The Goldman Sachs Group, Inc. (GS) 8-K Other events

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):
September 23, 2003

THE GOLDMAN SACHS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	No. 001-14965	No. 13-4019460
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

85 Broad Street New York, New York	10004
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:(212) 902-1000

N/A

(Former Name or Former Address, if Changed Since Last Report)

TABLE OF CONTENTS

	Item 5. Other Events.
	Item 7. Financial Statements and Exhibits.
	Item 12. Results of Operations and Financial Condition.
SIGNATURE
PRESS RELEASE

Item 5. Other Events.

     On September 23, 2003, The Goldman Sachs Group, Inc. (the “Registrant”) reported net earnings of $677 million for its fiscal third quarter ended August 29, 2003. Earnings per diluted share were $1.32 compared to $1.00 for the third quarter of 2002 and $1.36 for the second quarter of 2003. Annualized return on average tangible shareholders’ equity⁽¹⁾ was 17.8% for the third quarter of 2003 and 18.3% for the first nine months of 2003. Annualized return on average shareholders’ equity was 13.4% for the third quarter of 2003 and 13.8% for the first nine months of 2003.

Net Revenues

Investment Banking

     Net revenues in Investment Banking were $687 million compared to $652 million for the third quarter of 2002 and $659 million for the second quarter of 2003. Net revenues in Financial Advisory were $304 million compared to $315 million for the third quarter of 2002, reflecting continued weakness in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $383 million compared to $337 million for the same 2002 period, primarily reflecting higher net revenues from debt new issuance activity. The firm’s investment banking backlog declined during the quarter.

Trading and Principal Investments

     Net revenues in Trading and Principal Investments were $1.62 billion compared to $1.49 billion for the third quarter of 2002 and $2.01 billion for the second quarter of 2003.

     Fixed Income, Currency and Commodities (FICC) net revenues of $828 million decreased 37% compared to the same 2002 period, primarily due to weak results in mortgages and currencies, reflecting higher interest rates, widening mortgage spreads and volatile currency markets. Net revenues in interest rate products were lower compared to a particularly strong third quarter of 2002. These decreases were partially offset by higher net revenues in credit products, which benefited from continued narrowing of credit spreads.

     Net revenues in Equities were $441 million compared to $281 million for the third quarter of 2002, primarily due to higher net revenues in equity arbitrage, as well as in the firm’s global shares businesses, partially offset by lower net revenues in equity derivatives, reflecting reduced market volatility.

     Principal Investments recorded net revenues of $346 million, primarily due to an unrealized gain related to the firm’s convertible preferred stock investment in Sumitomo Mitsui Financial Group, Inc. (SMFG) of $277 million, as well as increases in the fair value of other corporate principal investments.

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Asset Management and Securities Services

     Net revenues in Asset Management and Securities Services were $1.49 billion compared to $1.50 billion for the third quarter of 2002 and $1.32 billion for the second quarter of 2003.

     Asset Management net revenues of $481 million increased 20% compared to last year’s third quarter, primarily reflecting higher assets under management, the contribution from Ayco, which was acquired on July 1, 2003,⁽²⁾ and increased incentive income. During the quarter, assets under management increased 5%, reflecting net asset inflows of $10 billion, spread across all asset classes, $4 billion from the acquisition of Ayco, primarily in fixed income and equity assets, and market appreciation of $5 billion, primarily in equity assets.

     Securities Services net revenues were $326 million compared to $266 million for the same 2002 period, primarily reflecting higher customer balances in the firm’s securities lending and margin lending businesses.

     Commissions were $684 million compared to $838 million for the same period last year, primarily reflecting lower equity commissions in the firm’s U.S. shares businesses, reduced clearing fees and lower merchant banking overrides.

Expenses

     Operating expenses were $2.81 billion, essentially unchanged from last year’s third quarter.

     Compensation and benefits of $1.90 billion increased 4% 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 nine months of 2003, consistent with the first nine months of 2002. Employment levels increased 6% during the quarter to 19,476, due primarily to the inclusion of 1,028 employees from the acquisition of Ayco. Excluding Ayco, employment levels were essentially unchanged during the quarter.

     Non-compensation-related expenses of $898 million decreased 8% compared to the same period last year, primarily reflecting lower depreciation and amortization expenses, occupancy expenses, brokerage, clearing and exchange fees, and market development expenses.

     The effective income tax rate was 33% for the first nine months of 2003, down from 34% for the first half of 2003 and 35% for 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 August 29, 2003, total capital was $72.89 billion, consisting of $20.44 billion in shareholders’ equity and $52.45 billion in long-term debt.⁽³⁾ Book value per share was $41.72 based on common shares outstanding, including restricted stock units granted to employees with no

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future service requirements, of 489.9 million at period end. Tangible book value per share was $31.12.⁽¹⁾

     During the quarter, the firm repurchased 3.2 million shares of its common stock at an average price of $85.32 per share. The remaining share authorization under the firm’s existing common stock repurchase program is 9.9 million shares.

Dividend

     The Board of Directors of The Goldman Sachs Group, Inc. declared a dividend of $0.25 per share to be paid on November 24, 2003 to common shareholders of record on October 27, 2003.

Cautionary Note Regarding Forward-Looking Statements

     This Form 8-K 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 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 “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.

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The Goldman Sachs Group, Inc. and Subsidiaries

Net Revenues
(unaudited)
($ in millions)

	Three Months Ended								% Change From
	August 29,		May 30,			August 30,			May 30,			August 30,
	2003		2003			2002			2003			2002
Investment Banking
Financial Advisory	$	304	$	258		$	315			18	%		(3	)%
Underwriting		383		401			337			(4	)		14
Total Investment Banking		687		659			652			4			5
Trading and Principal Investments
FICC		828		1,590			1,312			(48	)		(37	)
Equities		441		446			281			(1	)		57
Principal Investments		346		(28	)		(100	)		N.M.			N.M.
Total Trading and Principal Investments		1,615		2,008			1,493			(20	)		8
Asset Management and Securities Services
Asset Management		481		404			400			19			20
Securities Services		326		279			266			17			23
Commissions		684		635			838			8			(18	)
Total Asset Management and Securities Services		1,491		1,318			1,504			13			(1	)
Total net revenues	$	3,793	$	3,985		$	3,649			(5	)		4

	Nine Months Ended					% Change From
	August 29,		August 30,			August 30,
	2003		2002			2002
Investment Banking
Financial Advisory	$	899	$	1,200			(25	)%
Underwriting		1,165		1,107			5
Total Investment Banking		2,064		2,307			(11	)
Trading and Principal Investments
FICC		4,297		3,677			17
Equities		1,236		804			54
Principal Investments		241		(222	)		N.M.
Total Trading and Principal Investments		5,774		4,259			36
Asset Management and Securities Services
Asset Management		1,340		1,266			6
Securities Services		856		735			16
Commissions		1,931		2,531			(24	)
Total Asset Management and Securities Services		4,127		4,532			(9	)
Total net revenues	$	11,965	$	11,098			8

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The Goldman Sachs Group, Inc. and Subsidiaries

Consolidated Statements of Earnings
(unaudited)

		Three Months Ended									% Change From
		August 29,			May 30,			August 30,			May 30,			August 30,
		2003			2003			2002			2003			2002
		(in millions, except per share amounts and employees)
Revenues
Investment banking		$	592		$	556		$	593			6	%		-	%
Trading and principal investments			1,113			1,526			1,107			(27	)		1
Asset management and securities services			1,169			1,036			1,253			13			(7	)
Interest income			2,841			2,867			2,919			(1	)		(3	)
	Total revenues		5,715			5,985			5,872			(5	)		(3	)
Interest expense			1,922			2,000			2,223			(4	)		(14	)
	Revenues, net of interest expense		3,793			3,985			3,649			(5	)		4
Operating expenses
Compensation and benefits			1,896			1,992			1,824			(5	)		4
Amortization of employee initial public offering and acquisition awards			19			34			57			(44	)		(67	)
Brokerage, clearing and exchange fees			218			200			236			9			(8	)
Market development			62			64			75			(3	)		(17	)
Communications and technology			119			119			125			-			(5	)
Depreciation and amortization			130			139			161			(6	)		(19	)
Amortization of identifiable intangible assets			40			46			31			(13	)		29
Occupancy			151			177			172			(15	)		(12	)
Professional services and other			178			176			174			1			2
	Total non-compensation expenses		898			921			974			(2	)		(8	)
	Total operating expenses		2,813			2,947			2,855			(5	)		(1	)
Pre-tax earnings			980			1,038			794			(6	)		23
Provision for taxes			303			343			272			(12	)		11
Net earnings		$	677		$	695		$	522			(3	)		30
Earnings per share
Basic		$	1.39		$	1.43		$	1.05			(3	)		32
Diluted			1.32			1.36			1.00			(3	)		32
Average common shares outstanding
Basic			488.5			485.8			494.9			1			(1	)
Diluted			511.7			510.2			520.4			-			(2	)
Employees at period end (4)			19,476			18,421			20,647			6			(6	)
Ratio of compensation and benefits to revenues, net of interest expense			50	%		50	%		50	%

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The Goldman Sachs Group, Inc. and Subsidiaries

Consolidated Statements of Earnings
(unaudited)

			Nine Months Ended						% Change From
			August 29,			August 30,			August 30,
			2003			2002			2002
		(in millions, except per share amounts)
Revenues
Investment banking			$	1,774		$	2,123			(16	)%
Trading and principal investments				4,412			3,384			30
Asset management and securities services				3,268			3,810			(14	)
Interest income				8,340			8,489			(2	)
	Total revenues			17,794			17,806			-
Interest expense				5,829			6,708			(13	)
	Revenues, net of interest expense			11,965			11,098			8
Operating expenses
Compensation and benefits				5,982			5,549			8
Amortization of employee initial public offering and acquisition awards				102			265			(62	)
Brokerage, clearing and exchange fees				608			653			(7	)
Market development				181			231			(22	)
Communications and technology				355			401			(11	)
Depreciation and amortization				426			451			(6	)
Amortization of identifiable intangible assets				118			94			26
Occupancy				551			457			21
Professional services and other				606			463			31
	Total non-compensation expenses			2,845			2,750			3
	Total operating expenses			8,929			8,564			4
Pre-tax earnings				3,036			2,534			20
Provision for taxes				1,002			925			8
Net earnings			$	2,034		$	1,609			26
Earnings per share
Basic			$	4.17		$	3.24			29
Diluted				3.98			3.04			31
Average common shares outstanding
Basic				487.9			497.2			(2	)
Diluted				511.3			528.5			(3	)
Ratio of compensation and benefits to revenues, net of interest expense				50	%		50	%

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The Goldman Sachs Group, Inc. and Subsidiaries

Average Daily VaR ⁽⁵⁾
(unaudited)
($ in millions)

	Three Months Ended
	August 29,			May 30,			August 30,
Risk Categories	2003			2003			2002
Interest rates	$	47		$	39		$	35
Equity prices		24			24			21
Currency rates		14			18			19
Commodity prices		19			16			11
Diversification effect (6)		(40	)		(38	)		(39	)
Firmwide	$	64		$	59		$	47
* * *
Assets Under Management (7) (unaudited) ($ in billions)
	As of									% Change From
	August 31,			May 31,			August 31,			May 31,			August 31,
	2003			2003			2002			2003			2002
Money markets	$	93		$	91		$	100			2	%		(7	)%
Fixed income and currency		111			108			94			3			18
Equity		96			86			81			12			19
Alternative investments		65			61			61			7			7
Assets under management	$	365		$	346		$	336			5			9
	Three Months Ended
	August 31,			May 31,			August 31,
Assets Under Management	2003			2003			2002
Balance, beginning of period	$	346		$	346		$	350
Net asset inflows/(outflows) (8)		14			(18	)		(2	)
Net market appreciation/(depreciation)		5			18			(12	)
Balance, end of period	$	365		$	346		$	336
* * *
Principal Investments (unaudited) ($ in millions)
	As of August 29, 2003
	Corporate			Real Estate			Total
Private	$	974		$	767		$	1,741
Public		229			60			289
SMFG convertible preferred stock (9)		1,410			–			1,410
Total	$	2,613		$	827		$	3,440

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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
	Nine Months				Three Months
	Ended				Ended
	August 29, 2003				August 29, 2003			August 29, 2003
				(unaudited, $ in millions)
Shareholders’ equity	$	19,711			$	20,193		$	20,438
Deduct: Goodwill and identifiable intangible assets		(4,878	)			(4,980	)		(5,191	)
Tangible shareholders’ equity	$	14,833			$	15,213		$	15,247

(2)	On July 1, 2003, The Goldman Sachs Group, Inc. acquired The Ayco Company, L.P. (Ayco), a leading provider of sophisticated, fee-based financial counseling in the United States.
(3)	Includes long-term debt of approximately $3.0 billion issued by William Street Funding Corporation (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 $1.2 billion issued by consolidated variable interest entities, in each case, where the holders of the debt have no recourse to the general credit of the firm.
(4)	Excludes employees of Goldman Sachs’ property management subsidiaries. Substantially all of the costs of these employees are reimbursed to Goldman Sachs by the real estate investment funds to which these companies provide property management services. Total employees also excludes employees of certain consolidated entities that are held for investment purposes only.
(5)	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 uniform industry 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 fiscal year ended November 29, 2002.
(6)	Equals the difference between firmwide 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.
(7)	Substantially all assets under management are valued as of calendar month end.
(8)	For the three months ended August 31, 2003, includes $4 billion from the acquisition of Ayco.
(9)	Includes the impact of foreign exchange revaluation on the investment, for which the firm maintains an economic hedge.

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Item 7. Financial Statements and Exhibits.

     The following exhibit is furnished as part of this Report on Form 8-K:

99.1 Press release of the Registrant dated September 23, 2003 containing financial information for its fiscal third quarter ended August 29, 2003.

Item 12. Results of Operations and Financial Condition.

     On September 23, 2003, the Registrant reported its earnings for its fiscal third quarter ended August 29, 2003. A copy of the Registrant’s press release containing this information is being furnished as Exhibit 99.1 to this Report on Form 8-K and is incorporated herein by reference.

     The information furnished pursuant to Item 12, including Exhibit 99.1, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Exchange Act.

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	THE GOLDMAN SACHS GROUP, INC.                        (Registrant)
Date: September 23, 2003	By:	/s/ Dan H. Jester
		Name: Dan H. Jester Title: Vice President and Deputy            Chief Financial Officer

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