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Goldman Sachs Reports Second Quarter Earnings Per Share Of $1.36

NEW YORK – The Goldman Sachs Group, Inc. (NYSE:GS) today reported net earnings of $695 million for its fiscal second quarter ended May 30, 2003. Earnings per diluted share were $1.36 compared to $1.06 for the second quarter of 2002 and $1.29 for the first quarter of 2003. Annualized return on average tangible shareholders' equity (1) was 18.7% for the second quarter of 2003 and 18.5% for the first half of 2003. Annualized return on average shareholders' equity was 14.1% for the second quarter of 2003 and 13.9% for the first half of 2003.

Business Highlights


  • Goldman Sachs retained its leadership position in global mergers and acquisitions, ranking first in announced and completed worldwide mergers and acquisitions.(2)

  • The firm ranked first in worldwide equity and equity-related offerings and worldwide common stock offerings.(2)

  • Fixed Income, Currency and Commodities (FICC) produced net revenues of $1.59 billion, its second best quarter ever.

  • On June 24, 2003, the Board of Directors declared a dividend of $0.25 per share, an increase from $0.12 per share paid in prior quarters.




"Second quarter earnings reflect strong operating results from our Fixed Income, Currency and Commodities franchise and, given the continued difficult business environment, solid performance in our other core businesses," said Henry M. Paulson, Jr., Chairman and Chief Executive Officer. "Although we have yet to see sustained evidence of an economic recovery, stronger recent performance in the capital markets and improved investor sentiment have created a more optimistic outlook for our business."



Net Revenues


Investment Banking

Net revenues in Investment Banking were $659 million compared to $762 million for the second quarter of 2002 and $718 million for the first quarter of 2003. The reduction in Investment Banking net revenues compared to the same period last year was due to lower levels of activity across nearly all sectors. The firm's investment banking backlog increased during the quarter.

Net revenues in Financial Advisory were $258 million compared to $428 million for the second quarter of 2002, primarily reflecting a decline in industry-wide completed mergers and acquisitions. (3) Net revenues in the firm's Underwriting business were $401 million compared to $334 million for the same 2002 period, reflecting higher net revenues from debt new issuance activity, partially offset by lower net revenues from equity underwriting.


Trading and Principal Investments

Net revenues in Trading and Principal Investments were $2.01 billion compared to $1.44 billion for the second quarter of 2002 and $2.15 billion for the first quarter of 2003.

FICC net revenues of $1.59 billion increased 39% compared to the same 2002 period, reflecting higher net revenues across nearly all businesses, particularly credit products, interest rate products, currencies and mortgages. FICC continued to operate in a favorable environment, characterized by tightening credit spreads, declining interest rates, a steep yield curve, volatile currency markets and strong customer demand.

Net revenues in Equities were $446 million compared to $418 million for the second quarter of 2002, primarily reflecting higher levels of customer activity in equity derivatives, as well as higher net revenues in equity arbitrage, partially offset by lower net revenues in the firm's European shares business.

Principal Investments recorded negative net revenues of $28 million, primarily due to an unrealized loss of $113 million related to the firm's convertible preferred stock investment in Sumitomo Mitsui Financial Group, Inc. (SMFG), partially offset by real estate disposition gains.


Asset Management and Securities Services

Net revenues in Asset Management and Securities Services were $1.32 billion, 20% lower than the second quarter of 2002 and unchanged from the first quarter of 2003.

Asset Management net revenues of $404 million decreased 9% compared to last year's second quarter, primarily reflecting lower management and fund origination fees. During the quarter, assets under management were unchanged, reflecting net asset outflows of $18 billion, primarily in money market assets, offset by market appreciation, primarily in equity and fixed income assets.

Securities Services net revenues were $279 million compared to $262 million for the same 2002 period, primarily reflecting higher customer balances in the firm's securities lending and margin lending businesses and higher net revenues in the firm's matched book business.

Commissions were $635 million compared to $948 million for the same period last year, primarily reflecting lower equity commissions in the global shares businesses, reduced execution and clearing fees, as well as lower merchant banking overrides.



Expenses

Operating expenses were $2.95 billion, essentially unchanged from last year's second quarter.

Compensation and benefits of $1.99 billion increased 3% compared to the same period last year, commensurate with higher net revenues. The ratio of compensation and benefits to net revenues was 50% for the first half of 2003, consistent with the first half of 2002. Employment levels decreased 3% during the quarter and 7% compared to the end of 2002.

Non-compensation-related expenses of $921 million decreased 2% compared to the same period last year, primarily reflecting lower market development costs, brokerage, clearing and exchange fees, and communications and technology expenses. These decreases were partially offset by higher occupancy costs, reflecting exit costs of $36 million associated with reductions in the firm's global office space.

The effective income tax rate was 34% for the first half of 2003, down from 35% for both the first quarter of 2003 and fiscal year 2002. The lower effective income tax rate reflects an increase in tax credits and a change in the firm's geographic earnings mix.



Capital


As of May 30, 2003, total capital was $71.31 billion, consisting of $20.04 billion in shareholders' equity and $51.27 billion in long-term debt. (4) Book value per share was $41.39 based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 484.2 million at period end. Tangible book value per share was $31.56. (1)

During the quarter, the firm repurchased 3.7 million shares of its common stock at an average price of $74.02 per share. The remaining share authorization under the firm's existing common stock repurchase program is 12.0 million shares.



Dividend


In consideration of, among other factors, recent changes in U.S. tax legislation, the Board of Directors of The Goldman Sachs Group, Inc. increased the firm's quarterly dividend to $0.25 per share from $0.12 per share paid in prior quarters. The dividend will be paid on August 28, 2003 to common shareholders of record on July 29, 2003.



Shares Eligible for Future Sale


On June 26, 2003, approximately 51 million shares of common stock related to the firm's initial public offering (IPO) and subsequent acquisitions, primarily held by people who are active at the firm, become eligible for sale. In addition, approximately 11 million employee stock options granted at the time of the IPO and in subsequent acquisitions become exercisable on that date. Separately, in connection with the firm's ongoing policy of facilitating the orderly entry of shares into the market, up to an additional 5 million shares of common stock may become eligible for sale during the third quarter. Substantially all of the above-referenced shares are subject to compliance with blackout procedures and volume restrictions.



Footnotes


(1) Tangible shareholders' equity equals total shareholders' equity less goodwill and identifiable intangible assets. Management believes that tangible shareholders' equity is a meaningful measure because it reflects the equity deployed in the firm's businesses. Annualized return on average tangible shareholders' equity is computed by dividing annualized net earnings by average monthly tangible shareholders' equity. Tangible book value per share is computed by dividing tangible shareholders' equity by the number of common shares outstanding, including restricted stock units granted to employees with no future service requirements. The following table sets forth the reconciliation of shareholders' equity to tangible shareholders' equity:

Average for the
As of
Six Months
Ended
May 30, 2003
Three Months
Ended
May 30, 2003

May 30, 2003
 
(unaudited, $ in millions)
 
Shareholders' equity $ 19,483 $ 19,691 $ 20,042
Less: Goodwill and identifiable intangible assets 4,803 4,785 4,763
 
 
Tangible shareholders' equity $ 14,680 $ 14,906 $ 15,279
 

(2) Thomson Financial Securities Data - January 1, 2003 through May 30, 2003.

(3) Thomson Financial Securities Data - March 1, 2003 through May 30, 2003, and February 23, 2002 through May 31, 2002.

(4) Includes long-term debt of $3 billion issued during the quarter by William Street Funding Corp (a wholly-owned subsidiary of The Goldman Sachs Group, Inc. formed to raise funding to support loan commitments made by another William Street entity to investment grade clients) and $718 million issued by other consolidated variable interest entities, in each case, where the holders of the debt have no recourse to the general credit of the firm.




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 "Business - Certain Factors That May Affect Our Business" in the firm's Annual Report on Form 10-K for the fiscal year ended November 29, 2002.

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 we expect 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 "Business - Certain Factors That May Affect Our Business" in the firm's Annual Report on Form 10-K for the fiscal year ended November 29, 2002.




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, http://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 1121301, 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



Financial Data

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Contacts

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

Media Contact:
Peter Rose
Tel:1-212-902-5400