SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended May 30, 1997
Commission File Number: 000-25178
GS Financial Products U.S., L.P.
(Exact name of registrant as specified in its charter)
Cayman Islands 52-1919759
(State or other jurisdiction of (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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes ____X___ No _____
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Form 10-Q
PART I: FINANCIAL INFORMATION Page No.
Item 1: Financial Statements (Unaudited):
Condensed Statements of Income for the Three Fiscal Months and
the Six Fiscal Months ended May 31, 1996 and May 30, 1997 3
Condensed Balance Sheets as of November 29, 1996 and
May 30, 1997 4
Condensed Statement of Changes in Partners' Capital for the Six Fiscal
Months ended May 30, 1997 5
Condensed Statements of Cash Flows for the Six Fiscal Months ended May
31, 1996 and May 30, 1997 6
Notes to the Condensed Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 22
Item 4: Submission of Matters to a Vote of Security Holders 22
Item 6: Exhibits and Reports on Form 8-K 22
Signature 23
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<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Statements of Income
(U.S. dollars in thousands)
(Unaudited)
----------
<TABLE>
<CAPTION>
For the Three For the Six
Fiscal Months Ended Fiscal Months Ended
------------------- -------------------
May 31, May 30, May 31, May 30,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Intermediation profit $ 2,445 $ 1,632 $ 4,377 $ 5,968
Interest 1,573 2,905 3,713 5,007
Equity in earnings (loss) of affiliate (11) (13) (11) (27)
-------- -------- -------- --------
Total revenues 4,007 4,524 8,079 10,948
Interest expense 632 1,601 1,192 3,203
-------- -------- -------- --------
Revenues, net of interest expense 3,375 2,923 6,887 7,745
Expenses:
Operating 190 137 490 316
-------- -------- -------- --------
Income before taxes 3,185 2,786 6,397 7,429
Income taxes 124 112 252 298
-------- -------- -------- --------
Net Income $ 3,061 $ 2,674 $ 6,145 $ 7,131
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
unaudited condensed financial statements.
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<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Balance Sheets
(U.S. dollars in thousands)
(Unaudited)
----------
November 29, May 30,
1996 1997
---- ----
Assets:
Cash and cash equivalents $141,550 $218,371
Derivative transactions, at fair value:
Affiliate 5,273 0
Non-affiliate 222,493 169,849
Investment in affiliates 952 870
Other assets 707 282
-------- --------
Total assets $370,975 $389,372
======== ========
Liabilities and Partners' Capital:
Derivative transactions, at fair value:
Affiliate $ 4,157 $ 6,376
Non-affiliate 107,401 109,922
Long-term borrowings 116,778 127,110
Other liabilities and accrued expenses 8,596 4,846
-------- --------
Total liabilities 236,932 248,254
Commitments and contingencies
Partners' capital:
Limited partners 133,364 140,404
General partner 679 714
-------- --------
Total partners' capital 134,043 141,118
-------- --------
Total liabilities and partners' capital $370,975 $389,372
======== ========
The accompanying notes are an integral part of the
unaudited condensed financial statements.
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<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Statement of Changes in Partners' Capital
For the Six Fiscal Months Ended May 30, 1997
(U.S. dollars in thousands)
(Unaudited)
----------
General Limited Total
Partner's Partners' Partners'
Capital Capital Capital
------- ------- -------
Balance, November 29, 1996 $679 $133,364 $134,043
Net Income 36 7,095 7,131
Change in translation adjustment (1) (55) (56)
---- -------- --------
Balance, May 30, 1997 $714 $140,404 $141,118
==== ======== ========
The accompanying notes are an integral part of the
unaudited condensed financial statements.
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<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Condensed Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
----------
For the Six Fiscal Months Ended
May 31, May 30,
1996 1997
---- ----
Cash flows from operating activities:
Net Income $ 6,145 $ 7,131
Equity in loss of affiliate 11 27
Decreases (Increases) in operating assets:
Derivative transactions, at fair value:
Affiliate 0 5,273
Non-affiliate 11,187 52,644
Other assets (37) 425
--------- ---------
(Decreases) Increases in operating liabilities:
Derivative transactions, at fair value:
Affiliate (56,016) 2,219
Non-affiliate (10,780) 2,521
Other liabilities and accrued expenses (3,875) 6,581
Net cash (used in) provided by operating activities (53,365) 76,821
Cash flows from investing activities:
Short term investments 24,690 0
--------- ---------
Net cash provided by investing activities 24,690 0
Cash flows from financing activities:
Distribution to partners (1,925) 0
--------- ---------
Net cash used in financing activities (1,925) 0
Net (decrease) increase in cash and cash equivalents (30,600) 76,821
--------- ---------
Cash and cash equivalents, beginning of period 168,692 141,550
--------- ---------
Cash and cash equivalents, end of period $ 138,092 $ 218,371
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 0 $ 1,994
Income taxes paid $ 657 $ 155
The accompanying notes are an integral part of the
unaudited condensed financial statements.
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<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements
(Unaudited)
----------
1. Business and Basis of Presentation:
-----------------------------------
The business of GS Financial Products U.S., L.P. (the "Company") is to enter
into, as principal or guarantor, a variety of types of transactions
involving financial instruments such as interest rate swaps, interest rate
options (e.g., interest rate caps, interest rate floors and options on
interest rate swaps), currency swaps and options, commodity swaps and
options, index swaps and forward contracts (collectively, "Derivative
Transactions"). Generally, the Company enters into or guarantees Derivative
Transactions in situations where two or more counterparties (typically
including a related party) wish to enter into one or more Derivative
Transactions between themselves but want the Company to substitute its
credit for that of one or more of the counterparties. Market practice for
such transactions is that the Company typically substitutes its own credit
for that of one or more of the counterparties by entering into each of such
transactions directly as principal. Such Derivative Transactions may also
include the use of futures, or the purchase of the underlying instruments
subject to the transactions, such as foreign currency and physical
commodities. Because it conducts its business exclusively on a matched
basis, the Company is subject to credit risk but not market risk (as
described under Derivative Transactions -- see Note 2).
The unaudited condensed financial statements should be read in conjunction
with the audited financial statements of the Company as of and for the
fiscal years ended November 24, 1995 and November 29, 1996, included in the
Company's Annual Report on Form 10-K for the fiscal year ended November 29,
1996. Results for the six fiscal months are not necessarily indicative of
results for a full fiscal year. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation have been reflected.
The condensed balance sheet data as of November 29, 1996 was derived from
audited financial statements but does not include all disclosures required
under generally accepted accounting principles.
The Company's financial programs and counterparty credit risk have been
rated AAA by Standard & Poor's Ratings Group ("S&P") and Fitch Investors
Service, Inc. ("Fitch"). There can be no assurance that S&P and Fitch will
continue to rate the Company's financial programs and counterparty credit
risk, respectively, in their highest category and any decrease in such
ratings may adversely affect the Company's ability to compete successfully.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts.
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. ("Group").
The Company's financial statements are reported in U.S. dollars, the
functional currency of the Company. Assets and liabilities denominated in
currencies other than the U.S. dollar are measured using exchange rates
prevailing as of the balance sheet dates. Revenues and expenses are measured
at weighted average rates of exchange for the periods. The Company's equity
in gains or losses resulting from translating the financial statements of
affiliates in which it has invested, whose functional currency is other than
the U.S. dollar, is recorded as cumulative translation adjustments and
included in partners' capital.
The Company's Derivative Transactions are recorded on a trade date basis.
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 $1.5 million and $2.9 million for the three fiscal months ended
and the six fiscal months ended May 31, 1996, respectively,
Continued
-7-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
----------
and $1.0 million and $4.0 million for the three fiscal months ended and the
six fiscal months ended May 30, 1997, respectively.
The remainder of intermediation profit for these periods resulted
principally from an increase in the present value of the expected surplus
cash flows from the Company's portfolio due to a reduction in time remaining
until those cash flows are realized (including the impact of all hedges).
Intermediation profit earned on performance guarantees is deferred and
amortized over the term of the guarantee.
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. At
November 29, 1996, the Company had credit exposure exceeding 10% of its
total assets to two banks, which represented 26% of total assets. At May 30,
1997, the Company had credit exposure exceeding 10% of its total assets to
four banks, which represented 56% of total assets. Each of the banks had a
rating of single A plus or better from at least one internationally
recognized credit rating agency.
Certain prior period amounts have been reclassified to conform with the May
30, 1997 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
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<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
----------
In the normal course of its business the Company issues or guarantees
various Derivative Transactions whereby the Company agrees to pay amounts
that may increase in the event of changes in the level of an underlying
index. The Company enters into such transactions with counterparties only if
it is able to enter into offsetting transactions that, in the aggregate,
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 Derivative Transactions, net of collateral. As of November 29, 1996 and
May 30, 1997, the Company's aggregate credit exposure in respect of
Derivative Transactions was approximately $226 million and approximately
$138 million, respectively.
At November 29, 1996, and May 30, 1997, the Company did not have credit
exposure in respect of Derivative Transactions which exceeded 10% of total
assets to any counterparty.
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 $7 million and pledged collateral of
approximately $7 million related to Derivative Transactions at May 30, 1997.
The Company also limits its credit risk by observing certain limitations on
new Derivative Transactions. If such limits exceed management's criteria,
the Company will not enter into any transaction which increases that risk.
The calculation of these limitations incorporates the net assets of the
Company's general partner which is ultimately liable for the Company's
obligations (see Note 6).
A summary of the notional or contractual amounts (U.S. dollars 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.
November 29, 1996 May 30, 1997
----------------- ------------
Non-affiliates
Interest rate swap agreements $6,869 $6,889
Currency options written 1,034 915
Currency options purchased 594 687
Interest rate options written 1,800 1,041
Interest rate options purchased 1,481 2,415
Currency and other swap agreements 502 295
Foreign currency forwards 393 1,177
Continued
-9-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
----------
Affiliates
Interest rate swap agreements $9,879 $8,396
Currency options written 594 786
Currency options purchased 1,034 815
Interest rate options written 1,481 2,019
Interest rate options purchased 2,458 2,112
Currency and other swap agreements 1,974 1,360
Foreign currency forwards 393 1,177
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 as of
November 29, 1996 and May 30, 1997 and the average monthly fair values of
such instruments for the fiscal year ended November 29, 1996 and the six
fiscal months ended May 30, 1997, computed in accordance with the Company's
netting policy, are as follows:
(U.S. dollars in millions) As of November 29, 1996 As of May 30, 1997
- -------------------------- ----------------------- ------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Derivative Transactions
Non-affiliates $222.5 $107.4 $169.8 $109.9
Affiliates 5.3 4.2 0 6.4
Average Monthly Fair Value
--------------------------
(U.S. dollars in millions)
Twelve fiscal months ended Six fiscal months ended
November 29, 1996 May 30, 1997
----------------- ------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Derivative Transactions
Non-affiliates $214.3 $96.1 $199.9 $125.5
Affiliates 4.0 69.8 6.0 1.5
3. Related Party Transactions:
---------------------------
In the ordinary course of business, the Company enters into hedging
transactions with affiliates. Through May 30, 1997, 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 each of the six fiscal
months ended May 31, 1996 and May 30, 1997, approximately $84 thousand was
charged for such services.
Continued
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<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
----------
4. Investment in Affiliates:
-------------------------
The Company owns an approximate 2% general and limited partnership interest
in GS Financial Products International, L.P. ("FPI"). The Company accounts
for its investment in FPI under the equity method because of its
non-managing general partner interest in FPI.
FPI is engaged in a business similar to that of the Company. As of May 30,
1997, its assets consisted principally of Japanese equity and equity linked
securities. Under Cayman Islands law, as a general partner, the Company
would be liable for all of the liabilities of FPI if the assets of FPI were
inadequate to meet its obligations. As of May 30, 1997, FPI's long-term debt
securities were rated Aaa, AAA and AAA by Moody's Investors Service, Inc.
("Moody's"), S&P and Fitch, respectively.
FPI's functional currency is the Japanese yen, and the amounts presented
below were translated at the appropriate yen/dollar exchange rate.
Selected financial data for FPI (U.S. dollars in millions):
November 29, 1996 May 30, 1997
----------------- ------------
Total assets $400 $346
Total liabilities 304 310
Partners' capital 96 36
The decrease in capital is a result of a Yen 6 billion distribution of
capital made by FPI to GS Financial Products, L.P. As a result of this
distribution, the Company's general and limited partnership interest in FPI
increased from 1% to 2%.
5. Long-term Borrowings:
---------------------
November 29, 1996 May 30, 1997
----------------- ------------
Nikkei Indexed Notes due
December 22, 2000(1) $40,449 $41,730
S&P Enhanced Stock Index Growth
NOtes due August 9, 2002(2) 76,329 85,380
-------- --------
$116,778 $127,110
======== ========
(1) Inclusive of embedded written option to the note holders of $11.6
million as at November 29, 1996 and $10.2 million as at May 30, 1997.
(2) Inclusive of embedded written option to the note holders of $25.3
million as at November 29, 1996 and $32.8 million as at May 30, 1997.
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.
Continued
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<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Notes to Condensed Financial Statements, continued
(Unaudited)
----------
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 periodic receipts and payments on the
interest rate component of these Derivative Transactions 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 5.49% as of May 30, 1997.
6. Liability of General Partner:
-----------------------------
The Company's sole general partner is GS Financial Products U.S. Co. (the
"Corporate General Partner"). Under Cayman Islands law, the Corporate
General Partner, but not its shareholders, would be liable for all of the
obligations of the Company if the assets of the Company were inadequate to
meet its obligations. The sole business of the Corporate General Partner is
to manage the Company.
The assets of the Corporate General Partner consist principally of cash and
short-term investments. Short-term investments include U.S. Treasuries and
government agency securities with maturities of less than one year and are
carried at cost plus accrued interest, which approximates fair value. The
Corporate General Partner had assets and equity of approximately $12.2
million as of November 29, 1996 and assets of approximately $2.7 million and
equity of approximately $2.1 million as of May 30, 1997. The decrease in
total assets and equity is the result of a $10 million dividend paid by the
Corporate General Partner to GS Financial Products, L.P.
7. Income Taxes:
-------------
The Company is not subject to U.S. federal income taxes. Prior to January 1,
1997, the Company was required by U.S. federal tax regulations to withhold
income tax on behalf of its partners. These payments were made on behalf of
the Company by a related party. For the fiscal year ended November 29, 1996,
the related party remitted $4.53 million to tax authorities, the entire
amount of which the Company repaid to the related party. As of January 1,
1997, the Company is no longer required to withhold taxes on behalf of its
partners under U.S. federal tax regulations.
Certain of the Company's income is subject to a 4% New York City
unincorporated business tax. The statements of income for the fiscal
quarters ended May 31, 1996 and May 30, 1997, include a provision for
unincorporated business tax on income earned by the Company related to doing
business in New York City.
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<PAGE>
ITEM 2: 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 options, index swaps, commodity swaps and options, and
forward contracts. Generally, the Company enters into or guarantees Derivative
Transactions in situations where two or more counterparties wish to enter into
one or more Derivative Transactions between themselves but want the Company to
substitute its credit for that of one or more of the counterparties. Market
practice for such transactions is that the Company typically substitutes its own
credit for that of one or more of the counterparties by entering into each of
such transactions directly as principal. Such Derivative Transactions may also
include the use of futures contracts, or the purchase of the underlying
instruments subject to the transactions, such as foreign currency and physical
commodities. The Company's owned or guaranteed Derivative Transactions consist
principally of interest rate swaps, interest rate options, index swaps, currency
options, currency forwards and currency swaps denominated in a variety of
currencies.
At May 30, 1997, the Company had entered into or guaranteed $23 billion
notional amount of interest rate swaps and options, $7 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 May 30, 1997, substantially all of the Company's Derivative
Transactions involved some degree of hedging with affiliates. The Company has
entered into or guaranteed $16.7 billion notional amount of Derivative
Transactions with affiliates principally to hedge exposures on third party
transactions. In general, the notional amount of Derivative Transactions with
affiliates exceeds that with non-affiliates due to the greater notional amount
of affiliate versus non-affiliate transactions guaranteed, as well as Derivative
Transactions between the Company and affiliates which hedge the Company's
interest rate or currency exposure on surplus cash flow from its portfolio, or
which are intended to mitigate total credit risk.
RESULTS OF OPERATIONS
Changes in the Company's revenues are highly dependent on the volume of new
transactions originated. 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 May 30,
1997, 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
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<PAGE>
changes in interest rates. However, the sensitivity as of May 30, 1997 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.
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. Prior to January 1, 1997, the Company was required
by United States federal tax regulations to withhold income tax 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 of January 1, 1997, the Company is
no longer required to withhold taxes on behalf of its partners under US federal
tax regulations. As a result of the development of its business, the Company
determined that 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 a tax on the profits of the Company.
THREE FISCAL MONTHS ENDED MAY 30, 1997 VERSUS THREE FISCAL
MONTHS ENDED MAY 31, 1996
For the three fiscal months ended May 30, 1997, the Company reported
revenues net of interest expense of $2.9 million, consisting principally of
intermediation profits of $1.63 million and net interest income of $1.3 million.
During the period, the Company entered into or guaranteed 144 Derivative
Transactions with non-affiliates, and 147 hedging Derivative Transactions with
affiliates. The aggregate notional principal amount of Derivative Transactions
entered into or guaranteed by the Company during the period was $4.2 billion,
which resulted in initial intermediation profits of $1.0 million. The remainder
of intermediation profit for this period principally resulted from an increase
in the present value of the expected surplus cash flows from the Company's
portfolio due to a reduction in the time remaining until those cash flows are
realized (including the impact of all hedges). The Company incurred interest
expense of $1.6 million during the three fiscal months ended May 30, 1997.
In comparison, the Company reported revenues net of interest expense of $3.4
million for the three fiscal months ended May 31, 1996, which consisted
principally of intermediation profits of $2.4 million and net interest income of
$0.9 million. During the period, the Company entered into or guaranteed 36
Derivative Transactions with non-affiliates and hedged these transactions with
49 Derivative Transactions with affiliates. The aggregate notional principal
amount of Derivative Transactions entered into or guaranteed by the Company
during the period was $4.1 billion, which resulted in initial intermediation
profits of $1.5 million. The remainder of intermediation profit for this period
principally resulted from an increase in the present value of the expected
surplus cash flows from the Company's portfolio due to a reduction in the time
remaining until those cash flows are realized (including the impact of all
hedges). Interest expense for the three fiscal months ended May 31, 1996 was
$632 thousand.
Interest income for the fiscal quarter ended May 30, 1997 was $2.9 million
or 85% more than the same fiscal period of the previous year, due primarily to
increased cash balances. Total intermediation profit for the three month fiscal
period ending May 30, 1997 was approximately $1.6 million, or 33% less than the
same fiscal period of the previous year. Initial intermediation profit for the
three fiscal months ended May 30, 1997 decreased by $0.5 million, or 33% from
the three fiscal months ended May 31, 1996, reflecting a decrease in the average
maturity of Derivative Transactions entered into with non-affiliates during this
period. Interest expense of $1.6 million for the three fiscal months ended May
30, 1997 increased significantly from the $632 thousand incurred in the same
fiscal period in 1996. This increase is primarily due to the increase in
long-term borrowings. In August 1996, the Company issued $73 million of S&P
Enhanced Stock Index Growth Notes due August 9, 2002.
Operating expenses for the three fiscal months ended May 30, 1997 were $137
thousand, compared to $190 thousand in the fiscal quarter ended May 31, 1996.
The decrease was primarily due to a reduction in legal fees incurred. Fees and
expense reimbursement to Group affiliates included within operating expenses
were $42 thousand and $36 thousand for the fiscal quarters ended May 30, 1997
and May 31, 1996, respectively. Other
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<PAGE>
operating expenses were $95 thousand and $154 thousand for the three fiscal
month periods ended May 30, 1997 and May 31, 1996, respectively, and consisted
principally of legal, accounting and rating agency fees.
Net income of $2.7 million for the fiscal quarter ended May 30, 1997 showed
a slight decrease from the $3.1 million net income for the fiscal quarter ended
May 31, 1996. Total assets as of May 30, 1997 were $389 million, compared with
total assets of $371 million as of November 29, 1996.
SIX FISCAL MONTHS ENDED MAY 30, 1997 VERSUS SIX FISCAL MONTHS ENDED MAY 31, 1996
For the six fiscal months ended May 30, 1997, the Company reported revenues
net of interest expense of $7.8 million, consisting principally of
intermediation profits of $6 million and net interest income of $1.8 million.
This represented an increase in reported revenues net of interest expense of
12.5% compared to the six fiscal months ended May 31, 1996. During the period,
the Company entered into or guaranteed 277 Derivative Transactions with
non-affiliates and 282 hedging Derivative Transactions with affiliates. The
aggregate notional principal amount of Derivative Transactions entered into or
guaranteed by the Company during the period was $7.8 billion, which resulted in
initial intermediation profits of $4 million. The remainder of intermediation
profit for this period principally resulted from an increase in the present
value of the expected surplus cash flows from the Company's portfolio due to a
reduction in the time remaining until those cash flows are realized. The Company
incurred interest expense of $3.2 million during the six fiscal months ended May
30, 1997.
For the six fiscal months ended May 31, 1996, the Company reported revenues
net of interest expense of $6.9 million, which consisted principally of
intermediation profits of $4.4 million and net interest income of $2.5 million.
During the six fiscal months ended May 31, 1996, the Company entered into or
guaranteed 63 Derivative Transactions with non-affiliates, including 8
transactions which the Company purchased from an affiliate at their market value
and 82 hedging Derivative Transactions with affiliates. The aggregate notional
principal amount of Derivative Transactions entered into or guaranteed by the
Company during the period was $7.8 billion, which resulted in initial
intermediation profit of $2.9 million. The remainder of intermediation profits
for the six fiscal month period ended May 31, 1996 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 $1.2 million during the six
fiscal months ended May 31, 1996.
Interest income of $5 million for the six fiscal months ended May 30, 1997
increased by $1.3 million or 35% over the six fiscal months ended May 31, 1996
due to higher cash balances. Initial intermediation profit for the six fiscal
months ended May 30, 1997 increased 38% to $4 million compared to $2.9 million
during the six fiscal months ended May 31, 1996, reflecting an increase in the
number and a lengthening of the maturity of certain Derivative Transactions
entered into with non-affiliates. Other intermediation profit increased $0.5
million to $2 million for the six fiscal months ended May 30, 1997 compared to
other intermediation profit of $1.5 million in the six fiscal months of 1996.
This increase principally reflects an increase in the average net investment in
Derivative Transactions during the 1997 fiscal period. Interest expense of $3.2
million for the six fiscal months ended May 30, 1997 increased significantly
from the $1.2 million incurred in the same fiscal period in 1996 as a result of
the increase in long term debt outstanding. The effective weighted average
interest rate for long term borrowings was 5.49% for the six months ended May
30, 1997.
Operating expenses for the six fiscal months ended May 30, 1997 were $316
thousand, compared to $490 thousand in the six fiscal months ended May 31, 1996.
Fees and expense reimbursement to Group affiliates included within operating
expenses were $84 thousand for each of the six fiscal months ended May 30, 1997
and May 31, 1996. Other operating expenses were $232 thousand and $406 thousand
for the six fiscal month periods ended May 30, 1997 and May 31, 1996,
respectively, and consisted principally of legal, accounting and rating agency
fees. The reduction in other operating expenses was primarily due to a reduction
in the level of legal expenses incurred by the Company.
Net income of $7.1 million for the six fiscal months ended May 30, 1997
increased by 16% or $1 million from the six fiscal months ended May 31, 1996 net
income of $6.1 million. Total assets as of May 30, 1997 were $389 million,
consisting principally of Derivative Transactions and cash and cash equivalents.
Net cash provided by operating activities during the six months ended May
30, 1997 was $77 million, which primarily reflected receipts exceeding payments
on Derivative Transactions, including the receipt of certain payments under
Derivative Transactions with affiliates, prior to their original maturity. In
comparison, for the six fiscal months
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<PAGE>
ended May 31, 1996, cash used in operating activities was $53 million and
principally reflected payments exceeding receipts on Derivative transactions,
partially offset by net income.
LIQUIDITY AND CAPITAL RESOURCES
The Company conducts its business in a manner designed to require that cash
payments to the Company from its portfolio, taking into account market
fluctuations and the possibility of default, will be sufficient to make when due
all required payments on all the Company's liabilities, including payments of
principal and interest on borrowings. The Company needs capital principally to
absorb potential losses due to counterparty defaults. If counterparties were to
default on their obligations to the Company, these losses could be substantial.
However, based on the credit quality of its counterparties (including
affiliates), the Company does not currently anticipate any default losses and
has not recorded any provisions for credit losses.
The Company believes that the best measure, at any point in time, of its
credit exposure to a particular counterparty is the cost it would incur to
replace the obligations of that counterparty if it defaulted, net of any high
quality marketable securities posted as collateral by the counterparty. The
Company believes that under current market conditions it could enter into
replacement contracts for all of its contracts if the counterparties were to
default. However, there can be no assurance that the Company could enter into
such replacement contracts due to factors beyond the control of the Company,
such as the limited liquidity of many of the Company's assets and the potential
unavailability of suitable replacement contracts. Where several transactions
with one counterparty are subject to a master agreement which provides for
netting and which the Company believes is legally enforceable under relevant
law, the Company calculates the exposure resulting from those transactions on a
net basis, i.e., adding the positive and negative value, and where the
transactions are not subject to such a netting agreement, the Company calculates
its exposure on a gross basis, i.e., adding only positive values. This method is
identical to that used for calculating the amount of 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, November 29, 1996 and May 30, 1997,
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 and by the industry and location
of the obligors. (Totals do not equal Derivative Transactions reported as assets
principally because credit exposures include short-term investments, 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 where collateral has been received, to the extent of the
value of the collateral received.) At November 24, 1995, November 29, 1996 and
May 30, 1997, 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.
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<PAGE>
Current Credit Exposure - By S&P Rating of Obligor:
(U.S. dollars in millions)
November 24, 1995 November 29, 1996 May 30, 1997
----------------- ----------------- ------------
S&P Rating: $ Percent $ Percent $ Percent
- ----------- ------ ------- ------ ------- ------ -------
AAA $119.3 29.3% $125.3 34.0% $ 79.5 22.5%
AA+ 9.4 2.3 10.0 2.7 61.0 17.2
AA 37.3 9.2 31.9 8.7 58.7 16.6
AA- 89.7 22.0 23.6 6.4 4.1 1.2
A+ 117.1 28.8 84.1 22.8 88.5 24.9
A 32.3 7.9 48.8 13.2 30.7 8.7
A- 2.1 0.5 45.1 12.2 31.2 8.9
------ ---- ------ ---- ------ ----
Total $407.2 100.0% $368.8 100.0% $353.7 100.0%
====== ===== ====== ===== ====== =====
Current Credit Exposure - By Country of Obligor's Headquarters:
(U.S. dollars in millions)
November 24, 1995 November 29, 1996 May 30, 1997
----------------- ----------------- ------------
Country: $ Percent $ Percent $ Percent
- ------- ------ ------- ------ ------- ------ -------
U.S. $117.5 28.8% $178.7 48.4% $186.0 52.6%
France 65.6 16.1 65.5 17.7 58.4 16.5
Switzerland 43.0 10.6 28.3 7.7 52.6 14.9
Japan 102.2 25.1 69.7 18.9 45.4 12.8
Germany 34.1 8.4 6.9 1.9 8.7 2.5
Netherlands 34.2 8.4 17.6 4.8 0 0.0
Other 10.6 2.6 2.1 0.6 2.6 0.7
------ ---- ------ ---- ------ ----
Total $407.2 100.0% $368.8 100.0% $353.7 100.0%
====== ===== ====== ===== ====== =====
Current Credit Exposure - By Obligor Industry:
(U.S. dollars in millions)
November 24, 1995 November 29, 1996 May 30, 1997
----------------- ----------------- ------------
Industry: $ Percent $ Percent $ Percent
- -------- ------ ------- ------ ------- ------ -------
Banks $349.7 85.8% $257.7 69.9% $280.5 79.3%
Industrials 29.6 7.3 48.4 13.1 39.5 11.2
Financials 20.3 5.0 43.3 11.7 22.3 6.3
Government Agencies 7.6 1.9 19.4 5.3 11.4 3.2
------ ----- ------ ----- ------ -----
Total $407.2 100.0% $368.8 100.0% $353.7 100.0%
====== ===== ====== ===== ====== =====
The Company has entered into and may continue to enter into transactions
frequently with GS Financial Products International, L.P. ("FPI") or Goldman
Sachs Capital Markets, L.P. ("GSCM", obligations of GSCM being unconditionally
guaranteed by Group) in order to hedge transactions with third parties. (The
notional amount of Derivative Transactions with affiliates exceeds that with
non-affiliates due to a greater notional amount of affiliate versus
non-affiliate transactions guaranteed, as well as Derivative Transactions
between the Company and affiliates which hedge the Company's interest rate or
currency exposure on surplus cash flow from its portfolio, or which are intended
to mitigate total credit risk.) At May 30, 1997, the Company had no credit
exposure to FPI or GSCM as a result of these transactions. Since the Company had
no net credit exposure to Group or its affiliates at May 30, 1997, the Company
does not believe that financial information with respect to Group is material to
investors in the Company's securities.
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<PAGE>
The Company anticipates that its credit exposures may be highly concentrated
since financial instruments reported as assets may be issued by a limited number
of counterparties. At May 30, 1997, the Company had credit exposure net of
collateral exceeding 10% of its total assets to each of Morgan Guaranty Trust
Company of New York, Banque Nationale de Paris, Republic National Bank and Union
Bank of Switzerland. Together, such exposures represented 56% of total assets.
The Company would incur a large loss if any of these counterparties were to
default. The Company's largest credit exposure to any one counterparty was $62
million or 16% of total assets. However, Morgan Guaranty Trust Company of New
York, Banque Nationale de Paris, Republic National Bank and Union Bank of
Switzerland were rated AAA, A+, AA and AA+, respectively, by S&P at May 30,
1997, and the Company currently does not anticipate any loss as a result of this
exposure. Additionally, since the Company's credit exposure to any one
counterparty does not exceed the Company's net worth, the Company does not
consider its credit exposure excessive.
As of May 30, 1997, the Company was a party to Derivative Transactions with
a notional amount of $30 billion. Of these, $8.4 billion notional amount
represented Derivative Transactions which could not expose the Company to credit
risk (e.g., options written). The composition of the remainder of the Company's
Derivative Transactions by maturity and counterparty S&P rating is illustrated
below. 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 May 30, 1997
----------------- ----------------- ------------
Industry: $ Percent $ Percent $ Percent
- -------- ------ ------- ------ ------- ------ -------
1995-1996 $ 3,402 15.2% $ 850 3.6% $ 0 0.0%
1997-1999 10,544 47.2 12,918 54.0 10,346 47.8
2000-2003 4,469 20.0 4,671 19.5 5,238 24.2
2004-2005 3,283 14.7 2,549 10.7 2,284 10.6
2006-2021 637 2.9 2,895 12.2 3,769 17.4
------- ----- ------- ----- ------- -----
Total $22,335 100.0% $23,883 100.0% $21,637 100.0%
======= ===== ======= ===== ======= =====
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 May 30, 1997
----------------- ----------------- ------------
S&P Rating: $ Percent $ Percent $ Percent
- ----------- ------ ------- ------ ------- ------ -------
AAA $ 2,571 11.5% $ 2,727 11.4% $ 2,972 13.7%
AA+ 500 2.2 472 2.0 649 3.0
AA 685a 3.1 696a 2.9 713 3.3
AA- 1,254 5.6 1,133 4.7 1,004 4.6
A+ 1,482 6.6 274 1.1 252 1.2
A 1,301 5.8 1,465 6.1 1,310 6.1
A- 99 0.4 1,088 4.6 861 4.0
Below A- 200a 0.9 290a 1.2 90a 0.4
Affiliates 14,243 63.9 15,738 66.0 13,786 63.7
Total $22,335 100.0% $23,883 100.0% $21,637 100.0%
(a) Includes Derivative Transactions which are collateralized in part.
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<PAGE>
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 May 30, 1997
----------------- ----------------- ------------
$ Percent $ Percent $ Percent
------ ------- ------ ------- ------ -------
Interest rate $19,792 88.6% $19,910 83.4% $17,330 80.1%
Currency 1,826 8.2 3,923 16.4 4,257 19.7
Other 717 3.2 50 0.2 50 0.2
------- ----- ------- ----- ------- -----
Total $22,335 100.0% $23,883 100.0% $21,637 100.0%
======= ===== ======= ===== ======= =====
The notional amount of currencies, expressed in U.S. dollars at May 30,
1997, to be exchanged under currency options and currency swaps outstanding at
May 30, 1997 were U.S. dollars ($1,326 million), Dutch guilders (approximately
$674 million), Japanese yen (approximately $528 million), European currency
units (approximately $457 million), British pounds (approximately $426 million),
German marks (approximately $264 million), Italian lire (approximately $259
million), French francs (approximately $117 million), Hong Kong dollars
(approximately $103 million), Swiss francs (approximately $35 million), Mexican
pesos (approximately $33 million), Brazilian real (approximately $12 million),
Swedish krona (approximately $12 million), Australian dollars (approximately $8
million) and Belgium francs (approximately $3 million).
The fair values of Derivative Transactions as of November 29, 1996 and May
30, 1997 and the average monthly fair values of such instruments for the fiscal
year ended November 29, 1996 and the fiscal six months ended May 30, 1997,
computed in accordance with the Company's netting policy, are as follows:
(U.S. dollars in millions) November 29, 1996 May 30, 1997
- -------------------------- ----------------- ------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Derivative Transactions
- -----------------------
Non-affiliates $222.5 $107.4 $169.8 $109.9
Affiliates 5.3 4.2 0.0 6.4
Average Monthly Fair Value
--------------------------
(dollar amounts in millions)
Twelve fiscal months ended Six fiscal months ended
November 29, 1996 May 30, 1997
----------------- ------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Derivative Transactions
Non-affiliates $214.3 $96.1 $199.9 $125.5
Affiliates 4.0 69.8 6.0 1.5
The Company is also a general partner of FPI and, as such, would ultimately
be liable for all the obligations of FPI if it were insolvent. At May 30, 1997,
FPI had total liabilities of $310 million. At May 30, 1997, the long-term debt
securities of FPI were rated Aaa, AAA and AAA by Moody's, S&P and Fitch,
respectively.
At May 30, 1997, the Company had $218 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 distributions will be
limited to ensure that the Company's ability to meet its obligations is not
adversely affected.
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<PAGE>
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 may be
offered on a continuous basis. As of May 30, 1997, the Company had $427 million
available for future issuance under such registration statement. The Company has
issued and outstanding $40 million principal amount of Nikkei 225 Indexed Notes
due December 22, 2000 and $73 million principal amount 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, prior to January 1, 1997 under U.S. federal tax
regulation, the Company was required to withhold income tax on behalf of its
partners. Such withholding amounted to $4.53 million for the fiscal year ended
November 29, 1996, and was accrued as a distribution to partners and included in
Other liabilities and accrued expenses in the balance sheet. For the fiscal
quarter ended May 30, 1997 no such taxes were required to be remitted in
accordance with U.S. Federal law. Other than such withholding, if any, all net
income during the six month periods ending May 31, 1996 and May 30, 1997,
respectively, was retained in partners' capital. At May 30, 1997, the Company
had $141 million of partners' capital. The Company believes that this level of
partners' capital is sufficient for it to continue to expand both the type and
the volume of its Derivative Transactions.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Company has made in this Quarterly Report on Form 10-Q and anticipates
that it will make in future filings with the Securities and Exchange Commission,
in press releases and otherwise, written and oral forward-looking statements.
Any statement concerning the Company's expectations, beliefs, or intentions
about future conditions or events should be considered to be forward-looking and
should be understood to be subject to the factors discussed below, among others,
which may cause actual results for the Company to differ materially from those
anticipated by such forward-looking statements.
The Company's expectation that it will not be subject to market risk, that
it will receive an equal or greater payment or delivery with respect to any
payment or delivery obligation it incurs, and that it will have scheduled cash
sources that are available on or before the required payment of an obligation is
dependent upon the absence of counterparty default. While the Company has
procedures in place to monitor the credit quality of its counterparties, the
credit quality of a counterparty may be affected by economic, political and
other events beyond the Company's control. Defaults by counterparties with large
obligations to the Company could materially and adversely affect the Company's
results of operations and financial condition.
Group indirectly controls the Company and all of its business activities.
Group has several affiliates that compete with the Company for Derivative
Transactions and has its own credit policies for counterparties. No assurance
can be given that Group will not allocate transactions to its other affiliates
or will permit the business of the Company to continue to expand.
The Company expects routinely to enter into transactions with GSCM and other
affiliates of Group. The obligations of GSCM will be guaranteed by Group and the
obligations of other Group affiliates may also be guaranteed by Group. The
Company may, therefore, have a significant credit exposure to Group in the
future. If the Company has a material exposure to Group, a default by Group
would have a material and adverse effect on the Company.
In certain circumstances, the Company anticipates that it would attempt to
enter into Derivative Transactions to replace a defaulted transaction or to
reduce the risk of default. Failure to replace a defaulted Derivative
Transaction or the inability to enter into a Derivative Transaction to reduce
the risk of default could prevent the Company from eliminating the market or
credit risk with respect to one or more other Derivative Transactions. The
Company's ability to enter into replacement Derivative Transactions or other
risk reducing Derivative Transactions will be limited by the availability of
appropriate counterparties willing to enter into suitable Derivative
Transactions. No assurance can be given that the Company will be able to enter
into replacement or risk reducing Derivative Transactions.
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<PAGE>
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 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.
The Company's financial programs and counterparty credit risk have been
rated in the highest categories by S&P and Fitch (the "Rating Agencies"). A
change in the Company's ratings would materially and adversely impact its
ability to compete successfully. The Company's ratings may be changed or
withdrawn at any time by either of the Rating Agencies, based upon factors
selected solely by the Rating Agencies.
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<PAGE>
PART II: OTHER INFORMATION
- --------------------------
ITEM 1: LEGAL PROCEEDINGS
No litigation was commenced against the Company through May 30, 1997.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12.1 Statement re computation of ratios of earnings to fixed charges
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GS FINANCIAL PRODUCTS U.S., L.P.
acting by its general partner, GS Financial
Products U.S. Co.
Date: July 14, 1997 By: /s/ Greg Swart
------------------------------------
Greg Swart
President, Principal Financial Officer
and Principal Accounting Officer
For and on behalf of GS Financial Products U.S.,
Co., general partner of GS Financial Products
U.S., L.P.
-23-
GS FINANCIAL PRODUCTS U.S., L.P.
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the three For the six
Fiscal Months Ended Fiscal Months Ended
(Unaudited U.S. dollars May 31, May 30, May 31, May 30,
in thousands) 1996 1997 1996 1997
Earnings:
Income before income taxes $3,185 $2,786 $6,397 $7,429
Add: Fixed charges 658 1,616 1,246 3,233
------ ------ ------ -------
Earnings as adjusted $3,843 $4,402 $7,643 $10,662
Fixed charges:
Interest expense $632 $1,601 $1,192 $3,203
Debt amortization expense 26 15 54 30
Interest portion of rent expense 0 0 0 0
------ ------ ------ -------
Total fixed charges $658 $1,616 $1,246 $3,233
Ratio of earnings to fixed charges 6x 3x 6x 3x
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited quarterly condensed financial statements of GS Financial Products
U.S., L.P. and is qualified in its entirety by reference to such financial
statements contained in GS Financial Products U.S., L.P.'s Form 10-Q for the six
fiscal months ended May 30, 1997.
</LEGEND>
<CIK> 0000914720
<NAME> GS Financial Products U.S., L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-28-1997
<PERIOD-END> MAY-30-1997
<CASH> 218,371
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 389,372
<CURRENT-LIABILITIES> 0
<BONDS> 127,110
0
0
<COMMON> 0
<OTHER-SE> 141,118
<TOTAL-LIABILITY-AND-EQUITY> 389,372
<SALES> 0
<TOTAL-REVENUES> 10,948
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 316
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,203
<INCOME-PRETAX> 7,429
<INCOME-TAX> 298
<INCOME-CONTINUING> 7,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,131
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>
Notes
- ---------------
Balances relating to derivative transactions are not reflected in the above
figures.
</FN>
</TABLE>
