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Business Context and Reporting Period

Company: The Goldman Sachs Group, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended November 29, 2002
Overview: Goldman Sachs is a leading global investment banking, securities, and investment management firm. As of November 29, 2002, the firm operated in over 20 countries with 19,739 employees, approximately 37% of whom were based outside the United States. The firm reorganized its reporting segments in 2002, splitting the former "Global Capital Markets" segment into "Investment Banking" and "Trading and Principal Investments."

Key Financial Metrics

The following table summarizes the consolidated operating results by segment for the fiscal years ended November 29, 2002, November 30, 2001, and November 24, 2000 (in millions, except per share data).

Assets Under Management (AUM): Total AUM was $348 billion as of November 2002, compared to $351 billion in 2001 and $294 billion in 2000.
Dividends: Dividends of $0.12 per share were declared in each quarter of fiscal 2002.
Share Repurchases: As of January 31, 2003, the remaining authorization under the share repurchase program was 17.2 million shares.

Material Changes vs. Prior Period

• Revenue Decline: Total net revenues decreased 11.6% to $13.986 billion in 2002 from $15.811 billion in 2001. This decline was driven primarily by a 26.2% drop in Investment Banking revenues and a 17.3% drop in Trading and Principal Investments revenues.
• Profitability Pressure: Pre-tax earnings declined 12.0% to $3.253 billion. Investment Banking pre-tax earnings fell 47.7% to $376 million, reflecting a significant reduction in the volume and size of underwritings and M&A transactions.
• Expense Management: Total operating expenses decreased 11.4% to $10.733 billion, partially offsetting the revenue decline. This included a reduction in amortization of employee IPO awards to $212 million (down from $363 million in 2001).
• Asset Management Growth: Despite market volatility, the Asset Management and Securities Services segment saw net revenues increase 5.0% to $5.907 billion, driven by higher commissions and management fees.

Outlook, Risks, and Contingencies

Market Conditions: Management highlighted a "very challenging environment" characterized by volatile equity markets, a decline in capital-raising transactions, and investor concerns regarding financial market integrity following recent corporate scandals. The Sarbanes-Oxley Act of 2002 has diverted client attention from capital market transactions.

Legal and Regulatory Contingencies:

• Research Independence Settlement: On December 20, 2002, Goldman Sachs reached agreements in principle to resolve investigations into research analyst conflicts of interest. The firm agreed to pay $50 million in retrospective relief, contribute $50 million over five years for independent third-party research, and $10 million for investor education.
• Securities Litigation: The firm is a defendant in numerous class actions related to IPO processes (alleged antitrust violations and underpricing), including matters involving Enron, WorldCom, Global Crossing, and Asia Global Crossing. The firm believes the aggregate results will not have a material adverse effect on financial condition but could impact operating results for specific periods.
• Stock Options Antitrust: Affiliates are defendants in a class action regarding listed equity options; a settlement stipulation requires payments of approximately $22 million.

Risk Factors: Key risks include market volatility affecting trading positions, liquidity constraints, credit exposure to counterparties, and operational risks related to technology and infrastructure. The firm noted that its credit ratings are essential to liquidity and that a downgrade could increase borrowing costs and trigger collateral requirements.

Investor Verification Checklist

• Revenue Mix Shift: Verify the sustainability of the Asset Management segment's growth relative to the sharp decline in Investment Banking and Trading revenues.
• Legal Exposure: Review the status of the "Research Independence" settlement and ongoing securities litigation (Enron, WorldCom, Global Crossing) to assess potential future liabilities beyond the disclosed $110 million in research-related commitments.
• Expense Run Rate: Confirm if the reduction in operating expenses (specifically compensation and amortization) is sustainable or if it was driven by one-time factors like the reduction in IPO award amortization.
• Liquidity Position: Assess the firm's reliance on short-term borrowings and the potential impact of credit rating changes on its ability to fund operations and trading activities.
• Assets Under Management: Monitor the trend in AUM, which declined slightly from 2001 to 2002, to gauge the health of the fee-based revenue stream.