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:
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 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 (unaudited)
The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Information.
The accompanying notes are an integral part of the 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:
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