The Goldman Sachs Group, Inc. (GS) 8-K Goldman Sachs Reports Second Quarter Earnings Per Common Share of $1.71

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):
June 16, 2005

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)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

EX-99.1: PRESS RELEASE

Item 2.02 Results of Operations and Financial Condition.

On June 16, 2005, The Goldman Sachs Group, Inc. (the Registrant) reported its earnings for its fiscal second quarter ended May 27, 2005. 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 this Item 2.02, 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.

Item 8.01 Other Events.

On June 16, 2005, the Registrant reported net earnings of $865 million for its fiscal second quarter ended May 27, 2005. Diluted earnings per common share were $1.71 compared with $2.31 for the second quarter of 2004 and $2.94 for the first quarter of 2005. Annualized return on average tangible common shareholders’ equity⁽¹⁾ was 17.2% for the second quarter of 2005 and 23.5% for the first half of 2005. Annualized return on average common shareholders’ equity was 13.4% for the second quarter of 2005 and 18.5% for the first half of 2005.

Net Revenues

Investment Banking

Net revenues in Investment Banking were $815 million, 14% lower than the second quarter of 2004 and 9% lower than the first quarter of 2005. Net revenues in Financial Advisory were $386 million, 25% lower than the second quarter of 2004, reflecting a decrease in completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $429 million, 3% lower than the second quarter of 2004, reflecting lower net revenues in equity underwriting, primarily due to a decrease in industry-wide equity and equity-related offerings, partially offset by higher net revenues in debt underwriting, primarily due to an increase in bank loan and mortgage activity. The firm’s investment banking backlog increased during the quarter.

Trading and Principal Investments

Net revenues in Trading and Principal Investments were $2.81 billion, 22% lower than the second quarter of 2004 and 36% lower than the first quarter of 2005.

Net revenues in Fixed Income, Currency and Commodities (FICC) were $1.52 billion, 20% lower than the second quarter of 2004, primarily due to lower net revenues in credit products, interest rate products and commodities. In addition, mortgages performed well, although net revenues were lower compared with the second quarter of 2004, while net revenues in

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currencies improved. During the second quarter, trading conditions were less favorable than more recent quarters, as markets generally lacked direction. In addition, credit markets weakened and the U.S. yield curve continued to flatten.

Net revenues in Equities were $1.11 billion, 3% higher than the second quarter of 2004, primarily reflecting higher net revenues in the firm’s principal strategies business, partially offset by lower net revenues in the firm’s customer franchise businesses, particularly in convertibles. During the quarter, the business operated in an environment characterized by generally lower equity prices and continued low market volatility.

Principal Investments recorded net revenues of $189 million, primarily due to $107 million in gains from corporate and real estate principal investments and a $73 million gain related to the firm’s investment in the convertible preferred stock of Sumitomo Mitsui Financial Group, Inc. (SMFG).

Asset Management and Securities Services

Net revenues in Asset Management and Securities Services were $1.18 billion, 27% higher than the second quarter of 2004 and 4% higher than the first quarter of 2005.

Asset Management net revenues were $689 million, 15% higher than the second quarter of 2004, reflecting higher management fees, driven by growth in assets under management, partially offset by lower incentive fees. During the quarter, assets under management increased 2%, reflecting net asset inflows of $10 billion, primarily in fixed income, alternative investment and equity assets, partially offset by market depreciation of $2 billion, primarily in equity assets.

Securities Services net revenues were $489 million, 48% higher than the second quarter of 2004, as our prime brokerage business continued to perform well, reflecting higher global customer balances in securities lending and margin lending as well as seasonally higher activity levels in Europe.

Expenses

Operating expenses were $3.56 billion, 6% lower than the second quarter of 2004 and 16% lower than the first quarter of 2005.

Compensation Expenses

Compensation and benefits expenses were $2.40 billion, 13% lower than the second quarter of 2004, commensurate with lower net revenues. The ratio of compensation and benefits to net revenues was 50.0% for the first half of 2005, consistent with the first half of 2004.⁽²⁾ Employment levels were essentially unchanged during the quarter.

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Non-Compensation Expenses

Non-compensation expenses were $1.16 billion, 16% higher than the second quarter of 2004. Other expenses increased primarily due to higher expenses of consolidated entities held for investment purposes and higher levels of business activity. Occupancy expenses were higher and included $16 million of real estate exit costs associated with the relocation of office space. Professional fees were higher, reflecting increased consulting and legal fees. Brokerage, clearing and exchange fees increased, reflecting higher transaction volumes in certain of the firm’s businesses. Market development costs also increased, primarily due to higher levels of business activity. Excluding non-compensation expenses related to consolidated entities held for investment purposes⁽³⁾, non-compensation expenses were 11% higher than the second quarter of 2004 and 7% higher than the first quarter of 2005.

Provision For Taxes

The effective income tax rate for the first half of 2005 was 29.9%, up from 29.5% for the first quarter of 2005. Excluding the impact of audit settlements in 2005, the effective income tax rate for the first half of 2005 would have been 33.1%, down from 33.3% for the first quarter of 2005 and up from 31.8% for fiscal year 2004. The increase in the effective tax rate for the first half of 2005 compared with fiscal year 2004 was primarily due to lower tax credits and increased state and local taxes in 2005.

Capital

As of May 27, 2005, total capital was $121.53 billion, consisting of $26.40 billion in total shareholders’ equity (common equity of $25.65 billion and preferred equity of $750 million) and $95.13 billion in long-term debt.⁽⁴⁾ Book value per common share was $53.46 based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 479.7 million at period end. Tangible book value per common share was $41.46.⁽¹⁾

On April 25, 2005, The Goldman Sachs Group, Inc. issued $750 million of floating rate, non-cumulative, perpetual preferred stock.

The firm repurchased 15.5 million shares of its common stock during the quarter at an average price of $108.34 per share. The remaining share authorization under the firm’s existing common stock repurchase program is 19.5 million shares.

Dividend

The Board of Directors of The Goldman Sachs Group, Inc. declared a dividend of $0.25 per common share to be paid on August 25, 2005 to common shareholders of record on July 26, 2005.

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Cautionary Note Regarding Forward-Looking Statements

This Report on 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 Part I, Item 1 of the firm’s Annual Report on Form 10-K for the fiscal year ended November 26, 2004.

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 Part I, Item 1 of the firm’s Annual Report on Form 10-K for the fiscal year ended November 26, 2004.

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
SEGMENT NET REVENUES
(UNAUDITED)
$ in millions

	Three Months Ended						% Change From
	May 27,		Feb. 25,		May 28,		Feb. 25,			May 28,
	2005		2005		2004		2005			2004
Investment Banking
Financial Advisory	$	386	$	414	$	513		(7	)%		(25	)%
Equity underwriting		114		186		213		(39	)		(46	)
Debt underwriting		315		293		227		8			39
Total Underwriting		429		479		440		(10	)		(3	)
Total Investment Banking		815		893		953		(9	)		(14	)
Trading and Principal Investments
FICC		1,519		2,489		1,892		(39	)		(20	)
Equities trading		372		829		351		(55	)		6
Equities commissions		733		721		727		2			1
Total Equities		1,105		1,550		1,078		(29	)		3
SMFG		73		181		561		(60	)		(87	)
Other corporate and real estate gains and losses		107		148		65		(28	)		65
Overrides		9		15		31		(40	)		(71	)
Total Principal Investments		189		344		657		(45	)		(71	)
Total Trading and Principal Investments		2,813		4,383		3,627		(36	)		(22	)
Asset Management and Securities Services
Asset Management		689		749		601		(8	)		15
Securities Services		489		380		330		29			48
Total Asset Management and Securities Services		1,178		1,129		931		4			27
Total net revenues	$	4,806	$	6,405	$	5,511		(25	)		(13	)

	Six Months Ended				% Change From
	May 27,		May 28,		May 28,
	2005		2004		2004
Investment Banking
Financial Advisory	$	800	$	872		(8	)%
Equity underwriting		300		432		(31	)
Debt underwriting		608		412		48
Total Underwriting		908		844		8
Total Investment Banking		1,708		1,716		—
Trading and Principal Investments
FICC		4,008		3,995		—
Equities trading		1,201		1,297		(7	)
Equities commissions		1,454		1,441		1
Total Equities		2,655		2,738		(3	)
SMFG		254		762		(67	)
Other corporate and real estate gains and losses		255		167		53
Overrides		24		87		(72	)
Total Principal Investments		533		1,016		(48	)
Total Trading and Principal Investments		7,196		7,749		(7	)
Asset Management and Securities Services
Asset Management		1,438		1,362		6
Securities Services		869		612		42
Total Asset Management and Securities Services		2,307		1,974		17
Total net revenues	$	11,211	$	11,439		(2	)

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
In millions, except per share amounts and employees

	Three Months Ended									% Change From
	May 27,			Feb. 25,			May 28,			Feb. 25,			May 28,
	2005			2005			2004			2005			2004
Revenues
Investment banking	$	796		$	873		$	928			(9	)%		(14	)%
Trading and principal investments		2,562			4,141			3,409			(38	)		(25	)
Asset management and securities services		724			774			629			(6	)		15
Interest income		4,867			4,176			2,710			17			80
Total revenues		8,949			9,964			7,676			(10	)		17
Interest expense		4,022			3,449			2,038			17			97
Cost of power generation(5)		121			110			127			10			(5	)
Revenues, net of interest expense and cost of power generation		4,806			6,405			5,511			(25	)		(13	)
Operating expenses
Compensation and benefits(2)		2,403			3,203			2,771			(25	)		(13	)
Brokerage, clearing and exchange fees		274			252			252			9			9
Market development		94			82			76			15			24
Communications and technology		123			118			120			4			3
Depreciation and amortization		128			118			121			8			6
Amortization of identifiable intangible assets		31			31			31			—			—
Occupancy		186			148			156			26			19
Professional fees		109			96			85			14			28
Other expenses		214			212			159			1			35
Total non-compensation expenses		1,159			1,057			1,000			10			16
Total operating expenses		3,562			4,260			3,771			(16	)		(6	)
Pre-tax earnings		1,244			2,145			1,740			(42	)		(29	)
Provision for taxes		379			633			553			(40	)		(31	)
Net earnings		865			1,512			1,187			(43	)		(27	)
Preferred stock dividend		—			—			—			—			—
Net earnings applicable to common shareholders	$	865		$	1,512		$	1,187			(43	)		(27	)
Earnings per common share
Basic	$	1.78		$	3.06		$	2.43			(42	)		(27	)
Diluted		1.71			2.94			2.31			(42	)		(26	)
Average common shares outstanding
Basic		485.4			494.3			487.9			(2	)		(1	)
Diluted		506.2			515.1			513.5			(2	)		(1	)
Selected Data
Employees at period end (6)  (7)		20,888			20,678			19,533			1			7
Ratio of compensation and benefits to net revenues		50.0	%		50.0	%		50.0	%  (2)

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
In millions, except per share amounts

	Six Months Ended						% Change From
	May 27,			May 28,			May 28,
	2005			2004			2004
Revenues
Investment banking	$	1,669		$	1,682			(1	)%
Trading and principal investments		6,703			7,228			(7	)
Asset management and securities services		1,498			1,416			6
Interest income		9,043			5,255			72
Total revenues		18,913			15,581			21
Interest expense		7,471			3,911			91
Cost of power generation(5)		231			231			—
Revenues, net of interest expense and cost of power generation		11,211			11,439			(2	)
Operating expenses
Compensation and benefits(2)		5,606			5,766			(3	)
Brokerage, clearing and exchange fees		526			485			8
Market development		176			138			28
Communications and technology		241			232			4
Depreciation and amortization		246			256			(4	)
Amortization of identifiable intangible assets		62			63			(2	)
Occupancy		334			326			2
Professional fees		205			146			40
Other expenses		426			358			19
Total non-compensation expenses		2,216			2,004			11
Total operating expenses		7,822			7,770			1
Pre-tax earnings		3,389			3,669			(8	)
Provision for taxes		1,012			1,189			(15	)
Net earnings		2,377			2,480			(4	)
Preferred stock dividend		—			—			—
Net earnings applicable to common shareholders	$	2,377		$	2,480			(4	)
Earnings per common share
Basic	$	4.85		$	5.06			(4	)
Diluted		4.65			4.81			(3	)
Average common shares outstanding
Basic		489.8			490.0			—
Diluted		510.7			515.3			(1	)
Selected Data
Ratio of compensation and benefits to net revenues		50.0	%		50.0	%  (2)

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NON-COMPENSATION EXPENSES
(UNAUDITED)
$ in millions

	Three Months Ended						% Change From
	May 27,		Feb. 25,		May 28,		Feb. 25,			May 28,
	2005		2005		2004		2005			2004
Non-compensation expenses of consolidated investments (3)	$	49	$	15	$	2		N.M.	%		N.M.	%
Non-compensation expenses excluding consolidated investments
Brokerage, clearing and exchange fees		274		252		252		9			9
Market development		90		82		76		10			18
Communications and technology		123		118		120		4			3
Depreciation and amortization		124		116		121		7			2
Amortization of identifiable intangible assets		31		31		31		—			—
Occupancy		174		148		156		18			12
Professional fees		108		96		85		13			27
Other expenses		186		199		157		(7	)		18
Subtotal		1,110		1,042		998		7			11
Total non-compensation expenses, as reported	$	1,159	$	1,057	$	1,000		10			16

	Six Months Ended				% Change From
	May 27,		May 28,		May 28,
	2005		2004		2004
Non-compensation expenses of consolidated investments (3)	$	64	$	8		N.M.	%
Non-compensation expenses excluding consolidated investments
Brokerage, clearing and exchange fees		526		485		8
Market development		172		138		25
Communications and technology		241		232		4
Depreciation and amortization		240		256		(6	)
Amortization of identifiable intangible assets		62		63		(2	)
Occupancy		322		326		(1	)
Professional fees		204		146		40
Other expenses		385		350		10
Subtotal		2,152		1,996		8
Total non-compensation expenses, as reported	$	2,216	$	2,004		11

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(UNAUDITED)

Average Daily VaR⁽⁸⁾
$ in millions

	Three Months Ended
	May 27,			Feb. 25,			May 28,
	2005			2005			2004
Risk Categories
Interest rates	$	33		$	32		$	37
Equity prices		26			29			37
Currency rates		19			15			20
Commodity prices		24			28			15
Diversification effect(9)		(42	)		(39	)		(40	)
Total	$	60		$	65		$	69

Assets Under Management⁽¹⁰⁾
$ in billions

	As of						% Change From
	May 31,		Feb. 28,		May 31,		Feb. 28,			May 31,
	2005		2005		2004		2005			2004
Money markets	$	98	$	99	$	92		(1	)%		7	%
Fixed income and currency		153		145		123		6			24
Equity		135		136		114		(1	)		18
Alternative investments		104		102		86		2			21
Total	$	490	$	482	$	415		2			18

	Three Months Ended
	May 31,			Feb. 28,		May 31,
	2005			2005		2004
Balance, beginning of period	$	482		$	452	$	412
Net asset inflows / (outflows)
Money markets		(1	)		9		(1	)
Fixed income and currency		6			6		2
Equity		2			8		3
Alternative investments		3			4		5
Total net asset inflows / (outflows)		10			27		9
Net market appreciation / (depreciation)		(2	)		3		(6	)
Balance, end of period	$	490		$	482	$	415

Principal Investments
$ in millions

	As of May 27, 2005
	Corporate		Real Estate		Total
Private	$	1,195	$	692	$	1,887
Public		298		25		323
Subtotal		1,493		717		2,210
SMFG convertible preferred stock(11)		2,637		—		2,637
Total	$	4,130	$	717	$	4,847

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Footnotes

⁽¹⁾ Tangible common shareholders’ equity equals total shareholders’ equity less preferred shareholders’ equity less goodwill and identifiable intangible assets. Management believes that annualized return on average tangible common shareholders’ equity is a meaningful measure of performance because it excludes the portion of the firm’s common shareholders’ equity attributable to goodwill and identifiable intangible assets. As a result, this calculation measures corporate performance in a manner that treats underlying businesses consistently, whether they were acquired or developed internally. Annualized return on average tangible common shareholders’ equity is computed by dividing annualized net earnings applicable to common shareholders’ by average monthly tangible common shareholders’ equity. Tangible book value per common share is computed by dividing tangible common 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 a reconciliation of total shareholders’ equity to tangible common shareholders’ equity:

	Average for the						As of
	Six Months Ended			Three Months Ended
	May 27, 2005			May 27, 2005			May 27, 2005
	(unaudited, $ in millions)
Total shareholders’ equity	$	25,967		$	26,226		$	26,395
Deduct: Preferred shareholders’ equity		(214	)		(375	)		(750	)
Common shareholders’ equity		25,753			25,851			25,645
Deduct: Goodwill and identifiable intangible assets		(5,482	)		(5,685	)		(5,756	)
Tangible common shareholders’ equity	$	20,271		$	20,166		$	19,889

(2)	Compensation and benefits expenses include the amortization of employee initial public offering and acquisition awards of $5 million, $6 million and $15 million for the three months ended May 27, 2005, February 25, 2005 and May 28, 2004, respectively, and $11 million and $46 million for the six months ended May 2005 and May 2004, respectively. For the three months and six months ended May 28, 2004, the ratio of compensation and benefits to net revenues, including the amortization of employee initial public offering and acquisition awards, was 50.3% and 50.4%, respectively.
(3)	Consolidated entities held for investment purposes include entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities which 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 which 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 for the firm’s principal business activities.
(4)	Long-term debt includes nonrecourse debt of $13.33 billion, consisting of $5.12 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 wholly owned William Street entity to investment-grade clients) and $8.21 billion issued by consolidated variable interest entities and other consolidated entities. Nonrecourse debt is debt that The Goldman Sachs Group, Inc. is not directly or indirectly obligated to repay through a guarantee, general partnership interest or contractual arrangement.
(5)	Cost of power generation includes all of the direct costs of the firm’s consolidated power plant operations (e.g., fuel, operations and maintenance) as well as the depreciation and amortization associated with the plants and related contractual assets. Power generation revenues are included in “Trading and principal investments.”
(6)	Excludes 1,130, 1,138 and 1,037 employees as of May 2005, February 2005 and May 2004, respectively, of Goldman Sachs’ consolidated property management and loan servicing subsidiaries. Compensation and benefits expenses include $41 million, $42 million and $36 million for the three months ended May 27, 2005, February 25, 2005 and May 28, 2004, respectively, attributable to these subsidiaries, the majority of which is reimbursed to Goldman Sachs by the investment funds for which these companies manage properties and perform loan servicing. Such reimbursements are recorded in net revenues.
(7)	Excludes 6,626, 326 and 284 employees as of May 2005, February 2005 and May 2004, respectively, of consolidated entities that are held for investment purposes only. Compensation and benefits expenses include $17 million, $4 million and $3 million for the three months ended May 27, 2005, February 25, 2005 and May 28, 2004, respectively, attributable to these consolidated entities.
(8)	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 26, 2004.
(9)	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.
(10)	Substantially all assets under management are valued as of calendar month end.
(11)	Excludes an economic hedge on the unrestricted shares of common stock underlying the investment. As of May 27, 2005, the fair value of this hedge was $866 million. Includes the impact of foreign exchange revaluation on the investment, for which the firm also maintains an economic hedge.

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Item 9.01 Financial Statements and Exhibits.

(c) Exhibits.

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

99.1 Press release of the Registrant dated June 16, 2005 containing financial information for its fiscal second quarter ended May 27, 2005.

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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: June 16, 2005	By:	/s/ David A. Viniar
		Name:	David A. Viniar
		Title:	Chief Financial Officer

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