EX-99.1 3 y27880exv99w1.htm EX-99.1: PRESS RELEASE EX-99.1
 

Exhibit 99.1

     
The Goldman Sachs Group, Inc. ½ 85 Broad Street ½ New York, New York 10004
  (GOLDMAN SACHS LOGO)
 
 
GOLDMAN SACHS REPORTS RECORD
EARNINGS PER COMMON SHARE OF $19.69 FOR 2006
 
 
 
FOURTH QUARTER EARNINGS PER COMMON SHARE WERE $6.59
 

NEW YORK, December 12, 2006 — The Goldman Sachs Group, Inc. (NYSE: GS) today reported net revenues of $37.67 billion and net earnings of $9.54 billion for the year ended November 24, 2006. Diluted earnings per common share were $19.69, an increase of 76% compared with $11.21 for the year ended November 25, 2005. Return on average tangible common shareholders’ equity (1) (ROTE) was 39.8% and return on average common shareholders’ equity (ROE) was 32.8% for 2006.

Fourth quarter net revenues were $9.41 billion and net earnings were $3.15 billion. Diluted earnings per common share were $6.59 compared with $3.35 for the same 2005 quarter and $3.26 for the third quarter of 2006. Annualized ROTE (1) was 50.0% and annualized ROE was 41.5% for the fourth quarter.

Excluding non-cash expenses of $637 million related to the accounting for certain share-based awards under SFAS No. 123-R (2), net earnings for the year were $9.96 billion (2), diluted earnings per common share were $20.57 (2), ROTE (1) was 41.8% (2) and ROE was 34.4% (2). Excluding such non-cash expenses of $129 million for the fourth quarter, net earnings were $3.23 billion (2), diluted earnings per common share were $6.77 (2), annualized ROTE (1) was 51.7% (2) and annualized ROE was 42.8% (2).

Annual Business Highlights

    Goldman Sachs achieved record annual results in 2006, generating record net revenues, net earnings, diluted earnings per common share, ROTE (1) and ROE.
 
    The firm continued its leadership in investment banking, ranking first in worldwide announced and completed mergers and acquisitions, equity and equity-related offerings and public common stock offerings for the calendar year-to-date. (3)
 
    Investment Banking generated record net revenues of $5.63 billion, 5% higher than the previous record set in 2000.
 
    Fixed Income, Currency and Commodities (FICC) produced record net revenues of $14.26 billion, 60% higher than the previous record set in 2005.
 
    Equities generated record net revenues of $8.48 billion, 50% higher than the previous record set in 2005.
 
    Principal Investments achieved record net revenues of $2.82 billion.
 
    Asset Management achieved record net revenues of $4.29 billion. Assets under management increased $144 billion or 27% to a record $676 billion, with net asset inflows of $94 billion in 2006.
 
    Securities Services achieved record net revenues of $2.18 billion.

“We are very pleased with this year’s performance,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer. “The breadth of our franchise, the diversity of our businesses and the performance of our people enabled us to serve our clients around the world.”

Media Relations:  Peter Rose  212-902-5400   ½   Investor Relations:  John Andrews  212-357-2674

 


 

Net Revenues

Investment Banking

Full Year
Net revenues in Investment Banking were $5.63 billion for the year, 53% higher than 2005. Net revenues in Financial Advisory were $2.58 billion, 35% higher than 2005, primarily reflecting strong growth in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $3.05 billion, 73% higher than 2005. Net revenues were significantly higher in equity underwriting, reflecting increased client activity. Net revenues were also significantly higher in debt underwriting, primarily due to a significant increase in leveraged finance activity and, to a lesser extent, an increase in investment-grade activity. The firm’s investment banking backlog at the end of 2006 was higher than at the end of 2005. (4)

Fourth Quarter
Net revenues in Investment Banking were $1.34 billion, 42% higher than the fourth quarter of 2005 and 4% higher than the third quarter of 2006. Net revenues in Financial Advisory were $627 million, 15% higher than the fourth quarter of 2005, reflecting increased client activity. Net revenues in the firm’s Underwriting business were $717 million, 78% higher than the fourth quarter of 2005. Net revenues were significantly higher in debt underwriting, primarily due to an increase in leveraged finance and investment-grade activity, as well as in equity underwriting, primarily reflecting an increase in initial public offerings. The firm’s investment banking backlog increased during the quarter. (4)

Trading and Principal Investments

Full Year
Net revenues in Trading and Principal Investments were $25.56 billion for the year, 52% higher than 2005.

Net revenues in FICC were $14.26 billion for the year, 60% higher than 2005, primarily due to significantly higher net revenues in credit products (which includes distressed investing) and commodities. In addition, net revenues were higher in interest rate products, currencies and mortgages. During 2006, the business operated in an environment characterized by strong customer-driven activity and favorable market opportunities. In addition, corporate credit spreads tightened, the yield curve flattened and volatility levels were generally low in interest rate and currency markets.

Net revenues in Equities were $8.48 billion for the year, 50% higher than 2005, primarily reflecting significantly higher net revenues in derivatives, across all regions, as well as higher net revenues in shares. The increase also reflected the contribution from the firm’s insurance business, which was acquired in 2006. In addition, principal strategies performed well, although net revenues were lower than a particularly strong 2005. During 2006, Equities operated in a favorable environment characterized by strong customer-driven activity, generally higher equity prices and favorable market opportunities, although volatility levels were generally low.

Principal Investments recorded net revenues of $2.82 billion, reflecting a $937 million gain related to the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), a $527 million gain related to the firm’s investment in the convertible preferred stock of Sumitomo Mitsui Financial Group, Inc. (SMFG) and $1.35 billion in gains and overrides from other principal investments.

Fourth Quarter
Net revenues in Trading and Principal Investments were $6.63 billion, 57% higher than the fourth quarter of 2005 and 37% higher than the third quarter of 2006.

Net revenues in FICC were $3.10 billion, 58% higher than the fourth quarter of 2005, reflecting higher net revenues in credit products, commodities and, to a lesser extent, interest rate products. These increases were partially offset by significantly lower net revenues in currencies as well as lower net revenues in mortgages. During the quarter, FICC operated in an environment characterized by solid customer-driven activity, tightening corporate credit spreads and generally low volatility levels in interest rate and currency markets.

2


 

Net revenues in Equities were $2.13 billion, 52% higher than the fourth quarter of 2005, primarily reflecting higher net revenues in shares and derivatives. The increase also reflected the contribution from the firm’s insurance business, which was acquired in 2006. Net revenues in principal strategies were essentially unchanged compared with the fourth quarter of 2005. During the quarter, Equities operated in a favorable environment characterized by rising equity prices and solid customer-driven activity.

Principal Investments recorded net revenues of $1.40 billion, reflecting a $949 million gain related to the firm’s investment in ICBC, $528 million in gains and overrides, primarily from other corporate principal investments, and a $78 million loss related to the firm’s investment in SMFG.

Asset Management and Securities Services

Full Year
Net revenues in Asset Management and Securities Services were $6.47 billion for the year, 36% higher than 2005.

Asset Management net revenues were $4.29 billion for the year, 45% higher than 2005, reflecting significantly higher management and other fees, principally due to strong growth in assets under management, and significantly higher incentive fees. During the year, assets under management increased $144 billion or 27% to $676 billion, reflecting non-money market net asset inflows of $77 billion, spread across all asset classes, money market net asset inflows of $17 billion (5), and market appreciation of $50 billion, primarily in equity and fixed income assets.

Securities Services net revenues were $2.18 billion, 22% higher than 2005, as the firm’s prime brokerage business continued to generate strong results, primarily reflecting significantly higher global customer balances in securities lending and margin lending.

Fourth Quarter
Net revenues in Asset Management and Securities Services were $1.43 billion, 16% higher than the fourth quarter of 2005 and 2% lower than the third quarter of 2006.

Asset Management net revenues were $933 million, 19% higher than the fourth quarter of 2005. The increase was driven by significantly higher management and other fees, primarily due to growth in assets under management, partially offset by lower incentive fees. During the quarter, assets under management increased $47 billion or 7% to $676 billion, reflecting non-money market net asset inflows of $17 billion, spread across all asset classes, money market net asset inflows of $7 billion and market appreciation of $23 billion in equity and fixed income assets.

Securities Services net revenues were $496 million, 11% higher than the fourth quarter of 2005, as the firm’s prime brokerage business continued to generate strong results, reflecting significantly higher global customer balances in securities lending and margin lending.

Expenses

Operating expenses were $23.11 billion for 2006, 36% higher than 2005.

Compensation and Benefits

Compensation and benefits expenses were $16.46 billion for 2006, 40% higher than 2005, primarily reflecting increased discretionary compensation due to higher net revenues, and increased employment levels. The ratio of compensation and benefits to net revenues for 2006 was 43.7% compared with 46.6% (6) for 2005. Employment levels increased 12% compared with the end of 2005, including 3% during the fourth quarter.

3


 

In the first quarter of 2006, the firm adopted SFAS No. 123-R, which requires that share-based awards granted to retirement-eligible employees be expensed in the year of grant. In addition to expensing current year awards, prior year awards must continue to be amortized over the relevant service period. Therefore, although there is no incremental economic cost to the firm, compensation and benefits in 2006 included both amortization of prior year awards as well as new awards granted to retirement-eligible employees for services rendered in 2006.

Compensation and benefits expenses in 2006 included $637 million in continued amortization of prior year awards held by employees that were retirement-eligible on the date of adoption of SFAS No. 123-R. This amount represented the majority of the expense to be recognized with respect to these awards. The ratio of compensation and benefits to net revenues, excluding the non-cash expenses of $637 million, was 42.0% (2) for 2006.

Beginning in the fourth quarter of 2006, “Cost of power generation” in the consolidated statements of earnings was reclassified to operating expenses. “Cost of power generation” was previously reported as a reduction to revenues. Prior periods have been reclassified to conform to the current presentation, with no impact to the firm’s reported net earnings (6). The effect of this reclassification on the ratio of compensation and benefits to net revenues was to decrease the ratio by approximately 30 basis points and 60 basis points for 2006 and 2005, respectively.

Non-Compensation Expenses

Full Year
Non-compensation expenses were $6.65 billion for 2006, 28% higher than 2005. Excluding non-compensation expenses related to consolidated entities held for investment purposes (7), non-compensation expenses were 24% higher than 2005, primarily due to higher brokerage, clearing, exchange and distribution fees (8) in Equities and FICC, and increased other expenses (8), primarily due to costs related to the firm’s insurance business, which was acquired in 2006. In addition, market development costs and professional fees were higher, reflecting increased levels of business activity, and occupancy expenses increased, primarily reflecting new office space and higher facility expenses.

Fourth Quarter
Non-compensation expenses were $1.92 billion, 31% higher than the fourth quarter of 2005 and 13% higher than the third quarter of 2006. Excluding non-compensation expenses related to consolidated entities held for investment purposes (7), the increase in non-compensation expenses compared with the fourth quarter of 2005 was primarily due to higher brokerage, clearing, exchange and distribution fees (8) in Equities and FICC, and increased other expenses (8), primarily due to costs related to the firm’s insurance business, which was acquired in 2006. In addition, market development costs were higher, reflecting increased levels of business activity, and occupancy expenses increased, primarily due to new office space, higher facility expenses and $18 million of real estate exit costs.

Provision For Taxes

The effective income tax rate was 34.5% for 2006, up from 33.3% for the first nine months of 2006 and 32.0% for 2005. The increase in the effective income tax rate for 2006 compared with the first nine months of 2006 was primarily due to higher state and local taxes and a change in the geographic mix of earnings. The increase in the effective income tax rate for 2006 compared with 2005 was primarily related to a reduction in the impact of permanent benefits due to higher levels of earnings in 2006 and audit settlements in 2005.

Capital

As of November 24, 2006, total capital was $158.63 billion, consisting of $35.79 billion in total shareholders’ equity (common equity of $32.69 billion and preferred stock of $3.10 billion) and $122.84 billion in unsecured long-term borrowings (9). Book value per common share was $72.62 based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 450.1 million at year end. Tangible book value per common share was $61.47. (1)

4


 

The firm repurchased 50.2 million shares of its common stock at an average price of $155.64 per share, at a total cost of $7.82 billion during 2006, including 20.8 million shares of its common stock at an average price of $175.82 per share, at a total cost of $3.65 billion in the fourth quarter. The remaining share authorization under the firm’s existing common stock repurchase program is 52.6 million shares.

Dividends

The Board of Directors of The Goldman Sachs Group, Inc. (the Board) declared a dividend of $0.35 per common share to be paid on February 22, 2007 to common shareholders of record on January 23, 2007. The Board also declared dividends of $391.28, $387.50, $391.28 and $386.17 per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively (represented by depositary shares, each representing a 1/1000th interest in a share of preferred stock), to be paid on February 10, 2007 to preferred shareholders of record on January 26, 2007.

Goldman Sachs 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. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

Cautionary Note Regarding Forward-Looking Statements

This press release contains “forward-looking statements.” These statements are not historical facts but instead represent only the firm’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside of the firm’s control. It is possible that the firm’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of some of the risks and important factors that could affect the firm’s future results, see “Risk Factors” in Part I, Item 1A of the firm’s Annual Report on Form 10-K for the fiscal year ended November 25, 2005.

Statements about the firm’s 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 the firm expects 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. For a discussion of other important factors that could adversely affect the firm’s investment banking transactions, see “Risk Factors” in Part I, Item 1A of the firm’s Annual Report on Form 10-K for the fiscal year ended November 25, 2005.

Conference Call

A conference call to discuss the firm’s results, outlook and related matters will be held at 11:00 am (ET). The call will be open to the public. Members of the public who would like to listen to the conference call should dial 1-888-281-7154 (U.S. domestic) and 1-706-679-5627 (international). The number should be dialed at least 10 minutes prior to the start of the conference call. The conference call will also be accessible as an audio webcast through the Investor Relations section of the firm’s Web site, www.gs.com/our_firm/investor_relations/. There is no charge to access the call. For those unable to listen to the live broadcast, a replay will be available on the firm’s Web site or by dialing 1-800-642-1687 (U.S. domestic) or 1-706-645-9291 (international) passcode number 4464784, beginning approximately two hours after the event. Please direct any questions regarding obtaining access to the conference call to Goldman Sachs Investor Relations, via e-mail, at gs-investor-relations@gs.com.

5


 

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
SEGMENT NET REVENUES
(UNAUDITED)

$ in millions

                         
Year Ended
% Change From
Nov. 24, Nov. 25, Nov. 25,
2006 2005 2005
 
                       
Investment Banking
                       
Financial Advisory
  $ 2,580     $ 1,905       35 %
 
                       
Equity underwriting
    1,365       704       94  
Debt underwriting
    1,684       1,062       59  
 
                 
Total Underwriting
    3,049       1,766       73  
 
                       
 
                 
Total Investment Banking
    5,629       3,671       53  
 
                 
 
                       
Trading and Principal Investments
                       
FICC (6)
    14,262       8,940       60  
 
                       
Equities trading
    4,965       2,675       86  
Equities commissions
    3,518       2,975       18  
 
                 
Total Equities
    8,483       5,650       50  
 
                       
SMFG
    527       1,475       (64 )
ICBC
    937             N.M.  
Other corporate and real estate gains and losses
    949       569       67  
Overrides
    404       184       120  
 
                 
Total Principal Investments
    2,817       2,228       26  
 
                       
 
                 
Total Trading and Principal Investments
    25,562       16,818       52  
 
                 
 
                       
Asset Management and Securities Services
                       
Management and other fees
    3,332       2,629       27  
Incentive fees
    962       327       194  
 
                 
Total Asset Management
    4,294       2,956       45  
 
                       
Securities Services
    2,180       1,793       22  
 
                       
 
                 
Total Asset Management and Securities Services
    6,474       4,749       36  
 
                 
 
                       
 
                 
Total net revenues
  $ 37,665     $ 25,238       49  
 
                 

6


 

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
SEGMENT NET REVENUES
(UNAUDITED)

$ in millions

                                         
Three Months Ended
% Change From
Nov. 24, Aug. 25, Nov. 25, Aug. 25, Nov. 25,
2006 2006 2005 2006 2005
 
                                       
Investment Banking
                                       
Financial Advisory
  $ 627     $ 609     $ 546       3 %     15 %
 
                                       
Equity underwriting
    330       270       205       22       61  
Debt underwriting
    387       409       197       (5 )     96  
 
                             
Total Underwriting
    717       679       402       6       78  
 
                                       
 
                             
Total Investment Banking
    1,344       1,288       948       4       42  
 
                             
 
                                       
Trading and Principal Investments
                                       
FICC (6)
    3,104       2,860       1,967       9       58  
 
                                       
Equities trading
    1,235       707       602       75       105  
Equities commissions
    896       844       800       6       12  
 
                             
Total Equities
    2,131       1,551       1,402       37       52  
 
                                       
SMFG
    (78 )     261       723       N.M.       N.M.  
ICBC
    949       (8 )           N.M.       N.M.  
Other corporate and real estate gains and losses
    323       142       109       127       196  
Overrides
    205       35       20       N.M.       N.M.  
 
                             
Total Principal Investments
    1,399       430       852       N.M.       64  
 
                                       
 
                             
Total Trading and Principal Investments
    6,634       4,841       4,221       37       57  
 
                             
 
                                       
Asset Management and Securities Services
                                       
Management and other fees
    910       822       682       11       33  
Incentive fees
    23       96       105       (76 )     (78 )
 
                             
Total Asset Management
    933       918       787       2       19  
 
                                       
Securities Services
    496       537       447       (8 )     11  
 
                                       
 
                             
Total Asset Management and Securities Services
    1,429       1,455       1,234       (2 )     16  
 
                             
 
                                       
 
                             
Total net revenues
  $ 9,407     $ 7,584     $ 6,403       24       47  
 
                             

7


 

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)

In millions, except per share amounts

                         
Year Ended
% Change From
Nov. 24, Nov. 25, Nov. 25,
2006 2005 2005
 
                       
Revenues
                       
Investment banking
  $ 5,613     $ 3,599       56 %
Trading and principal investments
    24,027       15,452       55  
Asset management and securities services
    4,527       3,090       47  
Interest income
    35,186       21,250       66  
 
                 
Total revenues
    69,353       43,391       60  
 
                       
Interest expense
    31,688       18,153       75  
 
                 
 
                       
Revenues, net of interest expense (6)
    37,665       25,238       49  
 
                 
 
                       
Operating expenses
                       
Compensation and benefits (6)
    16,457       11,758       40  
 
                       
Brokerage, clearing, exchange and distribution fees (8)
    1,985       1,416       40  
Market development
    492       378       30  
Communications and technology
    544       490       11  
Depreciation and amortization
    521       501       4  
Amortization of identifiable intangible assets
    173       124       40  
Occupancy
    850       728       17  
Professional fees
    545       475       15  
Cost of power generation (6)
    406       386       5  
Other expenses (8)
    1,132       709       60  
 
                 
Total non-compensation expenses
    6,648       5,207       28  
 
                       
 
                 
Total operating expenses
    23,105       16,965       36  
 
                 
 
                       
Pre-tax earnings
    14,560       8,273       76  
Provision for taxes
    5,023       2,647       90  
 
                 
Net earnings
    9,537       5,626       70  
 
                       
Preferred stock dividends
    139       17       N.M.  
 
                 
Net earnings applicable to common shareholders
  $ 9,398     $ 5,609       68  
 
                 
 
                       
Earnings per common share
                       
Basic
  $ 20.93     $ 11.73       78 %
Diluted
    19.69       11.21       76  
Diluted, excluding the impact of the continued amortization of prior year share-based awards in 2006 (2)
    20.57       11.21       83  
 
                       
Average common shares outstanding
                       
Basic
    449.0       478.1       (6 )
Diluted
    477.4       500.2       (5 )
 
                       
Selected Data
                       
Ratio of compensation and benefits to net revenues (6)
    43.7 %     46.6 %        
 
                       
Ratio of compensation and benefits to net revenues, excluding the impact of the continued amortization of prior year share-based awards in 2006 (2) (6)
    42.0       46.6          

8


 

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)

In millions, except per share amounts and employees

                                         
Three Months Ended
% Change From
Nov. 24, Aug. 25, Nov. 25, Aug. 25, Nov. 25,
2006 2006 2005 2006 2005
 
                                       
Revenues
                                       
Investment banking
  $ 1,337     $ 1,285     $ 932       4 %     43 %
Trading and principal investments
    6,051       4,368       3,907       39       55  
Asset management and securities services
    982       975       820       1       20  
Interest income
    9,756       9,351       6,486       4       50  
 
                             
Total revenues
    18,126       15,979       12,145       13       49  
 
                                       
Interest expense
    8,719       8,395       5,742       4       52  
 
                             
 
                                       
Revenues, net of interest expense (6)
    9,407       7,584       6,403       24       47  
 
                             
 
                                       
Operating expenses
                                       
Compensation and benefits (6)
    2,505       3,530       2,458       (29 )     2  
 
                                       
Brokerage, clearing, exchange and distribution fees (8)
    571       523       403       9       42  
Market development
    154       117       110       32       40  
Communications and technology
    148       141       125       5       18  
Depreciation and amortization
    143       126       130       13       10  
Amortization of identifiable intangible assets
    45       50       31       (10 )     45  
Occupancy
    237       221       194       7       22  
Professional fees
    178       135       153       32       16  
Cost of power generation (6)
    98       101       99       (3 )     (1 )
Other expenses (8)
    343       278       221       23       55  
 
                             
Total non-compensation expenses
    1,917       1,692       1,466       13       31  
 
                                       
 
                             
Total operating expenses
    4,422       5,222       3,924       (15 )     13  
 
                             
 
                                       
Pre-tax earnings
    4,985       2,362       2,479       111       101  
Provision for taxes
    1,833       768       847       139       116  
 
                             
Net earnings
    3,152       1,594       1,632       98       93  
 
                                       
Preferred stock dividends
    48       39       8       N.M.       N.M.  
 
                             
Net earnings applicable to common shareholders
  $ 3,104     $ 1,555     $ 1,624       100       91  
 
                             
 
                                       
Earnings per common share
                                       
Basic
  $ 7.06     $ 3.46     $ 3.53       104 %     100 %
Diluted
    6.59       3.26       3.35       102       97  
Diluted, excluding the impact of the continued amortization of prior year share-based awards in 2006 (2)
    6.77       3.45       3.35       96       102  
 
                                       
Average common shares outstanding
                                       
Basic
    439.8       449.4       459.4       (2 )     (4 )
Diluted
    470.7       477.4       485.2       (1 )     (3 )
 
                                       
Selected Data
                                       
Employees at period end (10) (11)
    26,467       25,647       23,623       3       12  
 
                                       
Ratio of compensation and benefits to net revenues (6)
    26.6 %     46.5 %     38.4 %                
 
                                       
Ratio of compensation and benefits to net revenues, excluding the impact of the continued amortization of prior year share-based awards in 2006 (2) (6)
    25.3       44.8       38.4                  

9


 

NON-COMPENSATION EXPENSES
(UNAUDITED)

$ in millions

                                         
Year Ended
% Change From
Nov. 24, Nov. 25, Nov. 25,
2006 2005 2005
 
                                       
Non-compensation expenses of consolidated investments (7)
  $ 501     $ 265       89 %                
 
                                       
Non-compensation expenses excluding consolidated investments
                                       
Brokerage, clearing, exchange and distribution fees (8)
    1,985       1,416       40                  
Market development
    461       361       28                  
Communications and technology
    537       487       10                  
Depreciation and amortization
    444       467       (5 )                
Amortization of identifiable intangible assets
    169       124       36                  
Occupancy
    738       674       9                  
Professional fees
    534       468       14                  
Cost of power generation (6)
    406       386       5                  
Other expenses (8)
    873       559       56                  
 
                                 
Subtotal
    6,147       4,942       24                  
 
                                       
 
                                 
Total non-compensation expenses, as reported
  $ 6,648     $ 5,207       28                  
 
                                 
                                         
Three Months Ended
% Change From
Nov. 24, Aug. 25, Nov. 25, Aug. 25, Nov. 25,
2006 2006 2005 2006 2005
 
                                       
Non-compensation expenses of consolidated investments (7)
  $ 130     $ 153     $ 101       (15) %     29 %
 
                                       
Non-compensation expenses excluding consolidated investments
                                       
Brokerage, clearing, exchange and distribution fees (8)
    571       523       403       9       42  
Market development
    148       108       103       37       44  
Communications and technology
    146       139       124       5       18  
Depreciation and amortization
    119       103       113       16       5  
Amortization of identifiable intangible assets
    43       48       31       (10 )     39  
Occupancy
    210       188       166       12       27  
Professional fees
    176       132       150       33       17  
Cost of power generation (6)
    98       101       99       (3 )     (1 )
Other expenses (8)
    276       197       176       40       57  
 
                             
Subtotal
    1,787       1,539       1,365       16       31  
 
                                       
 
                             
Total non-compensation expenses, as reported
  $ 1,917     $ 1,692     $ 1,466       13       31  
 
                             

10


 

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(UNAUDITED)

Average Daily VaR (12)
$ in millions

                                         
Three Months Ended
Twelve Months Ended
Nov. 24, Aug. 25, Nov. 25, Nov. 24, Nov. 25,
2006 2006 2005 2006 2005
 
                                       
Risk Categories
                                       
Interest rates
  $ 51     $ 55     $ 45     $ 49     $ 37  
Equity prices
    75       61       44       72       34  
Currency rates
    14       21       15       21       17  
Commodity prices
    29       31       25       30       26  
Diversification effect (13)
    (63 )     (76 )     (49 )     (71 )     (44 )
 
                             
Total
  $ 106     $ 92     $ 80     $ 101     $ 70  
 
                             

Assets Under Management (14)
$ in billions

                                         
As of
% Change From
Nov. 30, Aug. 31, Nov. 30, Aug. 31, Nov. 30,
2006 2006 2005 2006 2005
 
                                       
Alternative investments
  $ 145     $ 139     $ 110       4 %     32 %
Equity
    215       193       167       11       29  
Fixed income
    198       186       154       6       29  
 
                             
Total non-money market assets
    558       518       431       8       29  
Money markets
    118       111       101       6       17  
 
                             
Total assets under management
  $ 676     $ 629     $ 532       7       27  
 
                             
                                         
Three Months Ended
Year Ended
Nov. 30, Aug. 31, Nov. 30, Nov. 30, Nov. 30,
2006 2006 2005 2006 2005
 
                                       
Balance, beginning of period
  $ 629     $ 593     $ 520     $ 532     $ 452  
 
                                       
Net asset inflows / (outflows)
                                       
Alternative investments
    6       13       2       32       11  
Equity
    4       4       4       16       25  
Fixed income
    7       10       (1 )     29       16  
 
                             
Total non-money market net asset inflows / (outflows)
    17       27       5       77       52  
Money markets
    7       3  (5)     3       17  (5)     11  
 
                             
Total net asset inflows / (outflows)
    24       30       8       94       63  
 
                                       
Net market appreciation / (depreciation)
    23       6       4       50       17  
 
                             
 
                                       
Balance, end of period
  $ 676     $ 629     $ 532     $ 676     $ 532  
 
                             

Principal Investments
$ in millions

                                         
As of November 24, 2006
Corporate Real Estate Total
 
                                       
Private
  $ 2,741     $ 555     $ 3,296                  
Public
    934       33       967                  
 
                                 
Subtotal
    3,675       588       4,263                  
SMFG convertible preferred stock (15)
    4,505             4,505                  
ICBC ordinary shares (16)
    5,194             5,194                  
 
                                 
Total
  $ 13,374     $ 588     $ 13,962                  
 
                                 

11


 

Footnotes

(1)   Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock, goodwill and identifiable intangible assets, excluding power contracts. The firm does not deduct power contracts because, unlike other intangible assets, less than 50% of these assets are supported by common shareholders’ equity. In the fourth quarter of 2006, management amended its calculation of tangible common shareholders’ equity to deduct insurance-related intangible assets (value of business acquired (VOBA) and deferred acquisition costs (DAC)) from total shareholders’ equity, because more than 50% of these assets are supported by common shareholders’ equity. Prior periods have been restated to conform to the current period presentation.
 
    Management believes that ROTE is meaningful because it measures the performance of businesses consistently, whether they were acquired or developed internally. ROTE is computed by dividing net earnings (or annualized net earnings for annualized ROTE) applicable to common shareholders by average monthly tangible common shareholders’ equity.
 
    The following table sets forth a reconciliation of total shareholders’ equity to tangible common shareholders’ equity:

                         
Average for the
As of
Year Ended Three Months Ended  
November 24, 2006 November 24, 2006 November 24, 2006
(unaudited, $ in millions)
 
                       
Total shareholders’ equity
  $ 31,048     $ 33,034     $ 35,786  
Preferred stock
    (2,400 )     (3,100 )     (3,100 )
 
                 
Common shareholders’ equity
    28,648       29,934       32,686  
Goodwill and identifiable intangible assets, excluding power contracts
    (5,013 )     (5,089 )     (5,019 )
 
                 
Tangible common shareholders’ equity
  $ 23,635     $ 24,845     $ 27,667  
 
                 

(2)   Statement of Financial Accounting Standards (SFAS) No. 123-R, “Share-Based Payment,” focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payments. In the first quarter of 2006, the firm adopted SFAS No. 123-R, which requires that share-based awards granted to retirement-eligible employees be expensed in the year of grant. In addition to expensing current year awards, prior year awards must continue to be amortized over the relevant service period. Therefore, compensation and benefits expenses in 2006 included (and, to a lesser extent, 2007 and 2008 will include) both amortization of prior year awards and new awards granted to retirement-eligible employees. Management believes that presenting the firm’s results excluding the impact of the continued amortization of prior year share-based awards granted to retirement-eligible employees increases the comparability of period-to-period operating results and allows for a more meaningful representation of the relationship of current period compensation to net revenues.
 
    The following tables set forth a reconciliation of net earnings, diluted earnings per common share, common shareholders’ equity and the ratio of compensation and benefits to net revenues, as reported, to these items excluding the impact of the continued amortization of prior year share-based awards granted to retirement-eligible employees:

                         
Year Ended
Three Months Ended
November 24, 2006 November 24, 2006 August 25, 2006
(unaudited, $ in millions)
 
                       
Net earnings
  $ 9,537     $ 3,152     $ 1,594  
Impact of the continued amortization of prior year share-based awards, net of tax
    421       81       90  
 
                 
Net earnings, excluding the impact of the continued amortization of prior year share-based awards
    9,958       3,233       1,684  
Preferred stock dividends
    (139 )     (48 )     (39 )
 
                 
Net earnings applicable to common shareholders, excluding the impact of the continued amortization of prior year share-based awards
  $ 9,819     $ 3,185     $ 1,645  
 
                 
                         
Year Ended
Three Months Ended
November 24, 2006 November 24, 2006 August 25, 2006
(unaudited)
 
                       
Diluted earnings per common share
  $ 19.69     $ 6.59     $ 3.26  
Impact of the continued amortization of prior year share-based awards, net of tax
    0.88       0.18       0.19  
 
                 
Diluted earnings per common share, excluding the impact of the continued amortization of prior year share-based awards
  $ 20.57     $ 6.77     $ 3.45  
 
                 

12


 

Footnotes (continued)

                         
   
Average for the
 
    Year Ended     Three Months Ended  
    November 24, 2006     November 24, 2006     August 25, 2006  
    (unaudited, $ in millions)  
 
                       
Total shareholders’ equity
  $ 31,048     $ 33,034     $ 32,618  
Preferred stock
    (2,400 )     (3,100 )     (2,850 )
 
                 
Common shareholders’ equity
    28,648       29,934       29,768  
Impact of the continued amortization of prior year share-based awards, net of tax
    (122 )     (192 )     (147 )
 
                 
Common shareholders’ equity, excluding the impact of the continued amortization of prior year share-based awards
    28,526       29,742       29,621  
Goodwill and identifiable intangible assets, excluding power contracts (see footnote 1 above)
    (5,013 )     (5,089 )     (5,094 )
 
                 
Tangible common shareholders’ equity (see footnote 1 above), excluding the impact of the continued amortization of prior year share-based awards
  $ 23,513     $ 24,653     $ 24,527  
 
                 
                         
Year Ended
Three Months Ended
November 24, 2006 November 24, 2006 August 25, 2006
(unaudited, $ in millions)
 
                       
Compensation and benefits
  $ 16,457     $ 2,505     $ 3,530  
Impact of the continued amortization of prior year share-based awards
    (637 )     (129 )     (133 )
 
                 
Compensation and benefits, excluding the impact of the continued amortization of prior year share-based awards
  $ 15,820     $ 2,376     $ 3,397  
 
                 
 
                       
Total net revenues
  $ 37,665     $ 9,407     $ 7,584  
Ratio of compensation and benefits to net revenues, excluding the impact of the continued amortization of prior year share-based awards
    42.0 %     25.3 %     44.8 %

    The firm’s ratio of compensation and benefits to net revenues, excluding the impact of the continued amortization of prior year share-based awards, is computed by dividing compensation and benefits, excluding the impact of the continued amortization of prior year share-based awards, by net revenues.
 
(3)   Thomson Financial — January 1, 2006 through November 24, 2006.
 
(4)   The firm’s investment banking backlog represents an estimate of future net revenues from investment banking transactions where management believes that future revenue realization is more likely than not.
 
(5)   Includes the transfer of $8 billion for the three months ended August 31, 2006 and for the year ended November 30, 2006, of money market assets under management to interest-bearing deposits at Goldman Sachs Bank USA, a wholly owned subsidiary of The Goldman Sachs Group, Inc. These deposits are not included in assets under management.
 
(6)   Beginning in the fourth quarter of 2006, “Cost of power generation” in the consolidated statements of earnings was reclassified to operating expenses. “Cost of power generation” was previously reported as a reduction to revenues. Compensation and benefits includes direct payroll costs associated with the firm’s consolidated power generation operations and cost of power generation includes the other direct costs associated with these power generation facilities and related contractual assets (e.g., fuel, operations, maintenance, depreciation and amortization). In the segment net revenue tables, this reclassification increased “Trading and Principal Investments — FICC” net revenues. Prior periods have been reclassified to conform to the current presentation, with no impact to the firm’s reported net earnings. The effect of this reclassification increased operating expenses as follows:

                                                                 
Year Ended
Three Months Ended
Nov. 24, Nov. 25, Nov. 26, Nov. 24, Aug. 25, May 26, Feb. 24, Nov. 25,
2006 2005 2004 2006 2006 2006 2006 2005
(unaudited, $ in millions)
 
                                                               
Compensation and benefits
  $ 78     $ 70     $ 29     $ 23     $ 20     $ 22     $ 13     $ 18  
Cost of power generation
    406       386       372       98       101       122       85       99  
 
                                               
Total
  $ 484     $ 456     $ 401     $ 121     $ 121     $ 144     $ 98     $ 117  
 
                                               

13


 

Footnotes (continued)

(7)   Consolidated entities held for investment purposes includes entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities that are not closely related to the firm’s principal businesses. For example, these investments include consolidated entities that hold real estate assets, such as golf courses and hotels in Asia, but exclude investments in entities that primarily hold financial assets. Management believes that it is meaningful to review non-compensation expenses excluding expenses related to these consolidated entities in order to evaluate trends in non-compensation expenses related to the firm’s principal business activities.
 
(8)   Beginning in the fourth quarter of 2006, third party research and brokerage fees and asset management sales and distribution fees have been reclassified from other expenses to brokerage, clearing, exchange and distribution fees in the consolidated statements of earnings. Prior periods have been reclassified to conform to the current presentation.

(9)   Beginning in November 2006, secured borrowings have been reclassified to collateralized financings, a new caption in the consolidated statement of financial condition. Secured long-term borrowings are no longer included within total capital.
 
(10)   Excludes 3,868, 9,901 and 7,382 employees as of November 2006, August 2006 and November 2005, respectively, of consolidated entities held for investment purposes. Compensation and benefits includes $64 million, $83 million and $60 million for the three months ended November 24, 2006, August 25, 2006 and November 25, 2005, respectively, attributable to these consolidated entities.
 
(11)   Beginning in 2006, includes 1,326 and 1,281 employees as of November 2006 and August 2006, respectively, of Goldman Sachs’ consolidated property management and loan servicing subsidiaries. November 2005 has been restated to conform to the current presentation and includes 1,198 employees.
 
(12)   VaR is the potential loss in value of Goldman Sachs’ trading positions due to adverse market movements over a one-day time horizon with a 95% confidence level. The modeling of the risk characteristics of the firm’s trading positions involves a number of assumptions and approximations. While management believes that these assumptions and approximations are reasonable, there is no standard methodology for estimating VaR, and different assumptions and/or approximations could produce materially different VaR estimates. For a further discussion of the calculation of VaR, see Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in the firm’s Annual Report on Form 10-K for the year ended November 25, 2005 and in Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” in the firm’s Quarterly Report on Form 10-Q for the quarter ended August 25, 2006.
 
(13)   Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated.
 
(14)   In the first quarter of 2006, the methodology for classifying certain non-money market assets was changed. The changes were primarily to reclassify certain assets allocated to external investment managers out of alternative investment assets and to reclassify currency funds into alternative investment assets. The changes did not impact total assets under management and prior periods have been reclassified to conform to the current presentation. Substantially all assets under management are valued as of calendar month end.
 
(15)   Excludes an economic hedge on the unrestricted shares of common stock underlying the investment. As of November 24, 2006, the fair value of this hedge was $3.07 billion. Includes the effect of foreign exchange revaluation on the investment, for which the firm also maintains an economic hedge.
 
(16)   Includes economic interests of $3.28 billion as of November 24, 2006 assumed by investment funds managed by Goldman Sachs.

14