Goldman Sachs 2000 Annual Report Download - page 37

entertainment costs associated with growth in employment
levels and business activity, and increased advertising
costs. Communications and technology expenses increased
42%, reflecting higher telecommunications and market data
costs associated with increased headcount. Depreciation
and amortization increased 44%, principally due to goodwill
related to business acquisitions, leasehold improvements
related to expanded offices, and capital expenditures on
telecommunications and technology-related equipment.
Occupancy expenses increased 40% due to new office
space needed to accommodate higher employment levels
globally. Professional services and other expenses
increased 59%, reflecting higher professional fees related to
technology initiatives and global expansion.
1999 versus 1998. Operating expenses were $11.35 billion
in 1999, a substantial increase over 1998, primarily due to
nonrecurring charges associated with Goldman Sachs’ con-
version to corporate form and related transactions, the
inclusion of compensation expense related to services ren-
dered by managing directors who were profit participating
limited partners, higher levels of compensation commensu-
rate with higher net revenues and amortization of employee
initial public offering awards. The nonrecurring charges
included $2.26 billion for employee initial public offering
awards and $200 million for the initial charitable contribu-
tion to The Goldman Sachs Foundation made at the time of
our initial public offering.
Compensation and benefits expense was $6.46 billion, an
increase of 68% compared with 1998. The ratio of compen-
sation and benefits to net revenues was 48% in 1999.
Employment levels increased 18% during the year, reflect-
ing growth in our core businesses. Expenses associated
with our temporary staff and consultants were $430 million
in 1999, an increase of 30% compared with 1998, reflecting
increased global expansion and consulting costs associated
with technology initiatives, including preparations for the
Year 2000.
Brokerage, clearing and exchange fees increased 5%, pri-
marily due to higher transaction volumes in equity deriva-
tives, U.S. and European equities, and commodities. Market
development expenses increased 27%, principally due to
higher levels of business activity and increased spending
on advertising. Communications and technology expenses
increased 15%, reflecting higher telecommunications and
market data costs associated with growth in employment
levels and additional spending on technology initiatives,
including preparations for the Year 2000. Depreciation and
amortization increased 39%, due to additional capital
expenditures on leasehold improvements and technology-
related and telecommunications equipment in support of
higher levels of business activity. Occupancy expenses
increased 52%, reflecting additional office space needed to
accommodate growth in employment levels. Professional
services and other expenses increased 20% due to
Goldman Sachs’ increased business activity.
Provision for Taxes
Our provision for taxes in 2000 was $1.95 billion compared
with a net tax benefit of $716 million in 1999.
The net tax benefit of $716 million in 1999 included nonre-
curring net benefits of $1.78 billion. These nonrecurring net
benefits included $825 million related to our conversion to
corporate form, $880 million related to the granting of
employee initial public offering awards and $80 million
related to a contribution of $200 million to The Goldman
Sachs Foundation made at the time of our initial public offer-
ing. Goldman Sachs’ effective tax rate for the period from
May 7, 1999 to the end of 1999, excluding the effect of these
nonrecurring items, was 40.0%. Prior to our conversion to
corporate form, we generally were not subject to U.S. fed-
eral and state income taxes. As a partnership, we were pri-
marily subject to local unincorporated business taxes and
taxes in non-U.S. jurisdictions on certain of our operations.
The effective tax rate for 2000 was 38.9% compared with
40.0%, excluding the effect of the nonrecurring tax bene-
fits in 1999. The decline in the effective tax rate was primar-
ily due to lower state and local taxes. Our effective tax rate
can vary from year to year depending on, among other fac-
tors, the geographic and business mix of our earnings. See
Note 12 to the consolidated financial statements for further
information regarding our provision for taxes.
Geographic Data
For a summary of the net revenues, pre-tax earnings and
identifiable assets of Goldman Sachs by geographic region,
see Note 14 to the consolidated financial statements.
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