SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the fiscal year ended November 29, 1996
Commission File Number: 000-25178
GS Financial Products U.S., L.P.
(Exact name of registrant as specified in its charter)
Cayman 52-1919759
(State or other jurisdiction (I.R.S. employer
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
-------------------- ------------------------------------------
Nikkei 225 Indexed Notes due American Stock Exchange
December 22, 2000
S&P Enhanced Stock Index Growth New York Stock Exchange
Notes due August 9, 2002
Securities registered pursuant to Section 12(g) of the Act:
Limited partnership interests
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: X
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing: Not
Applicable
-1-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Annual Report on Form 10-K
For the Fiscal Year Ended November 29, 1996
Form 10-K Item Number:
Page No.
--------
PART I
- ------
Item 1: Business............................................................3
Item 2: Properties.........................................................17
Item 3: Legal Proceedings..................................................17
Item 4: Submission of Matters to a Vote of Security-Holders................17
PART II
- -------
Item 5: Market for the Company's Common Equity and
Related Stockholder Matters.......................................18
Item 6: Selected Financial Data............................................18
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................19
Item 8: Financial Statements and Supplementary Data.......................27
Item 9: Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure...........................27
PART III
- --------
Item 10: Directors and Executive Officers of the Registrant................28
Item 11: Executive Compensation............................................29
Item 12: Security Ownership of Certain Beneficial Owners and
Management.......................................................30
Item 13: Certain Relationships and Related Transactions....................31
PART IV
- -------
Item 14: Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.........................................................34
Index to Financial Statements of the Company................................F-1
Signatures.................................................................F-13
Exhibit Index
-2-
<PAGE>
PART I
ITEM 1: BUSINESS
General
- -------
GS Financial Products U.S., L.P. (the "Company") was formed as a Cayman
Islands exempted limited partnership on February 5, 1992. All the partnership
interests in the Company are owned by subsidiaries of The Goldman Sachs Group,
L.P. ("Group"). The Company currently owns a portfolio consisting principally of
$30.5 billion notional amount of interest rate swaps, interest rate options,
index swaps, currency options, currency forwards and currency swaps denominated
in a variety of currencies.
The Company is a derivative products company engaged in the business of
entering into, as principal or guarantor, a variety of types of 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 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 currencies, physical commodities and
securities.
The Company observes limits on its activities in order to avoid
becoming subject to regulation in one or more countries in which it does
business. As discussed under "Regulation" below, the principal limitation on the
Company's business is that it will generally only transact business in
instruments which, in its opinion, do not constitute "securities" under the
United States federal securities laws. However, the Company may engage in
transactions in securities to the extent that the Company does not believe that
such transactions are of a magnitude or of a nature that will cause the Company
to become subject to regulation. Currently, there are no regulations which
materially restrict the ability of the Company to effect transactions in
commodities or futures contracts or options on futures contracts.
Hedging of Derivative Transactions
- ----------------------------------
Because of the nature of its business, the Company does not intend to
incur any payment or delivery obligation unless it is entitled to receive an
equal or greater payment or delivery from one or more third parties (which may
be affiliates of Group). In general, the Company refers to transactions where
all of the payment obligations or delivery obligations can be met from cash
flows or delivery obligations from one or more other transactions in its
portfolio as being "hedged", and as not having "market risk". It is important to
note in this regard that the Company hedges its cash flow on a portfolio basis,
not a transaction by transaction basis. Accordingly, a particular payment or
delivery obligation under a transaction may not be offset by a single
corresponding transaction.
Hedging is a strategy by which the Company seeks to eliminate market
risk. Obligations incurred by the Company may be hedged in several ways. For
example, if the Company enters into a contract requiring it to make a payment to
a counterparty based on an index, the Company may enter into one or more
contracts that require one or more other counterparties, which may be affiliates
of Group, to make an equal or greater cash payment to the Company based on the
same index. Similarly, the Company will only enter into an obligation to pay a
fixed amount (e.g., issue a fixed rate bond), if it also acquires one or more
assets which entitle the Company to receive amounts which are equal to or
greater than the amounts it owes.
-3-
<PAGE>
In its simplest form, the Company may hedge obligations by entering
into transactions which mirror the Company's obligation. For example, if under a
10-year interest rate swap with a $100 million notional principal amount the
Company is obligated to make semi-annual payments to Party A based on a floating
rate of interest, e.g., LIBOR, and receive payments based on a fixed rate of
interest, e.g., 6.50%, the Company may hedge its payment obligations under the
interest rate swap by entering into an interest rate swap with Party B with the
same maturity and notional principal amount under which Party B is obligated to
make semi-annual payments to the Company based on LIBOR and the Company is
obligated to make payments to Party B based on a 6.47% fixed rate of interest.
Over the term of the swaps, the Company's total revenue from the two swaps would
consist of the .03% difference between the amounts paid by the two
counterparties. This type of hedge eliminates all market risk and leaves the
Company exposed to the credit risk of either Party A or Party B, depending on
the level of the underlying index or interest rate (e.g., LIBOR).
The Company also may hedge obligations by entering into transactions
which generate cash flows which exceed the Company's obligations. In such cases,
the Company would typically have a cost to acquire the hedged position, and
would recover that cost together with a return, over the life of the hedged
position. For example, the Company may enter into two interest rate swaps which
are identical to those in the example above, except that Party A would agree to
make payments based on a fixed rate of 8.50% instead of 6.50%, in return for an
up-front payment by the Company. The up-front payment would equal the present
value of the 2.00% difference between the 8.50% paid by Party A and the 6.50%
market level for similar swaps. In such a case, the Company may fund the
up-front payment by issuing debt. The debt would be repaid from the difference
between the 8.50% received from Party A and the 6.47% paid to Party B, over the
life of the swaps. Over the term of the swaps, the Company's total revenue from
the two swaps would consist of the difference between the amounts paid by the
two counterparties, less the amount originally paid by the Company to Party A.
This would be partially offset by interest on the debt issued to fund the
up-front payment. This type of hedge also eliminates all market risk and leaves
the Company exposed to the credit risk of either Party A or Party B, depending
on the level of the underlying index (e.g., LIBOR). However, the profitability
of this type of hedge depends on the difference between the Company's cost of
funds and the discount rate applied to determine the amount of the up-front
payment.
In a more complex manner, the Company may hedge obligations by using
futures contracts, options on futures or other derivative instruments generally
traded on a futures exchange or board of trade, or by holding a portfolio of
financial instruments or physical commodities. In an interest rate swap, for
example, the Company's payment obligations could be hedged by the purchase of a
series of futures contracts which require payments to the Company based on
LIBOR, so long as the payment flows on the futures contracts can be expected to
match exactly or exceed the payment obligations on the swap. Regardless of the
method used to hedge an obligation, however, the Company is essentially placing
itself between two or, in certain circumstances, more separate counterparties,
thereby enabling each counterparty to rely on the Company's credit rather than
the corresponding counterparty's credit. Like other types of hedges discussed
above, the Company would use these types of hedges only if they completely
eliminated all market risk. The advantage of these types of hedges is that they
typically do not introduce as much credit risk as a hedge with another
counterparty. For example, if the Company uses futures to hedge, the
counterparty is an exchange clearinghouse and the credit exposure is subject to
margin requirements. As of November 29, 1996, the Company had not entered into
any hedges of this type because this type of hedge would not have been effective
in completely eliminating market risk, given the Company's existing portfolio of
Derivative Transactions. As the composition of the Company's portfolio develops,
however, this type of hedging may become effective to eliminate market risk.
Because the Company anticipates that all of its obligations will be
offset by equal or greater obligations from third parties, the Company will, in
the absence of a counterparty default, be protected against the effects of
market fluctuations. As discussed above, however, the Company will enter into
transactions as principal. Accordingly, in the event of a default by a
counterparty, the Company will be exposed to the risk of loss because it will
remain obligated to comply with its payment or delivery obligations to the
non-defaulting counterparty. Under such circumstances, the Company may sustain
losses the amount of which will depend upon a number of factors, including
whether the defaulting counterparty had accrued payment obligations to the
Company, whether the Company is able to enter into a transaction to replace the
position on which the default occurred and whether the Company is able to
terminate the non-defaulted position. See "Entering into New Derivative
Transactions and Risk Management -- Credit Quality and Counterparty Credit Risk"
and "Monitoring the Portfolio" below.
-4-
<PAGE>
Derivative Transactions
- -----------------------
The following is a summary of the types of instruments that the Company
currently anticipates entering into, purchasing and selling in the course of its
business. As discussed above, the Company's current portfolio of assets consists
principally of interest rate swaps and options, index swaps, currency forwards
and currency swaps and options denominated in a variety of currencies.
Nevertheless, the Company may expand its portfolio to include the entering into
of a variety of additional Derivative Transactions. The exact extent and timing
of the expansion of the Company's portfolio will depend upon market conditions
and other factors beyond the Company's control.
Margin or collateral is sometimes required to be deposited by one or
both parties to a Derivative Transaction. The Company does not expect generally
to require counterparties to post margin or collateral in respect of Derivative
Transactions. Changes in general market practices or in counterparties'
perception of the Company's creditworthiness could result in the Company
generally being required to post collateral or margin in the future.
Additionally, as described in more detail below, certain exchange traded
instruments always require margin deposits.
The Company does not currently anticipate entering into a transaction
which requires it to post margin or collateral unless it anticipates having
sufficient unpledged assets to satisfy such margin or collateral requirements.
For example, the Company may agree to post margin or collateral if it were to
receive an equivalent amount of margin or collateral under the related
transactions.
The Company does not limit the concentration of its portfolio in any
one type of instrument. As a result, the Company's portfolio could consist
entirely of one kind of instrument, or it could contain many types of
instruments. See "Entering into New Derivative Transactions and Risk Management"
below.
The Company may also engage in Derivative Transactions to hedge its
cost of funds. For example, the Company may issue a debt obligation with a
return linked to an index, and enter into a Derivative Transaction with a third
party or a Group affiliate to hedge the indexed component of the debt obligation
at terms which will result in a cost of funds to the Company which is either
fixed or floating based on a short-term interest rate.
Interest Rate and Currency Swaps
--------------------------------
An interest rate swap is a bilateral agreement that requires each party
to make periodic payments to the other party, the amounts of which are
determined on the basis of a stated fixed or floating rate of interest and a
specified notional principal amount. Typically, one party agrees to make
payments in an amount equal to a fixed rate of interest multiplied by the
notional principal amount, while the other party agrees to make payments in an
amount equal to a particular floating interest rate (e.g., LIBOR) multiplied by
the notional amount. The payment obligations of the parties might also be based
on two different floating rates. On each scheduled payment date, the amount
required to be paid by one party is netted against the amount required to be
paid by the other party and only this net amount is paid by one party to the
other. Neither party actually pays the notional principal amount at any time
during the term of the swap. Under a currency swap, one party agrees to pay a
fixed or a floating amount of a specified currency on each payment date, and the
other party agrees to pay a fixed or floating amount of a different currency. In
contrast with interest rate swaps, the parties to currency swaps typically
exchange the notional principal amount of each currency at initiation and
maturity.
Interest rate and currency swaps generally require periodic payments
and extend for periods of up to 10 years. However, some interest rate and
currency swaps may extend for substantially longer periods of time, such as 30
years or more. Such transactions are entered into by each party acting as
principal and typically may not be transferred or terminated without
counterparty consent. As a result, interest rate and currency swaps have limited
liquidity. By entering into a swap, a party assumes the risk of adverse interest
or exchange rate fluctuations, which could result in the party's being obligated
to make payments to its counterparty over a significant period of time.
-5-
<PAGE>
Interest Rate Caps and Floors
-----------------------------
An interest rate cap provides the purchaser with the right to receive
payments in an amount equal to the excess of a floating interest rate over a
specified fixed rate, multiplied by a stated notional principal amount. An
interest rate floor provides the purchaser with the right to receive payments in
an amount equal to the excess of a fixed interest rate over a floating rate,
multiplied by a stated notional principal amount. The purchaser of a cap or
floor pays a non-refundable fee (which may be referred to as a "premium") for
this right, but has no further payment obligations. In contrast to a swap,
therefore, a cap or floor imposes continuing payment obligations only on the
seller, and the purchaser cannot lose more than the fee paid. In addition, the
seller has no ongoing credit exposure to the purchaser. The seller, however, is
subject to risk of loss to the full extent of any adverse fluctuations in
interest rates above, in the case of a cap, or below, in the case of a floor,
the fixed rate and the purchaser therefore incurs exposure to the seller's
credit. For this reason, the seller may be required to deposit margin or
collateral. Conversely, the seller's potential profit on the transaction is
limited to the amount of the fee.
Payments are required to be made under caps and floors on periodic
scheduled payment dates, or on a single date. As in the case of swaps, interest
rate caps and floors are entered into by each party acting as principal and may
not be transferred or terminated without counterparty consent, although the
purchaser may simply allow the cap or floor to expire and forfeit the fee.
Currency Forwards
-----------------
Forward contracts on currencies are contractual obligations between two
parties to purchase and sell a specific quantity of one currency for a specific
quantity of a second currency (thereby creating a fixed exchange rate between
the two currencies) at a stated time in the future. Forward contracts generally
may not be liquidated prior to the stated maturity date, although the parties to
a forward contract may agree to enter into a second offsetting transaction with
the same maturity, thereby fixing each party's profit or loss on the two
transactions. As a result, a party to a forward contract must be prepared to
perform its obligations under the contract in full.
Forward contracts are entered into by the parties as principals and
generally may not be transferred or terminated without counterparty consent.
Each party's profit or loss on the transaction will be determined by changes in
the exchange rate between the two currencies that are the subject of the forward
contract.
Currency Options
----------------
An option on a currency provides the purchaser, or "holder", with the
right, but not the obligation, to purchase, in the case of a "call" option, or
to sell, in the case of a "put" option, a stated quantity of the underlying
currency at a fixed exchange rate up to a stated expiration date (or, in the
case of certain options, on such date). The holder pays a non-refundable fee for
the option, referred to as the "premium", but cannot lose more than this amount.
In contrast to a forward contract, an option imposes a binding obligation only
on the seller, or "writer", of the option. Upon the holder's exercise of the
option, the writer is obligated to complete the transaction in the underlying
currency. An option becomes worthless to the holder when it expires.
As in the case of interest rate caps and floors, the writer of a
currency option has no ongoing credit exposure to the purchaser. Because the
writer must complete the purchase or sale of the underlying currency upon the
purchaser's exercise of the option, however, the writer is exposed to
potentially unlimited losses in the event of adverse fluctuations in the
relevant exchange rate. The purchaser therefore has ongoing credit exposure to
the writer and the writer may be required to deposit margin or collateral.
Currency options are entered into by the parties as principals, and may not be
transferred or terminated without counterparty consent (although, as in the case
of caps and floors, the purchaser may simply allow the option to expire and
forfeit the premium).
-6-
<PAGE>
Futures Contracts
-----------------
A futures contract is a bilateral agreement providing for the purchase
and sale of a security (such as government bonds), currency, physical commodity
or index for a specified price. By its terms, a futures contract provides for a
specified delivery month in which the security, currency or commodity is to be
delivered or, in the case of a futures contract on an index of interest rates or
certain financial instruments, in which a cash settlement is to be paid. Unlike
other types of derivative instruments described above, futures contracts are
traded only on organized exchanges and may be entered into only through brokers
that are members of the relevant exchanges. The exchange clearinghouse acts as
the counterparty to each futures contract executed through the exchange, and is
responsible for all clearance and settlement functions. In contrast to most
other derivative instruments described herein, therefore, the parties to a
futures contract do not deal with each other as principals and assume the credit
risk of an exchange clearinghouse, rather than the credit risk of a particular
counterparty. In addition, because of the clearinghouse system, positions in
futures contracts may be liquidated by entering into offsetting transactions in
the same contract, which serves to terminate the position. As a result, futures
positions may be terminated without counterparty consent, subject to the
availability of a liquid secondary market on which to effect the offsetting
transaction on the relevant exchange. Most futures contracts are settled in this
manner rather than through the delivery of the underlying instrument or
commodity.
Upon entering into a futures contract, an amount of cash or cash
equivalents must be deposited with the broker by the purchaser and the seller as
"initial margin". Subsequent payments to and from the broker, referred to as
"variation margin", are then made on a daily basis as the value of the
underlying security, currency, commodity or index fluctuates in value, thereby
making positions in the futures contract more or less valuable, a process known
as "marking to market". The Company will be subject to margin requirements in
connection with the futures contracts into which it enters.
Options on Futures Contracts
----------------------------
An option on a futures contract provides the holder with the right, but
not the obligation, to enter into a "long" position in the underlying futures
contract, in the case of a "call" option, or a "short" position in the
underlying futures contract, in the case of a "put" option, at a fixed price up
to a stated expiration date. As in the case of other options, the holder pays a
non-refundable premium for the option, but cannot lose more than this amount.
The writer of an option on a futures contract, however, is subject to
initial and variation margin requirements in connection with the option and is
exposed to potentially unlimited losses. The Company will be subject to margin
requirements in connection with options on futures contracts written by it.
Options on futures contracts are traded on the same exchanges as the underlying
futures contracts, and may only be entered into through brokers which are
members of the relevant exchanges. Positions in options on futures contracts are
cleared through the relevant exchange clearinghouse, in the same manner, and
subject to the same considerations, as those discussed above under "Futures
Contracts".
Forward Contracts on Physical Commodities
-----------------------------------------
Forward contracts on physical commodities are contractual obligations
by two parties to purchase and sell a stated quantity of a commodity for a
specified price at a stated time in the future. Forward contracts on physical
commodities generally are used either to effect purchases and sales of the
commodity in the future or to hedge against the risk of adverse fluctuations in
the value of the commodity. The Company may enter into forward contracts on
physical commodities in a manner substantially similar to its use of currency
forwards, and will seek to hedge positions in such contracts either through the
establishment of offsetting forward positions or an offsetting position in
futures contracts on the same commodity.
-7-
<PAGE>
Commodity Options
-----------------
An option on a physical commodity provides the purchaser with the
right, but not the obligation, to purchase the underlying commodity, in the case
of a call option, or to sell the underlying commodity, in the case of a put
option, at any time up to a stated expiration date for a specified price. As in
the case of other types of options, the holder pays the writer a non-refundable
premium for the option but cannot lose more than this amount. Upon the holder's
exercise of the option, the writer is obligated to complete the transaction in
the underlying physical commodity.
Commodity Swaps
---------------
A commodity swap, which is substantially similar to a swap on interest
rates or currency exchange rates, is a bilateral agreement between two parties
to exchange payments on regularly scheduled dates, based on changes in the value
of a specified commodity. One party to the transaction undertakes to pay a fixed
amount on each payment date, while the other party agrees to pay a floating rate
based on the price of the underlying commodity, in each case, multiplied by a
notional quantity of the commodity. On each payment date, the parties net the
payments owed by each party, and only the net amount is paid by one party to the
other.
Commodity swaps may extend over substantial periods of time and
generally require payments to be made on a quarterly basis. Such transactions
are entered into by each party acting as principal and typically may not be
transferred or terminated without counterparty consent. As a result, commodity
swaps have limited liquidity. By entering into a commodity swap, each party
assumes the risk of adverse changes in the value of the underlying commodity,
which could result in either party being obligated to make payments to its
counterparty over a significant period of time.
Index Swaps
-----------
An index swap is a bilateral agreement between two parties based on the
value of an index of one or more currencies (including baskets of currencies),
one or more commodities (including baskets of commodities), one or more
securities (including baskets of securities) and/or any other index. One party
(Party A) may undertake to pay a fixed or floating rate of interest on a
specified notional value in exchange for the agreement by the other party (Party
B) to pay a floating rate based on a notional value (which is usually identical
to the notional value on which the interest payment is based at the inception of
the Derivative Transaction) of the selected index. As with commodity swaps, on
each payment date the parties net the payments owed by each party, and only the
net amount is paid by one party to the other. Index swaps generally extend from
relatively short periods (six months) to medium-term maturities (three to five
years). Payments are exchanged periodically at intervals negotiated by the
parties. On relatively short-term Derivative Transactions, the exchange of
payments is generally only made on the swap termination date.
In an index swap, both parties assume the risk of changes in the value
of the selected index, since, in the example above, if the index value on the
payment date is less than its value on the inception date, Party A will owe the
difference to Party B. On the other hand, if the index value on the payment date
is more than its value on the inception date, Party B will owe the difference to
Party A. In either case, the interest owed by Party A to Party B will be added
to or netted against the amounts owed in respect of changes in the index.
Entering into New Derivative Transactions and Risk Management
- -------------------------------------------------------------
In connection with entering into any Derivative Transaction, the
Company seeks to ensure that its obligations under any new Derivative
Transactions can be "hedged" with other Derivative Transactions. The Company
also considers a variety of factors, including any existing exposure of the
Company and Group and its affiliates to the proposed counterparty, the level and
volatility of the index to which the transaction would be linked, the credit
quality of the proposed counterparty and the credit risk it is undertaking in
connection with entering into such Derivative Transaction as well as the impact
of any additional such risk on its portfolio of Derivative Transactions. In
addition, prior to entering into a Derivative Transaction, the Company must
determine that the spread on such Derivative Transaction is satisfactory in
light of the credit risk associated with such Derivative Transaction. The Board
of Directors of GS Financial Products US Co. (the "Corporate General Partner"),
the general partner of the Company, has approved the Company's procedures to
monitor and control the credit quality of, and the Company's exposure to,
counterparties as described below and under "Monitoring the Portfolio" below.
Such procedures may be changed at any time.
-8-
<PAGE>
In connection with the Company entering into new Derivative
Transactions, it is important to recognize that Group has control over the
amount of new business that the Company originates and that the Company may
decline to enter into a transaction that meets its credit standards but exceeds
the exposure limits set by Group for itself and its affiliates. See "Credit
Quality and Counterparty Credit Risk -- Counterparty Credit Quality" below.
Market Risk and Liquidity Exposures
-----------------------------------
The Company intends to manage its portfolio of Derivative Transactions
so that cash payments to the Company from its portfolio will be sufficient to
make, when due, all required payments on all the Company's liabilities,
including payments of principal, premium, if any, and interest on any
indebtedness. As a result, the Company anticipates that it will not incur any
obligation unless it enters into one or more Derivative Transactions which
provide it with, or entitle it to receive, an equal or greater amount from a
third party, which may be an affiliate of Group. In addition, the Company does
not anticipate incurring any obligation unless it has scheduled cash sources
that are available on or before the dates of the required payments on the
obligation. For example, if the Company enters into a contract requiring it to
make payments based on an index, the Company may concurrently enter into a
contract that requires a third party to make equal or greater payments to the
Company based on the same index at the same time. 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).
The Company does not currently engage in, nor does it anticipate
engaging in, "dynamic hedging" (i.e., entering into cash or Derivative
Transactions which are expected approximately, but not exactly, to offset the
economics of the transactions being hedged and which are adjusted from time to
time to maintain the hedge ratio). Generally, dynamic hedging strategies would
not permit the Company to be certain that, absent a default, cash flows would be
sufficient to satisfy all of the related liabilities.
Credit Quality and Counterparty Credit Risk
-------------------------------------------
The Company anticipates that it will make payments on its obligations,
including any indebtedness, principally or exclusively with cash on hand and
receipts from its portfolio of Derivative Transactions. As a result, the
Company's ability to meet its obligations will depend on its ability to collect
the amounts owed pursuant to such Derivative Transactions. Accordingly, defaults
by counterparties with large obligations to the Company could materially and
adversely affect the Company's financial position and results of operations.
The amount which the Company would lose, that is, the amount the
Company would be required to pay to obtain a replacement instrument to hedge its
obligations on any Derivative Transaction (the "loss"), upon a counterparty
default on a particular transaction would be determined principally by the level
of the indices to which payments on the instruments issued by that counterparty
were linked. In the case of a default by a counterparty to an interest rate
swap, for example, the amount of the Company's loss would depend principally on
the level of interest rates. Similarly, the amount of the Company's loss on a
default in a currency swap would depend principally on currency exchange rates
whereas the amount of the Company's loss on a default in a Derivative
Transaction linked to the price of a commodity (such as gold or oil) would
depend upon the price of such commodity. The size of the loss would be affected
by the level of such indices at the time of default and, if the Company were
unable to replace the defaulted instrument or terminate its hedging
transactions, the changes in the level of such indices after the default and
prior to maturity of the hedging transactions. A number of the instruments in
which the Company intends to transact business have limited liquidity and
therefore could be difficult to replace. For any particular transaction there
will also be a number of other factors which can affect the amount of the
Company's potential loss. Depending on the terms of the transaction, these can
include, for example, the time remaining until maturity of the transaction, the
availability of any netting provisions in the agreement with the counterparty
and changes in the supply and demand for that type of transaction.
-9-
<PAGE>
The Company utilizes several techniques to assess and limit credit risk
as described below. The Company's procedures to monitor and control the credit
quality of, and the Company's exposure to, counterparties as described below may
be changed at any time by the Board of Directors of the Corporate General
Partner of the Company.
Counterparty Credit Quality. The Company's principal means of
controlling its credit risk is to substitute its credit principally for highly
creditworthy counterparties. By doing so, the Company anticipates that it will
experience a relatively low frequency of counterparty defaults.
The Company anticipates that it will substitute its credit principally
for obligors rated "A" or better by one or more nationally recognized
statistical rating organizations. However, the Company may do business with
counterparties rated below "A" and may enter into Derivative Transactions with
unrated counterparties.
Pursuant to an Origination Agreement with Goldman, Sachs & Co.
("GS&Co.") as described under "Certain Relationships and Related Transactions --
Operational and Administrative Relationships with Group -- New Business Services
Agreements" in Item 13, GS&Co. has agreed to provide, or cause to be provided,
credit reviews of counterparties. The Company has been advised by GS&Co. that
the credit quality of each counterparty to a new Derivative Transaction
(regardless of the extent of existing Derivative Transactions with such
counterparty) will be evaluated by the credit department of one of its
affiliates and by one or more other credit committees. This evaluation includes
a review of the credit exposure of Group and its affiliates to the
counterparty's credit. The Company has further been advised by GS&Co. that these
credit committees are composed of senior managers of the Goldman Sachs
international investment banking group as well as representatives of its credit
department and that they are responsible for conducting due diligence as to the
credit quality of potential counterparties for the purposes of other activities
of Group and its affiliates. GS&Co.'s role is solely to provide information to
the Company, and it has no liability to the Company in respect of the provision
of such credit reviews except in the case of gross negligence. Generally, the
Company does not anticipate entering into transactions which otherwise might
meet its standards but exceed any exposure limits set by Group for itself and
its affiliates. This may result in less business for the Company, since Group
and its affiliates may have large existing exposures to certain counterparties.
Collateral or Margin. 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 highly liquid and creditworthy securities (e.g., U.S. Treasury bonds and
notes and securities issued or backed by U.S. government 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 security
agreement.
Documentation. To reduce the amount of its credit exposure, the Company
anticipates that many of its swaps, currency options, forward contracts and
other similar transactions will be subject to master agreements which provide,
inter alia, for net payments between the parties in certain circumstances and
for the closing out, on a net settlement basis, of all outstanding transactions
upon a default by, or insolvency events affecting, either party. A common form
of such an agreement, particularly for interest rate and currency swaps, is the
form published by the International Swaps and Derivatives Association, Inc. (the
"ISDA Agreement"), although other forms may be used as well. The Company
anticipates that it will frequently enter into transactions with GS Financial
Products International, L.P. ("FPI") and Goldman Sachs Capital Markets, L.P.
("GSCM") in order to hedge its obligations on transactions between the Company
and third parties. In order to facilitate such transactions, the Company has
entered into ISDA Agreements with both FPI and GSCM. The obligations of GSCM
under its ISDA Agreement have been unconditionally guaranteed by Group.
Accordingly, the Company treats Group as the obligor with respect to the
Derivative Transactions entered into under the ISDA Agreement with GSCM. For a
summary of notional or contractual amounts involved in transactions with such
affiliates at November 29, 1996 and November 24, 1995, see Note 2 to the
Company's audited financial statements included in Item 14 below.
-10-
<PAGE>
Currently, Derivative Transactions shown in the Company's financial
statements on a net basis are subject to agreements that contain close-out
netting provisions that the Company believes are enforceable. In considering the
enforceability of any netting provisions, the Company relies on legal opinions
from counsel. Any such analysis will depend on the country, governing law, type
of transactions and counterparty involved.
In certain circumstances, the Company may be unable or unwilling to
take credit risk in a particular transaction, due to the Company's determination
of the credit risks present. In some limited cases, the Company may be able to
enter into such a transaction by structuring it on a limited-recourse basis,
thereby eliminating its credit exposure to one counterparty. In such a
transaction, the Company would enter into a Derivative Transaction with one
counterparty ("Party A"). The Company would hedge that transaction with a
different counterparty ("Party B") in a transaction where the Company would not
be obligated to make payments to Party B if payments are not received by the
Company from Party A. (Party B would not, however, have a security interest in
the transaction with Party A.) As a result, the Company would have no credit
exposure to Party A. The Company has entered into this type of transaction with
GSCM in the position of Party B.
Aggregate Credit Risk. Another technique which the Company may use to
limit the total credit risk to which it is exposed (i.e., the replacement cost
of its portfolio) is to limit the growth of its business. If the Company's total
credit risk exceeded levels which the Company found to be acceptable, the
Company would not enter into any Derivative Transactions which would increase
its total credit risk, and would, in the absence of transactions which decrease
its total credit risk, limit its operations to collecting payments from assets
as they mature and holding such payments in cash equivalents until they are used
to satisfy its liabilities (i.e., it would operate in run-off mode).
The Company's principal measurement of its total credit risk (the
"Total Credit Risk") is an evaluation of the likelihood that the Company's cash
receipts will be insufficient to meet its payment obligations on a timely basis
as a result of counterparty defaults, market risk, or differences in timing of
payment receipts and obligations. The Company estimates the Total Credit Risk
using computer based simulations which take into account the timing and amount
of payments required on the Company's assets, liabilities, and contingent
liabilities, the level and volatility of any indices to which those payments are
linked and the credit ratings of any counterparties who could owe money to the
Company. These simulation programs were developed by GS&Co. and are periodically
updated by GS&Co. to reflect new product types. The assumptions used in the
models are changed from time to time when the Company, in consultation with
GS&Co., determines that such changes would result in a more accurate measurement
of its credit risk.
The Company estimates its credit risk (i.e., replacement cost) in
respect of Derivative Transactions using financial models developed by its
affiliates to estimate fair value. The models 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. The Company's estimates of its credit risk are
solely internal and neither the models nor the assumptions used in such models
are reviewed by third parties.
The Company considers the credit risks posed by its existing portfolio
to be significantly below the levels it would find acceptable. The Company
periodically monitors its exposure to individual counterparties and reviews its
credit exposure to a counterparty prior to entering into any new transaction
with such counterparty. If the Company determines that its exposure to any
counterparty exceeds a level it deems acceptable, the Company will seek to
reduce its exposure as described under "Monitoring the Portfolio" below.
-11-
<PAGE>
Affiliate Credit Risk Limits. The Company frequently enters into
Derivative Transactions with affiliates of Group (such affiliates, other than
FPI, the "Group Affiliates"), principally GSCM. The Company also enters into
hedging transactions with FPI. Because the obligations of Group Affiliates will
be guaranteed by Group, the Company treats Group as the obligor on these
transactions for purposes of measuring its credit exposure. The Company may,
therefore, have a significant credit exposure to Group in the future, in which
case a default by Group would have a material adverse effect on the Company's
financial position and results of operations. The Company does not expect,
however, that such credit exposure would exceed the Company's net worth.
In order to limit its exposure to Group, the Company subjects
transactions with Group Affiliates to an additional credit limit over and above
the limits discussed above which are applicable to other obligors. Specifically,
the Company will not acquire any receivables issued or written by Group
Affiliates if, after giving effect to such acquisition and to the effect of any
netting agreements, the value of all such receivables would exceed 15% of the
Company's total assets. For a discussion of the Company's policies with respect
to netting agreements, see "Documentation" above. At November 29, 1996, the
Company had credit exposure of $12.6 million to Group or Group Affiliates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" under Item 7.
The Company from time to time enters into Derivative Transactions with
FPI. The Company is a general partner of FPI. The Company does not intend to
observe any credit limits on transactions with FPI, or with any other entity in
which it becomes a general partner in the future. The Company does not consider
it important to limit its direct credit exposure to any entity in which it is a
general partner, because as a general partner the Company is contingently liable
for all of the obligations of such entities (including transactions entered into
with third parties).
Monitoring the Portfolio
- ------------------------
The Company monitors its portfolio on an ongoing basis to verify that
there is no market or liquidity exposure and that its credit risk to obligors is
at a level the Company considers acceptable. The Company recalculates its
estimates of Total Credit Risk when it believes there is a significant change in
the composition of its portfolio, the credit quality of its counterparties or
the indices to which its Derivative Transactions are linked. Typically, the
Total Credit Risk is recalculated at least monthly.
If credit risk to one or more obligors exceeds levels which the Company
considers acceptable, then the Company may attempt to reduce its exposure to
such obligors by entering into one or more Derivative Transactions which would
have the effect of reducing such risk. Such Derivative Transactions could
include, for example, assigning or terminating a Derivative Transaction upon a
counterparty downgrade. However, counterparty consent would generally be
required for a sale or termination, and such consent may be difficult to obtain.
It may also be difficult to sell obligations of counterparties which are
perceived as weak credits. There can be no assurance that the Company would be
able to enter into Derivative Transactions which decrease the Total Credit Risk.
Competition
- -----------
The market for Derivative Transactions is highly competitive. The
principal means of competition are perceived credit quality, pricing and
flexibility.
In general, the Company competes with U.S. and international banks,
U.S. and international insurance companies and other similar financial
institutions. Many of these institutions have well-established reputations in
the market for Derivative Transactions and have significantly more capital than
the Company.
The Company will also compete with current and future affiliates of
Group which are in businesses substantially similar to that of the Company.
These are FPI and Goldman Sachs Mitsui Marine Derivative Products, L.P.
("GSMMDP"), which was organized by Group and Mitsui Marine and Fire Insurance
Co., Ltd. Neither of these entities is restricted from competing with the
Company and the Company believes that each does so or intends to do so. The
Company is a general partner of FPI and the directors and executive officers of
the Company are also directors or executive officers of one or both of GSMMDP or
FPI. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" under Item 7 and "Directors and Executive
Officers" under Item 10. Further, since each of these entities is directly or
indirectly controlled by Group, Group may increase or decrease the level or vary
the composition of new business in which any of these entities, including the
Company, engages. No assurances can be given as to whether Group will allocate
business to the Company or to one of its other highly rated affiliates.
-12-
<PAGE>
The Company anticipates that Group and certain counterparties may
prefer to use the Company's affiliates for certain Derivative Transactions
because the Company will be subject to the continuing reporting obligations of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whereas
the Company's affiliates are not. Such reporting obligations may require
inclusion in public filings of information that counterparties do not wish to
disclose and may increase, because of the involvement of counsel and accountants
assisting in such filings, the costs associated with such transactions. Due
principally to restrictions imposed by the United States federal securities
laws, the Company does not expect that FPI or GSMMDP will compete with it for
any transaction which would require such affiliate to issue an instrument which
is a security under such laws to a U.S. person. In addition, because the Company
will be able to access the U.S. capital markets, the Company's cost of funds may
be lower than the cost of funds for the Company's affiliates. The Company
believes Group has organized these entities to take advantage of the flexibility
and cost advantages each of such entities provides.
GSMMDP is highly rated, conducts the same business as the Company and
can be expected to be a significant competitor of the Company. The Company
anticipates that GSMMDP will engage principally in Derivative Transactions with
counterparties rated in the three highest rating categories by one or more
nationally recognized statistical rating agencies. As a result, the Company does
not anticipate that it will compete with GSMMDP for transactions involving
counterparties with ratings below the three highest categories. For transactions
where the Company competes with GSMMDP, in addition to the factors described
above, the Company anticipates that a number of counterparties may prefer GSMMDP
due to its credit support from owners with a longer operating history, larger
capital base, and more diversified business than the Company. However, the
Company is unable to predict the degree to which potential counterparties may
prefer GSMMDP to the Company. One of the directors of the Corporate General
Partner is also a director and President of the general partner of GSMMDP and
another director is a director of the general partner of GSMMDP. See "Directors
and Executive Officers" under Item 10.
FPI is a highly rated derivative products company. FPI has the same
executive officers as the Company. The Company anticipates that FPI will engage
in certain transactions that the Company intends to avoid due to regulatory
considerations, i.e., transactions which involve the purchase by FPI of
instruments which may be "securities" within the meaning of the United States
federal securities laws. However, the Company also expects that FPI will compete
with the Company for all types of other transactions. The Company does not
expect most counterparties to have a preference between itself and FPI. As a
result, the Company expects competition with FPI to be based principally on the
factors described above. See "Directors and Executive Officers" under Item 10.
Counterparties with the highest credit rating are the most desired. The
Company's financial programs and counterparty credit risk have been rated in the
highest rating category by Standard & Poor's Ratings Group ("S&P") and Fitch
Investors Service, Inc. ("Fitch" and, together with S&P, the "Rating Agencies"),
respectively. According to S&P and Fitch, these ratings are different from
long-term debt ratings. A reduction in the Company's financial programs,
counterparty credit risk or long-term debt rating may adversely affect the
Company's ability to compete successfully.
Price competition is reflected in the spread between the hedged
positions. The Company intends to keep its spreads competitive with the
marketplace.
-13-
<PAGE>
Regulation
- ----------
In certain jurisdictions where the Company's counterparties are
located, particularly the United States, there exist regulatory schemes which
are designed for brokers, dealers, investment companies or banks. These
regulatory schemes typically have capital and other requirements with which the
Company could not comply.
The Company limits the types of Derivative Transactions in which it
acts as counterparty in order to avoid becoming subject to such regulations. The
principal limitation is that the Company proposes to engage primarily in
transactions involving instruments which are not, in its view, "securities"
within the meaning of the United States federal securities laws. As a result of
such limitations on its business and the capital structure of the Company, the
Company believes that it is not required to be licensed, registered or
authorized under any current securities, commodities, or banking laws of the
Cayman Islands or the United States. Accordingly, neither the Company nor the
Corporate General Partner is registered as a broker-dealer under the Exchange
Act (or any similar state law); nor are they registered as investment companies
under the Investment Company Act of 1940 (or any similar state law).
There can be no assurance, however, that regulatory authorities in one
or more jurisdictions would not take a contrary view regarding the applicability
of any such laws (including the applicability of the broker-dealer regulation
requirements of the Exchange Act and the requirements of the Investment Company
Act of 1940). For example, the Securities and Exchange Commission (the
"Commission") has generally not addressed the question of what constitutes a
"security" within the meaning of the Exchange Act, and has broadly interpreted
the definition of "security" under the Investment Company Act of 1940 in the
context of applying the registration requirements of that Act. In addition,
Congress and United States governmental agencies, including the Commodity
Futures Trading Commission and the Government Accounting Office, have considered
or are considering issues relating to derivative instruments generally and the
appropriateness of alternative regulatory approaches. Were the Commission to
take the position that the transactions in which the Company engages involve
"securities", it might seek to require the Company to register as a
broker-dealer or investment company.
Application of these or any of the other regulatory schemes in their
current form would have a material adverse effect on the business of the
Company. The Company cannot, of course, predict the outcomes of any other
current or future considerations of issues such as the definition of securities
under the federal securities laws or the appropriateness or method of regulation
of derivative instruments. Any of these may have a material adverse effect on
the business of the Company.
As discussed herein, the Company is a general partner in FPI whose
business involves the purchase and sale of instruments that constitute
"securities" and whose liabilities are held primarily outside the United States.
FPI is also not registered as a broker-dealer under the Exchange Act or as an
investment company under the Investment Company Act of 1940, or licensed,
registered or authorized under any other securities, commodities or banking laws
of the Cayman Islands or the United States. Similar to the Company, there can be
no assurance that the Commission or regulatory authorities in other
jurisdictions would not take a contrary view and require such licensing,
registration or authorization. In the event such were required, by virtue of the
Company's general partnership interest in FPI and transactions in which the
Company may engage with FPI, any such licensing, registration or authorization
could have a material adverse effect on the business of the Company.
The Commission has announced that it is considering proposals to allow
derivative products companies such as the Company to register as broker-dealers
with the Commission under a regime which would exempt such companies from
certain regulations applicable to "full service" broker-dealers while permitting
such companies to engage in Derivative Transactions which the Commission deems
securities under current law. It is unclear what impact, if any, such proposals,
if adopted, would have on the Company's business or operations. If the
Commission adopted rules which subjected the Company to regulation as a
broker-dealer, the Company might choose to continue to limit its business
activities in order to avoid being subject to such regulation, or it might
choose to become subject to such regulation in order to be able to transact
business in more types of instruments.
-14-
<PAGE>
Several bills have been introduced in the U.S. Congress which, if
enacted into law, would impose varying degrees of regulation on certain of the
types of Derivative Transactions in which the Company acts as counterparty. Such
regulation could adversely affect certain of the Company's business activities.
The Company is unable to determine at this time whether such bills will be
enacted into law and, if so, the effect of such legislation on the Company's
business activities.
Rating Information
- ------------------
The Company's financial programs and counterparty credit risk have been
rated AAA by S&P and Fitch. According to S&P and Fitch, these ratings are
different from long-term debt ratings. The Company believes that such ratings
were based upon, among other things, the legal separation of the Company from
Group, the absence of market risk in the Company's portfolio, the credit quality
of the Company's counterparties, the capital of the Company available to absorb
defaults, and the procedures implemented by the Company to monitor and control
the credit quality of, and the Company's exposure to, counterparties. See
"Entering into New Derivative Transactions and Risk Management" and "Monitoring
the Portfolio" above.
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. See "Competition" above.
A financial programs and counterparty risk rating is not a
recommendation to purchase, sell or hold a security or enter into a Derivative
Transaction with the Company. Such rating does not comment as to the market
price of a security or the suitability of entering into a Derivative Transaction
for a particular investor or counterparty. Financial programs and counterparty
credit risk ratings may be changed or withdrawn at any time by the applicable
Rating Agency.
Cayman Islands Taxation
- -----------------------
Under existing legislation, the Government of the Cayman Islands will
not impose any income or profits tax, capital gains tax, capital transfer tax,
estate duty or inheritance tax upon the Company or the general or limited
partners thereof. Furthermore, the Company has obtained a Tax Exemption
Certificate from the Governor of the Cayman Islands which is effective for a
period of 50 years from March 3, 1992. The undertaking contained in that
certificate provides, in accordance with the provisions of Section 17(1) of the
Cayman Islands Exempted Limited Partnership Law, that no law thereafter enacted
in the Cayman Islands imposing any tax to be levied on profits, income, capital
gains or appreciation will apply to the Company or to any partner thereof in
respect of the operations or assets of such exempted limited partnership or the
partnership interest of a partner therein; and that the aforesaid taxes and any
tax in the nature of estate duty or inheritance tax will not be payable in
respect of the obligations of the Company or the interests of the partners
therein. The Company is liable, however, to pay the Government of the Cayman
Islands an annual registration fee, which, at current rates, is approximately
U.S. $580 per annum.
United States Taxation
- ----------------------
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.
In addition, 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.
-15-
<PAGE>
Important Factors Regarding Forward-Looking Statements
- ------------------------------------------------------
The Company has made in this Annual Report on Form 10-K and anticipates
that it will make in future filings with the 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.
The Company limits the types of instruments that it enters into as
principal or guarantees in order to avoid becoming subject to regulation. The
enactment of new legislation or new interpretations of existing statutes and
regulations may cause the Company to become subject to regulation in one or more
countries. If the Company were to become subject to regulation, no assurance can
be given that the Company would be able to comply with the applicable regulatory
requirements.
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 expects to make profits, if any, principally from the
spread between hedge transactions, which spread is expected to be a small
percentage of the notional amount of such transactions. The size of the spread
between transactions is subject to market forces and may be materially adversely
impacted by competitive or other economic conditions.
-16-
<PAGE>
The Company's financial programs and counterparty credit risk have been
rated in the highest categories by 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.
ITEM 2: PROPERTIES
The Company does not own any real property and owns minimal physical
assets. The Company leases its office from an affiliate under a Custodian and
Service Agreement. See "Certain Relationships and Related Transactions --
Operational and Administrative Relationships with Group -- Administrative
Services Agreements" under Item 13.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable
-17-
<PAGE>
PART II
ITEM 5: MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's general partnership and limited partnership
interests are indirectly held by Group (see Item 12). Accordingly, there is no
public market, in the United States or elsewhere, for the Company's limited
partnership interests. See "Liquidity and Capital Resources" under Item 7.
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 withholdings are accounted for as a distribution to partners.
There is no reciprocal tax treaty between the Cayman Islands and the United
States.
Partners' capital is not subject to withdrawal or redemption on demand
by the partners. The Company anticipates that it will make distributions to
partners in the future. However, such dividends and distributions will be
limited to ensure the Company's ability to meet its obligations is not adversely
affected.
ITEM 6: SELECTED FINANCIAL DATA
The selected income statement data for the period from February 5, 1992
(the Company's date of formation) to November 27, 1992 and for the fiscal years
ended November 26, 1993, November 25, 1994, November 24, 1995 and November 29,
1996, and the balance sheet data as of November 27, 1992, November 26, 1993,
November 25, 1994, November 24, 1995 and November 29, 1996 are derived from
financial statements of the Company. The selected financial data should be read
in conjunction with the financial statements of the Company and notes thereto
contained in Item 14.
<TABLE>
<CAPTION>
Feb. 5, 1992 Fiscal Year Fiscal Year Fiscal Year Fiscal Year
to Ended Ended Ended Ended
Nov. 27,1992 Nov. 26, 1993 Nov. 25, 1994 Nov. 24, 1995 Nov. 29, 1996
------------ ------------- ------------- ------------- -------------
(U.S. dollars in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
- ----------------------
Revenues,
net of interest expense $1,145 $5,694 $11,844 $13,461 $15,393
Operating expenses 41 882 1,645 878 879
Income before taxes 1,104 4,812 10,199 12,583 14,514
Net income 1,104 4,812 10,199 12,280 13,933
Balance Sheet Data:
- -------------------
Total assets $105,185 $168,661 $334,068 $405,052 $370,975
Long-term borrowings 0 0 0 40,383 116,778
Partners' capital 101,804 106,737 117,042 124,805 134,043
Other Data
- ----------
Ratio of earnings
to fixed charges(1) Not applicable Not applicable 378X(2) 26X 5X
<FN>
Note: (1) For purposes of computing the ratio of earning to fixed charges,
earnings as adjusted consist of net income plus income taxes and
fixed charges. Fixed charges consist of interest expense and
amortization of debt issuance costs.
(2) The Company does not consider this ratio to be meaningful since it
is based on $5,000,000 in principal amount of the Company's Series A
Medium-Term Notes outstanding only 42 days during fiscal 1994.
</FN>
</TABLE>
-18-
<PAGE>
ITEM 7: 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 guaranteed
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. See "Business" in Item 1.
At November 29, 1996, the Company had entered into or guaranteed $23.9
billion notional amount of interest rate swaps and options, $6.5 billion
notional amount of currency options, forwards and swaps and $0.05 billion
notional amount of other swaps and options with a total of 78 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 November 29, 1996, substantially all of the Company's
Derivative Transactions involved some degree of hedging with affiliates. The
Company has entered into or guaranteed $17.8 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.
The Company does not intend to be exposed to market risk (see "Business
- -- Entering into New Derivative Transactions and Risk Management -- Market Risk
and Liquidity Exposures" under Item 1). As a result, the Company expects to make
profits, if any, principally from the "spread" between the hedged transactions.
The spread between the hedged transactions will depend upon the type of
instrument subject to the transaction, the size of the transaction and the
creditworthiness of the counterparties. Generally, the spread between the hedged
transactions will be a small percentage (usually less than .10%) of the notional
amount of the transactions. The Derivative Transactions business is highly
competitive, however, and the spread for any set of hedged transactions may be
less than .01%. See "Business-- Competition" under Item 1.
For a discussion of affiliates of Group that may compete with the
Company, see "Business-- Competition" under Item 1. It is important to recognize
that, since each of these affiliates is directly or indirectly controlled by
Group, Group may increase or decrease the level or vary the composition of new
business in which any of these affiliates, including the Company, engages. No
assurances can be given as to whether Group will allocate business to the
Company or to one of its other highly rated affiliates.
-19-
<PAGE>
Results of Operations
- ---------------------
Changes in the Company's revenues are highly dependent on the volume of
new transactions originated. Derivative Transactions are recorded at their
estimated fair value. 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 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 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 November
29, 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 cash
flows which the Company is entitled to receive in the future. The Company,
therefore, may experience fluctuations in reported earnings as a result of
changes in interest rates. However, the sensitivity as of November 29, 1996 of
the Company's portfolio at that date to interest rates is such that a one
percentage point adverse change in interest rates would reduce the Company's net
worth 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. See "Business
- -- Cayman Islands Taxation" under Item 1.
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.
As a result of the development of its business, the Company determined that, as
of December 1, 1994, certain of its income was 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.
Fiscal 1996 Compared with Fiscal 1995
- -------------------------------------
For fiscal 1996, the Company reported revenues net of interest expense
of $15.4 million, consisting principally of intermediation profits of $11.6
million and net interest income of $3.8 million. This represented an increase in
reported revenues net of interest expense of 14.4% compared to fiscal 1995.
During the period, the Company entered into or guaranteed 315 Derivative
Transactions with non-affiliates, including 8 transactions which the Company
purchased from an affiliate at their market value, and 369 hedging Derivative
Transactions with affiliates. The aggregate notional principal amount of
Derivative Transactions entered into or guaranteed by the Company during the
period was $18.6 billion, which resulted in initial intermediation profits of
$7.0 million, including $473 thousand which resulted from transactions purchased
from affiliates. Other intermediation profit for the period was $4.6 million,
resulting principally from an increase in the present value of the expected
surplus cash flows from the Company's portfolio due primarily to a reduction
in the time remaining until those cash flows are realized. The Company incurred
interest expense of $3.6 million during fiscal 1996.
-20-
<PAGE>
For fiscal 1995, the Company reported revenues net of interest expense
of $13.5 million, which consisted principally of $7.9 million in intermediation
profits and net interest income of $5.6 million. During fiscal 1995, the Company
entered into or guaranteed 86 Derivative Transactions with non-affiliates,
including 9 transactions which the Company purchased from an affiliate at their
market value, and 98 hedging Derivative Transactions with affiliates. The
aggregate notional principal amount of Derivative Transactions entered into or
guaranteed by the Company during the period was $23.8 billion, which resulted in
initial intermediation profit of $6.7 million, including $784 thousand which
resulted from transactions purchased from affiliates. The remainder of
intermediation profits for fiscal 1995 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. The Company
incurred interest expense of $471 thousand during fiscal 1995.
Interest income for fiscal 1996 increased to $7.5 million, compared to
$6.0 million during the preceding year, as a result of larger average balances
of cash and cash equivalents. Total intermediation profit for the fiscal year
ended November 29, 1996 increased approximately $3.7 million or 47% as compared
to fiscal 1995. Initial intermediation profit for fiscal 1996 increased by $0.3
million or 4% over fiscal 1995, reflecting a significant increase in the number
of Derivative Transactions entered into with non-affiliates, mostly offset by a
reduction in the notional amount of such transactions as well as the shorter
maturities of such transactions. Other intermediation profit increased by $3.4
million to $4.6 million in fiscal 1996 versus other intermediation profit of
$1.2 million in fiscal 1995. The increase principally reflected an increase in
the average net investment in Derivative Transactions during the year. Interest
expense of $3.6 million for the fiscal year ended November 29, 1996 increased
significantly from the $0.5 million incurred in the same fiscal period in 1995.
This increase was the result of the significant increase in the average long
term debt outstanding in fiscal 1996 as compared to fiscal 1995. The effective
weighted average interest rate for long term borrowings was 5.41% for fiscal
1996.
Operating expenses for the fiscal year ended November 29, 1996 were
$879 thousand, virtually unchanged from $878 thousand during the same period in
1995. Fees and expense reimbursement to Group affiliates included within
operating expenses were $211 thousand and $195 thousand for the fiscal years
ended November 29, 1996 and November 24, 1995, respectively. Other operating
expenses were $668 thousand and $685 thousand for the fiscal years ended
November 29, 1996 and November 24, 1995, respectively, and consisted principally
of legal, accounting and rating agency fees.
Net income of $13.9 million for the 1996 fiscal year increased by 13.5%
or $1.7 million from fiscal 1995 net income of $12.3 million. Total assets as of
November 29, 1996 were $371 million, consisting principally of Derivative
Transactions and cash and cash equivalents.
Net cash used in operating activities during fiscal 1996 was $115.8
million, which principally reflected the prepayment of certain liabilities under
Derivative Transactions with affiliates. Net cash provided by financing
activities during fiscal 1996 was $64.0 million principally reflecting proceeds
on issuance of the Company's Medium-Term Notes. Cash provided by investing
activities during fiscal 1996 was $24.7 million. In comparison, for the 1995
fiscal year, cash provided from operating activities was $80.1 million and
principally reflected receipts exceeding payments on Derivative Transactions.
Net cash provided from financing activities during fiscal 1995 was $35.0
million, which reflected the repayment of the Company's Medium-Term Series A-1
Notes and the issuance of the Company's Nikkei 225 Indexed Notes Due December
22, 2000. Net cash used in investing activities during fiscal 1995 was $24.7
million.
Fiscal 1995 Compared with Fiscal 1994
- -------------------------------------
For fiscal 1995, the Company reported revenues net of interest expense
of $13.5 million, consisting principally of intermediation profits of $7.9
million and net interest income of $5.6 million. This represented an increase in
reported revenues net of interest expense of 13.7% compared to fiscal 1994.
During the period, the Company entered into or guaranteed 86 Derivative
Transactions with non-affiliates, including 9 transactions which the Company
purchased from an affiliate at their market value, and 98 hedging Derivative
Transactions with affiliates. The aggregate notional principal amount of
Derivative Transactions entered into or guaranteed by the Company during the
period was $23.8 billion, which resulted in initial intermediation profits of
$6.7 million, including $784 thousand resulting from transactions purchased from
affiliates. 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. The Company incurred interest expense of
$471 thousand during fiscal 1995.
-21-
<PAGE>
For fiscal 1994, the Company reported revenues net of interest expense
of $11.8 million, which consisted principally of $10.6 million in intermediation
profits. During fiscal 1994, the Company entered into or guaranteed 44
Derivative Transactions with non-affiliates, including 9 transactions which the
Company purchased from an affiliate at their market value, and 48 hedging
Derivative Transactions with affiliates. The aggregate notional principal amount
of Derivative Transactions entered into or guaranteed by the Company during the
period was $16.1 billion, which resulted in initial intermediation profit of
$6.1 million, including $2.2 million which resulted from transactions purchased
from affiliates. The remainder of intermediation profits for fiscal 1994
resulted from an increase in the present value of the expected surplus cash
flows from the Company's portfolio, of which approximately 90% was due to a
reduction in the time remaining until those cash flows are realized and
approximately 10% was due to the beneficial effect of changes in interest rates
during the period (including the impact of all hedges).
Interest income for fiscal 1995 increased significantly to $6.0
million, compared to $1.3 million during the preceding year, as a result of
significantly larger balances of cash and cash equivalents. Initial
intermediation profit for fiscal 1995 increased by approximately 10% over fiscal
1994, reflecting almost a doubling in the volume of Derivative Transactions
entered into with non-affiliates, mostly offset by lower margins due to a change
in the mix of transactions. The remainder of intermediation profit for fiscal
1995 was approximately 75% or $3.3 million less than fiscal 1994, principally
reflecting the absence of beneficial effects of interest rate changes on the
Company's portfolio (including the impact of all hedges) during the 1995 fiscal
period compared to fiscal 1994. Interest expense of $471 thousand for fiscal
1995 increased significantly from the $27 thousand incurred in fiscal 1994.
Fiscal 1995 interest expense reflected almost a full year of interest cost on
the Company's $5 million Medium-Term Series A-1 Notes and approximately one
month of interest cost on the issuance on October 26, 1995 of $40 million
principal in Nikkei 225 Indexed Notes due December 22, 2000. In comparison,
fiscal 1994 interest expense included 42 days of interest on the Company's $5
million Medium-Term Series A-1 Notes.
Operating expenses for fiscal 1995 were $878 thousand, compared to $1.6
million in fiscal 1994. Operating expenses for fiscal 1995 and fiscal 1994
included $194 thousand and $1.1 million, respectively, of non-recurring
expenses, principally legal and accounting costs related to the preparation and
filing of the registration statement for the Company's Medium-Term Note program.
Non-recurring expenses for fiscal 1995 declined by approximately 83% from fiscal
1994, essentially reflecting the completion of the registration of the
Medium-Term Note program during fiscal 1994. Other operating expenses increased
by approximately 33% to $685 thousand in fiscal 1995 from $517 thousand in
fiscal 1994, principally as a result of higher legal and accounting fees
relating to the periodic filing of the Company's reports on Form 10-Q and Form
10-K and affiliate related expenses. Fees and expense reimbursement to Group
Affiliates included within operating expenses were $195 thousand and $116
thousand for fiscal 1995 and fiscal 1994, respectively.
Net income of $12.3 million for the 1995 fiscal year increased by 21%
or $2.1 million from fiscal 1994 net income of $10.2 million. Total assets as of
November 24, 1995 were $425 million, consisting principally of Derivative
Transactions owned and cash and cash equivalents.
Net cash provided from operating activities during fiscal 1995 was
$80.1 million, which primarily reflected receipts exceeding payments on
Derivative Transactions. Net cash provided by financing activities during fiscal
1995 was $35.0 million. Net cash used in investing activities during fiscal 1995
was $24.7 million. In comparison, for the 1994 fiscal year, cash provided from
operating activities was $58.6 million and principally reflected receipts
exceeding payments on Derivative Transactions. Cash provided from financing
activities during fiscal 1994 was $5.0 million.
-22-
<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. For a discussion of the
effects of a counterparty default, see "Business -- Entering into New Derivative
Transactions and Risk Management -- Credit Quality and Counterparty Credit Risk"
under Item 1.
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 Derivative Transactions
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 24, 1995 and November 29, 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 Derivative Transactions reported
as assets principally because credit exposures include cash and cash equivalents
and exclude certain Derivative Transactions where the Company believes that it
does not have credit risk -- e.g., Derivative Transactions reported as assets in
respect of which collateral has been received to the extent of the value of the
collateral received.) At November 24, 1995 and November 29, 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.
-23-
<PAGE>
Current Credit Exposure - By S&P Rating of Obligor:
(U.S. dollars in millions)
November 24, 1995 November 29, 1996
----------------- -----------------
S&P Rating: $ Percent $ Percent
----------- ------ ------- ------ -------
AAA $119.3 29.3% $125.3 34.0%
AA+ 9.4 2.3 10.0 2.7
AA 37.3 9.2 31.9 8.7
AA- 89.7 22.0 23.6 6.4
A+ 117.1 28.8 84.1 22.8
A 32.3 7.9 48.8 13.2
A- 2.1 0.5 45.1 12.2
--- --- ---- ----
Total $407.2 100.0% $368.8 100.0%
====== ===== ====== =====
Current Credit Exposure - By Country of Obligor's Headquarters:
---------------------------------------------------------------
(U.S. dollars in millions)
November 24, 1995 November 29, 1996
----------------- -----------------
Country: $ Percent $ Percent
- ----------- ------ ------- ------ -------
U.S. $117.5 28.8% $178.7 48.4%
Japan 102.2 25.1 69.7 18.9
France 65.6 16.1 65.5 17.7
Switzerland 43.0 10.6 28.3 7.7
Netherlands 34.2 8.4 17.6 4.8
Germany 34.1 8.4 6.9 1.9
Other 10.6 2.6 2.1 0.6
---- --- --- ---
Total $407.2 100.0% $368.8 100.0%
====== ===== ====== =====
Current Credit Exposure - By Obligor Industry:
----------------------------------------------
(U.S. dollars in millions)
November 24, 1995 November 29, 1996
----------------- -----------------
Industry $ Percent $ Percent
- ----------- ------ ------- ------ -------
Banks $349.7 85.8% $257.7 69.9%
Industrials 29.6 7.3 48.4 13.1
Financials 20.3 5.0 43.3 11.7
Government Agencies 7.6 1.9 19.4 5.3
--- --- ---- ---
Total $407.2 100.0% $368.8 100.0%
====== ===== ====== =====
The Company has entered into and expects to continue to enter into
transactions frequently with FPI or 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 November 29, 1996, the Company had $12.6
million of credit exposure to GSCM as a result of these transactions. Due to the
level of credit exposure to Group or its affiliates at November 29, 1996, the
Company does not believe that financial information with respect to Group is
material to investors in the Company's securities.
-24-
<PAGE>
The Company anticipates that its credit exposures may be highly
concentrated since Derivative Transactions reported as assets and short term
investments may be transacted with a limited number of counterparties. At
November 24, 1995 the Company had credit exposure net of collateral exceeding
10% of its total assets to Sumitomo Bank. Sumitomo Bank was rated A+ by S&P at
November 24, 1995. At November 29, 1996, the Company had credit exposure net of
collateral exceeding 10% of its total assets to Banque National Paribas and
Morgan Guaranty Trust Company of New York. The Company would incur a large loss
if either counterparty were to default. However, Banque National Paribas and
Morgan Guaranty Trust Company of New York were rated A+ and AAA, respectively,
by S&P at November 29, 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 November 29, 1996, the Company was a party to Derivative
Transactions with a notional amount of $30.5 billion. Of these, $6.6 billion
notional amount with an estimated fair market value of $15.7 million 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. 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:
----------------------------------------------------------------
(U.S. dollars in millions)
November 24, 1995 November 29, 1996
----------------- -----------------
$ Percent $ Percent
------ ------- ------ -------
1994-1996 3,402 15.2% $850 3.6%
1997-1999 10,544 47.2 12,918 54.0
2000-2003 4,469 20.0 4,671 19.5
2004-2005 3,283 14.7 2,549 10.7
2006-2021 637 2.9 2,895 12.2
--- --- ----- ----
Total $22,335 100.0% $23,883 100.0%
======= ===== ======= =====
-25-
<PAGE>
Notional Amount of Derivative Transactions With Potential Credit
Exposure By Credit Quality of Obligor:
- --------------------------------------------------------------------------------
(U.S. dollars in millions)
November 24, 1995 November 29, 1996
----------------- -----------------
S&P Rating $ Percent $ Percent
- ----------- ------ ------- ------ -------
AAA $2,571 11.5% $2,727 11.4%
AA+ 500 2.2 472 2.0
AA 685a 3.1 696a 2.9
AA- 1,254 5.6 1,133 4.7
A+ 1,482 6.6 274 1.1
A 1,301 5.8 1,465 6.1
A- 99 0.4 1,088 4.6
Below A- 200a 0.9 290a 1.2
Affiliates 14,243 63.9 15,738 66.0
------ ---- ------ ----
Total $22,335 100.0% $23,883 100.0%
======= ===== ======= =====
(a) Includes Derivative Transactions which were collateralized in part.
Notional Amount of Derivative Transactions With Potential Credit
Exposure By Principal Underlying Index Type:
- --------------------------------------------------------------------------------
(U.S. dollars in millions)
November 24, 1995 November 29, 1996
----------------- -----------------
Industry $ Percent $ Percent
- ----------- ------ ------- ------ -------
Interest rate $19,792 88.6% $19,910 83.4%
Currency 1,826 8.2 3,923 16.4
Other 717 3.2 50 0.2
--- --- -- ---
Total $22,335 100.0% $23,883 100.0%
The notional amount of currencies, expressed in U.S. dollars at
November 29, 1996, to be exchanged under currency options and currency swaps
outstanding at November 29, 1996 (see "Currency" in the table above) were U.S.
dollars ($1,685 million), European currency units (approximately $507 million),
Japanese yen (approximately $382 million), Dutch guilders (approximately $381
million), Deutsche marks (approximately $275 million), British pounds
(approximately $271 million), Italian lire (approximately $132 million), French
francs (approximately $75 million), Australian dollars (approximately $64
million), Brazilian real (approximately $57 million), Swedish krona
(approximately $45 million), Swiss francs (approximately $39 million), Belgian
francs (approximately $6 million) and Canadian dollars (approximately $4
million).
The fair values of Derivative Transactions as of November 29, 1996 and
the average monthly fair values of such instruments for the fiscal year then
ended, computed in accordance with the Company's netting policy, are as follows:
-26-
<PAGE>
November 29, 1996 Average
----------------- -------
(U.S. dollars in millions)
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Non-affiliates
- --------------
Derivative
Transactions $222.5 $107.4 $214.3 $96.1
Affiliates
- ----------
Derivative
Transactions 5.3 4.2 4.0 69.8
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
November 29, 1996, FPI had total liabilities of $304 million and its long-term
debt securities were rated Aaa/AAA/AAA by Moody's Investors Service, Inc., S&P
and Fitch, respectively.
At November 29, 1996, the Company had $142 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 current payment obligations. The Company anticipates that it will make
distributions to partners in the future. However, such dividends and
distributions will be limited to ensure the Company's ability to meet its
obligations is not adversely affected.
The Company may 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 has issued and outstanding $40
million principal of Nikkei 225 Indexed Notes due December 22, 2000 and $73
million principal of S&P Enhanced Stock Index Growth Notes due August 9, 2002
and may issue additional Medium-Term Notes or otherwise incur debt in order to
acquire new Derivative Transactions. As a result, the Company's leverage may
increase. The Company's activities may 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 on demand
by the partners. However, under U.S. federal tax regulation, the Company
withholds income tax on behalf of its partners. This withholding, which is
accounted for as a distribution to partners, amounted to $4.530 million and
$4.486 million for the fiscal year ended 1996 and 1995, respectively. Other than
such withholding, all net income during fiscal 1995 and fiscal 1996,
respectively, was retained in partners' capital. At November 29, 1996, the
Company had $134 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.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
-27-
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership Agreement (as defined in Item 12) of the Company
provides for the conduct and management of the Company's business to be
performed by the Corporate General Partner. The Company does not compensate the
directors or officers of the Corporate General Partner for their services to the
Company. The compensation received by a director or officer of the Corporate
General Partner from Group or its affiliates is not determined by reference to
the services performed by such director or officer for the Corporate General
Partner.
The table below sets forth the names, ages and positions of the persons
who are the directors and executive officers of the Corporate General Partner.
All the directors below are also directors of GS Financial Products Co. ("GSFP
Co."), the managing general partner of FPI, and Executive Vice Presidents of
Group.
Name Age Position
- ---- --- --------
Bracebridge H. Young, Jr. 40 Director
Jacob D. Goldfield 37 Director
Richard E. Witten 43 Director
Oki Matsumoto 33 Director
Thomas K. Montag 40 Director
Kipp Nelson 37 Director
Greg Swart 29 President
Amy Furman 31 Secretary
Daphine Campbell 31 Vice President
Robert L. Gulley 36 *
______________
* As indicated below, Mr. Gulley is not an officer of the Corporate
General Partner. However, the Company believes Mr. Gulley could be deemed to be
a significant employee of the Corporate General Partner.
Bracebridge H. Young, Jr., has been a Director of the Corporate General
Partner since February 28, 1992. Mr. Young became a general partner of GS&Co. in
1988. In November 1996 Mr. Young became a participating limited partner of
Group.
Jacob D. Goldfield has been a Director of the Corporate General Partner
since November 19, 1992. Mr. Goldfield became a general partner of GS&Co. in
1990. Mr. Goldfield has been a Director of the corporate general partner of
GSMMDP since October 1993 and has also served intermittently as President of the
corporate general partner of GSMMDP. In November 1996, Mr. Goldfield became a
participating limited partner of Group.
Richard E. Witten has been a Director of the Corporate General Partner
since August 22, 1994. Mr. Witten became a general partner of GS&Co. in 1990. In
November 1996, Mr. Witten became a participating limited partner of Group.
Oki Matsumoto has been a Director of the Corporate General Partner
since May 1, 1995. Mr. Matsumoto became a general partner of GS&Co. and a
director of Goldman Sachs (Japan) Limited in 1994. Mr. Matsumoto was a vice
president of GS&Co. prior to that time. In November 1996, Mr. Matsumoto became a
participating limited partner of Group.
-28-
<PAGE>
Thomas K. Montag has been a Director of the Corporate General Partner
since May 1, 1995. Mr. Montag became a general partner of GS&Co. in November
1994 and was a vice president of GS&Co. prior to that time. Mr. Montag is a
director of the corporate general partner of GSMMDP. Commencing in October 1993,
Mr. Montag has served intermittently as president and vice president of the
corporate general partner of GSMMDP. In November 1996, Mr. Montag became a
participating limited partner of Group.
Kipp Nelson has been a Director of the Corporate General Partner since
May 1, 1995. Mr. Nelson became a general partner of GS&Co. in November 1994 and
was a vice president of GS&Co. prior to that time. Mr. Nelson has also been a
managing director of Goldman Sachs International since February 1995. In
November 1996, Mr. Nelson bacame a participating limited partner of Group.
Greg Swart has been President of the Corporate General Partner since
February 5, 1992. Mr. Swart is also the President of GSFP Co., the managing
general partner of FPI. Mr. Swart has been an employee of Goldman Sachs (Cayman)
Trust, Limited ("Cayman Trust"), a Group Affiliate, since October 1991 and prior
to that was an Assistant Manager in the Controllers Department of Goldman Sachs
International ("GSI") from January 1990 to January 1991.
Amy Furman has been Secretary of the Corporate General Partner since
August, 1996. Ms. Furman is also the Secretary of GSFP Co., the managing general
partner of FPI. Ms. Furman has been an employee of Cayman Trust since May 1994
and prior to that was an associate at Penn Corp. Financial Group from January
1992 to October 1993.
Daphine Campbell has been a Vice President of the Corporate General
Partner since August 1996. Ms. Campbell has been an employee of Cayman Trust
since January 1993 and prior to that was an employee of Midland Bank Trust
(Cayman) from January 1989 to December 1992.
Robert L. Gulley has been an employee of GS&Co. since 1986 and is
currently a vice president. Mr. Gulley is not an officer of the Corporate
General Partner or the Company; however, he could be deemed a significant
employee of the Corporate General Partner.
The President, Vice President and the Secretary are responsible to the
Board of Directors for the execution of transactions approved by the Board and
the administration of the business of the Corporate General Partner (including
the business of the Company) pursuant to authorities given by the Board. There
are no other officers of the Corporate General Partner or the Company.
ITEM 11: EXECUTIVE COMPENSATION
The Company does not employ any persons to conduct its business and
does not maintain any employee benefit plans. Instead, as discussed above under
"Directors and Executive Officers" in Item 10, the conduct and management of the
Company's business is performed by the Corporate General Partner. Neither the
directors nor the officers of the Corporate General Partner receive any
compensation from the Company for their services to the Company. As discussed
under "Certain Relationships and Related Transactions" in Item 13, the Company
engages Group Affiliates to perform operational and administrative functions.
The Company paid $195 thousand and $211 thousand during the fiscal
years ended November 24, 1995 and November 29, 1996, respectively, for services
pursuant to agreements with Group Affiliates. No services were obtained or
charged under the Origination Agreements (as defined in Item 13) during the
fiscal years ended November 24, 1995 and November 29, 1996 since all the
transactions were done on a principal basis. It is anticipated, however, that
charges will be incurred in the future. See "Certain Relationships and Related
Transactions -- Summary of Expenses" in Item 13.
The Company and the affiliates of Group providing services to the
Company are all subsidiaries of Group. Each director of the Corporate General
Partner, as a participating limited partner of Group, has substantially the same
interest in the profits of the Company as he has in the profits of the
affiliates that provide services to the Company. Accordingly, the directors of
the Corporate General Partner are not benefited by these inter-company payments.
-29-
<PAGE>
Under the Partnership Agreement (as defined in Item 12) of the Company,
the Corporate General Partner has an interest in the profits and losses of the
Company which may not fall below 0.2%. This interest is intended, in part, to
compensate the Corporate General Partner for the services of its officers and
directors to the Company. No other payments to the Corporate General Partner
will be made as a result of the performance of services by the officers and
directors of the Corporate General Partner to the Company. The Corporate General
Partner does not incur expenses on its own behalf as a result of its being
Corporate General Partner.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company was formed February 5, 1992 pursuant to a limited
partnership agreement (as amended and restated, the "Partnership Agreement").
There are two partners of the Company, the Corporate General Partner, which is
both a general and a limited partner, and GS Financial Products, L.P. ("GSFP"),
a limited partner.
The sole business of the Corporate General Partner is to manage the
Company. As of November 29, 1996, the Corporate General Partner had equity of
$12.2 million, and $12.3 million of assets (principally cash and short-term
investments).
The Corporate General Partner has one authorized and outstanding
deferred share (the "Deferred Share") held by Morgan Grenfell Nominees (Cayman)
Ltd., a Cayman Islands company ("MGCL"). Under the Articles of Association of
the Corporate General Partner, the Deferred Share has sufficient voting power to
permit its holder to block an attempt to voluntarily dissolve the Corporate
General Partner or the Company, even in circumstances where Group or its
affiliates have become subject to insolvency proceedings. The Deferred Share has
no other economic or voting rights. MGCL holds the Deferred Share as beneficial
owner and not as trustee for the holders of any indebtedness of the Company and
owes no duty to holders of the indebtedness, or other creditors of the Company,
with respect to the exercise of the voting rights attached to the Deferred
Share.
In the event of an insolvency of the Company and an inadequacy of the
assets of the Company to satisfy its liabilities, under Cayman Islands law, the
assets of the Corporate General Partner would become available to the creditors
of the Company. The Corporate General Partner is a Cayman Islands exempted
limited liability company. As a result, under Cayman Islands law, creditors of
the Company would have no recourse against the owners of the Corporate General
Partner. Accordingly, in an insolvency proceeding, creditors of the Company
would have only the assets of the Company and the Corporate General Partner
available to satisfy their claims. This is similar to the protection afforded
shareholders of a corporation organized in the United States.
The sole shareholder of the Corporate General Partner is GSFP, a Cayman
Islands exempted limited partnership. GSFP has two partners, GSFP Co., a general
partner, and GSCI Holdings L.L.C. ("Holdings"), a limited partner. GSFP is also
the managing general partner of FPI, while the Company is a general partner of
FPI.
GSFP Co. is a Cayman Islands limited liability company, all of the
ordinary shares of which are owned by Holdings. Like the Corporate General
Partner, GSFP Co. has one authorized and outstanding deferred share. Under the
Articles of Association of GSFP Co. the deferred share has sufficient voting
power to permit its holder to block an attempt to dissolve voluntarily GSFP Co.,
even in circumstances where Group or its affiliates have become subject to
insolvency proceedings.
Holdings is a Delaware limited liability company which is owned by
Group and GS Equity Markets, L.P., a partnership controlled by Group.
-30-
<PAGE>
Group is the parent company of the Goldman Sachs organization. As
discussed above, Group directly and indirectly owns all the ordinary shares of
Holdings. In addition, all the directors of the Corporate General Partner are
also Executive Vice Presidents of Group. Therefore, Group effectively controls
the business and operations of the Company. See "Directors and Executive
Officers" under Item 10. However, liabilities of the Company are not liabilities
of, or guaranteed by, Group or any partner thereof or controlling person
thereof. Accordingly, neither Group nor any such person has any liability with
respect to any indebtedness or other obligations of the Company.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Hedging Transactions with GSCM and FPI
- --------------------------------------
In the ordinary course of business, the Company enters into hedging
transactions with GSCM and/or FPI. As of November 29, 1996 and November 24,
1995, the notional amounts of the Derivative Transactions with GSCM were $16.8
billion and $13.5 billion, respectively. As of November 29, 1996 and
November 24, 1995, the notional amounts of the Derivative Transactions with FPI
were $1.0 billion and $1.3 billion, respectively.
Operational and Administrative Relationships with Group
- -------------------------------------------------------
The Company has engaged Group Affiliates to perform substantially all
of its operational and administrative functions. These services include both
services which the Company believes are essential to its ability to continue to
function ("Administrative Services"), as well as those services which it needs
in order to continue to expand its business ("New Business Services"). The
Company will not enter into any agreement or Derivative Transaction with any
affiliate of Group on terms that it believes are less favorable than arm's
length. The Company believes that the fees it has paid or will pay to Group
Affiliates under the Administrative Services and New Business Services
agreements are at least as favorable as would be available from non-affiliated
entities. Each of these agreements had an original term of 10 years. While each
of these agreements provides for resignation or termination of the appointment
of the relevant Group Affiliate upon 60 days' written notice, the relevant Group
Affiliate is not permitted to resign until a successor is appointed. Were the
Company to replace Group Affiliates as the providers of services under these
agreements, it is uncertain whether such services could be obtained at the same
expense, although the Company believes that they could be.
The Company has also entered into backup arrangements with Morgan
Grenfell (Cayman) Limited to provide Administrative Services if the Group
Affiliates providing the Administrative Services were unable to do so or were
terminated by the Company. However, in the case of New Business Services, if a
Group Affiliate performing New Business Services were unable to perform or were
terminated by the Company, the Company might not be able to find a successor to
perform such services. Without New Business Services, the Company may be unable
to enter into any further Derivative Transactions, at which point its business
may in practice be restricted to collecting the payments from its assets as they
mature and holding such payments in cash equivalents until they are used to
satisfy its liabilities.
Following are summaries of certain provisions of the Company's
agreements regarding operational and administrative services with Group
Affiliates. These summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, copies of the agreements,
which are exhibits hereto. See Item 14.
Administrative Services Agreements
----------------------------------
The services which the Company considers Administrative Services
include the maintenance of books, records and accounts, the preparation and
distribution of financial statements and other such material, and the investment
on a short-term basis of the Company's excess cash resources pursuant to
prearranged guidelines. These services currently are provided under an agreement
(the "Custodian Agreement") with Cayman Trust. In addition, pursuant to another
agreement (the "Space Sharing Agreement"), Cayman Trust provides for the
non-exclusive use within its premises of space for the Company's business uses,
including directors' and partners' meetings, as well as telecopy facilities and
separate telephone and post office box facilities. Each of the Company's
agreements with Cayman Trust was entered into on November 27, 1992. The
Custodian Agreement requires the Company to pay fees of $150,000 per annum,
subject to renegotiation under materially changed circumstances, while the Space
Sharing Agreement requires the Company to pay fees of $5,000 per annum, plus
reasonable expenses.
-31-
<PAGE>
Additionally, the Company holds brokerage accounts with two Group
Affiliates, GS&Co. and GSI, and various Group Affiliates may provide custody
services for, and clear and settle transactions by, the Company.
New Business Services Agreements
--------------------------------
Each of GS&Co. and GSI provides or will provide New Business Services
pursuant to separate agreements with the Company (together, the "Origination
Agreements"). Under these Agreements, each of GS&Co. and GSI has agreed to use
reasonable efforts to obtain bids from third parties with respect to proposed
transactions between third parties and the Company. In addition, GS&Co. has
agreed to provide, or cause to be provided, analyses of products and
transactions and credit reviews of counterparties. See "Business -- Entering
into New Derivative Transactions and Risk Management -- Credit Quality and
Counterparty Credit Risk -- Counterparty Credit Quality" under Item 1. GS&Co.
has no liability in respect of the provision of such credit reviews except in
the case of gross negligence. GS&Co. also provides, pursuant to another
agreement (the "Calculation Agreement"), certain technical and administrative
services to the Company, principally those required in connection with new
Derivative Transactions such as performing calculations designed to measure
credit and other risks to which the Company may be subject.
The Origination Agreements and the Calculation Agreement require the
Company to pay an amount equal to 105% of the costs and expenses of providing
the services covered by the agreements, apportioned in accordance with Group's
apportionment of such expenses for federal income tax purposes. In addition, if
the Company enters into a transaction based on a bid provided pursuant to an
Origination Agreement, the Company would pay a fee equal to the fee which
typically would be charged to third parties with respect to those services. For
an interest rate swap, the fee would generally be the present value of between
.001% and .01% per year of the notional principal amount of the interest rate
swap.
The Company does not currently anticipate making any changes to the
method pursuant to which costs are apportioned under the Origination and
Calculation Agreements. The Company expects the level of such expenses to
continue to increase in proportion with increases, if any, in the volume of
Derivative Transactions entered into. The Company believes that its costs would
be substantially similar if it were to obtain from third parties the services
provided pursuant to these agreements and that the method of cost allocation
used in such agreements is reasonable.
-32-
<PAGE>
Summary of Expenses
-------------------
The following table summarizes the charges paid by the Company during
the fiscal years ended November 25, 1994, November 24, 1995 and November 29,
1996 pursuant to the foregoing agreements. No services were obtained or charged
under the Origination Agreements through November 29, 1996, since all the
transactions prior to such date were done on a principal basis. It is
anticipated, however, that charges will be incurred in the future. Charges under
the Calculation Agreement for the period were determined by applying the
standard hourly overhead rates used by Group for the time spent by individuals
providing services under such Agreement.
<TABLE>
<CAPTION>
Group
Affiliate
Description Party Basis of Compensation expense incurred
Agreement of Service Thereto Compensation during the Fiscal Years Ended
- --------- ---------- ------- ------------ -----------------------------
(U.S. dollars in thousands)
Nov. 25, 1994 Nov. 24, 1995 Nov. 29, 1996
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Custodian "Back Office", i.e., Cayman Trust $50.0 per annum $50.0 $150.0 $150.0
Agreement payment process- in fiscal year
ing, accounting, 1994; and $150.0
cash management, per annum in 1995
custody and 1996
Space Office Space Cayman Trust $5,000 per annum $5.0 $5.0 $5.0
Sharing
Agreement
Origination Opportunities to GS&Co. Cost plus 5% $0.0 $0.0 $0.0
Agreement bid on intermediation
of third party
transactions
Origination Opportunities to GSI Cost plus 5% $0.0 $0.0 $0.0
Agreement bid on intermediation
of third party
transactions
Calculation Credit Risk limit GS&Co. Cost plus 5% $61.3 $40.5 $56.0
Agreement calculations
</TABLE>
-33-
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report:
1. Financial Statements
The financial statements are listed on page F-1 hereof
2. Financial Statement Schedules
None required
(b) Reports on Form 8-K:
None
(c) Exhibits:
Exhibit No. Description
- ----------- -------------------------------------------------------------------
1.1 Distribution Agreement, dated January 3, 1996, between the Company
and Goldman, Sachs & Co. ("GS&Co.")*
3.1 Certificate of Registration of the Company**
3.2 (a) Amended and Restated Limited Partnership Agreement of the Company**
3.2 (b) Amendment, dated November 24, 1993, to the Amended and Restated
Limited Partnership Agreement of the Company**
3.3 Memorandum of Association of the Corporate General Partner**
3.4 Restated Articles of Association of the Corporate General
Partner**
4.1 Indenture between the Company and The Bank of New York, as
Trustee, dated October 11, 1994***
10.1 Origination Agreement, dated January 5, 1994, between Goldman Sachs
International Limited and the Company**
10.2 Origination Agreement, dated November 27, 1992, between GS&Co. and
the Company**
10.3 International Swaps and Derivative Association, Inc. Master
Agreement, dated November 4, 1993, between the Company and GS
Financial Products International, L.P. ("GSFPI")**
10.4 International Swaps and Derivatives Association, Inc. Master
Agreement, dated February 24, 1993 (the "GSCM Agreement"), between
the Company and Goldman Sachs Capital Markets, L.P. ("GSCM")**
10.5 Guaranty, dated February 24, 1993, by The Goldman Sachs Group, L.P.
of GSCM's obligations under the GSCM Agreement**
10.6 Calculation Agreement, dated January 5, 1994, between the Company
and GS&Co.**
-34-
<PAGE>
Exhibit No. Description
- ----------- -------------------------------------------------------------------
10.7 (a) Custodian Agreement, dated November 27, 1992 (the "Custody
Agreement") between the Company and Goldman Sachs (Cayman) Trust,
Limited ("Cayman Trust") ****
10.7 (b) Amendment No. 1, dated as of February 14, 1996, to the Custody
Agreement *****
10.8 Space Sharing Agreement, dated November 27, 1992, between Cayman
Trust and the Company**
10.9 Back-up Agreement, dated June 10, 1993, between Morgan Grenfell
(Cayman) Limited and the Company**
10.10 Assignment and Assumption Agreement, dated as of November 23, 1992,
among the Company, GS&Co., GSCM and Group** +
12.1 Statement re computation of ratios of earnings to fixed charges
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
99.1 Tax Exemption Certificate of the Company**
99.2 Tax Exemption Certificate of the Corporate General Partner**
Notes
- ---------------------------------
* Incorporated herein by reference to the same numbered exhibit to the
Company's Current Report on Form 8-K dated January 3, 1996.
** Incorporated herein by reference from the same numbered exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-71544), dated
October 7, 1994.
*** Incorporated herein by reference to the same numbered exhibit to the
Company's Form 10-Q for the quarter ended August 26, 1994.
**** Incorporated herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 33-71544), dated October 7,
1994.
*****Incorporated herein by reference to the same numbered exhibit to the
Company's Form 10-K for the year ended November 24, 1995.
+ A portion of this exhibit has been omitted pursuant to an order of the
Securities and Exchange Commission dated October 6, 1994.
-35-
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
Report of Independent Accountants...........................................F-2
Balance Sheets as of November 24, 1995 and November 29, 1996................F-3
Statements of Income for the fiscal years ended
November 25, 1994, November 24, 1995 and November 29, 1996................F-4
Statements of Changes in Partners' Capital for the fiscal years ended
November 25, 1994, November 24, 1995 and November 29, 1996................F-5
Statements of Cash Flows for the fiscal years ended
November 25, 1994, November 24, 1995 and November 29, 1996................F-6
Notes to Financial Statements...............................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
__________
To the Partners,
GS Financial Products U.S., L.P.:
We have audited the accompanying balance sheets of GS FINANCIAL PRODUCTS U.S.,
L.P. as of November 24, 1995 and November 29, 1996, and the related statements
of income, changes in partners' capital and cash flows for the fiscal years
ended November 25, 1994, November 24, 1995 and November 29, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GS Financial Products U.S.,
L.P., as of November 24, 1995 and November 29, 1996, and the results of its
operations and its cash flows for the fiscal years ended November 25, 1994,
November 24, 1995 and November 29, 1996, in conformity with accounting
principles generally accepted in the United States.
COOPERS & LYBRAND L.L.P.
New York, New York
January 21, 1997.
F-2
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Balance Sheets
(U.S. dollars in thousands)
__________
November 24, 1995 November 29, 1996
----------------- -----------------
Assets:
Cash and cash equivalents (Note 1) $168,692 $141,550
Short term investments (Note 1) 24,690 0
Derivative transactions, at fair
value (Notes 1, 2 and 3):
Affiliate 0 5,273
Non-affiliate 230,326 222,493
Investment in affiliates (Note 4) 1,127 952
Other assets 217 707
-------- --------
Total assets $425,052 $370,975
======== ========
Liabilities and Partners' Capital:
Derivative transactions, at fair
value (Notes 1, 2 and 3):
Affiliate $153,446 $ 4,157
Non-affiliate 98,720 107,401
Long-term borrowings (Note 5) 40,383 116,778
Other liabilities and accrued
expenses 7,698 8,596
------- -------
Total liabilities 300,247 236,932
Commitments and contingencies (Note 4)
Partners' capital:
Limited Partners 124,172 133,364
General Partner 633 679
------- -------
Total partners' capital 124,805 134,043
------- -------
Total liabilities and partners'
capital $425,052 $370,975
======== ========
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Statements of Income
(U.S. dollars in thousands)
__________
Fiscal Years Ended
--------------------------------------------------
Nov. 25, 1994 Nov. 24, 1995 Nov. 29, 1996
------------- ------------- -------------
Revenues:
---------
Intermediation profit
(Notes 1, 2 and 3) $10,585 $7,898 $11,570
Interest 1,293 6,025 7,460
Equity in (loss) earnings
of affiliate (Note 4) (7) 9 (10)
-------- ----- ------
Total revenues 11,871 13,932 19,020
Interest expense (Note 5) 27 471 3,627
------ ------ -----
Revenues, net of
interest expense 11,844 13,461 15,393
Expenses:
---------
Operating (Note 3) 1,645 878 879
------ ------ -----
Income before taxes 10,199 12,583 14,514
Income taxes (Note 7) 0 303 581
------ ------ ------
Net Income $10,199 $12,280 $13,933
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Statements of Changes in Partners' Capital
(U.S. dollars in thousands)
__________
General Limited Total
Partner's Partners' Partners'
Capital Capital Capital
------- ------- -------
Balance, November 26, 1993 $543 $106,194 $106,737
Change in cumulative
translation adjustment 1 105 106
Net Income 51 10,148 10,199
---- ------- -------
Balance, November 25, 1994 595 116,447 117,042
Change in cumulative
translation adjustment (1) (30) (31)
Net Income 61 12,219 12,280
Distribution to partners (22) (4,464) (4,486)
---- ------- -------
Balance, November 24, 1995 $633 $124,172 $124,805
Change in cumulative
translation adjustment (1) (164) (165)
Net Income 69 13,864 13,933
Distribution to partners (22) (4,508) (4,530)
---- ------- -------
Balance, November 29, 1996 $679 $133,364 $134,043
---- -------- --------
---- -------- --------
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
GS FINANCIAL PRODUCTS U.S., L.P.
Statements of Cash Flows
(U.S. dollars in thousands)
__________
Fiscal Years Ended
--------------------------------------------------
Nov. 25, 1994 Nov. 24, 1995 Nov. 29, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net Income $ 10,199 $ 12,280 $ 13,933
Equity in (earnings) loss
of affiliate 7 (9) 10
Decreases (increases) in
operating assets:
Derivative transactions,
at fair value:
Affiliate 0 0 (4,050)
Non-affiliate (101,652) 24,308 7,833
Other assets (24) (188) (490)
Increases (decreases) in
operating liabilities:
Derivative transactions,
at fair value:
Affiliate 112,107 (15,791) (149,481)
Non-affiliate 37,633 56,977 8,681
Other liabilities and
accrued expenses 362 2,549 7,748
------- ------ -------
Net cash provided by (used in)
operating activities 58,632 80,126 (115,816)
Cash flows from investing
activities:
Short term investments 0 (24,690) 24,690
------- ------ -------
Net cash (used in) provided by
investing activities 0 (24,690) 24,690
Cash flows from financing
activities:
Proceeds from short-term
borrowings 5,000 0 0
Repayment of short-term
borrowings 0 (5,000) 0
Proceeds from long-term
borrowings 0 40,000 73,000
Distribution to Partners 0 0 (9,016)
------- ------ -------
Net cash provided by financing
activities 5,000 35,000 63,984
Net increase (decrease) in
cash and cash equivalents 63,632 90,436 (27,142)
Cash and cash equivalents,
beginning of period 14,624 78,256 168,692
------- ------ -------
Cash and cash equivalents, end
of period $78,256 $168,692 $141,550
------- ------- -------
------- ------- -------
Supplemental disclosure of
cash flow information:
Interest paid $27 $280 $1,067
Income taxes paid $0 $0 $752
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Financial Statements
__________
1. Business and Significant Accounting Policies:
---------------------------------------------
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 Derivative Transactions -- see
Note 2).
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.
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 have been prepared in accordance with
accounting principles generally accepted in the United States. The 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.
Derivative Transactions are recorded at their estimated fair value. 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 $7.0 million, $6.7 million and $6.1 million for the fiscal years
ended 1996, 1995 and 1994, respectively.
Continued
F-7
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Financial Statements (Continued)
__________
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). Intermediation
profit earned on performance guarantees is deferred and amortized over the
term of the guarantee. (See Note 3.)
Fair value for all Derivative Transactions 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.
No provisions for credit losses have been established for Derivative
Transactions reported as assets, since counterparty credit quality is taken
into account in determining fair value. Certain 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
November 29, 1996 presentation.
2. Derivative Transactions:
------------------------
The fair values of Derivative Transactions entered into under master
agreements and other arrangements that provide the Company, in its opinion,
with a right of setoff in the event of bankruptcy and default by the
counterparty are presented on a net basis in the balance sheets. 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. The fair values of swap and forward
agreements in a gain position, as well as options purchased are reported, in
accordance with the Company's netting policy, as assets in "Derivative
Transactions". Similarly, the fair value of swap and forward agreements in a
loss position as well as options written are reported as liabilities in
"Derivative Transactions". Derivative Transactions reported, in accordance
with the Company's netting policy, as assets 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.
Continued
F-8
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Financial Statements (Continued)
__________
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
November 29, 1996, the Company's aggregate credit exposure in respect of
Derivative Transactions was approximately $214 million and $226 million,
respectively. At November 29, 1996, the Company had credit exposure exceeding
10% of its total assets to two counterparties, which represented 26% of total
assets. Both of the counterparties had a rating of single A or better from at
least one internationally recognized credit rating agency. 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.
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 $8 million and pledged collateral of approximately $7
million related to Derivative Transactions as of November 29, 1996.
The Company also limits its credit risk by observing certain limitations on
new Derivative Transactions. If such limits exceed management's criteria, the
Company will not enter into any transaction which increases that risk. The
calculation of these limitations incorporates the net assets of the Company's
general partner which is ultimately liable for the Company's obligations (see
Note 7).
A summary of the notional or contractual amounts ($ 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.
Continued
F-9
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Financial Statements (Continued)
__________
November 24, 1995 November 29, 1996
----------------- -----------------
Non-affiliates
Interest rate swap agreements $7,240 $6,869
Currency options written 712 1,034
Currency options purchased 0 594
Interest rate options written 74 1,800
Interest rate options purchased 2,090 1,481
Currency and other swap agreements 384 502
Foreign currency forwards 230 393
Affiliates
Interest rate swap agreements $9,808 $9,879
Currency options written 0 594
Currency options purchased 712 1,034
Interest rate options written 1,452 1,481
Interest rate options purchased 1,372 2,458
Currency and other swap agreements 1,259 1,974
Foreign currency forwards 230 393
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 29, 1996 and the average monthly fair values of such
instruments for the fiscal year then ended, computed in accordance with the
Company's netting policy, are as follows:
(U.S. dollars in millions) November 29, 1996 Average
- -------------------------- ----------------- -------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Non-affiliates
- --------------
Derivative transactions $222.5 $ 107.4 $ 214.3 $96.1
Affiliates
- ----------
Derivative transactions 5.3 4.2 4.0 69.8
3. Related Party Transactions:
---------------------------
During the fiscal years ended 1996, 1995 and 1994, 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 were $473 thousand, $784
thousand and $2,226 thousand for the fiscal years ended 1996, 1995 and 1994,
respectively.
Continued
F-10
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Financial Statements (Continued)
__________
In the ordinary course of business, the Company enters into hedging
transactions with affiliates. Through November 29, 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. For the fiscal years ended 1996, 1995
and 1994, approximately $211 thousand, $195 thousand and $116 thousand were
charged for such services, 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
November 29, 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 November 29, 1996, FPI's
long-term debt securities were rated Aaa/AAA/AAA by Moody's Investors
Service, Inc., 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 (U.S. dollars in millions):
Fiscal years ended
November 25, 1994 November 24, 1995 November 29, 1996
----------------- ----------------- -----------------
Total assets $1,310 $516 $400
Total liabilities 1,195 406 304
Partners' capital 115 110 96
Net (loss) income (0.7) 0.9 (0.3)
5. Long-term Borrowings:
---------------------
November 24, 1995 November 29, 1996
----------------- -----------------
Nikkei Indexed Notes due December 22,
2000(1) $40,383 $40,449
S&P Enhanced Stock Index Growth
Notes due August 9, 2002(2) -- 76,329
------- ------
$40,383 $116,778
======= ========
- ------------------------
(1) Inclusive of embedded written option to the note holders of $11,022 as at
November 24, 1995 and $11,610 as at November 29, 1996.
(2) Inclusive of embedded written option to the note holders of $25,251 as at
November 29, 1996.
Continued
F-11
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Financial Statements (Continued)
__________
The stated principal amounts of the Nikkei Indexed Notes and S&P Enhanced
Stock Index Growth Notes are $40 million and $73 million, respectively. The
Company's obligations to the note holders under both notes could increase
based upon the closing equity index levels of the Nikkei 225 and S&P 500
indices at maturity. There is no stated coupon on the notes.
The Company has ascribed the proceeds from the notes to the underlying
principal component and the embedded written equity index option. The amounts
ascribed to the principal component will accrete, under the effective
interest method, to the stated principal amount over time. The embedded
written options are recorded at fair value.
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. The gains and losses on the interest rate
component of these Derivative Transactions are deferred and the periodic
receipts and payments are recognized as adjustments to interest expense and
are accrued over the life of the notes. The Derivative Transactions hedging
the embedded equity options are recorded at fair value. Including the impact
of the Derivative Transactions, the weighted average interest rate for the
notes was 5.41% as of November 29, 1996 and 5.89% as of November 24, 1995.
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 of $12.3 million and equity
of $12.2 million as of November 29, 1996 and $11.9 million of assets and
equity as of November 24, 1995.
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 fiscal year ended November 29, 1996 the related party remitted
$4.530 million to tax authorities, the entire amount of which the Company has
paid to the related party. For the fiscal year ended November 24, 1995
remittances by the related party to tax authorities amounted to $4.486
million, the entire amount of which was included in other liabilities and
accrued expenses at November 24, 1995 and was subsequently paid to the
related party.
Certain of the Company's income is subject to a 4% New York City
unincorporated business tax. The statement of income for the fiscal year
ended November 29, 1996 and November 24, 1995 includes a provision for
unincorporated business tax on income earned by the Company related to doing
business in New York City.
F-12
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of Section 13 or 15(d) 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 on this 27th day of
February, 1997.
GS FINANCIAL PRODUCTS U.S., L.P.
acting by its general partner, GS Financial
Products US Co.
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.
F-13
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Capacity Date
---------- -------- ----
position with
general partner
/s/ Bracebridge H. Young, Jr. Director February 27, 1997
- ------------------------------
Bracebridge H. Young, Jr.
/s/ Jacob D. Goldfield Director February 27, 1997
- ------------------------------
Jacob D. Goldfield
/s/ Richard E. Witten Director February 27, 1997
- ------------------------------
Richard E. Witten
/s/ Oki Matsumoto Director February 27, 1997
- ------------------------------
Oki Matsumoto
/s/ Thomas K. Montag Director February 27, 1997
- ------------------------------
Thomas K. Montag
/s/ Kipp Nelson Director February 27, 1997
- ------------------------------
Kipp Nelson
/s/ Greg Swart President, February 27, 1997
- ------------------------------ Principal Financial
Greg Swart Officer and
Principal Accounting
Officer
F-14
GS Financial Products U.S., L.P.
Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges
Fiscal Years Ended
-----------------------------------------------------
Nov. 25, 1994 Nov. 24, 1995 Nov. 29, 1996
-------------- ----------------- -----------------
(Unaudited U.S. Dollars in thousands)
Earnings:
Income from continuing
operations before income
taxes 10,199 12,583 14,514
Add: Fixed charges 27 500 3,643
------ ------ ------
Earnings as adjusted 10,226 13,083 18,157
Fixed charges:
Interest expense 27 471 3,627
Debt amortization expense 0 29 16
Interest portion of rent
expense 0 0 0
------ ------ ------
Total fixed charges 27 500 3,643
Ratio of earnings to fixed
charges 378(1) 26 5
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 and amortization of debt issuance costs.
Note (1): The Company does not consider this ratio to be meaningful since it is
based on $5,000,000 in principal amount of the Company's Series A Medium-Term
Notes outstanding only 42 days during fiscal 1994.
EXHIBIT NO. 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of GS
Financial Products U.S., L.P. (the "Company") on Form S-3 (File No. 33-99948),
filed with the Securities and Exchange Commission on December 1, 1995, of our
report dated January 21, 1997 on our audits of the financial statements of GS
Financial Products U.S., L.P. as of November 24, 1995 and November 29, 1996 and
for the fiscal years ended November 25, 1994, November 24, 1995, and November
29, 1996, which report is included in the Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
February 27, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the annual 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-K for the fiscal year ended November 29, 1996.
</LEGEND>
<CIK>0000914720
<NAME>GS Financial Products U.S., L.P.
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-29-1996
<PERIOD-END> NOV-29-1996
<CASH> 141,550
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 370,975
<CURRENT-LIABILITIES> 0
<BONDS> 116,778
0
0
<COMMON> 0
<OTHER-SE> 134,043
<TOTAL-LIABILITY-AND-EQUITY> 370,975
<SALES> 0
<TOTAL-REVENUES> 19,020
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,627
<INCOME-PRETAX> 14,514
<INCOME-TAX> 581
<INCOME-CONTINUING> 13,933
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,933
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
Notes
Balances relating to derivative transactions are not reflected in
the above figures.
</FN>
</TABLE>
