SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934.
For the quarterly period ended August 28, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934.
For the transition period to
-------- --------
Commission File Number: 000-25178
GS FINANCIAL PRODUCTS U.S., L.P.
(Exact name of registrant as specified in its charter)
CAYMAN ISLANDS 52-1919759
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
P.O. Box 896, Harbour Centre, North Church Street N/A
Grand Cayman, Cayman Islands, British West Indies
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) (809) 945-1326
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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
----- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date N/A.
-------
DATED OCTOBER 12, 1998
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
FORM 10-Q
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1: Financial Statements (Unaudited):
Condensed Statements of Income for the Three Fiscal Months and Nine Fiscal Months
Ended August 29, 1997 and August 28, 1998 3
Condensed Balance Sheets as of November 28, 1997 and
August 28, 1998 4
Condensed Statement of Changes in Partners' Capital for the Nine
Fiscal Months Ended August 28, 1998 5
Condensed Statements of Cash Flows for the Nine Fiscal Months
Ended August 29, 1997 and August 28, 1998 6
Notes to the Condensed Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Liquidity and Capital Resources 20
Item 3: Not Applicable
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 31
Item 4: Submission of Matters to a Vote of Security Holders 31
Item 5: Other Information 31
Item 6: Exhibits and Reports on Form 8-K 31
Signature 31
</TABLE>
-2-
<PAGE>
PART I: FINANCIAL INFORMATION
GS FINANCIAL PRODUCTS U.S., L.P.
CONDENSED STATEMENTS OF INCOME
(U.S. dollars in thousands)
(Unaudited)
---------
<TABLE>
<CAPTION>
FOR THE THREE FISCAL MONTHS ENDED FOR THE NINE FISCAL MONTHS ENDED
----------------------------------- -----------------------------------
AUGUST 29, 1997 AUGUST 28, 1998 AUGUST 29, 1997 AUGUST 28, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Intermediation profit (loss) $3,659 $ (59) $9,627 $ 172
Interest 3,409 6,063 8,416 19,226
Equity in earnings (loss) of affiliate 8 (2) (19) (14)
------ ------- ------- -------
Total revenues 7,076 6,002 18,024 19,384
Interest expense 1,951 4,137 5,154 12,791
------ ------ ------- ------
Revenues, net of interest expense 5,125 1,865 12,870 6,593
EXPENSES:
Operating 238 247 554 930
------ ------ ------ ------
Income before taxes 4,887 1,618 12,316 5,663
Income taxes 195 66 493 227
------- -------- --------- --------
Net Income $4,692 $1,552 $11,823 $ 5,436
===== ===== ====== ======
The accompanying notes are an integral part of the unaudited condensed financial statements.
</TABLE>
-3-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
CONDENSED BALANCE SHEETS
(U.S. dollars in thousands)
(Unaudited)
---------
<TABLE>
<CAPTION>
NOVEMBER 28, 1997 AUGUST 28, 1998
----------------- ---------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (Note 2) $291,375 $302,341
Securities owned, at fair value (Note 3) 95,185 82,856
Derivative Transactions, at fair value (Notes 2, 4 & 5):
Affiliate 19,561 14,112
Non-affiliate 172,956 133,905
Investment in affiliate (Note 6) 780 687
Other assets 1,826 992
------- -------
Total assets $581,683 $534,893
======= =======
LIABILITIES AND PARTNERS' CAPITAL:
Current portion of long-term borrowings (Note 7) $1,876
Derivative Transactions, at fair value (Notes 2, 4 & 5):
Non-affiliate $153,983 110,546
Long-term borrowings (Note 7) 276,489 265,320
Other liabilities and accrued expenses 3,090 3,658
------- -------
Total liabilities 433,562 381,400
Commitments and contingencies (Note 6)
PARTNERS' CAPITAL:
Limited Partners 147,373 152,718
General Partner 748 775
------- -------
Total partners' capital 148,121 153,493
------- -------
Total liabilities and partners' capital $581,683 $534,893
======= =======
The accompanying notes are an integral part of the unaudited condensed financial statements.
</TABLE>
-4-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
CONDENSED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE FISCAL MONTHS ENDED AUGUST 28, 1998
(U.S. dollars in thousands)
(Unaudited)
---------
<TABLE>
<CAPTION>
GENERAL LIMITED TOTAL
PARTNER'S CAPITAL PARTNERS' CAPITAL PARTNERS' CAPITAL
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance, November 28, 1997 $748 $147,373 $148,121
Net Income 27 5,409 5,436
Translation adjustment 0 (64) (64)
---- -------- -------
Balance, August 28, 1998 $775 $152,718 $153,493
=== ======= =======
The accompanying notes are an integral part of the unaudited condensed financial statements.
</TABLE>
-5-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
CONDENSED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
---------
<TABLE>
<CAPTION>
FOR THE NINE FISCAL MONTHS ENDED
--------------------------------
AUGUST 29, 1997 AUGUST 28, 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 11,823 $ 5,436
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in loss of affiliate 19 14
Unrealized depreciation on securities owned 5,972 7,569
Increase (decrease) in long-term borrowings due to 18,749 (2,223)
embedded derivative transactions, net
(Increases) Decreases in operating assets:
Derivative Transactions, at fair value:
Affiliate (42,986) 5,449
Non-affiliate 61,078 39,051
Other assets (568) 834
(Decreases) Increases in operating liabilities:
Derivative Transactions, at fair value:
Affiliate (4,157) 0
Non-affiliate 46,057 (43,437)
Other liabilities and accrued expenses (4,204) 583
--------- -------
Net cash provided by operating activities 91,783 13,276
Cash flows from investing activities:
Purchases of securities owned (136,797) 0
Sales of securities owned 0 4,760
--------- -------
Net cash (used in) provided by investing activities (136,797) 4,760
Cash flows from financing activities:
Issuance of long term borrowings 160,797 0
Repurchase of long term borrowings 0 (7,070)
--------- -------
Net cash provided by (used in) financing activities 160,797 (7,070)
--------- -------
Net increase in cash and cash equivalents 115,783 10,966
--------- -------
Cash and cash equivalents, beginning of period 141,550 291,375
--------- --------
Cash and cash equivalents, end of period $257,333 $302,341
======== =======
Supplemental disclosure of cash flow information:
Interest paid $ 3,100 $ 8,417
Income taxes paid 155 210
The accompanying notes are an integral part of the unaudited condensed financial statements.
</TABLE>
-6-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
-----------
1. DESCRIPTION OF BUSINESS:
-----------------------
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. In accordance with
market practice, the Company does this 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, physical commodities
and securities. 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 4). In addition, from
time to time, the Company issues structured notes (see Note 7).
Since October 1997, The Goldman Sachs Group, L.P. ("Group") has undertaken
a review of the operations of the Company and certain other affiliates of
Group engaged in the derivative products business in order to reassess the
scope of their activities, to evaluate the level and nature of staffing and
to review the procedures that are in place to handle the type and volume of
businesses that they may pursue. During this review, the Company and GS
Financial Products International, L.P. ("FPI") have not entered into any
new Derivative Transactions and have not issued any new debt securities.
This lack of activity by the Company has negatively affected the Company's
results of operations for the first three fiscal quarters of 1998. In
addition, this lack of activity is expected to have a significant negative
effect on the Company's results of operations in the fourth fiscal quarter
of 1998, and it may affect later quarters depending upon the timing of the
completion and implementation of the findings of the review.
The Company's long-term debt and counterparty credit risk have been rated
AAA by Standard & Poor's Ratings Group ("S&P") and Fitch IBCA, Inc.
("Fitch"). There can be no assurance that S&P and Fitch will continue to
rate the Company's long-term debt 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.
2. SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------
BASIS OF PRESENTATION
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 29, 1996 and November 28, 1997, included in the
Company's Annual Report on Form 10-K for the fiscal year ended November 28,
1997. Results for the nine fiscal month periods presented 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 28, 1997 was derived from
audited financial statements but does not include all disclosures required
under generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts.
-7-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
The Company is organized as a Cayman Islands exempted limited partnership.
All the partnership interests in the Company are owned by subsidiaries of
Group.
The 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 a cumulative translation adjustment and included in
partners' capital.
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.
Certain prior period amounts have been adjusted to conform with the August
28, 1998 presentation.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments and include time
deposits at banks with original maturities of three months or less.
FINANCIAL INSTRUMENTS
The Company's Derivative Transactions and securities owned are recorded on
a trade date basis.
Securities owned are recorded at their fair value. 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 intermediation profit amounts
were $3.0 million and $7.0 million for the three fiscal months and the nine
fiscal months ended August 29, 1997, respectively. The Company did not
recognize such intermediation profit for the three fiscal months and the
nine fiscal months ended August 28, 1998 because it did not enter into any
new transactions due to the aforementioned review.
The other intermediation profit for the three and the nine fiscal months
ended August 29, 1997 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). The other intermediation loss for the
three fiscal months ended August 28, 1998 was principally attributable to
expenses relating to the early termination of a Derivative Transaction
related to the repurchase and retirement of 67% of the 7% Mandatorily
Exchangeable Notes due July 23, 1999 (see Note 7) and from a decrease in
the present value of the expected 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). These losses were offset in
part by amortization of performance guarantee fees. The other
intermediation profit for the nine fiscal months ended August 28, 1998 was
principally attributable to the recognition of the residual performance
guarantee fees on transactions which were terminated prior to original
maturity due to the early termination of the underlying Derivative
Transactions at the request of the counterparties.
Fair value for all securities owned is based on quoted market prices. 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
-8-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
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.
Intermediation profit earned on performance guarantees is deferred and
amortized over the term of the guarantee (see Notes 4 & 5). Unamortized
guarantee fees are recognized as intermediation profit upon any early
termination of the underlying Derivative Transactions, as noted above.
PROVISION FOR TAXES
The Company, as a partnership, 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. 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.
The Company's income is subject to a 4% New York City unincorporated
business tax. The statements of income for the three fiscal months and the
nine fiscal months ended August 29, 1997 and August 28, 1998, include a
provision for unincorporated business tax on income earned by the Company
related to doing business in New York City.
CREDIT EXPOSURE
At November 28, 1997, the Company had credit exposure, net of collateral,
exceeding 10% of its total assets to four counterparties, which represented
44% of total assets. Each of the counterparties had a rating of A+ or
better from at least one internationally recognized credit rating agency.
At August 28, 1998, the Company had no credit exposure, net of collateral,
exceeding 10% of its total assets to any counterparty.
ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997, with reclassification of earlier periods
required for comparative purposes. SFAS No. 130 establishes standards for
the reporting and presentation of comprehensive income and its components
in the financial statements. The Company intends to adopt this standard
beginning in fiscal year 1999. This Statement is limited to issues of
reporting and presentation and, therefore, will not affect the Company's
results of operations or financial condition.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends
on its intended use of the derivative and the resulting designation. The
Company intends to adopt this standard beginning in fiscal year 2000 and is
currently assessing its impact.
3. SECURITIES OWNED:
----------------
As of November 28, 1997 and August 28, 1998, securities owned consisted of
shares of common stock of Oxford Health Plans, Inc. (fair value
approximately $11.4 million and $1.0 million, respectively) and shares of
common stock of Citicorp (fair value approximately $83.8 million and $81.9
million, respectively). The Company purchased these securities to hedge
certain of the Company's exposures incurred by its issuance of two series
of debt securities, one of which is mandatorily exchangeable at
-9-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
maturity into shares of common stock of Oxford Health Plans, Inc. and the
other of which is exchangeable, at the option of the holder, into shares of
Citigroup, Inc. common stock (see Notes 7 & 9).
-10-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
4. DERIVATIVE TRANSACTIONS:
-----------------------
The fair values of Derivative Transactions entered into under master
agreements and other arrangements that provide the Company, in its opinion,
with an enforceable 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, subject to 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, subject to the
Company's netting policy, as liabilities in "Derivative Transactions."
Derivative Transactions reported as assets are principally obligations of
major international financial institutions, primarily banks, which are
rated single A or better by at least one internationally recognized rating
agency.
Futures contracts are exchange-traded standardized contractual commitments
to buy or sell a specified quantity of a financial instrument, currency or
commodity at a specified price and future date. Forward contracts are
over-the-counter ("OTC") contracts between two parties who agree to
exchange a specified quantity of a financial instrument, currency or
commodity at a specified price and future date. Option contracts convey the
right to buy (call option) or sell (put option) a financial instrument,
currency or commodity at a pre-determined price. For written option
contracts, the writer receives a premium in exchange for bearing the risk
of unfavorable changes in the financial instrument, currency or commodity.
Swaps are OTC contracts between two parties who agree to exchange periodic
cash flow streams calculated on a pre-determined contractual (notional)
amount.
In the normal course of its business, the Company enters into 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 affected by changes in
interest rates or foreign exchange rates.
The Company's principal risk in respect of Derivative Transactions entered
into 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"). 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 a Derivative Transaction in a gain position,
net of collateral posted by the counterparty and any Derivative
Transactions structured on a limited recourse basis. As of November 28,
1997 and August 28, 1998, the Company's aggregate Credit Exposure in
respect of Derivative Transactions was approximately $152 million and
approximately $139 million, respectively.
The Company limits its Credit Exposure 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 $2.9 million related to Derivative
Transactions as at August 28, 1998.
The Company also limits its Credit Exposure 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 certain of these limitations
incorporates the net
-11-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
assets of the Company's general partner which is ultimately liable for the
Company's obligations (see Note 8).
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 amount is not a measure of market
or credit risk.
NOVEMBER 28, 1997 AUGUST 28, 1998
----------------- ---------------
Non-affiliates
Interest rate swap agreements $5,809 $2,760
Currency options written 1,115 438
Currency options purchased 384 111
Interest rate options written 1,471 1,115
Interest rate options purchased 1,787 1,463
Currency and other swap agreements 162 162
Foreign currency forwards 1,552 115
Equity options purchased 84 82
Affiliates
Interest rate swap agreements $8,003 $4,566
Currency options written 396 111
Currency options purchased 1,103 438
Interest rate options written 1,792 1,457
Interest rate options purchased 2,031 1,675
Currency and other swap agreements 893 312
Foreign currency forwards 1,535 109
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 Exposure.
As described in Note 2, 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 28, 1997 and August 28, 1998 and the average monthly fair values
of such instruments for the fiscal year ended November 28, 1997 and the
nine fiscal months ended August 28, 1998 are as follows:
-12-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
(U.S. dollars in millions) AS OF NOVEMBER 28, 1997 AS OF AUGUST 28, 1998
----------------------- ---------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Derivative Transactions
-----------------------
Non-affiliate $173.0 $154.0 $133.9 $110.5
Affiliate 19.6 0.0 14.1 0.0
Average Monthly Fair Value
(U.S. dollars in millions)
TWELVE FISCAL MONTHS ENDED NINE FISCAL MONTHS ENDED
NOVEMBER 28, 1997 AUGUST 28, 1998
-------------------------- -----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Derivative Transactions
-----------------------
Non-affiliate $175.1 $131.2 $150.0 $129.9
Affiliate 14.0 0.0 15.3 0.0
5. RELATED PARTY TRANSACTIONS:
--------------------------
In the ordinary course of business, the Company enters into hedging and
performance guarantee transactions with affiliates. Substantially all of
the Company's Derivative Transactions involved some degree of hedging with
affiliates.
As of August 28, 1998, the Company had $16 thousand of cash deposited in a
brokerage account with an affiliate.
During 1997, the Company paid approximately $702 thousand to an affiliate
pursuant to an origination agreement for services rendered in connection
with the issuance of certain of the Company's medium-term notes. The
Company has deferred and is amortizing this cost over the lives of the
related notes.
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 at market rates. In
aggregate, for the nine fiscal months ended August 29, 1997 and August 28,
1998, approximately $116 thousand and $172 thousand, respectively, were
charged for such services.
6. INVESTMENT IN AFFILIATE:
-----------------------
The Company owns an approximate 2% general partnership interest in FPI and
an additional indirect limited partnership interest in FPI. The Company
accounts for its investment in FPI under the equity method because it is
not the managing general partner of FPI.
FPI is engaged in a business similar to that of the Company. As of August
28, 1998, its assets consist principally of cash and cash equivalents and
equity securities of entities organized under Japanese
-13-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
law. Under Cayman Islands law, as a general partner, the Company would be
liable for all of the liabilities of FPI if the assets of FPI were
inadequate to meet its obligations. As of August 28, 1998, FPI had total
liabilities of $155 million. The Company, after analyzing the financial
position, results of operations and cash flows of FPI, believes that FPI
will be able to meet its obligations under its outstanding liabilities.
Accordingly, the Company does not believe that it is necessary to, and has
not, established a reserve with respect to FPI's obligations under its
liabilities.
As of August 28, 1998, 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 28, 1997 AUGUST 28, 1998
----------------- ---------------
Total assets $229 $183
Total liabilities 197 155
Partners' capital 32 28
7. BORROWINGS:
----------
The Company has issued both principal protected and non-principal protected
Medium-Term Notes ("Notes"). The payments on the Notes are determined by
reference to the performance of a single equity security or an equity
index. The Company's obligations to the holders of the Notes will fluctuate
based on the closing price of the applicable equity security or equity
index. Certain of the Notes are subject to redemption at the option of the
Company if certain conditions are met. The terms of the Company's
outstanding Notes linked to a single stock in one case allow, and in the
other case require, the holder to exchange the Notes into an amount of the
underlying security. Hedging of equity-linked Notes has utilized
substantially all of the proceeds from the issuance of such Notes.
The Company has bifurcated, where applicable, the proceeds from the Notes
into the underlying principal component and the embedded Derivative
Transactions. The amounts allocated to the principal component will
accrete, under the effective interest rate method, to the stated principal
amount over time. The embedded Derivative Transactions are recorded at
estimated fair value.
The Company has purchased equity securities and exchange traded options and
has entered into various Derivative Transactions with affiliates to
eliminate its market risk on the Notes. (See Note 4 for a discussion of
Credit Exposure on Derivative Transactions.) The fixed interest rates on
Notes linked to an equity index have been effectively converted to U.S.
dollar-based floating interest rate costs by entering into Derivative
Transactions with affiliates. The gains and losses on these Derivative
Transactions hedging the principal component are deferred and the periodic
receipts and payments are recognized as adjustments to interest expense and
are accrued over the life of the Notes. For the nine fiscal months ended
August 28, 1998, interest expense on Notes linked to a single stock was
$7.4 million, which was primarily offset by amounts recorded as interest
income. As discussed in Note 2, securities owned are recorded at fair value
and the Derivative Transactions hedging the embedded Derivative
Transactions are recorded at estimated fair value.
-14-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
<TABLE>
<CAPTION>
NOVEMBER 28, 1997 AUGUST 28, 1998
----------------- ---------------
<S> <C> <C>
Nikkei Indexed Notes due December 22, 2000(1) $ 52,008 $ 48,391
S&P Enhanced Stock Index Growth Notes due August 9, 2002(2) 94,380 104,142
7% Mandatorily Exchangeable Notes due July 23, 1999(3) 16,808 1,876
(Subject to Mandatory Exchange into Shares of Common Stock of
Oxford Health Plans, Inc.)
3% Citicorp Exchangeable Notes due August 28, 2002(4) 113,293 112,787
------- -------
Total long-term borrowings $276,489 $267,196
Current portion of long-term borrowings(3) --- 1,876
-------- --------
Long-term borrowings, less current portion $276,489 $265,320
======= =======
<FN>
(1) The $40 million face amount of Nikkei Indexed Notes are principal protected and have no
stated coupon. The carrying value includes an embedded written option to the note holders
of $19.0 million as at November 28, 1997 and $13.8 million as at August 28, 1998.
(2) The $73 million face amount of S&P Enhanced Stock Index Growth Notes are principal
protected and have no stated coupon. The carrying value includes an embedded written
option to the note holders of $40.1 million as at November 28, 1997 and $47.2 million as
at August 28, 1998.
(3) The 7% Mandatorily Exchangeable Notes due July 23, 1999 do not have a face amount, but had
an initial principal amount of $40.8 million, which represented 477,865 notes at the
prevailing market price of Oxford Health Plans, Inc. common stock on the date of issue. On
July 16, 1998, the Company repurchased and then retired approximately 67% of the notes for
$7.1 million, representing 320,000 notes. The remaining notes have an outstanding
principal amount of $13.5 million after the repurchase and retirement, and the carrying
value of the remaining notes of $1.9 million is included in current portion of long-term
borrowings in the Condensed Balance Sheet. The principal repayment amount will be
determined by the closing price of the Oxford Health Plans, Inc. common stock at maturity
and, accordingly, the carrying value will fluctuate based upon the prevailing market price
of the common stock. The ability of the note holders to participate in the appreciation of
the Oxford Health Plans, Inc. common stock is limited and cannot exceed a closing price of
$129.77 per note at maturity. The carrying value includes the embedded Derivative
Transactions of ($29.4 million) as at November 28, 1997 and ($11.6 million) at August 28,
1998.
(4) The $120 million face amount of Citicorp Exchangeable Notes are principal protected and
are exchangeable in $250,000 increments by the note holders at the rate of 3,637.5 shares
(see Note 9) of Citigroup, Inc. common stock per increment. In addition, the Notes are
redeemable by the Company at various times after September 14, 1999 at the face amount,
plus accrued interest, if the note holders have not exercised their exchange option. The
carrying value includes the embedded Derivative Transactions, net of $8.6 million as at
November 28, 1997 and $5.7 million as at August 28, 1998.
</FN>
</TABLE>
Including the impact of the Derivative Transactions, the weighted average
interest rate for the Notes was 5.58% and 6.33% for the nine fiscal months
ended August 29, 1997 and August 28, 1998, respectively.
On July 16, 1998, the Company repurchased and then retired approximately
67% of the 7% Mandatorily Exchangeable Notes due July 23, 1999 for $7.1
million, representing 320,000 such notes. Prior to repurchase, the notes
were held by an affiliate. The Company recognized a loss of $65 thousand on
the retirement, which was recorded in other intermediation profit,
primarily consisting of expenses relating to the early termination of a
Derivative Transaction related to the notes.
-15-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
8. 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.
The Corporate General Partner had assets of approximately $2.8 million and
equity of approximately $2.2 million as of November 28, 1997 and August 28,
1998.
9. SUBSEQUENT EVENTS:
------------------
On October 8, 1998, Citicorp common shares were converted into Citigroup,
Inc. common shares at the ratio of 2.5 Citigroup common shares for each
Citicorp common share as a result of the merger between Citicorp and
Travelers Group Inc.
-16-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a derivative products company engaged in the business of
entering into, as principal or guarantor, a variety of types of Derivative
Transactions, principally interest rate swaps, interest rate options (e.g.,
interest rate caps, interest rate floors and options on interest rate
swaps), currency swaps and options, index swaps, commodity swaps and
options, and forward contracts (collectively, "Derivative Transactions.").
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. In
accordance with market practice, the Company does this 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, physical commodities and securities. Derivative Transactions
entered into or guaranteed by the Company consist principally of interest
rate swaps, interest rate options, index swaps, currency options, currency
forwards and currency swaps denominated in a variety of currencies. In
addition, from time to time the Company issues structured notes.
At August 28, 1998, the Company had entered into or guaranteed $13.0
billion notional amount of interest rate swaps and options, $1.8 billion
notional amount of currency options, forwards and swaps and $82 million
notional amount of equity options with a total of 39 counterparties.
In general, the Company refers to transactions where all of its 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.
Substantially all of the Company's Derivative Transactions involved some
degree of hedging with affiliates. The Company has entered into or
guaranteed $8.7 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, structured notes or which are intended to mitigate total credit
risk.
As of August 28, 1998, the Company had equity-linked Medium-Term Notes
outstanding with a carrying value of $267 million. The Company expects to
continue to issue equity-linked Medium-Term Notes in the future. The
Company intends to utilize most of the proceeds received from such
issuances to acquire shares of common stock, purchase exchange-traded and
over-the-counter options and enter into interest rate and equity-linked
swaps with affiliates to hedge its obligations under the Notes. The
remainder of the proceeds from each issuance will be added to the Company's
working capital to support its operating activities.
Since October 1997, The Goldman Sachs Group, L.P. ("Group") has undertaken
a review of the operations of the Company and certain other affiliates of
Group engaged in the derivative products business in order to reassess the
scope of their activities, to evaluate the level and nature of staffing and
to review the procedures that are in place to handle the type and volume of
businesses that they may pursue. During this review, the Company and GS
Financial Products International, L.P. ("FPI") have not entered into any
new Derivative Transactions and have not issued any new debt securities.
This lack of activity by the Company has negatively affected the Company's
results of operations for the first three fiscal quarters of 1998. In
addition, this lack of activity is expected to have a significant
-17-
<PAGE>
negative effect on the Company's results of operations in the fourth fiscal
quarter of 1998, and it may affect later quarters depending upon the timing
of the completion and implementation of the review.
RESULTS OF OPERATIONS
Changes in the Company's revenues are highly dependent on the volume, term
and type 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, term and type of 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 August 28, 1998, 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 August 28, 1998
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.
The Company, as a partnership, is not subject to U.S. federal income taxes.
Prior to January 1, 1997, the Company was required by United States federal
tax regulations to withhold income tax on behalf of its partners. 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.
The Company's income is subject to a 4% New York City unincorporated
business tax. The statements of income for the three fiscal months and the
nine fiscal months ended August 28, 1998 and August 29, 1997 include a
provision for unincorporated business tax on income earned by the Company
related to doing business in New York City. Depending upon the manner in
which the business of the Company will be operated in other jurisdictions,
there is a possibility that one or more such jurisdictions would impose tax
on the profits of the Company.
THREE FISCAL MONTHS ENDED AUGUST 28, 1998 VERSUS THREE FISCAL MONTHS ENDED
AUGUST 29, 1997
As described above, Group has undertaken a review of the operations of the
Company and certain other affiliates of Group engaged in the derivative
products business. Since the commencement of this review, the Company has
neither entered into nor guaranteed any new Derivative Transactions.
-18-
<PAGE>
This lack of activity by the Company has negatively affected the Company's
results of operations in the third fiscal quarter of 1998 relative to the
same fiscal quarter of the prior year.
For the fiscal quarter ended August 28, 1998, the Company reported revenues
net of interest expense of $1.9 million, consisting principally of net
interest income. This represented a decrease in reported revenues net of
interest expense of 64% compared to the fiscal quarter ended August 29,
1997. During the period, the Company did not enter into or guarantee any
new Derivative Transactions due to the aforementioned review by Group. The
Company incurred interest expense of $4.1 million during the fiscal quarter
ended August 28, 1998.
For the three fiscal months ended August 29, 1997, the Company reported
revenues net of interest expense of $5.1 million, which consisted
principally of intermediation profits of $3.7 million and net interest
income of $1.5 million. During the three fiscal months ended August 29,
1997, the Company entered into or guaranteed 241 Derivative Transactions
with non-affiliates and 260 hedging Derivative Transactions with
affiliates. The aggregate notional principal amount of Derivative
Transactions entered into or guaranteed by the Company during the period
was $6.8 billion, which resulted in initial intermediation profit of $3.0
million. The remainder of intermediation profit for the three fiscal month
period ended August 29, 1997 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 the time remaining until those cash flows
are realized. The Company incurred interest expense of $2.0 million during
the three fiscal months ended August 29, 1997.
Interest income for the fiscal quarter ended August 28, 1998 was $6.1
million or 78% more than the same fiscal period of the previous year,
primarily as a result of amounts recorded as interest income on Derivative
Transactions relating to notes issued by the Company that are linked to a
single stock. As a result of the aforementioned review by Group, the
Company did not earn any initial intermediation profit during the fiscal
quarter ended August 28, 1998. The Company reported other intermediation
loss of $59 thousand for the fiscal quarter ended August 28, 1998 compared
to other intermediation profit of $0.7 million in the fiscal quarter ended
August 29, 1997. The loss was principally attributable to expenses relating
to the early termination of a Derivative Transaction related to the
repurchase and retirement of 67% of the 7% Mandatorily Exchangeable Notes
due July 23, 1999 and from a decrease in the present value of the expected
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). These losses were offset in part by amortization of performance
guarantee fees. Interest expense of $4.1 million for the fiscal quarter
ended August 28, 1998 increased significantly from the $2.0 million
incurred in the same fiscal period in 1997. This increase was the result of
the increase in the long-term debt outstanding. The effective weighted
average interest rate for long-term borrowings was 6.34% for the fiscal
quarter ended August 28, 1998, as compared to 5.77% for the fiscal quarter
ended August 29, 1997.
Operating expenses for the three fiscal months ended August 28, 1998 were
$247 thousand, compared to $238 thousand in the fiscal quarter ended August
29, 1997. Fees and expense reimbursement to Group affiliates included
within operating expenses were $39 thousand and $32 thousand for the fiscal
quarters ended August 28, 1998 and August 29, 1997, respectively. Other
operating expenses were $208 thousand and $206 thousand for the three
fiscal month periods ended August 28, 1998 and August 29, 1997,
respectively, and consisted principally of legal, accounting, rating agency
fees and amortization of debt issuance costs.
Net income of $1.6 million for the fiscal quarter ended August 28, 1998
decreased by 66% or $3.1 million from the fiscal quarter ended August 29,
1997 net income of $4.7 million. This decrease was primarily due to the
lack of activity described above. Total assets as of August 28, 1998 were
$535 million, consisting principally of cash and cash equivalents,
securities owned, and Derivative Transactions.
-19-
<PAGE>
NINE FISCAL MONTHS ENDED AUGUST 28, 1998 VERSUS NINE FISCAL MONTHS ENDED
AUGUST 29, 1997
For the nine fiscal months ended August 28, 1998, the Company reported
revenues net of interest expense of $6.6 million, consisting principally of
net interest income of $6.4 million. This represented a decrease in
reported revenues net of interest expense of 49% compared to the nine
fiscal months ended August 29, 1997. During the period, the Company did not
enter into or guarantee any new Derivative Transaction due to the review by
Group described above. The other intermediation profit for this period
principally resulted from the recognition of the residual performance
guarantee fees on transactions which were terminated prior to original
maturity due to the early termination of the underlying Derivative
Transactions at the request of the counterparties. The Company incurred
interest expense of $12.8 million during the nine fiscal months ended
August 29, 1998.
For the nine fiscal months ended August 29, 1997, the Company reported
revenues net of interest expense of $12.9 million, which consisted
principally of intermediation profits of $9.6 million and net interest
income of $3.3 million. During the nine fiscal months ended August 29,
1997, the Company entered into or guaranteed 518 Derivative Transactions
with non-affiliates, and 542 hedging Derivative Transactions with
affiliates. The aggregate notional principal amount of Derivative
Transactions entered into or guaranteed by the Company during the period
was $14.8 billion, which resulted in initial intermediation profit of $7.0
million. The remainder of intermediation profits for this period resulted
from an increase in the present value of the expected surplus cash flows
from the Company's portfolio due to a reduction in the time remaining until
those cash flows are realized. The Company incurred interest expense of
$5.2 million during the nine fiscal months ended August 29, 1997.
Interest income of $19.2 million for the nine fiscal months ended August
28, 1998 increased by $10.8 million or 128% over the nine fiscal months
ended August 29, 1997 primarily due to amounts recorded as interest income
on Derivative Transactions relating to notes issued by the Company that are
linked to a single stock. During the period, the Company did not enter into
or guarantee any new Derivative Transactions due to the aforementioned
review by Group. Other intermediation profit decreased $2.4 million to $172
thousand for the nine fiscal months ended August 28, 1998 compared to other
intermediation profit of $2.6 million for the nine fiscal months ended
August 29, 1997. This decrease principally reflects a decrease in the
average net investment in Derivative Transactions. Interest expense of
$12.8 million for the nine fiscal months ended August 28, 1998 increased
significantly from the $5.2 million incurred in the same fiscal period in
1997 as a result of the increase in long term debt outstanding. The
effective weighted average interest rate for long term borrowings was 6.33%
and 5.58% for the nine fiscal months ended August 28, 1998 and August 29,
1997, respectively.
Operating expenses for the nine fiscal months ended August 28 ,1998 were
$930 thousand, compared to $554 thousand in the nine fiscal months ended
August 29, 1997. Fees and expense reimbursement to Group affiliates within
operating expenses were $172 thousand and $116 thousand for the nine fiscal
months ended August 28, 1998 and August 29, 1997. Other operating expenses
were $758 thousand and $438 thousand for the nine fiscal months periods
ended August 28, 1998 and August 29, 1997, respectively, and consisted
principally of legal, accounting and rating agency fees. The increase in
operating expenses was primarily due to an increase in the level of legal
and accounting expenses incurred by the Company relating to aforementioned
review and amortization of debt issuance costs.
Net income of $5.4 million for the nine fiscal months ended August 28, 1998
decreased by 54% or $6.4 million from the nine fiscal months ended August
29, 1997 net income of $11.8 million. Total assets as of August 28, 1998
were $535 million, consisting principally of cash and cash equivalents,
securities owned, and Derivative Transactions.
Net cash provided by operating activities during the nine months ended
August 28, 1998 was $13.3 million, which primarily reflected receipts of
cash which reduced the Company's net investment in Derivative Transactions
and net income. In comparison, for the nine fiscal months
-20-
<PAGE>
ended August 29, 1997 net cash provided by operating activities was $91.8
million which primarily reflected receipts exceeding payments on Derivative
Transactions, including the receipt of certain payments under Derivative
Transaction with affiliates, prior to their original maturity.
-21-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company conducts its business in a manner designed to require that cash
payments to the Company from its portfolio, taking into account market
fluctuations and the possibility of default, will be sufficient to make
when due all required payments on all the Company's liabilities, including
payments of principal and interest on borrowings. The Company needs capital
principally to absorb potential losses due to counterparty defaults. If
counterparties were to default on their obligations to the Company, these
losses could be substantial. However, based on the credit quality of its
counterparties (including affiliates), the Company does not currently
anticipate any default losses and has not recorded any provisions for
credit losses.
The Company believes that the best measure, at any point in time, of its
credit exposure to a particular counterparty is the cost it would incur to
replace the obligations of that counterparty if it defaulted, net of any
high quality marketable securities posted as collateral by the
counterparty. The Company believes that under current market conditions it
could enter into replacement contracts for all of its contracts if the
counterparties were to default. However, there can be no assurance that the
Company could enter into such replacement contracts due to factors beyond
the control of the Company, such as the limited liquidity of many of the
Company's assets and the potential unavailability of suitable replacement
contracts. Where several transactions with one counterparty are subject to
a master agreement which provides for netting and which the Company
believes is legally enforceable under relevant law, the Company calculates
the exposure resulting from those transactions on a net basis, i.e., adding
the positive and negative values; 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 and any Derivative Transactions structured on a limited
recourse basis.
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 only 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 28, 1997 and August 28, 1998, 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., any collateralized
portion of Derivative Transactions reported as assets and any Derivative
Transactions structured on a limited recourse basis.) At November 28, 1997
and August 28, 1998, the Company's counterparties consisted largely of
banks located in Europe, North America and Japan, as well as affiliates of
Group. 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.
-22-
<PAGE>
Current Credit Exposure - By S&P Rating of Obligor:
---------------------------------------------------
(U.S. dollars in millions)
NOVEMBER 28, 1997 AUGUST 28, 1998
----------------- ---------------
S&P Rating: $ Percent $ Percent
- ----------- - ------- - -------
AAA $127.8 28.8% $149.2 33.8%
AA+ 77.1 17.4 54.6 12.4
AA 70.4 15.9 36.5 8.2
AA- 33.2 7.5 130.3 29.5
A+ 86.1 19.4 58.1 13.1
A 11.0 2.5 8.5 2.0
A- 37.1 8.4 0.1 0.0
Below A- 0.3 0.1 4.5 1.0
--------- ------- ------- -------
Total $443.0 100.0% $441.8 100.0%
===== ===== ===== =====
Current Credit Exposure - By Country of Obligor's Headquarters:
---------------------------------------------------------------
(U.S. dollars in millions)
NOVEMBER 28, 1997 AUGUST 28, 1998
----------------- ---------------
Country: $ Percent $ Percent
- -------- - ------- - -------
U.S. $253.2 57.2% $265.0 60.0%
Switzerland 70.3 15.9 41.2 9.3
France 58.6 13.2 30.1 6.8
Germany 36.9 8.3 62.4 14.1
Japan 24.0 5.4 3.8 0.9
Netherlands 0.0 0.0 38.3 8.7
Other 0.0 0.0 1.0 0.2
------- ------------ ----- ------
Total $443.0 100.0 $441.8 100.0%
===== ========== ===== =====
Current Credit Exposure - By Obligor Industry:
----------------------------------------------
(U.S. dollars in millions)
NOVEMBER 28, 1997 AUGUST 28, 1998
----------------- ---------------
Industry: $ Percent $ Percent
- --------- - ------- - -------
Banks $336.5 76.0% $319.8 72.4%
Financial 60.2 13.5 59.0 13.4
Industrials 28.7 6.5 11.2 2.5
Government Agencies 17.6 4.0 51.8 11.7
------ ----- ----- -----
Total $443.0 100.0% $441.8 100.0%
===== ===== ===== =====
The Company has entered into and expects to continue to enter into transactions
with FPI or Goldman Sachs Capital Markets, L.P. ("GSCM"), (obligations of GSCM
being unconditionally guaranteed by Group) in order to hedge transactions with
third parties. At August 28, 1998, the Company had $14.1 million of credit
exposure to FPI and GSCM, collectively, as a result of hedging and guaranteeing
transactions. Due to the level of credit exposure to Group or its affiliates at
August 28, 1998, the Company does not believe that financial information with
respect to Group is material to investors in the Company's debt securities.
-23-
<PAGE>
The Company anticipates that its credit exposures may be highly concentrated
since financial instruments reported as assets may be transacted with a limited
number of counterparties. At August 28, 1998, the Company had no credit exposure
net of collateral exceeding 10% of its total assets to any counterparty. The
Company's largest credit exposure to any one counterparty was $49.4 million, or
9.2% of total assets, to Commerzbank AG which was rated AA- by S&P on August 28,
1998. The Company currently does not anticipate any loss as a result of its
credit exposures. 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 exposures excessive.
As of August 28, 1998, the Company was a party to Derivative Transactions with a
notional amount of $14.9 billion. Of these, $4.4 billion notional amount
represented Derivative Transactions which could not expose the Company to credit
risk (e.g., options written and Derivative Transactions structured on a limited
recourse basis). 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 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 28, 1997 AUGUST 28, 1998
----------------- ---------------
$ Percent $ Percent
- ------- - -------
1997-1999 $ 8,374 40.1% $ 2,546 24.2%
2000-2002 4,278 20.5 2,315 22.0
2003-2005 3,621 17.4 1,866 17.7
2006-2034 4,580 22.0 3,797 36.1
------- ---- ------- ------
Total $20,853 100.0% $10,524 100.0%
====== ===== ====== =====
Notional Amount of Derivative Transactions With
-----------------------------------------------
Potential Credit Exposure - By Credit Quality of Obligor:
---------------------------------------------------------
(U.S. dollars in millions)
NOVEMBER 28, 1997 AUGUST 28, 1998
----------------- ---------------
S&P Rating: $ Percent $ Percent
- ----------- - ------- - -------
AAA $ 3,415 16.4% $ 1,631 15.5%
AA+ 239 1.1 433 4.1
AA 303 1.5 300 2.9
AA- 438 2.1 134 1.3
A+ 66 0.3 101 1.0
A 1,112 5.3 613 5.8
A- 1,552 7.4 50 0.5
Below A- 114(a) 0.6 163(a) 1.5
Affiliates 13,614 65.3 7,099 67.4
------- ------ ------- ------
Total $20,853 100.0% $10,524 100.0%
====== ===== ====== =====
(a) Includes Derivative Transactions which are collateralized in part and
therefore reflect reduced credit exposure.
-24-
<PAGE>
Notional Amount of Derivative Transactions With Potential
---------------------------------------------------------
Credit Exposure - By Principal Underlying Index Type:
-----------------------------------------------------
(U.S. dollars in millions)
NOVEMBER 28, 1997 AUGUST 28, 1998
----------------- ---------------
$ Percent $ Percent
- ------- - -------
Interest rate $16,498 79.1% $9,389 89.2%
Currency 4,271 20.5 1,053 10.0
Other 84 0.4 82 0.8
------- ------- ------- -------
Total $20,853 100.0% $10,524 100.0%
====== ===== ====== =====
The various currencies and their respective notional amounts, expressed in U.S.
dollars, to be exchanged under currency options, forwards and currency swaps
outstanding at August 28, 1998 were U.S. dollars ($150 million), Japanese yen
(approximately $128 million), British pounds (approximately $99 million), Dutch
guilders (approximately $206 million), European currency units (approximately
$121 million), German marks (approximately $228 million), Italian lire
(approximately $81 million), and French francs (approximately $40 million).
The fair values of Derivative Transactions as of November 28, 1997 and August
28, 1998 and the average monthly fair values of such instruments for the fiscal
year ended November 28, 1997 and the nine fiscal months ended August 28, 1998,
are as follows:
AS OF NOVEMBER 28, 1997 AS OF AUGUST 28, 1998
----------------------- ---------------------
(U.S. dollars in millions) Assets Liabilities Assets Liabilities
- -------------------------- ------ ----------- ------ -----------
Derivative Transactions
Non-affiliate $173.0 $154.0 $133.9 $110.5
Affiliate 19.6 0.0 14.1 0.0
Average Monthly Fair Value
--------------------------
(U.S. dollars in millions)
TWELVE FISCAL MONTHS ENDED NINE FISCAL MONTHS ENDED
NOVEMBER 28, 1997 AUGUST 28, 1998
----------------- ---------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Derivative Transactions
Non-affiliate $175.1 $131.2 $150.0 $129.9
Affiliate 14.0 0.0 15.3 0.0
The Company is also a general partner of FPI and, as such, would ultimately be
liable for all the obligations of FPI if FPI were insolvent. At August 28, 1998,
FPI had total liabilities of $155 million. The Company, after analyzing the
financial position, results of operations and cash flows of FPI, believes that
FPI will be able to meet the obligations under its outstanding liabilities.
Accordingly, the Company does not believe that it is necessary to, and has not,
established a reserve with respect to FPI's obligations under its liabilities.
As of August 28, 1998, FPI's long-term debt securities were rated Aaa, AAA and
AAA by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Group ("S&P") and Fitch IBCA, Inc. ("Fitch"), respectively.
-25-
<PAGE>
At August 28, 1998, the Company had $302 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 has made, in the
past, and anticipates that, in the future, it will make distributions to
its partners. However, such 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 "shelf" registration statement that initially covered $500
million of Medium-Term Notes. As of August 28, 1998, the Company had $226
million available for future issuance under such registration statement.
The Company has issued and outstanding $40 million face amount of Nikkei
225 indexed Notes due December 22, 2000; $73 million face amount of S&P
Enhanced Stock Index Growth Notes due August 9, 2002; approximately $13.5
million principal amount of 7% Mandatorily Exchangeable Notes due July 23,
1999 (Subject to Mandatory Exchange into Shares of Common Stock of Oxford
Health Plans, Inc. ("Oxford")); and $120 million principal amount of 3%
Citicorp Exchangeable Notes due August 28, 2002. The single stock related
Note issuances (i.e., Oxford and Citicorp) are an integral part of
individually structured Derivative Transactions. Payments on the above
Notes are determined by reference to the performance of a single equity
security or an equity index. The terms of the Citicorp notes allow, and the
terms of the Oxford notes require, the holder to exchange the Notes into an
amount of the underlying security. The Company has purchased equity
securities and has entered into Derivative Transactions with affiliates of
Group and purchased exchange-traded options to eliminate its market risk on
the Notes. Hedging of equity-linked Notes has utilized substantially all of
the proceeds from the issuance of such Notes. The Company intends to
continue to issue equity-linked Medium-Term Notes in the future. As a
result, the Company's leverage will increase. The Company's activities also
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.
On July 16, 1998, the Company repurchased and then retired approximately
67% of the 7% Mandatorily Exchangeable Notes due July 23, 1999 for $7.1
million, representing 320,000 such notes. Prior to repurchase, the notes
were held by an affiliate. The Company recognized a loss of $65 thousand on
the retirement, primarily consisting of expenses relating to the early
termination of a Derivative Transaction related to the notes.
As of August 28, 1998, securities owned consisted of shares of common stock
of Oxford (fair value approximately $1.0 million) and shares of common
stock of Citicorp (fair value approximately $81.9 million).
Partners' capital is not subject to withdrawal or redemption on demand by
the partners. All net income during the nine month periods ending August
29, 1997 and August 28, 1998, respectively, was retained in partners'
capital. At August 28, 1998, the Company had $153 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.
YEAR 2000 AND EMU RISKS
Substantially all of the Company's operational and administrative functions
are provided by affiliates of Group. Group has advised the Company as
follows with respect to Year 2000 issues and the establishment of the
European Economic and Monetary Union ("EMU"):
-26-
<PAGE>
YEAR 2000
With the new millennium approaching, many institutions around the world are
reviewing and modifying their computer systems to ensure that they are Year
2000 compliant. The issue, in general terms, is that many existing computer
systems and microprocessors with data functions (including those in
non-information technology equipment and systems) use only two digits to
identify a year in the date field with the assumption that the first two
digits of the year are always "19". Consequently, on January 1, 2000,
computers that are not Year 2000 compliant will read the year as 1900.
Systems that calculate, compare or sort using the incorrect date will
malfunction.
Group, which for purposes of this discussion of Year 2000 and the
discussion under "-EMU" below includes its affiliates, has determined that
it will be required to modify or replace portions of its information
technology systems, both hardware and software, and its non-information
technology systems so that they will properly recognize and utilize dates
beyond December 31, 1999. Group presently believes that with modifications
to existing software, conversions to new software and replacement of some
hardware, the Year 2000 issue will be satisfactorily resolved in its own
systems worldwide. However, if such modifications and conversions are not
made or are not completed on a timely basis, or if Group's identification
and assessment of "mission-critical" systems proves to have been incorrect
or incomplete, the Year 2000 issue could have a material adverse effect on
the Company. Moreover, even if these changes are successful, failure of
third parties to which Group is financially or operationally linked to
address their own system problems could have a material adverse effect on
the Company.
Group has undertaken a firmwide initiative to address the Year 2000 issue
and has developed a plan to review and, as appropriate, modify or replace
the software (and replace some hardware) in its computer systems in its
offices around the world. Group's business and multi-disciplinary teams
have completed an education initiative (i.e., an awareness phase) and a
global review of Group's "mission-critical" computer systems and
non-information technology systems and applications (i.e., an assessment
phase) with regard to the Year 2000 issue. Group participated in
preliminary industry-wide, external systems test conducted by the
Securities Industry Association in July 1998 and is in the process of
conducting its own internal tests to prepare for Year 2000 compliance.
Group achieved successful results in each of the preliminary industry-wide
tests in which it participated.
As part of the plan, Group is continuing to renovate and test its internal
and third party supplied technologies and applications in partnership with
an external consulting organization. Group has established an internal
auditing process to track and verify the results of its plan and tests.
Group believes it is currently on schedule to substantially complete the
renovation, validation and implementation phases of its plan with respect
to its internal and third party supplied "mission-critical" systems by
year-end 1998. In addition, Group expects to participate in proposed
industry-wide testing involving global market participants throughout the
first half of 1999. This external testing is expected to involve major
market participants that conduct business globally, including competing
firms and financial intermediaries, such as stock exchanges, clearing
agencies and commercial banks, that are prominent in the U.S. and major
foreign markets. In the case of its non-information technology systems and
hardware, Group is on schedule to confirm that such systems and hardware
have been upgraded and tested by mid-1999.
Group is also working with key external parties, including major clients,
counterparties, exchanges, clearing agencies, clearing houses, commercial
banks, utilities and other vendors to assess the remediation efforts made
by these parties with respect to their own systems. Accordingly, Group has
initiated communications with counterparties, intermediaries and vendors
with whom it has important financial and operational relationships to
determine the extent to which they are vulnerable to the Year 2000 issue.
Group has not yet received sufficient information from these parties about
their remediation plans to predict the outcome of their efforts. In
addition, Group is undertaking a comprehensive review of credit risks posed
by Year 2000 problems at major third parties to which Group is financially
or operationally linked. Group is also developing a contingency plan that
is
-27-
<PAGE>
expected to address financial and operational problems that might arise on
and around January 1, 2000. This contingency plan would include
establishing additional sources of liquidity that could be drawn upon in
the event of systems disruption and identifying alternative vendors and
back-up processes that do not rely on computers, whenever possible.
If third parties with whom the Company interacts have Year 2000 problems
that are not remedied, the following problems could result: (i) in the case
of certain third parties, in disruption of important services upon which
the Company depends, such as telecommunications and electrical power; (ii)
in the case of data providers, in the receipt of inaccurate or out-of-date
information that would impair the Company's ability to perform critical
data functions, such as pricing the Company's securities or other assets;
(iii) in the case of financial intermediaries such as exchanges and
clearing agents, in failed trade settlements, an inability to trade in
certain markets and disruption of funding flows; (iv) in the case of
counterparties and customers, in financial and accounting difficulties for
those parties that expose the Company to increased credit risk and lost
business. Disruption or suspension of activity in the world's financial
markets is also possible.
Group has incurred and expects to continue to incur expenses allocable to
internal staff, as well as costs for outside consultants, computer systems'
remediation and replacement and non-information technology systems'
remediation and replacement (including validation) in order to achieve Year
2000 compliance. Group currently estimates that these costs will total
between $120 million and $150 million, the majority of which will have been
spent by the end of 1998. The remaining cost of the Group's Year 2000
program is expected to be incurred in 1999.
The costs of the Year 2000 program and the date on which Group plans to
complete the Year 2000 modifications are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of
third-party remediation plans and other factors. Group can give no
assurance that these estimates will be achieved, and actual results could
differ materially from Group's plans. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and
correct relevant computer source codes and embedded technology, the results
of internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
EMU
Commencing on January 1, 1999, 11 European countries will enter into the
EMU and replace their local currencies with a single currency, the Euro.
During a three-year transition period, the national currencies will
continue to exist but only as a fixed denomination of the Euro. Beginning
January 1, 1999, the Euro will be the predominant currency to settle
wholesale (non-cash) transactions previously denominated in the
participating national currencies.
In order to address the issues associated with the introduction of the
Euro, Group has implemented a worldwide EMU conversion and testing plan.
The Euro conversion presents systems issues that are unprecedented in three
respects. First, Group must convert an exceptionally large amount of the
data in its systems. Second, the nature of the systems changes will depend
on numerous technical decisions that have yet to be made by the
participating countries, making advance preparations more difficult.
Moreover, the participating countries are under no obligation to reach a
consensus on how these technical issues will be resolved, and the protocols
they adopt may, and in some cases do, differ. Third, unlike the systems
changes that will be required by the Year 2000 issue, those required by the
addition of the Euro must all be implemented over a single weekend,
beginning when markets close December 31, 1998. Group currently estimates
the cost of its EMU conversion program will be $30 million.
The changes to Group's data and computer systems will affect the Company's
clearance, settlement and financial reporting activities, among other key
operations of the Company. If not properly
-28-
<PAGE>
implemented, these changes could lead to failed trade settlements,
inability to reconcile trading positions and funding disruptions. These
changes could also lead to erroneous entries in the Company's books and
records. These events could result in misstatement of the Company's
financial condition and results of operations and could impair the
Company's ability to manage its risks.
The Company is also dependent for proper transaction clearance and
reporting on many third parties, including counterparties, clearing agents,
banks, exchanges, clearing houses and providers of information. If these
third parties' systems do not appropriately reflect the introduction to the
Euro, the Company's clearance, settlement and reporting activities could be
adversely affected in the manner described above.
Management can give no assurance that the Company, its affiliates or third
parties on whom it depends will have the systems necessary to process
Euro-denominated transactions. Moreover, EMU-related disruption and
suspension of activity in European markets could hurt the Company's
business in those markets, resulting in lost business.
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, financial
condition and cash flows.
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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview" for a discussion of the recent review
by Group of the Company's operations.
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.
-29-
<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 entering into new business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Year 2000
and EMU Risks" for a discussion of the Company's reliance upon Group and
its affiliates with respect to the Year 2000 and EMU issues.
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 affected by competitive or other economic conditions.
The Company's long-term debt and counterparty credit risk have been rated
in the highest categories by S&P and Fitch (the "Rating Agencies"). A
change in the Company's ratings would materially adversely affect 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.
ACCOUNTING DEVELOPMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997, with
reclassification of earlier periods required for comparative purposes. SFAS
No. 130 establishes standards for the reporting and presentation of
comprehensive income and its components in the financial statements. The
Company intends to adopt this standard beginning in fiscal year 1999. This
Statement is limited to issues of reporting and presentation and,
therefore, will not affect the Company's results of operations or financial
condition.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends
on its intended use of the derivative and the resulting designation. The
Company intends to adopt this standard beginning in fiscal year 2000 and is
currently assessing its effect.
-30-
<PAGE>
PART II: OTHER INFORMATION
--------------------------
ITEM 1: LEGAL PROCEEDINGS
No litigation was commenced against the Company through August 28, 1998.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
On September 28, 1998, Group announced that its partners had decided to
withdraw both its plan to incorporate and its registration statement to
issue stock to the public.
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
None filed during the quarterly period ended August 28, 1998
-31-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GS FINANCIAL PRODUCTS U.S., L.P.
acting by its general partner, GS Financial
Products US Co.
Date: October 12, 1998 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.
-32-
GS FINANCIAL PRODUCTS U.S., L.P.
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FOR THE THREE FISCAL MONTHS ENDED FOR THE NINE FISCAL MONTHS ENDED
--------------------------------- --------------------------------
(Unaudited)
(U.S. dollars in thousands) August 29, 1997 August 28, 1998 August 29, 1997 August 28, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Earnings:
Income from continuing operations
before income taxes $4,887 $1,618 $12,316 $5,663
Add: Fixed charges 1,961 4,195 5,174 12,960
--------------- --------------- --------------- --------------
Earnings as adjusted $6,848 $5,813 $17,490 $18,623
Fixed charges:
Interest expense $1,951 $4,137 $5,154 $12,791
Debt amortization expense 10 58 20 169
Interest portion of rent expense 0 0 0 0
---------------- --------------- --------------- --------------
Total fixed charges $1,961 $4,195 $5,174 $12,960
Ratio of earnings to fixed charges 3.5% 1.4% 3.4% 1.4%
<FN>
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.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited quarterly condensed statements of GS Financial Products U.S., L.P. and
is qualified in its entirety by reference to such financial statements contained
in GS Financial Products U.S., L.P.'s Form 10-Q for the nine fiscal months ended
August 28, 1998.
</LEGEND>
<CIK> 0000914720
<NAME> GS Financial Products U.S., L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-27-1998
<PERIOD-END> AUG-28-1998
<CASH> 302,341
<SECURITIES> 82,856
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 534,893
<CURRENT-LIABILITIES> 1,876
<BONDS> 265,320
0
0
<COMMON> 0
<OTHER-SE> 153,493
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 19,384
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 930
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,791
<INCOME-PRETAX> 5,663
<INCOME-TAX> 227
<INCOME-CONTINUING> 5,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,436
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>
Notes
- -----
Balances relating to derivative transactions are not reflected in the above figures.
</FN>
</TABLE>
