Goldman Sachs Reports Record Earnings Per Common Share of $19.69 for 2006; Fourth Quarter Earnings Per Common Share Were $6.59.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- The Goldman Sachs The Goldman Sachs Group, Inc., or simply Goldman Sachs (NYSE: GS) is one of the world's largest global investment banks. Goldman Sachs was founded in 1869, and is headquartered in the Lower Manhattan area of New York City at 85 Broad Street. Group, Inc. (NYSE NYSE See: New York Stock Exchange : GS) today reported net revenues of $37.67 billion and net earnings of $9.54 billion for the year ended November November: see month. 24, 2006. Diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. 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 Possessing a physical form that can be touched or felt. Tangible refers to that which can be seen, weighed, measured, or apprehended by the senses. A tangible object is something that is real and substantial. An automobile is an example of tangible Personal Property. common shareholders' equity Shareholders' Equity A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares. (1) (ROTE rote 1 n. 1. A memorizing process using routine or repetition, often without full attention or comprehension: learn by rote. 2. Mechanical routine. ) was 39.8% and return on average common shareholders' equity (ROE A fictitious surname used for an unknown or anonymous person or for a hypothetical person in an illustration. A lawsuit is generally named for the persons who are parties to it. ) 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 annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. ROTE (1) was 50.0% and annualized ROE was 41.5% for the fourth quarter. Excluding non-cash expenses Noun 1. non-cash expense - an expense (such as depreciation) that is not paid for in cash disbursal, disbursement, expense - amounts paid for goods and services that may be currently tax deductible (as opposed to capital expenditures) of $637 million related to the accounting for certain share-based awards under SFAS SFAS Statement of Financial Accounting Standards SFAS Special Forces Assessment and Selection SFAS Student Financial Aid Services SFAS Sport Fishing Association of Singapore SFAS Safety Features Actuation System SFAS Statewide Fixed Assets System 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 Year-to-date (YTD) The period beginning at the start of the calendar year up to the current 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 FICC Fixed Income Clearing Corporation FICC Federal Identity Credentialing Committee FICC Federal Interagency Coordinating Council FICC Fixed Income, Currency and Commodities FICC Frequency Interference Control Center ) 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 Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. 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.
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"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."
Net Revenues
Investment Banking
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Full Year
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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 Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. 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 investment-grade Of, relating to, or being a bond suitable for purchase by institutions under the prudent man rule. Investment-grade is restricted to those bonds graded BBB and above by Standard & Poor's and graded Baa3 and above by Moody's. activity. The firm's investment banking backlog Backlog The total value of sales orders waiting to be fulfilled. Notes: This figure is used mainly in the manufacturing industry. Increases or decreases in a company's backlog indicate the future direction of sales and earnings. 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 char·ac·ter·ize tr.v. character·ized, character·iz·ing, character·iz·es 1. To describe the qualities or peculiarities of: characterized the warden as ruthless. 2. by strong customer-driven activity and favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. market opportunities. In addition, corporate credit spreads tightened, the yield curve flattened flat·ten v. flat·tened, flat·ten·ing, flat·tens v.tr. 1. To make flat or flatter. 2. To knock down; lay low: The boxer was flattened with one punch. and volatility Volatility 1. A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time. 2. A variable in option pricing formulas that denotes the extent to which the return of the underlying asset will fluctuate between now and the 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 derivatives In finance, contracts whose value is derived from another asset, which can include stocks, bonds, currencies, interest rates, commodities, and related indexes. Purchasers of derivatives are essentially wagering on the future performance of that asset. , 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 Industrial and Commercial Bank of China (ICBC) (Simplified Chinese: 中国工商银行; Traditional Chinese: Limited (ICBC ICBC Industrial and Commercial Bank of China ICBC Insurance Corporation of British Columbia ICBC International Commercial Bank of China ICBC Imax Cargo Bay Camera (Space Shuttle) ICBC Interagency Committee on Back Contamination ), a $527 million gain related to the firm's investment in the convertible preferred stock Convertible Preferred Stock Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Also known as "convertible preferred shares". of Sumitomo Mitsui Financial Group Sumitomo Mitsui Financial Group (株式会社三井住友フィナンシャルグループ , Inc. (SMFG SMFG Sumitomo Mitsui Financial Group (Japan) SMFG System Management Functional Group ) 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. 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 Prime Brokerage A special group of services that many brokerages give to special clients. The services provided under prime brokering are securities lending, leveraged trade executions, and cash management, among other things. business continued to generate strong results, primarily reflecting significantly higher global customer balances in securities lending Securities Lending When a brokerage lends securities owned by its clients to short sellers. Notes: This allows brokers to create additional revenue (commissions) on the short sale transaction. 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 billionand 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 Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. 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. 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 Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. 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 con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: 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 Verb 1. conform to - satisfy a condition or restriction; "Does this paper meet the requirements for the degree?" fit, meet coordinate - be co-ordinated; "These activities coordinate well" the current presentation, with no impact to the firm's reported net earnings (6). The effect of this reclassification Reclassification The process of changing the class of mutual funds once certain requirements have been met. These requirements are generally placed on load mutual funds. Reclassification is not considered to be a taxable event. on the ratio of compensation and benefits to net revenues was to decrease the ratio by approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. 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 BROKERAGE, contracts. The trade or occupation of a broker; the commissions paid to a broker for his services. , 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 Gaining or having physical possession of real property subject to, or in the absence of, legal right or title. In a fire insurance policy, for example, the term 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 geographic /geo·graph·ic/ (je?o-graf´ik) in pathology, of or referring to a pattern that is well demarcated, resembling outlines on a map. geographic pertaining to geography. 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 Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. of $3.10 billion) and $122.84 billion in unsecured Unsecured A loan or equity interest that is given without any guarantee of payment, performance, satisfaction or opportunity for return from the recipient. No property, interest or security is used as collateral in either a guarantee or a pledge. long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. borrowings (9). Book value per common share Book Value Per Common Share A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly. Formula: was $72.62 based on common shares outstanding, including restricted stock units Restricted stock units Similar to restricted stock. However, the unit represents a promise that employees will receive stock in the future. The units do not pay dividends until the stock is vested. 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) 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 The right or permission to use a system resource; the process of granting access. See access control. under the firm's existing common stock repurchase Stock repurchase A firm's repurchase of outstanding shares of its common stock. program is 52.6 million shares.
Dividends
The Board of Directors of The Goldman Sachs Group, Inc. (the Board) declared de·clare v. de·clared, de·clar·ing, de·clares v.tr. 1. To make known formally or officially. See Synonyms at announce. 2. To state emphatically or authoritatively; affirm. 3. a dividend of $0.35 per common share to be paid on February February: see month. 22, 2007 to common shareholders of record on January January: see month. 23, 2007. The Board also declared dividends declared dividend A dividend authorized by a firm's board of directors. At the time a dividend is declared, the firm creates a liability for the dividend's payment. 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 DEPOSITARY, contracts. He with whom a deposit is confided or made. 2. It is, the essence of the contract of deposits that it should be gratuitous on the part 'of the depositary. 9 M. R. 470. 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.
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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 diversified (di·verˑ·s 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 London, city, Canada London, city (1991 pop. 303,165), SE Ont., Canada, on the Thames River. The site was chosen in 1792 by Governor Simcoe to be the capital of Upper Canada, but York was made capital instead. London was settled in 1826. , Frankfurt Frankfurt (frängk`f  rt) or Frankfurt am Main (frängk`f , Tokyo Tokyo (tō`kēō), city (1990 pop. 8,163,573), capital of Japan and of Tokyo prefecture, E central Honshu, at the head of Tokyo Bay. , Hong Kong Hong Kong (hŏng kŏng), Mandarin Xianggang, special administrative region of China, formerly a British crown colony (2005 est. pop. 6,899,000), land area 422 sq mi (1,092 sq km), adjacent to Guangdong prov. and other major
financial centers around the world.
Cautionary Note Regarding Forward-Looking Statements ---------------------------------------------------- This press release contains "forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. ." 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 Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 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 mod·i·fy v. mod·i·fied, mod·i·fy·ing, mod·i·fies v.tr. 1. To change in form or character; alter. 2. 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 A change or alteration in existing materials. Modification generally has the same meaning in the law as it does in common parlance. The term has special significance in the law of contracts and the law of sales. 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 reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. 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 Investor relations The process by which the corporation communicates with its investors. 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.
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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:
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(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:
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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:
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(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.
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