                                                              As of November 2002
                                                                             Assets      Liabilities

            Forward settlement cOntracts ..............2222222.             $1,714          $ 1,805
            SWApP AGT@@MEeNES.....2..2000000, ce                                289             342
            OPtION COMEACES 22222202000 0000 0e en                            1,654           1,697
            iple e                                                          $3,657          3,844




Securitization Activities

The firm securitizes commercial and residential mortgages and home equity loans, government and corporate
bonds and other types of financial assets. The firm acts as underwriter of the beneficial interests that are sold
to investors. The firm derecognizes financial assets transferred in securitizations provided it has relinquished
control over such assets. Transferred assets are accounted for at fair value prior to securitization.

The firm may retain interests in securitized financial assets, which it generally attempts to sell as quickly as
possible, subject to prevailing market conditions.                Retained interests are accounted for at fair value and are
included in "Total financial instruments owned, at fair value" in the consolidated statement of financial condition.

During 2002, the firm securitized $138.3 billion of financial assets, including $89.3 biltion of agency mortgage—
backed securities. Cash flows received on retained interests and other securitization cash flows were
approximately $502 million for the year ended November 2002. As of November 2002, the firm held $2.9 billion


                                     GOLDMAN, SACHS & CO. and SUBSIDIARIES

               NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)




of retained interests, including $737 million of retained interests for which the fair value is based on quoted
market prices in active markets.

The following table sets forth the weighted average key economic assumptions used in measuring the fair
value of retained interests for which fair value is based on alternative pricing sources with reasonable, little or
no price transparency and the sensitivity of those fair values to immediate adverse changes of 10% and 20% in
those assumptions:

                                                                     As of November 2002

                                                                      Retained Interests:

                                                           Mortgage and Other Asset—Backed (2)
                                                                       (in millions)

              Fair value of retained interests                               $2,145
              Weighted average life (years)                                      4.1

              Annual prepayment rate                                             25.4%
               Impact of 10% adverse change                                  $     (7)
                Impact of 20% adverse change                                 $    (11)

              Annual credit losses (1)                                            1.6%
               Impact of 10% adverse change                                  $     (7)
                Impact of 20% adverse change                                 $    (13)

              Annual discount rate                                                6.7%
               Impact of 10% adverse change                                  $    (38)
                Impact of 20% adverse change                                 $    (74)




    (1) The impact of adverse changes takes into account credit mitigants incorporated in the retained interests, including
    overcollateralization and subordination provisions.

    (2) Includes retained interests in government and corporate bonds and other types of financial assets that are not subject to
    prepayment risk.


The preceding table does not give effect to the offsetting benefit of other financial instruments that are held to
hedge risks inherent in these retained interests. Changes in fair value based on a 10% adverse variation in
assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the
change in fair value is not usually linear. In addition, the impact of a change in a particular assumption is
calculated independently of changes in any other assumption. In practice, simultaneous changes in
assumptions might magnify or counteract the sensitivities disclosed above.

Secured Borrowing and Lending Activities

The firm obtains secured, short—term financing principally through the use of repurchase agreements and
securities lending agreements to obtain securities for settiement, to finance inventory positions and to meet
customers‘ needs.       in these transactions, the firm either provides or receives collateral, including U.S.
government, federal agency, mortgage—backed, investment—grade foreign sovereign obligations and equity
securities.


                                   GOLDMAN, SACHS & CO. and SUBSIDIARIES

              NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)




The firm receives collateral in connection with resale agreements, securities lending transactions, derivative
transactions, customer margin loans and other secured lending activities. In many cases, the firm is permitted
to sell or repledge securities held as collateral. These securities may be used to secure repurchase
agreements, enter into securities lending or derivative transactions or cover short positions. As of November
2002, the fair value of securities received as collateral by the firm that it was permitted to sell or repledge was
$231 billion, of which $218 billion was sold or repledged.

The firm also pledges its own assets to collateralize repurchase agreements and other secured financings. As
of November 2002, the carrying value of securities included in "Financial instruments owned, at fair value" that
had been loaned or pledged to counterparties that did not have the right to sell or repledge was $18 billion.

Note 4. Short—Term Borrowings

The firm obtains short—term borrowings, on a secured basis, primarily from Group Inc. and through bank loans
on an unsecured basis. The carrying value of these short—term obligations approximates fair value due to their
short—term nature.

Note 5. Long—Term and Subordinated Borrowings

Long—term borrowings include non—U.S. dollar obligations issued at floating rates of interest.               Long—term
borrowings, by fiscal maturity date, as of November 2002 are set forth below (in millions):

                              Maturity Dates
                                 2004                                        $   9
                                 2005                                           9
                                 2006                                          10
                                 2007                                          10
                                 2008 — thereafter                           _348
                                      Total                                  $386


Subordinated borrowings bear interest at floating rates and include $6.5 billion payable on September 30, 2005,
to Group Inc. The carrying value of these borrowings approximates fair value.

Note 6. Commitments and Contingencies

Litigation

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 believes, based on currently available information,
that the results of such proceedings, in the aggregate, will not have a material adverse effect in 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.

On December 20, 2002, as part of a proposed global settlement involving the leading securities firms operating
in the United States, agreements in principle were announced among the firm and various regulatory authorities
to resolve their investigations of GS&Co. relating to investment research analysts‘ conflicts of interest.
Pursuant to the agreements in principle, the firm has agreed, among other things, to (i) pay $50 million in
retrospective relief, (ii) contribute $50 million over five years to provide independent third—party research to
clients, (iii) contribute $10 million for investor education, and (iv) adopt internal structural and other safeguards
to further ensure the integrity of GS&Co. investment research. In connection with the agreements, the firm also
expects to be joining the other leading securities firms who are part of the proposed global settlement in an
initiative that will prohibit the allocation of shares in initial public offerings to executives and directors of public
                                                             9


                                   GOLDMAN, SACHS & CO. and SUBSIDIARIES

              NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)




companies. Current or future civil lawsuits implicating investment research analysts‘ conflicts of interest were
not settled as part of the agreements in principle. The firm‘s total potential liability in respect of such civil cases
cannot be reasonably estimated but could be material to results of operations in a given period.

Leases

The firm has obligations under long—term noncancelable lease agreements, principally for office space, expiring
on various dates through fiscal 2011.      Certain agreements are subject to periodic escalation provisions for
increases in real estate taxes and other charges. Minimum rental commitments, net of minimum sublease
rentals, under noncancelable leases for 2003 and the succeeding four years and thereafter are set forth below
(in millions):


                              Minimum Rental Commitments
                                 2003                                       $ 94
                                 2004                                         89
                                 2005                                         76
                                 2006                                         95
                                 2007                                         47
                                 2008 — Thereafter                          __43
                                       Total                                $444



Other Commitments

The firm had commitments to enter into forward secured financing transactions, including certain repurchase
and resale agreements and secured borrowing and lending arrangements of $12.2 billion as of November
2002.

In connection with its lending activities, the firm had outstanding commitments of $1.9 billion as of November
2002.. These commitments are agreements to lend to counterparties, have fixed termination dates and are
contingent on all conditions to borrowing set forth in the contract having been met. Since these commitments
may expire unused, the total commitment amount does not necessarily reflect the actual future cash flow
requirements.

The firm provides letters of credit issued by various banks to counterparties in lieu of securities or cash to
satisfy various collateral and margin deposit requirements. Letters of credit outstanding were $7.9 billion as of
November 2002.

The firm had outstanding commitments and guarantees of $29 million relating primarily to client and fund
management activities as of November 2002.

Note 7. Employee Benefit Plans

The firm‘s employees participate in various Group Inc.—sponsored pension plans and certain other
postretirement benefit plans, primarily healthcare and life insurance, which cover most employees worldwide.
Certain benefits are also provided to former or inactive employees prior to retirement. A summary of these
plans is set forth below:

Defined Benefit Pension Plans and Postretirement Plans

Group Inc. maintains a defined benefit pension plan for substantially all U.S. employees of the firm. Employees
of certain non—U.S. subsidiaries participate in various local defined benefit plans. These plans generally
                                                             10


                                  GOLDMAN, SACHS & CO. and SUBSIDIARIES

              NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)




provide benefits based on years of credited service and a percentage of the employee‘s eligible compensation.
In addition, the firm has unfunded postretirement benefit plans that provide medical and life insurance for
eligible retirees, employees and dependents in the United States. Group Inc. does not project the plans‘ benefit
obligations and fair value of assets independently of other participating subsidiaries.

Defined Contribution Plans

The firm contributes to Group Inc.—sponsored U.S. and non—U.S. defined contribution plans.               The firm‘s
contribution to these plans was $68.2 million for 2002.

Group Inc. has also established a nonqualified, defined contribution plan (the Plan) for certain senior
employees of the firm. Shares of common stock of Group Inc. contributed to the Plan and outstanding as of
November 2002 will vest and generally be distributable to the participant on specified future dates if the
participant satisfies certain conditions and the participant‘s employment with the firm has not been terminated,
with certain exceptions for terminations of employment due to death or a change in control. Dividends on the
underlying shares of common stock are paid currently to the participants. Forfeited shares remain in the Plan
and are reallocated to other participants.

Note 8. Employee Incentive Plans

Stock Incentive Plan

Group Inc. sponsors a stock incentive plan that provides for grants of incentive stock options, nongualified
stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and
other stock—based awards to employees of the firm.

Restricted Stock Units

Group Inc. issued restricted stock units to employees of the firm under the stock incentive plan primarily in
connection with its initial public offering and as part of year—end compensation.      In all cases, delivery of the
underlying shares of common stock is conditioned on the grantee‘s satisfying certain other requirements
outlined in the award agreements.

Stock Options

Stock options granted by Group Inc. to employees of the firm in connection with Group Inc.‘s initial public
offering are exercisable in equal installments on or about the third, fourth and fifth anniversary of the grant date,
and nearly all of the options exercisable as of November 2002 are comprised of the first such installment. Stock
options granted to employees subsequent to Group Inc.‘s initial public offering will generally become
exercisable on or about the third anniversary of the date of grant. Exercisability of all employee stock options is
contingent on the grantee satisfying certain conditions and on the grantee continuing to be employed, with
certain exceptions for terminations of employment due to death, retirement, extended absence, certain
reductions in workforce or a change in control. Once service requirements have been met, these options will
generally remain exercisable, subject to satisfaction of certain conditions, until the tenth anniversary of the date
of grant.

Note 9. Net Capital Requirements

GS&Co is a registered U.S. broker—dealer and futures commission merchant subject to Rule 15c3—1 of the
Securities and Exchange Commission and Rule 1.17 of the Commodity Futures Trading Commission, which
specify uniform minimum net capital requirements, as defined, for their registrants.        GS&Co has elected to
compute net capital in accordance with the "Alternate Net Capital Requirement," as permitted by Rule 15c3—1.
                                                           11


                               GOLDMAN, SACHS & CO. and SUBSIDIARIES

            NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)




As of November 2002, GS&Co had regulatory net capital, as defined, of $4.7 billion, which exceeded the
amount required by $4.1 billion.

Certain other subsidiaries of GS&Co are also subject to capital adequacy requirements promulgated by
authorities of the countries in which they operate. As of November 2002, these subsidiaries were in
compliance with their local capital adequacy requirements.

As of November 2002, GS&Co made a computation related to the reserve requirement for Proprietary
Accounts of Introducing Brokers. The reserve requirement and amounts held on deposit in the Reserve Bank
were $162 million and $559 million, respectively.




                                                     12



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