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Goldman Sachs Reports Second Quarter 1999 Earnings

NEW YORK - The Goldman Sachs Group, Inc. (NYSE: GS) today reported net earnings, which were reduced by non-recurring items related to its conversion to corporate form, of US$340 million for its fiscal second quarter ended May 28, 1999. Diluted earnings per share, after these non-recurring items, were US$0.71 for the period.

On a pro forma basis, net earnings were US$624 million in the second quarter or US$1.30 per diluted share. These per share results were 16% higher than the pro forma first quarter of 1999 and 30% higher than the pro forma results for the same 1998 period. Pro forma earnings exclude the effects of non-recurring items related to Goldman Sachs' initial public offering (IPO) and assume that the firm's incorporation and other related transactions had occurred at the beginning of each fiscal year. Annualized return on average stockholders' equity, on a pro forma basis, was 32%.

Diluted core earnings per share, on a pro forma basis, were US$1.36 for the second quarter. Pro forma diluted core earnings per share exclude the amortization of the employee initial public offering awards and include all of the restricted stock units awarded to employees in common shares outstanding.



Second Quarter Highlights
  • Net revenues were a record US$3.5 billion for the quarter.
  • The successful completion of Goldman Sachs' US$3.7 billion initial public offering, the largest financial services IPO and the second largest U.S. equity offering of any kind.
  • Continued strength throughout the quarter in the firm's mergers and acquisitions and equity underwriting franchises.
  • Outstanding performance in equities and fixed income, currency and commodities ("FICC") trading.
  • Awarded mandate, effective in the second half of 1999, to serve as the named fiduciary of approximately US$10 billion in assets on behalf of a large pension fund.
"It was a remarkable quarter for Goldman Sachs," said Henry M. Paulson, Jr., Chairman and Chief Executive Officer. "The firm's performance underscores the importance of leadership in our key businesses, as well as the benefits of robust market conditions."



Business Line Review

Investment Banking

Investment Banking generated net revenues of US$1 billion in the second quarter, an 11% increase over the prior quarter and 5% above the same 1998 period. Demand for the firm's advisory and new issues capabilities was strong, reflecting extremely active markets for both. The firm continued its first place ranking in worldwide announced and completed mergers and acquisitions for the calendar year through May 31. [See Note 1]. The firm also maintained its strong market position in equity underwriting, ranking first in worldwide IPOs and second in worldwide public common stock offerings over the same period. [See Note 1]. Net revenue growth was especially strong within the high technology, energy, healthcare, and media and entertainment industry groups.


Trading and Principal Investments

Net revenues in the Trading and Principal Investments business were US$1.7 billion, 27% higher than the prior 1999 quarter and 23% above the same quarter of 1998. Net revenues in Equities rose 110% over the prior year period due to favorable conditions in the global equity markets which resulted in higher customer flows in the firm's global shares and equity derivatives businesses. Strong results in equity arbitrage also contributed to the increase in equities. FICC recorded a modest decline in net revenues compared to a particularly strong period in the prior year and a 4% increase compared to the prior quarter. FICC continued to benefit from the recovery in the fixed income markets that began in the latter part of 1998. Principal investments net revenues increased 13% compared to the same 1998 period due to mark-to-market gains on certain of the firm's investments in its merchant banking funds.

Asset Management and Securities Services

Net revenues in Asset Management and Securities Services were US$749 million for the second quarter, an increase of 2% over the prior period and 17% above 1998's second quarter. In comparison to the end of the first quarter of 1999, assets under supervision were up 4% and assets under management were unchanged. Asset management revenues increased 48% over the prior year period, primarily reflecting a 25% increase in assets under management to US$207 billion. Securities services net revenues were comparable to the prior year period but decreased relative to the prior quarter principally because of declines in the firm's fixed income matched book. Commissions increased 13% over the same 1998 period as generally strong and volatile equity markets resulted in higher transaction volumes in listed equity securities.

Notes:

(1) Securities Data Company - January 1 to May 31, 1999.



Expense Review

Operating Expenses


Operating expenses were US$5.0 billion for the second quarter, an increase of 154% over the same period in 1998 primarily due to non-recurring items recognized in connection with the firm's initial public offering in early May. These non-recurring expense items included US$2.3 billion for employee equity-based awards and US$200 million for a contribution to the Goldman Sachs Fund, a charitable foundation.

Pro forma operating expenses were US$2.4 billion for the second quarter, an increase of 11% compared to the same pro forma period in 1998 primarily due to increased compensation and benefits commensurate with higher profit levels. Non-compensation-related expenses rose 10% due to higher employment levels and growth in business activity.

Income Taxes

The provision for taxes in the second quarter of 1999 reflected a net benefit of US$1.8 billion primarily due to non-recurring items recognized in connection with the firm's initial public offering. These non-recurring items included a net benefit of US$825 million related to the conversion of The Goldman Sachs Group, L.P. to corporate form, a benefit of US$880 million related to the granting of employee equity-based awards and a benefit of US$80 million related to the contribution to the Goldman Sachs Fund. The firm's effective tax rate for the corporate period, excluding the impact of non-recurring items, was 41%.

As of May 28, 1999, total capital was US$29.7 billion, consisting of US$7.9 billion in stockholders' equity and US$21.9 billion in long-term debt. Book value per share was US$16.55, based on common shares outstanding, including the formula-based restricted stock units, of 474,712,271 at period end.

Goldman Sachs is a leading global investment banking and securities firm, providing a full range of investing, advisory and financing services worldwide to a substantial and diversified client base, which 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

Statements in this press release may constitute "forward-looking statements". These forward-looking statements represent only the firm's belief regarding future events, many of which, by their nature, are inherently uncertain and outside of its control. For a discussion of some of the risks and factors that could affect the firm's future results, see the description of "Risk Factors" in its Prospectus, dated May 3, 1999.



Financial Data

Financial data are available in a spreadsheet [Microsoft® Excel®, 60KB].




Contacts

Investor Contact:
John Andrews
Tel: 1-212-357-2674


Media Contact:
Kate Baum
Tel: 1-212-902-0348