Goldman Sachs 2002 Annual Report Download - page 40

further information regarding our stock-based compen-
sation, including our adoption, beginning in fiscal 2003,
of the fair value method of accounting for stock-based
compensation.
Non-compensation-related expenses were $3.70 billion
for 2002, 6% below 2001. Excluding amortization of
goodwill and identifiable intangible assets, these expenses
decreased 3% compared with last year, primarily reflect-
ing lower market development and communications and
technology expenses due to the continued impact of
expense reduction initiatives first implemented in 2001,
reduced employment levels and lower levels of business
activity. These reductions were partially offset by higher
occupancy expenses primarily related to new leases and
one-time costs related to the postponement of construc-
tion plans for a smaller facility adjacent to our office
building currently under construction in Jersey City,
New Jersey. Amortization of goodwill and identifiable
intangible assets was lower than in 2001, reflecting the
adoption of the goodwill non-amortization provisions of
Statement of Financial Accounting Standards (SFAS) No.
142, “Goodwill and Other Intangible Assets.”
V E R S U S 2000
Operating expenses were $12.12 billion for 2001, 7%
above 2000 excluding the SLK charge of $290 million.
Compensation and benefits of $7.70 billion were essen-
tially unchanged from the prior year as lower discre-
tionary compensation was offset by incremental expense
related to the inclusion of SLK. The ratio of compensa-
tion and benefits to net revenues for 2001 was 49% com-
pared with 47% for 2000. Employment levels were
essentially unchanged from November 2000. Sub-
stantially all of the equity-based compensation granted
for 2001 was in the form of stock options. See “—Recent
Accounting Developments” below as well as Note 2
and Note 12 to the consolidated financial statements for
further information regarding our stock-based compensation.
Non-compensation expenses were $3.95 billion, an
increase of 28% compared with 2000, primarily due to
higher brokerage, clearing and exchange fees, intangible
asset amortization, communications and technology costs
and occupancy and depreciation expenses partially offset
by reduced market development expenses. In addition to
the inclusion of SLK, the increase in our non-compensation
expenses in 2001 was primarily due to growth in employ-
ment levels during 2000 partially offset by the effect of
expense reduction initiatives implemented in 2001.
Certain properties occupied by Goldman Sachs were
affected by the terrorist attack of September 11, 2001.
We recorded expenses related to the attack in 2001,
which were not material and were wholly offset by an
expected insurance recovery. These expenses, and the
related insurance recovery, pertain to write-offs of dam-
aged technology and telecommunications equipment, cer-
tain employee-related expenditures and other business
recovery costs.
Provision for Taxes
The effective income tax rate for 2002 was 35.0% , down
from 37.5% in 2001. The decline in the effective income
tax rate compared with 2001 was primarily due to a
change in our geographic earnings mix combined with
ongoing efforts to convert major operating subsidiaries
around the world to corporate form and an increase in
tax-exempt income and domestic tax credits.
The effective tax rate for 2001 was 37.5% compared
with 38.9% in 2000. The decline in the effective tax rate
in 2001 was primarily due to lower state and local taxes.
Our effective tax rate can vary from period to period
depending on, among other factors, the geographic and
business mix of our earnings. These same and other fac-
tors, including our history of pre-tax earnings, are taken
into account in assessing our ability to realize our net
deferred tax assets. See Note 13 to the consolidated
financial statements for further information regarding
our provision for taxes.
Certain Factors That May Affect
Our Results of Operations
As an investment banking, securities and investment
management firm, our businesses are materially affected
by conditions in the financial markets and economic con-
ditions generally, both in the United States and elsewhere
around the world. In the last year, we have been operat-
ing in a very challenging environment: the number and
size of securities underwritings and mergers and acquisi-
tion transactions have declined significantly; the equities
markets in the United States and elsewhere have been
volatile and are at levels substantially below their record
highs; investors have exhibited concerns over the
integrity of the U.S. financial markets as a result of
recent, highly publicized financial scandals; and the atten-
tion of management of many clients has been diverted
from capital-raising transactions and acquisitions and
dispositions in part as a result of corporate governance
regulations, such as the Sarbanes-Oxley Act of 2002, and
related uncertainty in capital markets. It is unclear how
long this environment will last, but so long as it does, our
businesses will be adversely affected.
Managem ent’s D iscussion and A nalysis
38 G O L D M A N SA CH S 2002 AN N UA L R EPO RT