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management’s฀discussion฀and฀analysis
44฀฀฀G O L D M A N ฀ S A C H S ฀ 2 004฀ A N N U A L ฀ R E P O RT
in accordance with the fair-value method prescribed by
SFAS No. 123, using the prospective adoption method. The
adoption of the recognition provisions of SFAS No. 123 did not
have a material effect on our results of operations because sub-
stantially all of the employee equity-based compensation granted
for 2003 was in the form of restricted stock units. See Note 2
and Note 12 to the consolidated financial statements for fur-
ther information regarding our stock-based compensation.
Non-compensation-related expenses of $4.05 billion for 2003
increased 10% compared with 2002. This increase was primar-
ily due to (i) higher other expenses, which included net provi-
sions of $159 million for a number of litigation and regulatory
proceedings; (ii) increased amortization of identifiable intangi-
ble assets, reflecting impairment charges of $188 million, pri-
marily in respect of option specialist rights; and (iii) exit costs of
$153 million associated with reductions in our global office
space. These exit costs were primarily reflected in occupancy
expenses, with the balance in depreciation and amortization
expenses. Excluding the aggregate charges of $500 million
described above, our 2003 non-compensation expenses declined
slightly compared with 2002, reflecting lower depreciation and
amortization, communications and technology, and market
development expenses, and brokerage, clearing and exchange
fees, partially offset by higher professional fees, primarily
reflecting increased legal fees. The expense declines were primar-
ily due to the impact of reduced employment levels, lower levels
of business activity and continued cost-containment discipline.
Provision฀for฀Taxes
The effective income tax rate for 2004 was 31.8%, down from
32.4% for 2003. The change in the effective income tax rate for
2004 compared with 2003 reflected a decrease in state and local
taxes and the effect of audit settlements. The effective income
tax rate for 2003 of 32.4% was down from 35.0% in 2002.
The decline in the effective income tax rate for 2003 compared
with 2002 was primarily due to an increase in tax credits and a
decrease in state and local taxes.
Our effective income tax rate can vary from period to period
depending on, among other factors, the geographic and business
mix of our earnings, the level of our tax credits and the effect of
tax audits. Certain of these and other factors, including our his-
tory 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 regard-
ing our provision for taxes.
SEGMENT฀OPERATING฀ RESULTS฀
The following table sets forth the net revenues, operating expenses and pre-tax earnings of our segments:
segment฀operating฀results฀
฀ ฀ YEAR฀ENDED฀NOVEMBER฀
(IN฀MILLIONS)฀ 2004฀ 2003฀ 2002
Investment Banking Net revenues $฀ 3,374 $฀ 2,711฀ $฀ 2,830
Operating expenses 2,973 ฀2,504฀ 2,454
฀฀฀ Pre-tax earnings $฀ ฀ ฀401฀ $฀ ฀ ฀207฀ $฀ ฀ ฀376
Trading and Principal Net revenues $13,327 $10,443฀ $฀ 8,647
Investments Operating expenses 8,287 ฀6,938฀ 6,505
฀฀฀ Pre-tax earnings฀$฀5,040฀ $฀ 3,505฀ $฀ 2,142
Asset Management and Net revenues $฀ 3,849 $฀ 2,858฀ $฀ 2,509
Securities Services Operating expenses 2,430 ฀฀1,890฀ 1,562
฀฀฀ Pre-tax earnings฀$฀ 1,419฀ $฀฀฀฀฀968฀ $฀ ฀ ฀947
Total Net revenues $20,550 $16,012฀ $13,986
Operating expenses(1) 13,874 11,567฀ 10,733
฀฀฀ Pre-tax earnings฀$฀ 6,676฀ $฀ 4,445฀฀ $฀฀3,253
฀
(1)฀฀Includes฀the฀following฀expenses฀that฀have฀not฀been฀allocated฀to฀our฀segments:฀(i)฀the฀amortization฀of฀employee฀initial฀public฀offering฀awards,฀net฀of฀forfeitures,฀
of฀$19฀million,฀ $80฀million฀and฀ $212฀million฀for฀ the฀years฀ ended฀November฀2004,฀ November฀2003฀and฀ November฀2002,฀ respectively;฀(ii)฀net฀ provisions฀for฀a฀
number฀of฀litigation฀and฀regulatory฀proceedings฀of฀$103฀million฀and฀$155฀million฀ for฀the฀years฀ended฀November฀2004฀and฀November฀2003,฀respectively,฀and฀
(iii)฀$62฀million฀in฀connection฀with฀the฀establishment฀of฀Goldman฀Sachs฀Gao฀Hua฀Securities฀Company฀Limited,฀an฀investment฀banking฀and฀securities฀venture฀in฀
China,฀for฀the฀year฀ended฀November฀2004.฀
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