PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following Pro Forma Consolidated Financial Information is based upon the historical consolidated financial statements of Goldman Sachs. In addition to the offerings, this information reflects the pro forma effects of the following items:

  • the incorporation transactions and the related transactions described under "Certain Relationships and Related Transactions — Incorporation and Related Transactions";

  • compensation to managing directors who were profit participating limited partners;

  • compensation in the form of restricted stock units awarded to employees in lieu of ongoing cash compensation;

  • the provision for corporate income taxes;

  • the redemption of our senior limited partnership interests;

  • cash distributions by The Goldman Sachs Group, L.P. to its partners in the second quarter of fiscal 1999 in accordance with its partnership agreement, including distributions for partner income taxes related to earnings in the first quarter of fiscal 1999, capital withdrawals by the managing directors who were profit participating limited partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association and distributions to satisfy obligations to retired limited partners; and

  • the recognition of net tax assets.

These items are collectively referred to as the "Pro Forma Adjustments".

The Pro Forma Consolidated Income Statement Information does not give effect to the following items because of their non-recurring nature:

  • the restricted stock units awarded to employees based on a formula;

  • the initial irrevocable contribution of shares of common stock to the defined contribution plan;

  • the recognition of net tax assets; and

  • a contribution to the Goldman Sachs Fund, a charitable foundation.

The Pro Forma Consolidated Balance Sheet Information, however, does give effect to these non-recurring items.

The Pro Forma Adjustments are based upon available information and certain assumptions that management believes are reasonable. The Pro Forma Consolidated Financial Information and accompanying notes should be read in conjunction with the consolidated financial statements and their notes.

The Pro Forma Consolidated Financial Information presented is not necessarily indicative of the results of operations or financial position that might have occurred had the Pro Forma Adjustments actually taken place as of the dates specified, or that may be expected to occur in the future.

Pro Forma Consolidated Income Statement Information
(in millions, except per share data)


Year Ended November 27, 1998

Historical

Pro Forma
Adjustments

Pro Forma

Adjustment
for Offerings

Pro Forma
as Adjusted
for Offerings

Total revenues $ 22,478 $ — $ 22,478 $— $22,478
Interest expense, principally on
   short-term funding
13,958

28(a)

13,986



13,986

Revenues, net of interest expense 8,520 (28)
8,492 8,492
Compensation and benefits, excluding
   employee initial public offering awards
3,838 303(b)
4,141 4,141
Employee initial public offering awards 461(c)
461 461
Other operating expenses 1,761



1,761



1,761

Total operating expenses 5,599 764 6,363 6,363
Pre-tax earnings 2,921 (792) 2,129 2,129
Provision for taxes 493

380(d)

873



873

Net earnings $ 2,428

$(1,172)

$ 1,256

$—

$ 1,256

Shares outstanding:
   Basic 424(e)
51(f)
475
   Diluted 428(e)
51(f)
479
Earnings per share:
   Basic $ 2.96 $ 2.65
   Diluted 2.93 2.62
 
Pro Forma Consolidated Income Statement Information
(unaudited)
(in millions, except per share data)


Three Months Ended February 26, 1999

Historical

Pro Forma
Adjustments

Pro Forma

Adjustment
for Offerings

Pro Forma
as Adjusted
for Offerings

Total revenues $ 5,856 $ — $ 5,856 $— $ 5,856
Interest expense, principally on
    short-term funding
2,861

7(a)

2,868



2,868

Revenues, net of interest expense 2,995 (7)
2,988 2,988
Compensation and benefits, excluding
    employee initial public offering awards
1,275 191(b)
1,466 1,466
Employee initial public offering awards 115(c)
115 115
Other operating expenses 532



532


532

Total operating expenses 1,807 306 2,113 2,113
Pre-tax earnings 1,188 (313)
875 875
Provision for taxes 181

178(d)

359



359

Net earnings $ 1,007

$ (491)

$ 516

$—

$ 516

Shares outstanding:
   Basic 427(e)
51(f)
478
   Diluted 437(e)
51(f)
488
Earnings per share:
   Basic $ 1.21 $ 1.08
   Diluted 1.18 1.06

The accompanying notes are an integral part of the Pro Forma Consolidated Financial Information.

Pro Forma Consolidated Balance Sheet Information
(unaudited)
(in millions, except per share data)


As of February 26, 1999

Historical

Pro Forma
Adjustments

Pro Forma

Adjustment
for Offerings

Pro Forma
as Adjusted
for Offerings

Cash and cash equivalents $ 3,345 $ (200)(g)
$ 134 $2,568(f)
$ 2,702
(891)(h)
(888)(i)
(1,232)(k)
Other 227,279

1,815(l)

229,094



229,094

Total assets $230,624

$(1,396)

$229,228

$2,568

$231,796

Long-term borrowings $ 20,405 $ 371(a)
$ 20,776 $ — $ 20,776
Other 203,228

165(b)

203,393



203,393

Total liabilities 223,633 536 224,169 224,169
Partners' capital, partners' capital
    allocated for income taxes and
    potential withdrawals, and
    accumulated other comprehensive
    income
6,991 (371)(a)
(891)(h)
(888)(i)
(3,609)(j)


(1,232)(k)







Total partnership capital 6,991 (6,991)
Common stock and nonvoting common
    stock, par value $0.01 per share
4(j)
4 4
Restricted stock units 3,356(m)
3,356 3,356
Additional paid-in capital 3,605(j)
4,271 2,568(f)
6,839
666(m)
Retained earnings (165)(b)
(807)
(807)
(200)(g)
1,815(l)
(2,257)(m)
Unearned compensation

(1,765)(m)

(1,765)



(1,765)

Total stockholders' equity 5,059 5,059 2,568 7,627
Total liabilities, partnership capital and
   stockholders' equity
$230,624

$(1,396)

$229,228

$2,568

$231,796

Book value per share $ 11.94 $ 16.07

The accompanying notes are an integral part of the Pro Forma Consolidated Financial Information.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

Note 1: Basis of Presentation

As permitted by the rules and regulations of the SEC, the Pro Forma Consolidated Financial Information is presented on a condensed basis. The Pro Forma Consolidated Balance Sheet Information was prepared as if the Pro Forma Adjustments had occurred as of February 26, 1999. Book value per share equals stockholders' equity divided by the shares of common stock and nonvoting common stock outstanding, including the shares of common stock underlying the restricted stock units awarded to employees based on a formula, of 423,712,271 prior to the offerings and 474,712,271 as adjusted for the offerings. See Note 2(e) below for a further discussion of shares outstanding.

The Pro Forma Consolidated Income Statement Information for the fiscal year ended November 27, 1998 and the three-month fiscal period ended February 26, 1999 was prepared as if the Pro Forma Adjustments had taken place at the beginning of fiscal 1998.

For pro forma purposes, the offerings and, where applicable, the related transactions reflect the initial public offering price of $53.00 per share.

Note 2: Pro Forma Adjustments and Adjustment for Offerings

(a) Retired limited partners exchange of interests for debentures. Adjustment to reflect the issuance of junior subordinated debentures to the retired limited partners in exchange for their interests in The Goldman Sachs Group, L.P. and certain affiliates. These junior subordinated debentures will have a principal amount of $295 million, an initial carrying value of $371 million and an effective interest rate of 7.5%. The annual interest expense to be recorded on these debentures in the first year will be $28 million.

(b) Compensation and benefits, excluding employee initial public offering awards. Since Goldman Sachs has operated as a partnership, there is no meaningful historical measure of the compensation and benefits that would have been paid, in corporate form, to the managing directors who were profit participating limited partners for services rendered in fiscal 1998 and in the three months ended February 26, 1999. Accordingly, management has estimated these amounts, which are substantially performance-based, by reference to a pro forma ratio of total compensation and benefits to net revenues that it deemed appropriate for Goldman Sachs as a whole, given the historical operating results in these periods. As a result, additional compensation and benefits expense related to the managing directors who were profit participating limited partners of $427 million in fiscal 1998 and $242 million in the three months ended February 26, 1999 has been recorded on the Pro Forma Consolidated Income Statement Information.

The future compensation and benefits related to services rendered by the managing directors who were profit participating limited partners will be based upon measures of financial performance, including net revenues, pre-tax earnings and the ratio of compensation and benefits to net revenues, as described under "Management — The Partner Compensation Plan — Determination of Salary and Bonus". Management anticipates that, consistent with industry practice, it will adjust the form and structure of its compensation arrangements to achieve a relationship of compensation and benefits to net revenues within a range that it believes is appropriate given prevailing market conditions.

In addition to the employee initial public offering awards, restricted stock units will also be granted to employees in lieu of a portion of ongoing cash compensation. Of the total restricted stock units assumed to be granted in lieu of cash compensation, 50% will require future service as a condition to the delivery of the underlying shares of common stock. In accordance with Accounting Principles Board Opinion No. 25, the restricted stock units with future service requirements will be recorded as compensation expense over the four-year service period following the date of grant. Goldman Sachs expects to record this expense over the service period as follows: 52%, 28%, 14% and 6% in years one, two, three and four, respectively. If these stock-based awards had been made from the beginning of fiscal 1998, historical compensation expense would have been reduced by $124 million in fiscal 1998 and $51 million in the three months ended February 26, 1999 because a portion of cash compensation recorded in these periods would have been replaced by restricted stock units with future service requirements. These reductions are reflected in the Pro Forma Consolidated Income Statement Information.

The adjustment of $165 million to the Pro Forma Consolidated Balance Sheet Information reflects the additional compensation and benefits that we would have recorded assuming the Pro Forma Adjustments had occurred as of February 26, 1999. This adjustment includes $232 million in compensation and benefits related to the managing directors who were profit participating limited partners offset by a reduction of $67 million related to the issuance of restricted stock units to employees, in lieu of a portion of cash compensation, for which future service is required as a condition to the delivery of the underlying shares of common stock. This adjustment to the Pro Forma Consolidated Balance Sheet Information excludes the compensation expense of $26 million in the first quarter of fiscal 1999 related to the portion of restricted stock units that, for pro forma income statement purposes only, were assumed to be awarded in fiscal 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Operating Expenses" for a discussion of the actual expense we expect to record in the second quarter of fiscal 1999.

(c) Expense related to employee initial public offering awards. Adjustment to reflect the amortization of the 33,292,869 restricted stock units awarded to employees on a discretionary basis. These restricted stock units will have a value of $1,765 million, approximately 26% of which will be amortized as a non-cash expense in the twelve months following the date of grant. The remaining 74% of the value of these restricted stock units will be amortized over the next four years as follows: 26%, 26%, 15% and 7% in years two, three, four and five, respectively.

The options to purchase 40,127,592 shares of common stock awarded to employees on a discretionary basis will be accounted for pursuant to Accounting Principles Board Opinion No. 25, as permitted by paragraph 5 of Statement of Financial Accounting Standards No. 123. Since these options will have no intrinsic value on the date of grant, no compensation expense will be recognized.

The estimated fair value of these discretionary options on the date of grant is $709 million using a Black-Scholes option pricing model. If Statement of Financial Accounting Standards No. 123 had been applied, compensation expense of $185 million and $46 million would have been included in the Pro Forma Consolidated Income Statement Information in fiscal 1998 and the three months ended February 26, 1999, respectively. See "Management — The Employee Initial Public Offering Awards" for a description of these awards.

(d) Pro forma provision for income taxes. Adjustment to reflect a pro forma provision for income taxes for Goldman Sachs in corporate form at an effective tax rate of 41%.

(e) Pro forma common stock and nonvoting common stock. Shares outstanding, computed on a weighted-average basis, after giving effect to the Pro Forma Adjustments. For the purpose of calculating basic earnings per share and book value per share, shares outstanding prior to the offerings includes the nonvoting common stock, the shares of common stock irrevocably contributed to the defined contribution plan and, pursuant to Statement of Financial Accounting Standards No. 128, the shares of common stock underlying the restricted stock units awarded to employees based on a formula since future service is not required as a condition to the delivery of the underlying shares of common stock.

With respect to the three months ended February 26, 1999, pro forma basic shares outstanding also includes the shares of common stock underlying the restricted stock units assumed to be awarded in lieu of ongoing cash compensation in fiscal 1998 for which future service would not have been required as a condition to the delivery of the underlying shares of common stock.

Pro forma diluted shares outstanding prior to the offerings reflects the dilutive effect of the common stock deliverable pursuant to the restricted stock units awarded to employees on a discretionary basis, and, with respect to the three months ended February 26, 1999, the dilutive effect of the shares of common stock underlying the restricted stock units assumed to be awarded in lieu of ongoing cash compensation in fiscal 1998 for which future service would have been required as a condition to the delivery of the underlying shares of common stock.

(f) Adjustment for the offerings. Shares as adjusted to reflect the issuance of 51,000,000 shares of common stock offered by The Goldman Sachs Group, Inc., which reflects the exercise, in full, of the underwriters' options to purchase 9,000,000 shares of common stock. Net proceeds from the offerings reflect the deduction of underwriting discounts and of estimated expenses payable by Goldman Sachs in connection with the offerings.

(g) Charitable contribution. Adjustment to reflect the charitable contribution of $200 million.

(h) Retired limited partner exchanges of interests for cash. Adjustment to reflect the payment of $891 million in cash to the retired limited partners in exchange for their interests in The Goldman Sachs Group, L.P. and certain affiliates.

(i) Redemption of senior limited partnership interests for cash. Adjustment to reflect the redemption of the senior limited partnership interests for cash of $888 million by The Goldman Sachs Group, L.P. prior to the incorporation transactions described under "Certain Relationships and Related Transactions — Incorporation and Related Transactions — Incorporation Transactions".

(j) Partner exchanges of interests for shares. Adjustment of $3,609 million to reflect the issuance of 265,019,073 shares of common stock to the managing directors who were profit participating limited partners, 47,270,551 shares of common stock to retired limited partners, 30,425,052 shares of common stock and 7,440,362 shares of nonvoting common stock to Sumitomo Bank Capital Markets, Inc. and 30,975,421 shares of common stock to Kamehameha Activities Association, in exchange for their respective interests in The Goldman Sachs Group, L.P. and certain affiliates.

(k) Cash distributions. Adjustment to reflect cash distributions of $1,232 million by The Goldman Sachs Group, L.P. to its partners, including Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, in the second quarter of fiscal 1999 in accordance with its partnership agreement, including distributions for partner income taxes related to earnings in the first quarter of fiscal 1999, capital withdrawals by the managing directors who were profit participating limited partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association and distributions to satisfy obligations to certain retired limited partners.

Goldman Sachs expects that additional cash distributions for partner income taxes related to earnings in the second quarter of fiscal 1999 will be significant due, in part, to certain expenses that are not deductible by the partners. Goldman Sachs expects to record a substantial tax asset on the consummation of the offerings related to these expenses. These cash distributions and the related tax asset are not reflected in the Pro Forma Consolidated Balance Sheet Information.

(l) Net tax assets. Adjustment to reflect the addition to retained earnings related to the recognition of a net tax asset of $1,815 million under Statement of Financial Accounting Standards No. 109 at an effective tax rate of 41%. The components of this net tax asset, which will be included in "Other assets" on the consolidated statement of financial condition, are (i) a net benefit of $808 million related to the conversion of The Goldman Sachs Group, L.P. to corporate form, (ii) a benefit of $925 million related to the 30,025,946 restricted stock units awarded to employees based on a formula and the initial irrevocable contribution of 12,555,866 shares of common stock to the defined contribution plan and (iii) a benefit of $82 million related to the charitable contribution.

As discussed in Note 2(k) above, Goldman Sachs expects to record a substantial tax asset on the consummation of the offerings related to certain expenses that are not deductible by the partners in fiscal 1999. The tax asset associated with these expenses in the second quarter of fiscal 1999 is not reflected in the Pro Forma Consolidated Balance Sheet Information.

(m) Effect on stockholders' equity of employee initial public offering awards. Adjustment to reflect the effect on the components of stockholders' equity, excluding the tax benefit described in Note 2(l) above, of (i) the restricted stock units awarded to employees based on a formula, (ii) the initial irrevocable contribution of shares of common stock to the defined contribution plan and (iii) the restricted stock units awarded to employees on a discretionary basis.

The following table sets forth each of these components as of February 26, 1999:

Common Stock
and Nonvoting
Common Stock

Restricted
Stock Units

Additional
Paid-In
Capital

Retained
Earnings

Unearned
Compensation

(in millions)
Restricted stock units awarded
   based on a formula
$— $ 1,591 $— $ (1,591)
$ —
Contribution of shares of
   common stock to the defined
   contribution plan
666 (666)
Restricted stock units awarded
   on a discretionary basis


1,765





(1,765)

Total Adjustment $—


$ 3,356

$666

$ (2,257)

$ (1,765)

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