SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended August 30, 1996
Commission File Number: 000-25178
GS Financial Products U.S., L.P.
(Exact name of registrant as specified in its charter)
Cayman Islands 52-1919759
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
P.O. Box 896
Harbour Centre, North Church Street
Grand Cayman, Cayman Islands
British West Indies
(Address of principal executive offices)
(809) 945-1326
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days:
Yes __X__ No _____
GS FINANCIAL PRODUCTS U.S., L.P.
Form 10-Q
PART I: FINANCIAL INFORMATION Page No.
Item 1: Financial Statements (Unaudited):
Condensed Statements of Income for the Three Fiscal Months and
the Nine Fiscal Months ended August 25, 1995 and August 30, 1996......3
Condensed Balance Sheets as of November 24, 1995 and
August 30, 1996.......................................................4
Condensed Statement of Changes in Partners' Capital for the Nine
Fiscal Months ended August 30, 1996...................................5
Condensed Statements of Cash Flows for the Nine Fiscal Months ended
August 25, 1995 and August 30, 1996...................................6
Notes to the Condensed Financial Statements...........................7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................13
Liquidity and Capital Resources..................................16
PART II: OTHER INFORMATION
Item 1: Legal Proceedings...............................................22
Item 4: Submission of Matters to a Vote of Security Holders.............22
Item 6: Exhibits and Reports on Form 8-K................................22
Signature................................................................23
PART I: FINANCIAL INFORMATION
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Statements of Income
(U.S. dollars in thousands)
(Unaudited)
__________
For the Three For the Nine
Fiscal Months Ended Fiscal Months Ended
Aug.25, 1995 Aug.30, 1996 Aug.25, 1995 Aug.30, 1996
------------ ------------ ------------ ------------
Revenues:
Intermediation profit $3,699 $2,640 $6,269 $7,017
Interest 1,299 1,771 3,918 5,484
Equity in earnings
(loss) of affiliate (8) 8 1 (3)
Total revenues 4,990 4,419 10,188 12,498
Interest expense 79 851 233 2,043
Revenues, net of
interest expense 4,911 3,568 9,955 10,455
Expenses:
Operating 152 164 751 654
Income before taxes 4,759 3,404 9,204 9,801
Income taxes 190 140 368 392
------------ ------------ ------------ ------------
Net Income $4,569 $3,264 $8,836 $9,409
GS FINANCIAL PRODUCTS U.S., L.P.
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Balance Sheets
(U.S. dollars in thousands)
(Unaudited)
__________
Nov.24, 1995 Aug.30, 1996
------------ ------------
Assets:
Cash and cash equivalents $168,692 $178,791
Short-term investments 24,690 0
Financial instruments owned, at fair value:
Derivative transactions 230,326 206,931
Investment in affiliates 1,127 1,008
Other assets 217 273
------------ ------------
Total assets $425,052 $387,003
Liabilities and Partners' Capital:
Financial instruments issued, at fair value:
Derivative transactions
Affiliates $153,638 $58,422
Non-affiliates 98,720 77,639
Long-term borrowings 40,000 113,000
Other liabilities and accrued expenses 7,889 6,934
------------ ------------
Total liabilities 300,247 255,995
Commitments and contingencies
Partners' capital:
Limited partners 124,172 130,344
General partner 633 664
Total partners' capital 124,805 131,008
------------ ------------
Total liabilities and partners' capital $425,052 $387,003
GS FINANCIAL PRODUCTS U.S., L.P.
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Statement of Changes in Partners' Capital
For the Nine Fiscal Months Ended August 30, 1996
(U.S. dollars in thousands)
(Unaudited)
__________
General Limited Total
Partners' Partners' Partners'
Capital Capital Capital
------------ ------------ ------------
Balance, November 24, 1995 $633 $124,172 $124,805
Net Income 47 9,362 9,409
Translation adjustment (1) (115) (116)
Distribution to partners (15) (3,075) (3,090)
------------ ------------ ------------
Balance, August 30, 1996 $664 $130,344 $131,008
GS FINANCIAL PRODUCTS U.S., L.P.
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
__________
For the Nine Fiscal Months Ended
Aug.25, 1995 Aug.30, 1996
------------ ------------
Cash flows from operating activities:
Net income $8,836 $9,409
Equity in (earnings) loss of affiliate (1) 3
Decreases (Increases) in operating assets:
Short-term investments 0 24,690
Financial instruments owned, at fair value:
Derivative transactions 55,127 23,395
Other assets (341) (56)
(Decreases) Increases in operating liabilities:
Financial instruments issued, at fair value:
Derivative transactions
Affiliates (49,725) (95,216)
Non-affiliates 37,613 (21,081)
Other liabilities and accrued expenses 1,122 (2,120)
------------ ------------
Net cash provided by (used in)
operating activities 52,631 (60,976)
Cash flows from financing activities:
Issuance of long term borrowings 0 73,000
Distribution to partners 0 (1,925)
Net cash provided by financing activities 0 71,075
Net increase in cash and cash equivalents 52,631 10,099
Cash and cash equivalents, beginning of period 78,256 168,692
------------ ------------
Cash and cash equivalents, end of period $130,887 $178,791
Supplemental disclosure of cash flow information:
Interest paid $228 $0
Income taxes paid $0 $657
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements
(Unaudited)
_________
1. Business and Basis of Presentation:
The business of GS Financial Products U.S., L.P. (the "Company") is to
enter into, as principal or guarantor, a variety of types of
transactions involving financial instruments such as interest rate
swaps, interest rate options (e.g., interest rate caps, interest rate
floors and options on interest rate swaps), currency swaps and options,
commodity swaps and options, index swaps and forward contracts
(collectively, "Derivative Transactions"). Generally, the Company
enters into or guarantees Derivative Transactions in situations where
two or more counterparties (typically including a related party) wish
to enter into one or more Derivative Transactions between themselves
but want the Company to substitute its credit for that of one or more
of the counterparties. Market practice for such transactions is that
the Company typically substitutes its own credit for that of one or
more of the counterparties by entering into each of such transactions
directly as principal. Such Derivative Transactions may also include
the use of futures, or the purchase of the underlying instruments
subject to the transactions, such as foreign currency and physical
commodities. Because it conducts its business exclusively on a matched
basis, the Company is subject to credit risk but not market risk (as
described under Financial Instruments -- see Note 2).
The unaudited condensed financial statements should be read in
conjunction with the audited financial statements of the Company as of
and for the fiscal years ended November 25, 1994 and November 24, 1995,
included in the Company's Annual Report on Form 10-K for the fiscal
year ended November 24, 1995. Results for the nine fiscal months are
not necessarily indicative of results for a full fiscal year. In the
opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation have been
reflected.
The condensed balance sheet data as of November 24, 1995 was derived
from audited financial statements but does not include all disclosures
required under generally accepted accounting principles.
The Company's financial programs and counterparty credit risk have
been rated AAA by Standard & Poor's Ratings Group ("S&P") and Fitch
Investors Service, Inc. ("Fitch"). There can be no assurance that S&P
and Fitch will continue to rate the Company's financial programs and
counterparty credit risk, respectively, in their highest category and
any decrease in such ratings may adversely affect the Company's ability
to compete successfully.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts.
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements
(Unaudited)
_________
The Company is organized as a Cayman Islands exempted limited
partnership. All the partnership interests in the Company are owned by
subsidiaries of The Goldman Sachs Group, L.P.
The Company's financial statements are reported in U.S. dollars, the
functional currency of the Company. Assets and liabilities denominated
in currencies other than the U.S. dollar are measured using exchange
rates prevailing as of the balance sheet dates. Revenues and expenses
are measured at weighted average rates of exchange for the periods. The
Company's equity in gains or losses resulting from translating the
financial statements of affiliates in which it has invested, whose
functional currency is other than the U.S. dollar, is recorded as
cumulative translation adjustments and included in partners' capital.
The Company's Derivative Transactions are recorded on a trade date
basis.
Financial instruments are recorded at their estimated fair value.
Consequently, changes in the amounts recorded in the balance sheet
resulting from changed market values are included currently in income
as intermediation profit. As a result, due to the nature of the
Company's activities, a substantial portion of the intermediation
profit from credit enhancing new Derivative Transactions may be
recognized upon entering into such transactions. Such amounts were
$2.3 million and $4.6 million for the three fiscal and nine fiscal
months ended August 25, 1995, respectively, and $1.6 million and $4.5
million for the three fiscal and nine fiscal months ended August 30,
1996, respectively.
The remainder of intermediation profit for these periods resulted
principally from an increase in the present value of the expected
surplus cash flows from the Company's portfolio due to a reduction in
time remaining until those cash flows are realized (including the
impact of all hedges) and intermediation profit earned on performance
guarantees, which is deferred and amortized over the term of the
guarantee. (See Notes 2 and 3.)
Fair value for all financial instruments is estimated by using
financial models developed by affiliates, which incorporate market data
for the relevant instruments or for instruments with similar
characteristics. Fair value is estimated at a specified point in time.
The nature, size, and timing of transactions and the liquidity of the
markets may not ultimately allow for the realization of these values.
Derivative Transactions entered into under master agreements and other
arrangements that provide the Company, in its opinion, with the right
of setoff in the event of a bankruptcy or default by the counterparty
are presented net in the balance sheets.
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements
(Unaudited)
_________
Cash equivalents are short-term, highly liquid investments including
time deposits at banks with original maturities of three months or
less. Short-term investments include time deposits at banks with
original maturities of one year or less and are carried at cost plus
accrued interest, which approximates market value.
Certain prior year amounts have been reclassified to conform with the
August 30, 1996 presentation.
2. Financial Instruments:
Financial instruments owned and issued represent Derivative
Transactions with net positive values and net negative values,
respectively. Derivative Transactions are principally interest rate
swaps, interest rate options, index swaps, currency options, currency
forwards and currency swaps which are denominated in various
currencies. Financial instruments owned are principally obligations of
major international financial institutions, primarily banks, which are
rated in the single-A category or better by major internationally
recognized rating agencies.
Futures contracts are exchange-traded standardized contractual
commitments to buy or sell a specified quantity of a financial
instrument, currency or commodity at a specified price and future date.
Forward contracts are over-the-counter ("OTC") contracts between two
parties who agree to exchange a specified quantity of a financial
instrument, currency or commodity at a specified price and future date.
Option contracts convey the right to buy (call option) or sell (put
option) a financial instrument, currency or commodity at a
pre-determined price. For written option contracts, the writer
receives a premium in exchange for bearing the risk of unfavorable
changes in the financial instrument, currency or commodity. Swaps are
OTC contracts between two parties who agree to exchange periodic cash
flow streams calculated on a pre-determined contractual (notional)
amount.
In the normal course of its business the Company issues or guarantees
various Derivative Transactions whereby the Company agrees to pay
amounts that may increase in the event of changes in the level of an
underlying index. The Company enters into such transactions with
counterparties only if it is able to enter into offsetting transactions
that entitle the Company to receive amounts that are equal to or in
excess of the amounts it owes. As a result, so long as none of its
counterparties defaults, the Company believes that it bears no market
risk (i.e., its ability to satisfy its obligations will not be affected
by market conditions). While the ultimate excess cash flows on these
offsetting transactions will be positive or zero, the reported revenues
in any period (based on the discounted value of these excess cash
flows) will be impacted by changes in interest rates or foreign
exchange rates.
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements
(Unaudited)
_________
The Company's principal risk in respect of Derivative Transactions
owned or guaranteed is the credit risk associated with potential
failure by counterparties to perform under the terms of their
obligations to the Company. Credit exposure is measured by the loss the
Company would record in such a circumstance and equals, at any point in
time, the cost of replacing such financial instruments, net of
collateral. As of November 24, 1995 and August 30, 1996, the Company's
aggregate credit exposure consisting solely from financial instruments
was approximately $214 million and approximately $197 million,
respectively.
At November 24, 1995, the Company had credit exposure exceeding 10% of
its total assets to one counterparty, which represented 16% of total
assets. This counterparty had a rating of single A or better from at
least one internationally recognized credit rating agency. At August
30, 1996, the Company had credit exposure net of collateral exceeding
10% of its total assets to five counterparties, which represented 57%
of total assets. Each of the counterparties had a rating of single-A
or better from at least one internationally recognized credit rating agency.
The Company limits its credit risk by doing business principally with
highly rated counterparties. In certain circumstances, the Company may
also require a counterparty to post marketable securities, principally
U.S. government agency and U.S. treasury securities, as collateral in
order to reduce the amount of the Company's credit exposure. The
Company has obtained collateral of approximately $12 million and
pledged collateral of approximately $7 million related to Derivative
Transactions as of August 30, 1996.
The Company also limits its credit risk by observing certain
limitations on new Derivative Transactions. If such limits exceed
management's criteria, the Company will not enter into any transaction
which increases that risk. The calculation of these limitations
incorporates the net assets of the Company's general partner which is
ultimately liable for the Company's obligations (see Note 6).
A summary of the notional or contractual amounts ($ in millions) of
the Company's Derivative Transactions by principal characteristic
follows. It should be noted that notional principal amount is not a
measure of market or credit risk.
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
_________
Nov.24, 1995 Aug.30, 1996
------------ ------------
Non-affiliates
Interest rate swap agreements $7,240 $6,699
Options written 1,423 2,187
Options purchased 1,453 1,800
Currency and other swap agreements 384 590
Foreign currency forwards 230 358
Affiliates
Interest rate swap agreements $9,808 $9,601
Options written 1,452 1,771
Options purchased 2,084 2,876
Currency and other swap agreements 1,259 1,004
Foreign currency forwards 230 358
The notional amount of Derivative Transactions with affiliates differs
from that with non-affiliates generally due to a different notional amount of
affiliate versus non-affiliate transactions guaranteed, as well as to
Derivative Transactions between the Company and affiliates which hedge the
Company's interest rate or currency exposure on surplus cash flow from its
portfolio, or which are intended to mitigate total credit risk.
As described in Note 1, Derivative Transactions are carried at estimated
fair value, with the resulting gains and losses recognized currently as
intermediation profit. The fair values of Derivative Transactions owned or
issued as of November 24, 1995 and August 30, 1996 and the average monthly
fair values of such instruments for the fiscal year ended November 24, 1995
and the nine fiscal months ended August 30, 1996, computed in accordance with
the Company's netting policy, are as follows:
($ in millions) As of November 24, 1995 As of August 30, 1996
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
Derivative Transactions
Non-affiliates $230.3 $ 98.7 $206.9 $77.6
Affiliates 0.0 153.6 0.0 58.4
Average Monthly Fair Value for Fiscal Periods
(dollar amounts in millions)
Twelve fiscal months ended Nine fiscal months ended
As of November 24, 1995 As of August 30, 1996
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
Derivative Transactions
------------ ------------ ------------ ------------
Non-affiliates $ 212.9 $ 73.0 $217.9 $98.1
Affiliates 0.0 124.8 2.1 88.0
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
_________
3. Related Party Transactions:
During the nine fiscal month period ended August 30, 1996, the Company
purchased third party interest rate swaps and options from an affiliate
at fair value and hedged these purchases with Derivative Transactions
issued to affiliates. Intermediation profit related to these
transactions during this period was $473 thousand. No such
transactions were entered into during the three and nine fiscal month
periods ended August 25, 1995.
In the ordinary course of business, the Company enters into hedging
transactions with affiliates. At August 30, 1996, substantially all of
the Company's Derivative Transactions involved some degree of hedging
with affiliates.
In accordance with agreements with certain affiliates, technical and
administrative services may be provided to the Company for an amount
representing 105% of the cost incurred. In addition, the Company has
entered into a custodian and space sharing agreement with another
affiliate for which an agreed upon fee per annum is charged.
The Company also obtains brokerage and custodial services from
affiliates. Approximately $48 thousand and $150 thousand was charged
for such services during the three fiscal months and nine fiscal months
ended August 25, 1995, respectively, and $45 thousand and $129 thousand
was charged for the three fiscal months and nine fiscal months ended
August 30, 1996, respectively.
4. Investment in Affiliates:
The Company owns an approximate 1% general and limited partnership
interest in GS Financial Products International, L.P. ("FPI"). The
Company accounts for its investment in FPI under the equity method
because of its non-managing general partner interest in FPI.
FPI is engaged in a business similar to that of the Company. As of
August 30, 1996, its assets consist principally of Japanese equity and
equity linked securities. Under Cayman Islands law, as a general
partner, the Company would be liable for all of the liabilities of FPI
if the assets of FPI were inadequate to meet its obligations. As of
August 30, 1996, FPI's long-term debt securities were rated Aaa/AAA/AAA
by Moody's Investors Service, Inc. ("Moody's"), S&P and Fitch,
respectively.
FPI's functional currency is the Japanese yen, and the amounts
presented below were translated at the appropriate yen/dollar exchange
rate.
Selected financial data for FPI ($ in millions):
Nov.24, 1995 Aug.30, 1996
------------ ------------
Total assets $516 $534
Total liabilities 406 433
Partners' capital 110 101
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
_________
5. Long-term Borrowings:
Nov.24, 1995 Aug.30, 1996
------------ ------------
Nikkei indexed notes due December 22, 2000 $40,000 $40,000
S&P enhanced stock index growth notes due
August 9, 2002 - 73,000
------------ ------------
$40,000 $113,000
The Company has entered into derivative transactions with an affiliate to
effectively convert its obligations under both notes into U.S. dollar-based
floating interest rate costs. Including the impact of derivative
transactions, the weighted average interest rate for long term borrowings was
5.89% as of November 24, 1995 and 5.46% as of August 30, 1996.
The gains and losses on the related derivative transactions are deferred
and the periodic receipts and payments associated are recognized as
adjustments to interest expense and are accrued over the life of the notes.
6. Liability of General Partner:
The Company's sole general partner is GS Financial Products US Co. (the
"Corporate General Partner"). Under Cayman Islands law, the Corporate General
Partner, but not its shareholders, would be liable for all of the obligations
of the Company if the assets of the Company were inadequate to meet its
obligations. The sole business of the Corporate General Partner is to manage
the Company.
The assets of the Corporate General Partner consist principally of cash
and short-term investments. Short-term investments include U.S. Treasuries
and government agency securities with maturities of less than one year, and
are carried at cost plus accrued interest, which approximates fair value. The
Corporate General Partner had assets and equity of $11.9 million as of
November 24, 1995 and $12.1 million as of August 30, 1996.
7. Income Taxes:
The Company is not subject to U.S. federal income taxes. In accordance
with U.S. federal tax regulations, the Company withholds income tax on behalf
of its partners. These payments are made on behalf of the Company by a
related party. For the nine months ended August 30, 1996 the related party
remitted $3.090 million, $1.925 million of which the Company has paid to the
related party and $1.165 which is included in other liabilities and accrued
expenses. For the fiscal year ended 1995 remittances by the related party
amounted to $4.486 million, the entire amount of which was included in other
liabilities and accrued expenses.
Certain of the Company's income is subject to a 4% New York City
unincorporated business tax. The statements of income for the three and nine
fiscal month periods ended August 25, 1995 and August 30, 1996, include a
provision for unincorporated business tax on income earned by the Company
related to doing business in New York City.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a derivative products company engaged in the business
of entering into, as principal or guarantor, a variety of types of
Derivative Transactions, principally interest rate swaps, interest rate
options (e.g., interest rate caps, interest rate floors and options on
interest rate swaps), currency swaps and currency options, index swaps,
commodity swaps and options, and forward contracts. Generally, the
Company enters into or guarantees Derivative Transactions in situations
where two or more counterparties wish to enter into one or more
Derivative Transactions between themselves, but want the Company to
substitute its credit for that of one or more of the counterparties.
Market practice for such transactions is that the Company typically
substitutes its own credit for that of one or more of the
counterparties by entering into each of such transactions directly as
principal. Such Derivative Transactions may also include the use of
futures contracts, or the purchase of the underlying instruments
subject to the transactions, such as foreign currency and physical
commodities. The Company's owned or guaranteed Derivative Transactions
consist principally of interest rate swaps, interest rate options,
index swaps, currency options, currency forwards and currency swaps
denominated in a variety of currencies.
At August 30, 1996, the Company had entered into or guaranteed $23.8
billion notional amount of interest rate swaps and options, $3.3
billion notional amount of currency options, forwards and swaps and
$0.1 billion notional amount of other swaps and options with a total of
77 counterparties.
In general, the Company refers to transactions where all of the
payment obligations or delivery obligations can be met from cash flow
or delivery obligations from one or more transactions in its portfolio
as being "hedged". It is important to note in this regard that the
Company hedges its cash flow on a portfolio basis, not on a transaction
by transaction basis. Accordingly, any particular payment or delivery
obligation under a transaction may not be offset with a single
corresponding transaction.
Through August 30, 1996, substantially all of the Company's Derivative
Transactions involved some degree of hedging with affiliates. The
Company has entered into or guaranteed $15.6 billion notional amount
of Derivative Transactions with affiliates principally to hedge
exposures on third party transactions. In general, the notional amount
of Derivative Transactions with affiliates exceeds that with
non-affiliates due to the greater notional amount of affiliate versus
non-affiliate transactions guaranteed, as well as Derivative
Transactions between the Company and affiliates which hedge the
Company's interest rate or currency exposure on surplus cash flow from
its portfolio, or which are intended to mitigate total credit risk.
Results of Operations
Changes in the Company's revenues are highly dependent on the volume
of new transactions originated. Financial instruments are recorded at
their estimated fair value. Consequently, changes in the amounts
recorded in the balance sheet resulting from changed market values are
included currently in income as intermediation profit. As a result, a
substantial portion of the intermediation profit from new Derivative
Transactions may be recognized upon entering into such transactions.
Hence, the Company's profitability may be extremely variable from
quarter to quarter, depending on the volume and maturity of new
origination.
Although certain of the interest rate swaps in the Company's current
portfolio require payments in currencies other than U.S. dollars, the
Company has entered into Derivative Transactions with affiliates of The
Goldman Sachs Group, L.P. ("Group") which entitle it to receive equal
or greater amounts of the same currencies. To the extent that the
Company has or is entitled to receive amounts of currencies other than
the U.S. dollar which amounts are not needed to service the Company's
obligations, the Company's reported earnings will be affected by
changes in the value (expressed in U.S. dollars) of such currencies.
However, as of August 30, 1996, the Company does not consider its
exposure to currencies other than the U.S. dollar to be material to its
financial condition since, even if the Company were to realize no value
from any currencies other than the U.S. dollar, its net worth would be
reduced by less than 1%. As the Company is unable to predict the
movement of foreign currencies, the Company is unable to predict
whether its net worth would be reduced as a result of such exposure.
Changes in interest rates will change the present value of any future
cash flows to which the Company is entitled. Therefore, the Company
may experience fluctuations in reported earnings as a result of changes
in interest rates. However, the sensitivity as of August 30, 1996 of
the Company's portfolio to interest rates is such that a one percentage
point adverse change in interest rates would reduce the Company's net
worth at that date by less than 1%. As the Company is unable to
predict the movement of interest rates, the Company is unable to
predict whether its net worth would be reduced as a result of such
exposure.
Neither the Company nor its partners is subject to any income or
profits tax, capital gains tax, capital transfer tax, estate duty or
inheritance tax under the laws of the Cayman Islands. Further, the
Company has obtained a Tax Exemption Certificate from the Governor of
the Cayman Islands, which is effective for 50 years from March 3, 1992,
which provides that no law thereafter enacted in the Cayman Islands
imposing any tax on profits, income, capital gains or appreciation may
apply to the Company or any partner thereof.
For United States federal income tax purposes, the Company is treated
as a partnership. Accordingly, the Company is not subject to United
States federal income tax on its profits. Instead, any profits or
losses of the Company are attributed to its partners. However, the
Company does withhold United States federal income taxes on behalf of
its partners with respect to their share of the Company's profits from
the active conduct of business in the United States. Certain of the
Company's income is subject to a 4% New York City unincorporated
business tax. Depending upon the manner in which the business of the
Company will be operated in other jurisdictions, there is a possibility
that one or more such jurisdictions would impose tax on the profits of
the Company.
Three Fiscal Months Ended August 30, 1996 Versus Three Fiscal Months
Ended August 25, 1995
For the three fiscal months ended August 30, 1996, the Company
reported revenues net of interest expense of $3.6 million, consisting
principally of intermediation profits of $2.6 million and net interest
income of $0.9 million. During the period, the Company entered into or
guaranteed 101 Derivative Transactions with non-affiliates, and 105
hedging Derivative Transactions with affiliates. The aggregate
notional principal amount of Derivative Transactions entered into or
guaranteed by the Company during the period was $4.0 billion, which
resulted in initial intermediation profits of $1.6 million. The
remainder of intermediation profit for this period principally resulted
from an increase in the present value of the expected surplus cash
flows from the Company's portfolio due to a reduction in the time
remaining until those cash flows are realized (including the impact of
all hedges). The Company incurred interest expense of $851 thousand
during the three fiscal months ended August 30, 1996.
In comparison, the Company reported revenues net of interest expense
of $4.9 million for the three fiscal months ended August 25, 1995,
which consisted principally of intermediation profits of $3.7 million
and net interest income of $1.2 million. During the period, the Company
entered into or guaranteed 23 Derivative Transactions with
non-affiliates and hedged these transactions with 33 Derivative
Transactions with affiliates. The aggregate notional principal amount
of Derivative Transactions entered into or guaranteed by the Company
during the period was $12.0 billion, which resulted in initial
intermediation profits of $2.3 million. The remainder of
intermediation profit for the fiscal quarter reflected the beneficial
impact of changes in interest rates during the period (including the
impact of all hedges) and an increase in the present value of the
expected surplus cash flows from the Company's portfolio due to a
reduction in the time remaining until those cash flows are realized.
Interest income for the fiscal quarter ended August 30, 1996 was $1.8
million, 36% greater than the same fiscal period of the previous year,
principally reflecting a larger average cash and cash equivalents
balance. Total intermediation profit for the three month fiscal period
ending August 30, 1996 decreased by $1.1 million, a 29% reduction
compared to the same fiscal period of the previous year. Initial
intermediation profit for the three fiscal months ended August 30, 1996
decreased by $0.7 million, or 30% from the three fiscal months ended
August 25, 1995, principally reflecting a decrease in the notional
value of Derivative Transactions entered into with non-affiliates. The
remainder of intermediation profit for the three fiscal months ended
August 30, 1996 decreased by $0.4 million or 29% due to a change in the
present value of the expected surplus cash flows from the Company's
portfolio due to a change in interest rates during the period.
Interest expense of $851 thousand for the three fiscal months ended
August 30, 1996 increased significantly from the $79 thousand incurred
in the same fiscal period in 1995. Interest expense for the fiscal
quarter ended August 30, 1996 reflected interest on the Company's $40
million Nikkei 225 Indexed Notes due December 22, 2000, which were
issued in October 1995, and interest on the Company's $73 million S&P
enhanced stock index growth notes due August 9, 2002 which were issued
August 9, 1996. In comparison, interest expense for the fiscal quarter
ended August 25, 1995 reflected interest on the Company's $5 million
Series A-1 Floating Rate Notes which were issued in October 1994 and
matured in October 1995.
Operating expenses for the three fiscal months ended August 30, 1996
was $164 thousand, compared to $152 thousand in the fiscal quarter
ended August 25, 1995. Fees and expense reimbursement to Group
affiliates included within operating expenses were $45 thousand and $48
thousand for the fiscal quarters ended August 30, 1996 and August 25,
1995, respectively. Other operating expenses were $119 thousand and
$104 thousand for the three fiscal month periods ended August 30, 1996
and August 25, 1995, respectively, and consisted principally of legal,
accounting and rating agency fees. This resulted in net income for the
quarter ended August 30, 1996 of $3.3 million.
Nine Fiscal Months Ended August 30, 1996 Versus Nine Fiscal Months
Ended August 25, 1995
For the nine fiscal months ended August 30, 1996, the Company reported
revenues net of interest expense of $10.5 million, which consisted
principally of intermediation profits of $7.0 million and net interest
income of $3.4 million. During the period, the Company entered into or
guaranteed 164 Derivative Transactions with non-affiliates, including 8
transactions which the Company purchased from an affiliate at their
market value, and hedged these transactions with 187 Derivative
Transactions with affiliates. The aggregate notional principal amount
of Derivative Transactions entered into or guaranteed by the Company
during the period was $11.8 billion, which resulted in initial
intermediation profits of $4.5 million. The remainder of
intermediation profit for this period resulted from an increase in the
present value of the expected surplus cash flows from the Company's
portfolio due to a reduction in the time remaining until those cash
flows are realized (including the impact of all hedges). The Company
incurred interest expense of $2.0 million during the nine fiscal months
ended August 30, 1996.
For the nine fiscal months ended August 25, 1995, the Company reported
revenues net of interest expense of $10.0 million, which consisted
principally of intermediation profits of $6.3 million and net interest
income of $3.7 million. During the period, the Company entered into or
guaranteed 63 Derivative Transactions with non-affiliates and hedged
these transactions with 73 Derivative Transactions with affiliates.
The aggregate notional principal amount of Derivative Transactions
entered into or guaranteed by the Company during the period was $17.6
billion, which resulted in initial intermediation profits of $4.6
million. The remainder of intermediation profit for this period
resulted from an increase in the present value of the expected surplus
cash flows from the Company's portfolio due to a reduction in the time
remaining until those cash flows are realized, which was partly offset
by the adverse effect of changes in interest rates during the period
(including the impact of all hedges). Interest expense for the nine
fiscal months ended August 25, 1995 was $0.2 million.
Interest income for the nine fiscal months ended August 30, 1996
increased to $5.5 million compared to $3.9 million during the same
period of the preceding year, as a result of larger average balances of
cash and cash equivalents. Total intermediation profit for the nine
fiscal month period ending August 30, 1996 was approximately $0.7
million or 12% more than the same fiscal period of the preceding year.
Initial intermediation profit decreased $0.1 million or 2% when
compared to the same fiscal period of the preceding year. Other
intermediation profit increased $0.8 million or 47% when compared to
the same fiscal period in 1995 principally reflecting the beneficial
effect of interest rate changes on the Company's portfolio during the
1996 fiscal period. Interest expense of $2.0 million for the nine
fiscal months ended August 30, 1996 increased significantly from the
$0.2 million incurred in the same fiscal period in 1995. Interest
expense for the nine fiscal months ended August 30, 1996 reflected
interest on the Company's $40 million principal amount of Nikkei 225
Indexed Notes due December 22, 2000, which were issued in October 1995,
and interest on the Company's $73 million S&P enhanced stock index
growth notes due August 9, 2002 which were issued August 9, 1996. In
comparison, interest expense for the nine fiscal months ending August
25, 1995 reflected interest on the Company's $5 million Series A-1
Floating Rate Notes which were issued in October 1994 and matured in
October 1995.
Operating expenses for the nine fiscal months ended August 30, 1996
were $654 thousand, compared to $751 thousand during the same period in
1995. Fees and expense reimbursement to Group affiliates included
within operating expenses were $129 thousand and $150 thousand for the
nine fiscal months ended August 30, 1996 and August 25, 1995,
respectively. Other operating expenses were $525 thousand and $601
thousand for the nine fiscal months ended August 30, 1996 and August
25, 1995, respectively, and consisted principally of legal, accounting
and rating agency fees.
Net income for the nine fiscal months ended August 30, 1996 was $9.4
million compared to $8.8 for the nine fiscal months ended August 30,
1995. Cash used in operating activities during the nine fiscal months
ended August 30, 1996 was $61.0 million, which principally reflected
payments on financial instruments issued exceeding receipts on
financial instruments owned. In comparison, for the nine fiscal months
ended August 25, 1995, cash provided by operating activities was $52.6
million and principally reflected receipts on financial instruments
owned exceeding payments made on financial instruments issued. Cash
provided by financing activities during the nine fiscal months ended
August 30, 1996 was $71.1 million, which principally reflected the
issuance of additional long term debt. For the nine fiscal months
ended August 30, 1995 no cash was provided by financing activities.
Liquidity and Capital Resources
The Company conducts its business in a manner designed to require that
cash payments to the Company from its portfolio, taking into account
market fluctuations and the possibility of default, will be sufficient
to make when due all required payments on all the Company's
liabilities, including payments of principal and interest on
borrowings. The Company needs capital principally to absorb potential
losses due to counterparty defaults. If counterparties were to default
on their obligations to the Company, these losses could be substantial.
However, based on the credit quality of its counterparties (including
affiliates), the Company does not currently anticipate any default
losses and has not recorded any provisions for credit losses.
The Company believes that the best measure, at any point in time, of
its credit exposure to a particular counterparty is the cost it would
incur to replace the obligations of that counterparty if it defaulted,
net of any high quality marketable securities posted as collateral by
the counterparty. The Company believes that under current market
conditions it could enter into replacement contracts for all of its
contracts if the counterparties were to default. However, there can be
no assurance that the Company could enter into such replacement
contracts due to factors beyond the control of the Company, such as the
limited liquidity of many of the Company's assets and the potential
unavailability of suitable replacement contracts. Where several
transactions with one counterparty are subject to a master agreement
which provides for netting and which the Company believes is legally
enforceable under relevant law, the Company calculates the exposure
resulting from those transactions on a net basis, i.e., adding the
positive and negative value; and where the transactions are not subject
to such a netting agreement, the Company calculates its exposure on a
gross basis, i.e., adding only positive values. This method is
identical to that used for calculating the amount of financial
instruments recorded on the Company's balance sheet. As a result, at
any point in time, the Company's aggregate credit exposure in respect
of an asset equals the cost of replacing such asset less the value of
any collateral posted by the counterparty. The Company has applied
Financial Accounting Standards Board Interpretation No. 39, "Offsetting
of Amounts Relating to Certain Contracts", for financial reporting
purposes for all periods presented.
In certain circumstances, the Company may reduce its credit exposure
to a counterparty by requiring that the counterparty deposit margin or
collateral. When accepting margin or collateral, the Company generally
accepts high quality marketable securities (e.g., U.S. Treasury bonds
or notes and securities issued or backed by U.S. governmental
agencies). The Company calculates credit exposure net of collateral
when it believes that it has a perfected security interest in such
collateral under an enforceable agreement.
The composition, at November 25, 1994, November 24, 1995 and August
30, 1996, of the Company's credit exposures is shown in the tables
below according to the long-term debt ratings of the obligors by S&P
rating and by the industry and location of the obligors. (Totals do not
equal financial instruments owned principally because credit exposures
include short-term investments, cash and cash equivalents and exclude
certain financial instruments where the Company believes that it does
not have credit risk -- e.g., financial instruments owned in respect of
which collateral has been received to the extent of the value of the
collateral received.) At November 25, 1994, November 24, 1995 and
August 30, 1996, the Company's counterparties consisted largely of
banks located in Europe, North America and the Far East, as well as
affiliates. It is important to note that the Company's credit exposures
will fluctuate as a result of new transactions, as well as changes in
the replacement cost of existing transactions due to changes in, among
other things, the level of indices to which transactions are linked,
supply and demand for particular transactions and the time remaining
until maturity of the transactions.
Current Credit Exposure - By S&P Rating of Obligor:
(dollar amounts in millions)
Nov.25, 1994 Nov.24, 1995 Aug.30, 1996
-------------- -------------- --------------
S&P Rating: __$___ Percent __$___ Percent __$___ Percent
AAA $94.2 35.9% $119.3 29.3% $137.5 36.7%
AA+ 0.0 0.0 9.4 2.3 10.6 2.8
AA 70.5 26.8 37.3 9.2 49.7 13.2
AA- 8.9 3.4 89.7 22.0 11.0 2.9
A+ 56.6 21.6 117.1 28.8 61.0 16.2
A 31.9 12.1 32.3 7.9 47.7 12.7
A- 0.0 0.0 2.1 0.5 58.4 15.5
BBB 0.5 0.2 0.0 0.0 0.0 0.0
------ ------- ------ ------- ------ -------
Total $262.6 100.0% $407.2 100.0% $375.9 100.0%
Current Credit Exposure - By Country of Obligor's Headquarters:
(dollar amounts in millions)
Nov.25, 1994 Nov.24, 1995 Aug.30, 1996
-------------- -------------- --------------
Country: __$___ Percent __$___ Percent __$___ Percent
U.S. $138.0 52.6% $117.5 28.8% $145.1 38.7%
Japan 15.5 5.9 102.2 25.1 75.5 20.1
France 30.1 11.5 65.6 16.1 64.6 17.2
Switzerland 19.0 7.2 43.0 10.6 51.5 13.7
Netherlands 27.7 10.5 34.2 8.4 28.5 7.6
U.K. 22.5 8.6 2.6 0.6 3.2 0.8
Germany 0.0 0.0 34.1 8.4 2.7 0.7
Other 9.8 3.7 8.0 2.0 4.8 1.2
------ ------- ------ ------- ------ -------
Total $262.6 100.0% $407.2 100.0% $375.9 100.0%
Current Credit Exposure - By Obligor Industry:
(dollar amounts in millions)
Nov.25, 1994 Nov.24, 1995 Aug.30, 1996
-------------- -------------- --------------
Industry: __$___ Percent __$___ Percent __$___ Percent
Banks $203.5 77.5% $349.7 85.8% $321.0 85.4%
Industrials 21.6 8.2 29.6 7.3 19.8 5.3
Financials 31.5 12.0 20.3 5.0 29.0 7.7
Government Agencies 6.0 2.3 7.6 1.9 6.1 1.6
------ ------- ------ ------- ------ -------
Total $262.6 100.0% $407.2 100.0% $375.9 100.0%
The Company has entered into and expects to continue to enter into
transactions frequently with FPI or Goldman Sachs Capital Markets, L.P.
("GSCM", obligations of GSCM being unconditionally guaranteed by Group)
in order to hedge transactions with third parties. (The notional amount
of Derivative Transactions with affiliates exceeds that with
non-affiliates due to a greater notional amount of affiliate versus
non-affiliate transactions guaranteed, as well as Derivative
Transactions between the Company and affiliates which hedge the
Company's interest rate or currency exposure on surplus cash flow from
its portfolio, or which are intended to mitigate total credit risk.)
At August 30, 1996, the Company had no credit exposure to either FPI or
GSCM as a result of these transactions since it did not have a positive
estimated replacement cost for its position with either counterparty.
Since the Company had no net credit exposure to Group or its affiliates
at August 30, 1996, the Company does not believe that financial
information with respect to Group is material to investors in the
Company's securities.
The Company anticipates that its credit exposures may be highly
concentrated since financial instruments owned and short term
investments may be issued by a limited number of counterparties. At
August 30, 1996, the Company had credit exposure net of collateral
exceeding 10% of its total assets to the Bank National Paribas, the
Union Bank of Switzerland, the Republic National Bank, Morgan Guaranty
Trust Co. of New York and Sumitomo Bank. The Company would incur a
large loss if any or all of these entities were to default. However,
the Bank National Paribas, the Union Bank of Switzerland, the Republic
National Bank, Morgan Guaranty Trust Co. of New York and Sumitomo Bank
were rated A+, AAA, AA, AAA and A, respectively, by S&P at August 30,
1996, and the Company currently does not anticipate any loss as a
result of these exposures. Additionally, the Company currently does
not consider its credit exposure to any counterparty excessive since
none of such exposures exceeded the Company's net worth.
As of August 30, 1996, the Company was a party to Derivative
Transactions with a notional amount of $27.2 billion. Of these, $4.9
billion notional amount represented Derivative Transactions which could
not expose the Company to credit risk (e.g., options written). The
composition of the remainder of the Company's Derivative Transactions
by maturity and counterparty S&P rating is illustrated below. Notional
amounts presented for November 25, 1994 will not conform to the
Company's financial statements since certain transactions with
potential credit risk (e.g., options purchased) were not required to be
disclosed in the Company's financial statements. It should be noted
that notional principal amount is not a measure of market or credit
risk.
Notional Amount of Derivative Transactions with Potential Credit
Exposure - By Maturity:
(dollar amounts in millions)
Nov.25, 1994 Nov.24, 1995 Aug.30, 1996
-------------- -------------- --------------
__$___ Percent __$___ Percent __$___ Percent
1994-1996 $5,201 29.7% $3,402 15.2% $1,525 6.8%
1997-1999 7,605 43.4 10,544 47.2 11,633 51.2
2000-2003 2,575 14.7 4,469 20.0 4,704 22.1
2004-2005 1,808 10.3 3,283 14.7 2,582 11.6
2006-2021 334 1.9 637 2.9 1,855 8.3
------ ------- ------ ------- ------ -------
Total $17,523 100.0% $22,335 100.0% $22,299 100.0%
Notional Amount of Derivative Transactions With Potential Credit
Exposure - By Credit Quality of Obligor:
(dollar amounts in millions)
Nov.25, 1994 Nov.24, 1995 Aug.30, 1996
-------------- -------------- --------------
S&P Rating: __$___ Percent __$___ Percent __$___ Percent
AAA $2,144 12.2% $2,571 11.5% $2,358 10.6%
AA+ 0 0.0 500 2.2 785 3.5
AA 1,351a 7.7 685a 3.1 751a 3.4
AA- 1,354 7.7 1,254 5.6 1,162 5.2
A+ 1,622a 9.3 1,482 6.6 336 1.5
A 535 3.0 1,301 5.8 1,501 6.7
A- 0 0.0 99 0.4 1,127 5.1
Below A- 150 0.9 200a 0.9 440a 1.9
Affiliates 10,367 59.2 14,243 63.9 13,839 62.1
------ ------- ------ ------- ------ -------
Total $17,523 100.0% $22,335 100.0% $22,299 100.0%
(a) Includes Derivative Transactions which were collateralized in
part. See footnote 2 to the unaudited condensed financial statements.
Notional Amount of Derivative Transactions With Potential Credit Exposure
- By Principal Underlying Index Type:
(dollar amounts in millions)
Nov.25, 1994 Nov.24, 1995 Aug.30, 1996
-------------- -------------- --------------
__$___ Percent __$___ Percent __$___ Percent
Interest rate $16,982 96.9% $19,792 88.6% $19,698 88.3%
Currency 502 2.9 1,826 8.2 2,511 11.3
Other 39 0.2 717 3.2 90 0.4
------ ------- ------ ------- ------ -------
Total $17,523 100.0% $22,335 100.0% $22,299 100.0%
The notional amount of currencies, expressed in U.S. dollars at August
30, 1996, to be exchanged under currency options and currency swaps
outstanding at August 30, 1996 were U.S. dollars ($1,414 million),
Dutch guilders (approximately $391 million), Deutsche marks
(approximately $223 million), Japanese yen (approximately $179
million), British pounds (approximately $113 million), Italian lire
(approximately $86 million), French francs (approximately $55 million),
Canadian dollars (approximately $24 million), European Currency units
(approximately $9 million), Swedish krona (approximately $9 million)
and Swiss francs (approximately $8 million).
The fair values of Derivative Transactions owned or issued as of
November 24, 1995 and August 30, 1996 and the average monthly fair
values of such instruments for the fiscal year ended November 24, 1995
and the fiscal nine months ended August 30, 1996, computed in
accordance with the Company's netting policy, are as follows:
($ in millions) As of November 24, 1995 As of August 30, 1996
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
Derivative Transactions
Non-affiliates $230.3 $ 98.7 $206.9 $77.6
Affiliates 0.0 153.6 0.0 58.4
Average Monthly Fair Value for Fiscal Periods
(dollar amounts in millions)
Twelve fiscal months ended Nine fiscal months ended
November 24, 1995 August 30, 1996
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
Derivative Transactions
Non-affiliates $ 212.9 $ 73.0 $ 217.9 $ 98.1
Affiliates 0.0 124.8 2.1 88.0
The Company is also a general partner of FPI and, as such, would
ultimately be liable for all the obligations of FPI if it were
insolvent. At August 30, 1996, FPI had total liabilities of $433
million. At August 30, 1996, the long-term debt securities of FPI were
rated Aaa/AAA/AAA by Moody's, S&P and Fitch, respectively.
At August 30, 1996, the Company had $178.8 million of cash and cash
equivalents available to meet its payment obligations. The Company
believes that such level of cash and cash equivalents is sufficient to
enable it to meet all of its operating requirements.
The Company intends to expand its portfolio by purchasing new
Derivative Transactions, principally from affiliates of Group. The
Company has an effective registration statement covering $500 million
of Medium-Term Notes that are being offered on a continuous basis. As
at August 30, 1996 the Company had utilized $73 million of the
registration. The Company anticipates issuing additional Medium-Term
Notes or otherwise incurring debt in order to acquire new Derivative
Transactions. As a result, the Company anticipates that its leverage
will increase. The Company's activities are likely to include
purchasing new instruments, primarily interest rate and currency swaps,
and entering into hedges which convert the return on such Derivative
Transactions into a fixed or floating rate of return on the Company's
investment.
Partners' capital is not subject to withdrawal or redemption by the
partners. However, under U.S. federal tax regulation, the Company
withholds income tax on behalf of its partners. Such withholding
amounted to $1.617 million and $3.090 million for the nine fiscal
months ended August 25, 1995 and August 30, 1996, respectively. The
distribution for the nine fiscal months ended August 25, 1995 was
accrued as a distribution to partners and included in Other liabilities
and accrued expenses in the balance sheet. The distribution for the
nine fiscal months ended August 30, 1996 includes $1.925 million remitted
to a related party which makes payments on behalf of the Company and $1.165
million included in Other liabilities and accrued expenses in the
balance sheet. These amounts were accounted for as a distribution to
partners. Other than such withholding, all net income during the three
and nine month periods ending August 25, 1995 and August 30, 1996,
respectively, was retained in partners' capital. The Company
anticipates that it will make distributions to partners of up to 100%
of its earnings in the future.
At August 30, 1996, the Company had $131.0 million of partners'
capital. The Company believes that this level of partners' capital is
sufficient for it to continue to expand both the type and the volume of
its Derivative Transactions.
Important Factors Regarding Forward-Looking Statements
The Company has made in this Quarterly Report on Form 10-Q and
anticipates that it will make in future filings with the Securities and
Exchange Commission, in press releases and otherwise, written and oral
forward-looking statements. Any statement concerning the Company's
expectations, beliefs, or intentions about future conditions or events
should be considered to be forward-looking and should be understood to
be subject to the factors discussed below, among others, which may
cause actual results for the Company to differ materially from those
anticipated by such forward-looking statements.
The Company's expectation that it will not be subject to market risk,
that it will receive an equal or greater payment or delivery with
respect to any payment or delivery obligation it incurs, and that it
will have scheduled cash sources that are available on or before the
required payment of an obligation is dependent upon the absence of
counterparty default. While the Company has procedures in place to
monitor the credit quality of its counterparties, the credit quality of
a counterparty may be affected by economic, political and other events
beyond the Company's control. Defaults by counterparties with large
obligations to the Company could materially and adversely affect the
Company's results of operations and financial condition.
Group indirectly controls the Company and all of its business
activities. Group has several affiliates that compete with the Company
for Derivative Transactions and has its own credit policies for
counterparties. No assurance can be given that Group will not allocate
transactions to its other affiliates or will permit the business of the
Company to continue to expand.
The Company expects routinely to enter into transactions with GSCM and
other affiliates of Group. The obligations of GSCM will be guaranteed
by Group and the obligations of other Group affiliates may also be
guaranteed by Group. The Company may, therefore, have a significant
credit exposure to Group in the future. If the Company has a material
exposure to Group, a default by Group would have a material and adverse
effect on the Company.
In certain circumstances the Company anticipates that it would attempt
to enter into Derivative Transactions to replace a defaulted
transaction or to reduce the risk of default. Failure to replace a
defaulted Derivative Transaction or the inability to enter into a
Derivative Transaction to reduce the risk of default could prevent the
Company from eliminating the market or credit risk with respect to one
or more other Derivative Transactions. The Company's ability to enter
into replacement Derivative Transactions or other risk reducing
Derivative Transactions will be limited by the availability of
appropriate counterparties willing to enter into suitable Derivative
Transactions. No assurance can be given that the Company will be able
to enter into replacement or risk reducing Derivative Transactions.
The Company anticipates that it will continue to depend upon
affiliates of Group for the performance of essential management,
operational, and administrative functions and the solicitation of new
business. The failure of the relevant Group affiliate to perform those
functions could prevent the Company from continuing to expand its
business.
While the Company believes that in the case of credit exposures
calculated on a "net basis" (i.e., adding the positive and negative
values) or net of collateral that it has in place an enforceable
netting agreement or an enforceable security interest, no assurance can
be given that a court under all circumstances would enforce the netting
agreement or recognize the validity of the security interest.
The Company's financial programs and counterparty credit risk have
been rated in the highest categories by S&P and Fitch (the "Rating
Agencies"). A change in the Company's ratings would materially
adversely impact its ability to compete successfully. The Company's
ratings may be changed or withdrawn at any time by any of the Rating
Agencies, based upon factors selected solely by the Rating Agencies.
PART II: OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
No litigation was commenced against the Company through August 30, 1996.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12.1 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K:
(not applicable)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GS FINANCIAL PRODUCTS U.S., L.P.
acting by its general partner, GS Financial
Products US Co.
Date: October 15, 1996 By: /s/ Greg Swart
---------------------------------------------
Greg Swart
President, Principal Financial Officer
and Principal Accounting Officer
For and on behalf of GS Financial Products US
Co., managing general partner of GS Financial
Products U.S., L.P.
INDEX TO EXHIBITS
Exhibits
12.1 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
GS Financial Products U.S., L.P.
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
For the Three For the Nine
Fiscal Months Ended Fiscal Months Ended
(Unaudited Dollars Aug.25, 1995 Aug.30, 1996 Aug.25, 1995 Aug.30, 1996
in thousands) ------------ ------------ ------------ ------------
Earnings:
Income from continuing
operations before
income taxes 4,759 3,404 9,204 9,801
Add: Fixed charges 79 851 233 2,043
------------ ------------ ------------ ------------
Earnings as adjusted 4,838 4,255 9,437 11,844
Fixed charges:
Interest expense 79 851 233 2,043
Interest portion of
rent expense 0 0 0 0
------------ ------------ ------------ ------------
Total fixed charges 79 851 233 2,043
Ratio of earnings to
fixed charges 61.24 5.00 40.50 5.80
For purposes of computing the ratio of earnings to fixed charges,
earnings as adjusted consist of net income plus income taxes and fixed
charges. Fixed charges consist of interest expense.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited quarterly condensed financial statements of GS Financial
Products U.S., L.P. and is qualified in its entirety by reference to
such financial statements contained in GS Financial Products U.S.,
L.P.'s Form 10-Q for the nine fiscal months ended August 30, 1996.
<CIK> 0000914720
<NAME> GS Financial Products U.S., L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-24-1995
<PERIOD-END> AUG-30-1996
<CASH> 178,791
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 387,003
<CURRENT-LIABILITIES> 0
<BONDS> 113,000
0
0
<COMMON> 0
<OTHER-SE> 131,008
<TOTAL-LIABILITY-AND-EQUITY> 387,003
<SALES> 0
<TOTAL-REVENUES> 12,498
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 654
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,043
<INCOME-PRETAX> 9,801
<INCOME-TAX> 392
<INCOME-CONTINUING> 9,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,409
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>
Notes
Balances relating to derivative transactions owned and issued are not
reflected in the above figures.
<FN>
</TABLE>
