The Goldman Sachs Approach 2005 annual report goldman sachs 2005annual report www.gs.com The Goldman Sachs Business Principles financial highlights 1. Our clients’ interests always come fi rst. Our experience shows that if we serve our clients well, our own AS OF OR FOR THE YEAR ENDED NOVEMBER success will follow. ($ AND SHARE AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2003 2. Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most diffi cult operating results Net revenues to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that Investment banking $ 3,671 $ 3,374 $ 2,711 govern us. Our continued success depends upon unswerving adherence to this standard. Trading and principal investments 16,362 13,327 10,443 3. Our goal is to provide superior returns to our shareholders. Profi tability is critical to achieving superior returns, Asset management and securities services 4,749 3,849 2,858 building our capital, and attracting and keeping our best people. Signifi cant employee stock ownership aligns the Total net revenues 24,782 20,550 16,012 interests of our employees and our shareholders. Pre-tax earnings 8,273 6,676 4,445 Net earnings 5,626 4,553 3,005 4. We take great pride in the professional quality of our work. We have an uncompromising determination to achieve Net earnings applicable to common shareholders 5,609 4,553 3,005 excellence in everything we undertake. Though we may be involved in a wide variety and heavy volume of activity, common share data we would, if it came to a choice, rather be best than biggest. Diluted earnings per common share $ 11.21 $ 8.92 $ 5.87 5. We stress creativity and imagination in everything we do. While recognizing that the old way may still be Average diluted common shares outstanding 500.2 510.5 511.9 the best way, we constantly strive to fi nd a better solution to a client’s problems. We pride ourselves on having Dividends declared per common share $ 1.00 $ 1.00 $ 0.74 Book value per common share (1) 57.02 50.77 43.60 pioneered many of the practices and techniques that have become standard in the industry. Tangible book value per common share (2) (3) 45.72 40.91 33.56 6. We make an unusual effort to identify and recruit the very best person for every job. Although our activities are Ending stock price 134.12 104.84 96.08 measured in billions of dollars, we select our people one by one. In a service business, we know that without the financial condition and other operating data best people, we cannot be the best fi rm. Total assets $706,804 $ 531,379 $403,799 Long-term borrowings 100,007 80,696 57,482 7. We offer our people the opportunity to move ahead more rapidly than is possible at most other places. Advancement Total shareholders’ equity 28,002 25,079 21,632 depends on merit and we have yet to fi nd the limits to the responsibility our best people are able to assume. Leverage ratio (4) 25.2x 21.2x 18.7x For us to be successful, our men and women must refl ect the diversity of the communities and cultures in which Adjusted leverage ratio (5) 18.2x 15.1x 16.5x we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Debt to equity ratio (6) 3.6x 3.2x 2.7x Being diverse is not optional; it is what we must be. Return on average common shareholders’ equity (7) 21.8% 19.8% 15.0% Return on average tangible common shareholders’ equity (8) 27.6% 25.2% 19.9% 8. We stress teamwork in everything we do. While individual creativity is always encouraged, we have found that team effort often produces the best results. We have no room for those who put their personal interests ahead of selected data the interests of the fi rm and its clients. Total employees 22,425 20,722 19,476 Assets under management ($ IN BILLIONS) $ 532 $ 452 $ 373 9. The dedication of our people to the fi rm and the intense effort they give their jobs are greater than one fi nds in most other organizations. We think that this is an important part of our success. (1) Book value per common share is based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 460.4 million, 494.0 million and 496.1 million as of November 2005, November 2004 and November 2003, respectively. 10. We consider our size an asset that we try hard to preserve. We want to be big enough to undertake the largest (2) Tangible book value per common share is computed by dividing tangible common shareholders’ equity by the number of common shares outstanding, including restricted stock units granted to employees with no future service requirements. project that any of our clients could contemplate, yet small enough to maintain the loyalty, the intimacy and the (3) Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock and goodwill and identifi able intangible assets. esprit de corps that we all treasure and that contribute greatly to our success. See “Financial Information — Management’s Discussion and Analysis — Capital and Funding” for further information regarding our calculation of tangible common shareholders’ equity. 11. We constantly strive to anticipate the rapidly changing needs of our clients and to develop new services to meet (4) Leverage ratio equals total assets divided by total shareholders’ equity. those needs. We know that the world of fi nance will not stand still and that complacency can lead to extinction. (5) Adjusted leverage ratio equals adjusted assets divided by tangible equity capital. See “Financial Information — Management’s Discussion and Analysis — Capital and Funding” for further information regarding adjusted assets, tangible equity capital and our calculation of adjusted 12. We regularly receive confi dential information as part of our normal client relationships. To breach a confi dence or leverage ratio. (6) Debt to equity ratio equals long-term borrowings divided by total shareholders’ equity. to use confi dential information improperly or carelessly would be unthinkable. (7) Return on average common shareholders’ equity is computed by dividing net earnings applicable to common shareholders by average monthly common shareholders’ equity. 13. Our business is highly competitive, and we aggressively seek to expand our client relationships. However, we (8) Return on average tangible common shareholders’ equity is computed by dividing net earnings applicable to common shareholders by must always be fair competitors and must never denigrate other fi rms. average monthly tangible common shareholders’ equity. See “Financial Information — Management’s Discussion and Analysis — Results of Operations” for further information regarding our calculation of return on average tangible common shareholders’ equity. 14. Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the fi rm and in their personal lives. As open markets and global fi nance transform economies, capital markets will play an increasingly vital role in connecting the capital and ideas necessary for growth. Goldman Sachs operates at the very center of this vast change, and as a catalyst for fi nancial progress, fosters entrepreneurship, innovation, effi ciency and economic reform. To succeed, we must remain nimble and ready to combine capital with strategic advice to play a constructive role for our clients and in the marketplace. In any market environment, however, certain tenets of our fi rm remain absolute: a dedication to our clients, a determination to attract and develop talent with unsurpassed market expertise and a commitment to our culture of excellence, teamwork and integrity. With this as our focus, we believe Goldman Sachs will be well positioned not only to respond to change, but to anticipate it in ways that best serve our clients and our shareholders. goldman sachs 2005 annual report page 1 Henry M. Paulson, Jr., chairman and chief executive officer Lloyd C. Blankfein, president and chief operating officer page 2 goldman sachs 2005 annual report Fellow Shareholders: This past year was a successful one for Goldman Sachs, refl ecting both a robust market environment and strong performance across all of our major businesses. For 2005, net revenues increased 21% to $24.8 billion and net earnings rose 24% to $5.6 billion. Earnings per diluted common share (EPS) were up 26%. Our return on average tangible common shareholders’ equity was 28%. Book value per common share has grown from $20.94 at the end of our fi rst year as a public company in 1999 to $57.02 at our fi scal year-end on November 25, 2005, an annually com- pounded rate of 18% over this period. Although Goldman Sachs cannot control the business environment in which we operate and we fully expect to encounter far more diffi cult years than 2005, we are responsible for how well we identify and capitalize on the opportunities potentially available to us. Our ability to do this is dependent on the long-term strength of our franchise. That strength is rooted in deep client relation- ships, market knowledge, risk management expertise and leading positions in the most important fi nancial markets around the world. These attributes have allowed us to grow our net revenues at an annually compounded rate of 11%— nearly twice the rate of global GDP growth — since 1999.