SULLIVAN & CROMWELL
NEW YORK TELEPHONE: (212) 558-4000
TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC) 125 Broad Street,
New York 10004-2498
CABLE ADDRESS: LADYCOURT, NEW YORK __________
FACSIMILE: (212) 558-3588 (125 Broad Street)250 PARK AVENUE, NEW
YORK 10177-0021
(212) 558-3792 (250 Park Avenue)1701 PENNSYLVANIA AVE, N.W.
WASHINGTON, D.C. 20006-5805
444 SOUTH FLOWER STREET, LOS ANGELES 90071-2901
8, PLACE VENDOME, 75001 PARIS
ST. OLAVE'S HOUSE, 9a IRONMONGER LANE, LONDON EC2V 8EY
101 COLLINS STREET, MELBOURNE 3000
2-1, MARUNOUCHI I-CHOME, CHIYODA-KU, TOKYO 100
GLOUCESTER TOWER, 11 PEDDER STREET, HONG KONG
July 12, 1996
Securities and Exchange Commission,
450 Fifth Street, N.W.,
Washington, D.C. 20549.
Re: GS Financial Products U.S., L.P. --
Form 10-Q for the quarterly period ended May 31, 1996
Ladies and Gentlemen:
On behalf of GS Financial Products U.S., L.P. (the "Company"),
enclosed for filing under the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules and regulations thereunder is the Company's
Form 10-Q for the quarterly period ended May 31, 1996.
The accompanying EDGAR filing represents the Company's first
electronic filing with the Securities and Exchange Commission.
Accordingly, pursuant to Rule 901(d) of Regulation S-T, a paper copy of the
accompanying Form 10-Q is being sent to OFIS Filer Support, SEC Operations
Center, 6432 General Green Way, Alexandria, VA 22312-2413 within 6 business
days of the date of the accompanying filing. The paper copy will be
stamped "THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(D) OF
REGULATION S-T".
Should you have any questions or comments concerning the enclosed
documents, please contact Robert W. Reeder (212 558-3755) or the
undersigned (212-558-4940).
Very truly yours,
/s/ William G. Farrar
William G. Farrar
(Enclosures)
cc: Michael H. Mitchell (Stop 3-3)
Charles A. Sjoquist (Stop 7-2)
Kathryn L. Jorden (Stop 7-2)
(Securities and Exchange Commission)
Anthony J. Leitner
Robert L. Gulley
(Goldman, Sachs & Co.)
<PAGE>
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 May 31, 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 (I.R.S. employer
jurisdiction of identification no.)
incorporation
or
organization)
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 _____
<PAGE>
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 Six Fiscal Months ended May 26, 1995 and May 31, 1996......... 3
Condensed Balance Sheets as of November 24, 1995 and
May 31, 1996...................................................... 4
Condensed Statement of Changes in Partners' Capital for the Six
Fiscal Months ended May 31, 1996.................................. 5
Condensed Statements of Cash Flows for the Six Fiscal Months
ended May 26, 1995 and May 31, 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
<PAGE>
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 Six
Fiscal Months Ended Fiscal Months Ended
May 26, May 31, May 26, May 31,
1995 1996 1995 1996
Revenues:
Intermediation profit $1,933 $2,445 $2,569 $4,377
Interest 1,577 1,573 2,619 3,713
Equity in earnings 8 (11) 9 (11)
(loss) of affiliate
Total revenues 3,518 4,007 5,197 8,079
Interest expense 78 632 154 1,192
Revenues, net of 3,440 3,375 5,043 6,887
interest expense
Expenses:
Operating 321 190 599 490
Income before taxes 3,119 3,185 4,444 6,397
Income taxes 125 124 178 252
Net Income $2,994 $3,061 $4,266 $6,145
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Balance Sheets
(U.S. dollars in thousands)
(Unaudited)
__________
November 24, 1995 May 31, 1996
Assets:
Cash and cash equivalents $168,692 $138,092
Short-term investments 24,690 0
Financial instruments owned, at
fair value:
Derivative transactions 230,326 219,139
Investment in affiliates 1,127 1,066
Other assets 217 254
Total assets $425,052 $358,551
Liabilities and Partners' Capital:
Financial instruments issued, at
fair value:
Derivative transactions
Affiliates $153,638 $97,622
Non-affiliates 98,720 87,940
Long-term borrowings 40,000 40,000
Other liabilities and accrued 7,889 4,014
expenses
Total liabilities 300,247 229,576
Commitments and contingencies
Partners' capital:
Limited partners 124,172 128,322
General partner 633 653
Total partners' capital 124,805 128,975
Total liabilities and partners' $425,052 $358,551
capital
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Statement of Changes in Partners' Capital
For the Six Fiscal Months Ended May 31, 1996
(U.S. dollars in thousands)
(Unaudited)
__________
General Limited Total
Partner's Partners' Partners'
Capital Capital Capital
Balance, November 24, 1995 $633 $124,172 $124,805
Net Income 30 6,115 6,145
Translation adjustment (1) (49) (50)
Distribution to partners (9) (1,916) (1,925)
Balance, May 31, 1996 $653 $128,322 $128,975
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
__________
For the Six Fiscal Months Ended
May 26, 1995 May 31, 1996
Cash flows from operating activities:
Net income $4,266 $6,145
Equity in (earnings) loss of affiliate (9) 11
Decreases (Increases) in operating assets:
Short-term investments 0 24,690
Financial instruments owned, at fair value:
Derivative transactions 62,849 11,187
Other assets (253) (37)
(Decreases) Increases in operating liabilities:
Financial instruments issued, at fair value:
Derivative transactions
Affiliates (66,706) (56,016)
Non-affiliates 32,800 (10,780)
Other liabilities and accrued expenses 657 (3,875)
Net cash provided by (used in) 33,604 (28,675)
operating activities
Cash flows from financing activities:
Distribution to partners 0 (1,925)
Net cash used in financing activities 0 (1,925)
Net increase (decrease) in cash and 33,604 (30,600)
cash equivalents
Cash and cash equivalents, beginning 78,256 168,692
of period
Cash and cash equivalents, end of $111,860 $138,092
period
Supplemental disclosure of cash flow
information:
Interest paid $149 $0
Income taxes paid $0 $657
The Company recorded an accrual for the six fiscal months ended May
26, 1995 of $1.617 million for the withholding of U.S. federal income
taxes on behalf of its partners. This amount was accounted for as a
distribution to partners.
<PAGE>
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 six 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.
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
__________
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported
amounts.
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 $2.0 million and $2.3
million for the three fiscal months ended and six fiscal months
ended May 26, 1995, respectively, and $1.5 million and $2.9
million for the three fiscal months ended and six fiscal months
ended May 31, 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.
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
__________
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.
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 May 31, 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 single-A 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.
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
__________
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.
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 May 31, 1996, the Company's aggregate
credit exposure consisting solely from financial instruments
was approximately $214 million and approximately $211 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 May 31, 1996, the Company had credit
exposure net of collateral exceeding 10% of its total assets to
four counterparties, which represented 45% of total assets.
Each of the counterparties had a rating of single-A minus 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 securities of U.S.
government agencies and U.S. treasuries, 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 $7 million related to
Derivative Transactions.
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
__________
The Company also limits its credit risk by observing certain
limitations on new Derivative Transactions. If such limits
exceed management's criteria, the Company will not enter into
any transaction which increases that risk. The calculation of
these limitations incorporates the net assets of the Company's
general partner which is ultimately liable for the Company's
obligations (see Note 6).
A summary of the notional or contractual amounts ($ in
millions) of the Company's Derivative Transactions by principal
characteristic is set out below. It should be noted that
notional principal amount is not a measure of market or credit
risk.
November 24, 1995 May 31, 1996
Non-affiliates
Interest rate swap agreements $7,240 $7,648
Options written 1,423 1,815
Options purchased 1,453 1,930
Currency and other swap agreements 614 765
Affiliates
Interest rate swap agreements $9,808 $10,429
Options written 1,452 1,850
Options purchased 2,084 2,555
Currency and other swap agreements 1,489 1,596
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
__________
The notional amount of Derivative Transactions with affiliates
differs from that with non-affiliates generally due to a
different notional amount of affiliate versus non-affiliate
transactions guaranteed, as well as to Derivative Transactions
between the Company and affiliates which hedge the Company's
interest rate or currency exposure on surplus cash flow from
its portfolio, or which are intended to mitigate total credit
risk.
As described in Note 1, Derivative Transactions are carried at
estimated fair value, with the resulting gains and losses
recognized currently as intermediation profit. The fair values
of Derivative Transactions owned or issued as of November 24,
1995 and May 31, 1996 and the average monthly fair values of
such instruments for the fiscal year ended November 24, 1995
and the six fiscal months ended May 31, 1996, computed in
accordance with the Company's netting policy, are as follows:
($ in millions) As of November 24, 1995 As of May 31, 1996
Assets Liabilities Assets Liabilities
Derivative
Non-affiliates $230.3 $ 98.7 $219.1 $87.9
Affiliates 0.0 153.6 0.0 97.6
Average Monthly Fair Value for Fiscal Periods
(dollar amounts in millions)
Twelve fiscal months ended Six fiscal months ended
November 24, 1995 May 31, 1996
Assets Liabilities Assets Liabilities
Derivative
Non-affiliates $219.9 $73.0 $221.7 $103.5
Affiliates 0.0 124.8 3.1 100.1
3. Related Party Transactions:
During the six fiscal month period ended May 31, 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 six
fiscal month period ended May 26, 1995.
In the ordinary course of business, the Company enters into
hedging transactions with affiliates. At May 31, 1996,
substantially all of the Company's Derivative Transactions
involved some degree of hedging with affiliates.
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
__________
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 $57 thousand and $102 thousand was
charged for such services during the three fiscal months and
six fiscal months ended May 26, 1995, respectively, and $36
thousand and $84 thousand was charged for the three fiscal
months and six fiscal months ended May 31, 1996, respectively.
4. Investment in Affiliates:
The Company owns an approximate 1% general and limited
partnership interest in GS Financial Products International,
L.P. ("FPI"). The Company accounts for its investment in FPI
under the equity method because of its non-managing general
partner interest in FPI.
FPI is engaged in a business similar to that of the Company.
As of May 31, 1996, its assets consist principally of Japanese
equity and equity linked securities. Under Cayman Islands law,
as a general partner, the Company would be liable for all of
the liabilities of FPI if the assets of FPI were inadequate to
meet its obligations. As of May 31, 1996, FPI's long-term debt
securities were rated Aaa/AAA/AAA by Moody's Investors Service,
Inc. ("Moody's"), S&P and Fitch, respectively.
FPI's functional currency is the Japanese yen, and the amounts
presented below were translated at the appropriate yen/dollar
exchange rate.
Selected financial data for FPI ($ in millions):
November 24, 1995 May 31, 1996
Total assets $516 $583
Total liabilities 406 481
Partners' capital 110 102
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
__________
5. Long-term Borrowings:
On October 25, 1995, the Company issued $40.0 million in Nikkei
225 Indexed Notes due December 22, 2000 (the "Nikkei Notes").
The Company entered into a derivative transaction with an
affiliate to effectively convert its obligations under the
Nikkei Notes into U.S. dollar-based floating interest rate
costs. Including the impact of the derivative transaction, the
current and weighted average interest rate on the Nikkei Notes
was 5.888% as of November 24, 1995 and 5.4375% as of May 31,
1996. The gains and losses on the derivative transaction are
deferred and the periodic receipts and payments associated are
recognized as adjustments to interest expense and are accrued
over the life of the Nikkei 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 May 31, 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. Such
withholding amounted to $1.925 million for the six fiscal months
ended May 31, 1996. For the fiscal year ended November 24,
1995, withholdings of $4.486 million were included in other
liabilities and accrued expenses and owed to a related party,
which had made payments of such amount on behalf of the
Company.
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 six fiscal month periods ended May 26, 1995 and May
31, 1996, include a provision for unincorporated business tax on
income earned by the Company related to doing business in New
York City.
<PAGE>
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 May 31, 1996, the Company had entered into or guaranteed
$25.0 billion notional amount of interest rate swaps and options,
$2.9 billion notional amount of currency options and swaps and $0.7
billion notional amount of other swaps and options with a total of
74 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 May 31, 1996, substantially all of the Company's
Derivative Transactions involved some degree of hedging with
affiliates. The Company has entered into or guaranteed $16.4
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.
<PAGE>
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 May 31, 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 May
31, 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.
<PAGE>
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 May 31, 1996 Versus Three Fiscal Months
Ended May 26, 1995
For the three fiscal months ended May 31, 1996, the Company
reported revenues net of interest expense of $3.4 million,
consisting principally of intermediation profits of $2.4 million and
net interest income of $0.9 million. During the period, the Company
entered into or guaranteed 36 Derivative Transactions with
non-affiliates, and 49 hedging Derivative Transactions with
affiliates. The aggregate notional principal amount of Derivative
Transactions entered into or guaranteed by the Company during the
period was $4.1 billion, which resulted in initial intermediation
profits of $1.5 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 $632 thousand during the three
fiscal months ended May 31, 1996.
In comparison, the Company reported revenues net of interest
expense of $3.4 million for the three fiscal months ended May 26,
1995, which consisted principally of intermediation profits of $1.9
million and interest income of $1.6 million. During the period, the
Company entered into or guaranteed 26 Derivative Transactions with
non-affiliates and hedged these transactions with 26 Derivative
Transactions with affiliates. The aggregate notional principal
amount of Derivative Transactions entered into or guaranteed by the
Company during the period was $3.7 billion, which resulted in
initial intermediation profits of $2.0 million. Total
intermediation profit of $1.9 million for the fiscal quarter was
lower than initial intermediation profits due to the adverse effects
of changes in interest rates during the period which was partially
offset by 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). Interest expense for the three fiscal months
ended May 26, 1995 was $78 thousand.
<PAGE>
Interest income for the fiscal quarter ended May 31, 1996 was
$1.6 million, approximately the same as that earned during the
fiscal quarter ended May 26, 1995. Total intermediation profit for
the three month fiscal period ending May 31, 1996 was approximately
$0.5 million, or 26%, more than the same fiscal period of the
previous year, principally reflecting the substantial beneficial
effect of interest rate changes on the Company's portfolio during
the 1996 fiscal period and the minor adverse effect of such changes
during the 1995 fiscal period. Initial intermediation profit for
the three fiscal months ended May 31, 1996 decreased by $0.5
million, or 25% from the three fiscal months ended May 26, 1995,
reflecting a decrease in the average maturity of Derivative
Transactions entered into with non-affiliates. Interest expense of
$632 thousand for the three fiscal months ended May 31, 1996
increased significantly from the $78 thousand incurred in the same
fiscal period in 1995. Interest expense for the fiscal quarter
ended May 31, 1996 reflected interest on the Company's $40 million
Nikkei 225 Indexed Notes due December 22, 2000, which were issued in
October 1995, while interest expense for the fiscal quarter ended
May 26, 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 May 31,
1996 were $190 thousand, compared to $321 thousand in the fiscal
quarter ended May 26, 1995. Fees and expense reimbursement to Group
affiliates included within operating expenses were $36 thousand and
$57 thousand for the fiscal quarters ended May 31, 1996 and May 26,
1995, respectively. Other operating expenses were $154 thousand and
$264 thousand for the three fiscal month periods ended May 31, 1996
and May 26, 1995, respectively, and consisted principally of legal,
accounting and rating agency fees.
Net income of $3.1 million for the fiscal quarter ended May 31,
1996 was approximately the same as net income for the fiscal quarter
ended May 26, 1995. Total assets as of May 31, 1996 were $358.6
million, compared with total assets of $425.1 million as of November
24, 1995. The decline in total assets primarily reflected a
decrease of $30.6 million in cash and cash equivalents and a
decrease in short term investments of $24.7 million as the Company
entered into Derivative Transactions which reduced financial
instruments issued to affiliates.
<PAGE>
Six Fiscal Months Ended May 31, 1996 Versus Six Fiscal Months Ended
May 26, 1995
For the six fiscal months ended May 31, 1996, the Company
reported revenues net of interest expense of $6.9 million, which
consisted principally of intermediation profits of $4.4 million and
net interest income of $2.5 million. During the period, the Company
entered into or guaranteed 63 Derivative Transactions with
non-affiliates, including 8 transactions which the Company purchased
from an affiliate at their market value, and hedged these
transactions with 82 Derivative Transactions with affiliates. The
aggregate notional principal amount of Derivative Transactions
entered into or guaranteed by the Company during the period was $7.8
billion, which resulted in initial intermediation profits of $2.9
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
$1.2 million during the six fiscal months ended May 31, 1996.
For the six fiscal months ended May 26, 1995, the Company
reported revenues net of interest expense of $5.0 million, which
consisted principally of intermediation profits of $2.6 million and
interest income of $2.6 million. During the period, the Company
entered into or guaranteed 40 Derivative Transactions with
non-affiliates and hedged these transactions with 40 Derivative
Transactions with affiliates. The aggregate notional principal amount
of Derivative Transactions entered into or guaranteed by the Company
during the period was $5.6 billion, which resulted in initial
intermediation profits of $2.3 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 six fiscal months ended May 26,
1995 was $0.2 million.
<PAGE>
Interest income for the six fiscal months ending May 31, 1996
increased to $3.7 million compared to $2.6 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
six fiscal month period ending May 31, 1996 was approximately $4.4
million or 69% more than the same fiscal period of the preceding
year, principally reflecting the substantial beneficial effect of
interest rate changes on the Company's portfolio during the 1996
fiscal period and the minor adverse effect of such changes during
the 1995 fiscal period. Total intermediation profits during the six
fiscal month period ended May 31, 1996 also benefited from an
increase in initial intermediation profit of $0.6 million when
compared to the same fiscal period of the preceding year, reflecting
an increase in the number and notional value of Derivative
Transactions entered into during the fiscal period. Interest
expense of $1.2 million for the six fiscal months ended May 31, 1996
increased significantly from the $0.2 million incurred in the same
fiscal period in 1995. Interest expense for the six fiscal months
ended May 31, 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, while interest expense for the six
fiscal months ended May 26, 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 six fiscal months ended May 31, 1996
were $490 thousand, compared to $599 thousand during the same period
in 1995. Fees and expense reimbursement to Group affiliates
included within operating expenses were $84 thousand and $102
thousand for the six fiscal months ended May 31, 1996 and May 26,
1995, respectively. Other operating expenses were $406 thousand and
$497 thousand for the six fiscal months ended May 31, 1996 and May
26, 1995, respectively, and consisted principally of legal,
accounting and rating agency fees.
Net income for the six fiscal months ended May 31, 1996 was
$6.1 million compared to $4.3 million for the same fiscal period in
1995. Cash used in operating activities during the six fiscal month
period ended May 31, 1996 was $28.7 million, which principally
reflected payments made on financial instruments issued exceeding
receipts on financial instruments owned. In comparison, for the six
fiscal month period ended May 26, 1995, cash provided from operating
activities was $33.6 million and principally reflected receipts on
financial instruments owned exceeding payments made on financial
instruments issued.
<PAGE>
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.
<PAGE>
The composition, at November 25, 1994, November 24, 1995 and
May 31, 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 May 31, 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)
November 25, 1994 November 24, 1995 May 31, 1996
S&P Rating: __$__ Percent __$__ Percent __$__ Percent
AAA $94.2 35.9% $119.3 29.3% $119.4 34.2%
AA+ 0.0 0.0 9.4 2.3 10.0 2.9
AA 70.5 26.8 37.3 9.2 50.0 14.3
AA- 8.9 3.4 89.7 22.0 10.4 3.0
A+ 56.6 21.6 117.1 28.8 42.9 12.3
A 31.9 12.1 32.3 7.9 65.8 18.9
A- 0.0 0.0 2.1 0.5 50.5 14.4
BBB 0.5 0.2 0.0 0.0 0.0 0.0
Total $262.6 100.0% $407.2 100.0% $349.0 100.0%
<PAGE>
Current Credit Exposure - By Country of Obligor's Headquarters:
(dollar amounts in millions)
November 25, 1994 November 24, 1995 May 31, 1996
Country: __$__ Percent __$__ Percent __$__ Percent
U.S. $138.0 52.6% $117.5 28.8% $132.4 37.9%
Japan 15.5 5.9 102.2 25.1 92.0 26.4
Switzerland 19.0 7.2 43.0 10.6 50.0 14.3
France 30.1 11.5 65.6 16.1 35.5 10.2
Netherlands 27.7 10.5 34.2 8.4 24.8 7.1
U.K. 22.5 8.6 2.6 0.6 4.7 1.4
Germany 0.0 0.0 34.1 8.4 1.5 0.4
Other 9.8 3.7 8.0 2.0 8.1 2.3
Total $262.6 100.0% $407.2 100.0% $349.0 100%
Current Credit Exposure - By Obligor Industry:
(dollar amounts in millions)
November 25, 1994 November 24, 1995 May 31, 1996
Industry: __$__ Percent __$__ Percent __$__ Percent
Banks $203.5 77.5% $349.7 85.8% $303.1 86.9%
Industrials 21.6 8.2 29.6 7.3 22.8 6.5
Financials 31.5 12.0 20.3 5.0 17.9 5.1
Government
Agencies 6.0 2.3 7.6 1.9 5.2 1.5
Total $262.6 100.0% $407.2 100.0% $349.0 100.0%
<PAGE>
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 May 31, 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
May 31, 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 may be issued by a
limited number of counterparties. At May 31, 1996, the Company had
credit exposure net of collateral exceeding 10% of its total assets
to the Sumitomo Bank, the Fuji Bank, the United Bank of Switzerland
and the Republic National Bank. The Company would incur a large
loss if any or all of these entities were to default. However, the
Sumitomo Bank, the Fuji Bank, the United Bank of Switzerland and the
Republic National Bank were rated A, A-, AAA and AA, respectively,
by S&P at May 31, 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 May 31, 1996, the Company was a party to Derivative
Transactions with a notional amount of $28.6 billion. Of these,
$4.7 billion notional amount represented Derivative Transactions
which could not expose the Company to credit risk (e.g., options
written). The composition of the remainder of the Company's
Derivative Transactions by maturity and counterparty S&P rating is
illustrated below. Notional amounts presented for November 25, 1994
will not conform to the Company's financial statements since certain
transactions with potential credit risk (e.g., options purchased)
were not required to be disclosed in the Company's financial
statements. It should be noted that notional principal amount is
not a measure of market or credit risk.
<PAGE>
Notional Amount of Derivative Transactions with Potential Credit Exposure
- By Maturity:
(dollar amounts in millions)
November 25, 1994 November 24, 1995 May 31, 1996
__$__ Percent __$__ Percent __$__ Percent
1994-1996 $ 5,201 29.7% $ 3,402 15.2% $ 2,546 10.6%
1997-1999 7,605 43.4 10,544 47.2 13,031 54.5
2000-2003 2,575 14.7 4,469 20.0 4,205 17.6
2004-2005 1,808 10.3 3,283 14.7 3,136 13.1
2006-2021 334 1.9 637 2.9 1,004 4.2
Total $17,523 100.0% $22,335 100.0% $23,922 100.0%
Notional Amount of Derivative Transactions With Potential Credit Exposure
- By Credit Quality of Obligor:
(dollar amounts in millions)
November 25, 1994 November 24, 1995 May 31, 1996
S&P Rating: __$__ Percent __$__ Percent __$__ Percent
AAA $2,144 12.2% $2,571 11.5% $3,120 13.1%
AA+ 0 0.0 500 2.2 600 2.5
AA 1,351a 7.7 685b 3.1 749b 3.1
AA- 1,354 7.7 1,254 5.6 1,300 5.4
A+ 1,622c 9.3 1,482 6.6 465 1.9
A 535 3.0 1,301 5.8 1,805 7.6
A- 0 0.0 99 0.4 862 3.6
Below A- 150 0.9 200d 0.9 440d 1.8
Affiliates 10,367 59.2 14,243 63.9 14,581 61.0
Total $17,523 100.0% $22,335 100.0% $23,922 100.0%
(a) Includes $700 million notional amount of Derivative
Transactions which were collateralized in part.
(b) Includes $685 million notional amount of Derivative
Transactions which were collateralized in part.
(c) Includes $500 million notional amount of Derivative
Transactions which were collateralized.
(d) Includes $50 million notional amount of Derivative
Transactions which were collateralized.
<PAGE>
Notional Amount of Derivative Transactions With Potential Credit
Exposure
- By Principal Underlying Index Type:
(dollar amounts in millions)
November 25, 1994 November 24, 1995 May 31, 1996
__$__ Percent __$__ Percent __$__ Percent
Interest rate $16,982 96.9% $19,792 88.6% $21,199 88.6%
Currency 502 2.9 1,826 8.2 2,085 8.7
Other 39 0.2 717 3.2 638 2.7
Total $17,523 100.0% $22,335 100.0% $23,922 100.0%
The notional amount of currencies, expressed in U.S. dollars at
May 31, 1996, to be exchanged under currency options and currency
swaps outstanding at May 31, 1996 were U.S. dollars ($695 million),
Dutch guilders (approximately $372 million), Japanese yen
(approximately $363 million), Deutsche marks (approximately $282
million), British pounds (approximately $281 million), French francs
(approximately $34 million), Brazilian real (approximately $16
million), Canadian dollars (approximately $10 million), European
Currency units (approximately $9 million), Swedish krona
(approximately $8 million), Swiss francs (approximately $8 million),
Belgian francs (approximately $4 million), Spanish pesetas
(approximately $2 million) and Italian lire (approximately $1
million).
The fair values of Derivative Transactions owned or issued as
of November 24, 1995 and May 31, 1996 and the average monthly fair
values of such instruments for the fiscal year ended November 24,
1995 and the fiscal six months ended May 31, 1996, computed in
accordance with the Company's netting policy, are as follows:
($ in millions) As of November 24, 1995 As of May 31, 1996
Assets Liabilities Assets Liabilities
Derivative Transactions
Non-affiliates $ 230.3 $ 98.7 $ 219.1 $ 87.9
Affiliates 0.0 153.6 0.0 97.6
Average Monthly Fair Value for Fiscal Periods
(dollar amounts in millions)
Twelve fiscal months ended Six fiscal months ended
November 24, 1995 May 31, 1996
Assets Liabilities Assets Liabilities
Derivative Transactions
Non-affiliates $ 219.9 $ 73.0 $ 221.7 $ 103.5
Affiliates 0.0 124.8 3.1 100.1
<PAGE>
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 May 31, 1996, FPI had total liabilities of $481
million. At May 31, 1996, the long-term debt securities of FPI were
rated Aaa/AAA/AAA by Moody's, S&P and Fitch, respectively.
At May 31, 1996, the Company had $138.1 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. 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 $1.925 million for the
six fiscal months ended May 26, 1995 and May 31, 1996, respectively.
The distribution for the six fiscal months ended May 26, 1995 was
accrued as a distribution to partners and included in Other
liabilities and accrued expenses in the balance sheet. Other than
such withholding, all net income during the three and six month
periods ending May 26, 1995 and May 31, 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 May 31, 1996, the Company had $129.0 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.
<PAGE>
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.
<PAGE>
PART II: OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
No litigation was commenced against the Company through May 31, 1996.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(not applicable)
(b) Reports on Form 8-K:
(not applicable)
<PAGE>
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: July 15, 1996 By: /s/ Greg Swart
__________________________________________
Greg Swart
President, Principal Financial Officer
and Principal Accounting Officer
For and on behalf of GS Financial Products
Co., managing general partner of GS Financial
Products U.S., L.P.
<PAGE>
INDEX TO EXHIBITS
Exhibits
None.
