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 27, 1999
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) (345) 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.
<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 Nine Fiscal Months Ended August 27, 1999
and August 28, 1998 3
Condensed Statements of Financial Condition as of
August 27, 1999 and November 27, 1998 4
Condensed Statement of Changes in Partners' Capital
for the Nine Fiscal Months Ended August 27, 1999 5
Condensed Statements of Cash Flows for the Nine
Fiscal Months Ended August 27, 1999 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 17
Liquidity and Capital Resources 21
Item 3: Quantitative and Qualitative Disclosures About Market Risk 29
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 30
Item 6: Exhibits and Reports on Form 8-K 30
Signature 32
- 2 -
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
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 27, 1999 AUGUST 28, 1998 AUGUST 27, 1999 AUGUST 28, 1998
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Intermediation profit (loss) $ 179 $ (59) $ 255 $ 172
Interest 4,789 6,063 13,945 19,226
Equity in loss of affiliate (6) (2) (6) (14)
-------- -------- -------- --------
Total revenues 4,962 6,002 14,194 19,384
Interest expense 2,602 4,137 7,999 12,791
-------- -------- -------- --------
Revenues, net of interest expense 2,360 1,865 6,195 6,593
EXPENSES:
Operating 733 247 1,952 930
-------- ------- -------- --------
Income before taxes 1,627 1,618 4,243 5,663
Income taxes 65 66 170 227
-------- ------- -------- --------
Net Income $1,562 $1,552 $ 4,073 $ 5,436
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed financial
statements.
- 3 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(U.S. dollars in thousands)
(Unaudited)
---------
<TABLE>
<CAPTION>
AUGUST 27, 1999 NOVEMBER 27, 1998
--------------- -----------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $257,734 $293,636
Securities owned, at fair value 49,048 38,828
Derivative transactions, at fair value:
Affiliate -- 11,865
Non-affiliate 46,263 114,958
Investment in affiliate 880 804
Other assets 772 703
-------- --------
Total assets $354,697 $460,794
======== ========
LIABILITIES AND PARTNERS' CAPITAL:
Current portion of long-term borrowings $85,748 $2,573
Derivative transactions, at fair value:
Affiliate 28,116 --
Non-affiliate 6,240 89,078
Long-term borrowings 71,890 209,033
Other liabilities and accrued expenses 1,229 2,791
-------- --------
Total liabilities 193,223 303,475
Commitments and contingencies
Partners' capital:
Limited Partners 160,659 156,525
General Partner 815 794
-------- --------
Total partners' capital 161,474 157,319
Total liabilities and partners' capital $354,697 $460,794
======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
financial statements.
- 4 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
CONDENSED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE FISCAL MONTHS ENDED AUGUST 27, 1999
(U.S. dollars in thousands)
(Unaudited)
---------
<TABLE>
<CAPTION>
GENERAL LIMITED TOTAL
PARTNER'S CAPITAL PARTNERS' CAPITAL PARTNERS' CAPITAL
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance, November 27, 1998 $794 $156,525 $157,319
Net Income 21 4,052 4,073
Foreign currency translation adjustment 0 82 82
======== ======== ========
Balance, August 27, 1999 $ 815 $160,659 $161,474
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
financial statements.
- 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 27, 1999 AUGUST 28, 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $4,073 $5,436
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in loss of affiliate 6 14
Unrealized (gain) loss on securities owned (12,114) 7,569
Decrease (increase) in long-term borrowings due to
embedded derivative transactions, net 10,706 (2,223)
Decreases (increases) in operating assets:
Derivative transactions, at fair value:
Affiliate 11,865 5,449
Non-affiliate 68,695 39,051
Other assets (69) 834
Increases (decreases) in operating liabilities:
Derivative transactions, at fair value:
Affiliate 28,116 0
Non-affiliate (82,838) (43,437)
Other liabilities and accrued expenses (1,562) 583
-------- --------
Net cash provided by operating activities 26,878 13,276
Cash flows from investing activities:
Sales of securities owned -- 4,760
-------- --------
Net cash provided by investing activities -- 4,760
Cash flows from financing activities:
Repurchase of long term borrowings (62,780) (7,070)
-------- ---------
Net cash used in financing activities (62,780) (7,070)
Net (decrease) increase in cash and cash equivalents (35,902) 10,966
-------- --------
Cash and cash equivalents, beginning of period 293,636 291,375
Cash and cash equivalents, end of period $257,734 $302,341
======== ========
Supplemental disclosure of cash flow information:
Interest paid $4,983 $8,417
Income taxes paid 290 210
<FN>
Supplemental disclosure of noncash investing and financing activities:
On July 23, 1999, 157,865 shares of Oxford Health Plans, Inc. with a value of approximately $2.4
million were delivered to the noteholders in settlement of the Company's obligation under its 7%
Mandatorily Exchangeable Notes (see Note 7).
</FN>
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
financial statements.
- 6 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
1. DESCRIPTION OF BUSINESS:
-----------------------
Since October 1997, The Goldman Sachs Group, L.P., which was succeeded by
The Goldman Sachs Group, Inc. ("Group") in May 1999, has undertaken a
review of the business and operations of GS Financial Products U.S., L.P.
(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 (as defined in the next paragraph) and have not
issued any new debt securities. On July 9, 1999, the Boards of Directors of
GS Financial Products US Co., the Company's corporate general partner, and
of GS Financial Products Co., the corporate general partner of FPI, agreed
that the Company and FPI would not enter into any new Derivative
Transactions or issue any new debt securities, and that both the Company
and FPI would pursue attractive opportunities to retire or transfer their
obligations, with the eventual goal of liquidating both companies.
Consistent with this goal, the Company has terminated or assigned 45% of
its swap portfolio (approximately $2.2 billion notional amount) during the
fiscal quarter ended August 27, 1999. No gains or losses were incurred on
the terminations or assignments. In addition, the Company has also retired
approximately $118 million face amount of its outstanding debt securities
since May 28, 1999 (see Note 7). The Board of Directors of the Company's
corporate general partner has not approved a formal plan for liquidating
the Company. The lack of activity has negatively affected the Company's
results of operations for the first three quarters of 1999, and will have a
significant negative effect on the Company's results of operations in
future quarters, but is not expected to affect the ability of the Company
to meet its obligations. No assurance can be given as to what effect these
actions will have on the Company's credit ratings described below.
The historical business of the Company was 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 entered into or guaranteed Derivative Transactions
in situations where two or more counterparties (typically including an
affiliate of the Company) wished to enter into one or more Derivative
Transactions between themselves but wanted the Company to substitute its
credit for that of one or more of the counterparties. In accordance with
market practice, the Company did this by entering into each of such
transactions directly as principal. Such Derivative Transactions also
included the use of futures contracts, 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
on Derivative Transactions (as described under "Derivative Transactions" --
see Note 4).
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.
- 7 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
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 November 27,
1998 and November 28, 1997, and for the fiscal years ended November 27,
1998, November 28, 1997 and November 29, 1996, included in the Company's
Annual Report on Form 10-K for the fiscal year ended November 27, 1998.
Results for the fiscal quarters 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 statement of financial condition as of November 27, 1998 was
derived from audited financial statements but does not include all
disclosures required under generally accepted accounting principles.
These financial statements have been prepared in accordance with generally
accepted accounting principles that require management to make estimates
and assumptions that affect the unaudited condensed financial statements
and related disclosures. These estimates and assumptions are based on
judgement and available information and, consequently, actual results could
be materially different from these estimates.
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 dates of the condensed statements of financial condition. 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 foreign
currency translation adjustments and included in partners' capital.
Certain transactions entered into by the Company are presented on a
net-by-counterparty basis, where management believes a right of setoff
exists under an enforceable master netting agreement.
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.
- 8 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
Securities owned are recorded at fair value. Derivative Transactions are
recorded at estimated fair value.
Intermediation profits were $255 thousand for the nine fiscal months ended
August 27, 1999. The Company recognized a profit of $329 thousand
principally from amortization of performance guarantee fees. This was
offset in part by a loss of $74 thousand due to a decrease in the present
value of the Company's net investment in Derivative Transactions. The
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 thereto.
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. 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.
The Company's income is subject to a 4% New York City unincorporated
business tax. The condensed statements of income for the fiscal quarters
ended August 27, 1999 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
The Company anticipates that its credit exposures may be highly
concentrated since financial instruments reported as assets may be with a
limited number of counterparties. In addition, this concentration may
increase as the Company begins to retire or transfer its obligations. At
August 27, 1999, the Company had credit exposure net of collateral
exceeding 10% of its total assets to Royal Bank of Canada and Rabobank
Nederland. The combined exposures to these two banks represented 23% of the
Company total assets. Royal Bank of Canada and Rabobank Nederland were
rated AA- and AAA, respectively, by at least one internationally recognized
credit rating agency at August 27, 1999. At November 27, 1998, the Company
had credit exposure exceeding 10% of its total assets to Bank of America,
NA and Commerzbank AG. The combined exposures to these two banks
represented 24% of the Company total assets. Bank of America, NA and
Commerzbank AG both were rated AA- by at least one internationally
recognized credit rating agency at November 27, 1998.
- 9 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
ACCOUNTING DEVELOPMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for the reporting and presentation of
comprehensive income and its components in the financial statements. This
statement is effective for fiscal years beginning after December 15, 1997
and was adopted by the Company in the fiscal quarter ended February 26,
1999. The components of comprehensive income are set forth below:
<TABLE>
<CAPTION>
FOR THE NINE FISCAL MONTHS ENDED
-------------------------------------
(U.S. dollars in thousands)
AUGUST 27, 1999 AUGUST 28, 1998
--------------- ---------------
<S> <C> <C>
Net income $4,073 $5,436
Other comprehensive income (loss):
Foreign currency translation adjustment 82 (64)
------ ------
Total comprehensive income $4,155 $5,372
====== ======
</TABLE>
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - An amendment of FASB Statement No. 133", which deferred
for one year the effective date of the accounting and reporting
requirements of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". 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
instrument depends on its intended use and the resulting designation. The
Company intends to adopt the provisions of SFAS No. 133 deferred by SFAS
No. 137 in fiscal 2001 and is currently assessing its effect.
3. SECURITIES OWNED:
----------------
As of August 27, 1999, securities owned consisted of shares of common stock
of Citigroup, Inc. (fair value approximately $49.0 million). At November
27, 1998, securities owned consisted of shares of common stock of
Citigroup, Inc. and Oxford Health Plans, Inc. (fair value approximately
$36.9 million and $1.9 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 was mandatorily
exchangeable at maturity into shares of common stock of Oxford Health
Plans, Inc. and the other of which was exchangeable, at the option of the
holder, into shares of Citigroup, Inc. common stock. (See Note 7).
- 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 by the Company are
presented in the condensed statements of financial condition on a
net-by-counterparty basis, where management believes a right of setoff
exists under an enforceable master netting agreement. 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 under the caption
"Derivative transactions, at fair value". Similarly, the fair value of swap
and forward agreements in a loss position, as well as options written, are
reported as liabilities under the caption "Derivative transactions, at fair
value". Derivative Transactions reported in accordance with the Company's
netting policy as assets are principally obligations of major international
financial institutions which are rated 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.
The Company historically entered into various Derivative Transactions
whereby the Company agreed to pay amounts that might increase in the event
of changes in the level of an underlying index. The Company entered into
such transactions with counterparties only if it was able to enter into
offsetting transactions that entitled the Company to receive amounts that
were equal to or in excess of the amounts it owed. 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 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 August 27, 1999
and November 27, 1998, the Company's aggregate Credit Exposure in respect
of Derivative Transactions was approximately $45 million and approximately
$124 million, respectively.
- 11 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
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.
Treasury bonds or notes and securities issued or backed by U.S.
governmental agencies, as collateral in order to reduce the amount of the
Company's credit exposure. The Company did not hold any collateral related
to Derivative Transactions as of August 27, 1999.
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.
<TABLE>
<CAPTION>
AUGUST 27, 1999 NOVEMBER 27, 1998
--------------- -----------------
<S> <C> <C>
Non-affiliates
Interest rate swap agreements $1,547 $2,385
Currency options written 0 304
Currency options purchased 0 108
Interest rate options written 0 826
Interest rate options purchased 390 1,450
Currency and other swap agreements 0 162
Foreign currency forwards 10 66
Equity options purchased 49 37
Affiliates
Interest rate swap agreements $2,266 $3,413
Currency options written 0 108
Currency options purchased 0 304
Interest rate options written 390 1,450
Interest rate options purchased 0 826
Currency and other swap agreements 0 312
Foreign currency forwards 10 64
</TABLE>
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 structured notes, 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 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 owned or
issued as of August 27, 1999 and November 27, 1998 and the average monthly
fair values of such instruments for the nine fiscal months ended August 27,
1999 and the fiscal year ended November 27, 1998, computed in accordance
with the Company's netting policy, are as follows:
- 12 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
<TABLE>
<CAPTION>
Fair Value
----------
(U.S. dollars in millions)
AS OF AUGUST 27, 1999 AS OF NOVEMBER 27, 1998
--------------------- -----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Derivative Transactions
-----------------------
Non-affiliates $46.3 $6.2 $115.0 $89.1
Affiliates 0 28.1 11.9 0.0
</TABLE>
<TABLE>
<CAPTION>
Average Monthly Fair Value
--------------------------
(U.S. dollars in millions)
NINE FISCAL MONTHS ENDED FISCAL YEAR ENDED
AUGUST 27, 1999 NOVEMBER 27, 1998
------------------------ ---------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Derivative Transactions
-----------------------
Non-affiliates $85.2 $63.9 $148.2 $122.4
Affiliates 12.7 0.0 12.3 0.0
</TABLE>
5. RELATED PARTY TRANSACTIONS:
--------------------------
The Company historically entered into hedging and performance guarantee
transactions with affiliates. Substantially all of the Company's Derivative
Transactions involve 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 an affiliate for
which an agreed upon fee per annum is charged. The Company also obtains
brokerage and custodial services from affiliates at market rates. For the
nine fiscal months ended August 27, 1999 and August 28, 1998, approximately
$1.2 million and $172 thousand, respectively, were charged for such
services. The significant increase in services fees is primarily due to
additional expenses billed to the Company as a result of the aforementioned
review by Group.
6. INVESTMENT IN AFFILIATE:
-----------------------
The Company owns an approximate 2% general and limited partnership interest
in FPI. The Company accounts for its investment in FPI under the equity
method because of its non-managing general partner interest in FPI.
As discussed above, FPI will not engage in any new Derivative Transactions
and will not issue any new debt securities. As of August 27, 1999, its
assets consist principally of cash and cash equivalents, Japanese
government debt securities and Derivative Transactions. 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. The Company, after analyzing the financial position, results
of operations and cash flows of FPI, believes
- 13 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
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.
The Board of Directors of GS Financial Products Co., the corporate general
partner of FPI, has not approved a formal plan of liquidation for FPI.
As of August 27, 1999, 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):
AUGUST 27, 1999 NOVEMBER 27, 1998
---------------- -----------------
Total assets $165 $170
Total liabilities 129 137
Partners' capital 36 33
7. LONG-TERM 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 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 a Note linked to a
single stock may either allow for or mandatorily require the holder to
exchange the Notes into an amount of the underlying security. The hedging
of equity-linked Notes has utilized substantially all of the proceeds from
the issuance of such Notes.
The Company has ascribed, where applicable, the proceeds from the Notes to
the underlying principal component and the embedded Derivative
Transactions. The amounts ascribed 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 has entered into various
Derivative Transactions with affiliates and has purchased exchange traded
options 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 27, 1999, interest expense on Notes
- 14 -
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
linked to a single stock was approximately $2.8 million, which was
primarily offset by amounts recorded in 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, respectively.
<TABLE>
<CAPTION>
AUGUST 27, 1999 NOVEMBER 27, 1998
--------------- -----------------
<S> <C> <C>
Nikkei Indexed Notes due December 22, 2000(1) $48,281 $49,818
S&P Enhanced Stock Index Growth Notes due August 9, 2002(2) 64,045 116,399
7% Mandatorily Exchangeable Notes due July 23, 1999(3) --- 2,573
(Subject to Mandatory Exchange into Shares of Common Stock of
Oxford Health Plans, Inc.)
3% Citicorp Exchangeable Notes due August 28, 2002(4) 45,312 42,816
------- -------
Total long-term borrowings 157,638 211,606
Current portion of long-term borrowings(1,3,4) 85,748 2,573
------- -------
Long-term borrowings, less current portion $71,890 $209,033
======= ========
</TABLE>
(1) The $40 million face amount of Nikkei Indexed Notes are principal protected
and have no stated coupon. The carrying value is inclusive of an embedded
written option to the note holders of $11.5 million as of August 27, 1999
and $14.7 million as of November 27, 1998. On September 8, 1999, the
Company repurchased and then retired approximately $33.5 million face
amount, or approximately 84% of the principal amount of the Notes then
outstanding, for $34.3 million. Accordingly, the carrying value of the
notes that were repurchased of $40.4 million is included in current portion
of long-term borrowings in the August 27, 1999 statement of financial
condition. Prior to repurchase, the notes were held by an affiliate. The
company recorded no gain or loss on the retirement.
(2) The $36.5 million face amount as of August 27, 1999, and $73 million face
amount as of November 27, 1998 of S&P Enhanced Stock Index Growth Notes
(the "S&P Notes") are principal protected and have no stated coupon. The
carrying value is inclusive of an embedded written option to the note
holders of $33.7 million as of August 27, 1999 and $58.6 million as of
November 27, 1998. On April 5, 1999, the closing value of the S&P 500
Composite Stock Index was 1321.12. As a result, pursuant to the terms of
the S&P Notes, the redemption amount payable at maturity will be $53.25 per
each $25 face amount of the S&P Notes, irrespective of further increases or
decreases in the closing value of the index. On August 23, 1999, the
Company repurchased and then retired $36.5 million face amount, or 50% of
the notes then outstanding, for approximately $62.8 million. The Company
recorded no gain or loss on the retirement.
(3) The 7% Mandatorily Exchangeable Notes due July 23, 1999 matured on July 23,
1999. In accordance with the terms of such notes, common stock of Oxford
Health Plans, Inc. with a value of $2.4 million on July 23, 1999 was
delivered to the noteholders in settlement of the Company's obligation.
(4) The 3% Citicorp Exchangeable Notes are principal protected and are
exchangeable in $250,000 increments by the holders of such Notes at the
rate of 5,456.25 shares of Citigroup, Inc. common stock for each $250,000
of face amount. The carrying value includes the embedded Derivative
Transactions of $1.38 million and ($0.7) million as of August 27, 1999 and
November 27, 1998, respectively. On September 14, 1999, the remaining
outstanding notes ($48 million face amount) were redeemed at the face
amount plus accrued interest for approximately $48 million. Accordingly,
the carrying value of the notes of $45.3 million is included in current
portion of long-term borrowings in the August 27, 1999 statement of
financial condition. The Company recorded a $66 thousand gain on the
transaction.
Including the impact of the Derivative Transactions, the weighted average
interest rate for the Notes was 6.17% as of August 27, 1999 and 5.99% as of
November 27, 1998.
- 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 and equity of $2.1 million as of
August 27, 1999 and assets of $2.6 million and equity of approximately $2.4
million as of November 27, 1998.
- 16 -
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since October 1997, The Goldman Sachs Group, L.P., which was succeeded by The
Goldman Sachs Group, Inc. ("Group") in May 1999, has undertaken a review of the
business and operations of GS Financial Products U.S., L.P. (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. On July 9, 1999, the Boards of Directors of GS Financial Products US
Co., the Company's corporate general partner, and of GS Financial Products Co.,
the corporate general partner of FPI, agreed that the Company and FPI would not
enter into any new Derivative Transactions or issue any new debt securities, and
that both the Company and FPI would pursue attractive opportunities to retire or
transfer their obligations, with the eventual goal of liquidating both
companies. Consistent with this goal, the Company has terminated or assigned 45%
of its swap portfolio (approximately $2.2 billion notional amount) during the
fiscal quarter ended August 27, 1999. No gains or losses were incurred on the
terminations or assignments. In addition, the Company has also retired
approximately $118 million face amount of its outstanding debt securities since
May 28, 1999 (see Note 7 to Item 1 of this Form 10-Q). The Board of Directors of
the Company's corporate general partner has not approved a formal plan for
liquidating the Company. The lack of activity has negatively affected the
Company's results of operations for the first three quarters of 1999, and will
have a significant negative effect on the Company's results of operations in
future quarters, but is not expected to affect the ability of the Company to
meet its obligations. No assurance can be given as to what effect these actions
will have on the Company's credit ratings.
The historical business of the Company was 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 entered into
or guaranteed Derivative Transactions in situations where two or more
counterparties (typically including an affiliate of the Company) wished to enter
into one or more Derivative Transactions between themselves but wanted the
Company to substitute its credit for that of one or more of the counterparties.
In accordance with market practice, the Company did this by entering into each
of such transactions directly as principal. Such Derivative Transactions also
included the use of futures contracts, 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 on
Derivative Transactions (as described under "Derivative Transactions" -- see
Note 4 to Item 1 of this Form 10-Q).
- 17 -
<PAGE>
At August 27, 1999, the Company had entered into or guaranteed approximately
$4.6 billion notional amount of interest rate swaps and options, $20 million
notional amount of currency forwards and $49 million notional amount of equity
options with a total of 19 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, except with respect to certain
interest rate swaps entered into to hedge the interest rate risk on its
outstanding debt, 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 involve some degree
of hedging with affiliates. As of August 27, 1999, the Company has entered into
or guaranteed approximately $2.7 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 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
structured notes and interest rate or currency exposure on surplus cash flow
from its portfolio or which are intended to mitigate total credit risk.
As of August 27, 1999, the Company had equity-linked Medium-Term Notes
outstanding with a carrying value of $158 million. As discussed above, the
Company does not intend to issue equity-linked Medium-Term Notes in the future.
RESULTS OF OPERATIONS
Due to the results of the aforementioned review by Group as discussed above in
"-- Overview", the Company does not intend to enter into any new Derivative
Transactions or issue any new debt securities. The lack of activity negatively
affected the Company's results of operations for the first nine fiscal months of
1999, and will have a significant negative effect on the Company's results of
operations in future quarters.
Neither the Company nor its partners are 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, and 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.
The Company's income is subject to a 4% New York City unincorporated business
tax. The condensed statements of income for the three fiscal months and the nine
fiscal months ended August 27, 1999 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. 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.
- 18 -
<PAGE>
THREE FISCAL MONTHS ENDED AUGUST 27, 1999 VERSUS THREE FISCAL MONTHS
ENDED AUGUST 28, 1998
For the three fiscal months ended August 27, 1999, the Company reported
revenues, net of interest expense, of $2.4 million, consisting principally of
net interest income. This represented an increase in reported revenues, net of
interest expense, of 27% compared to the fiscal quarter ended August 28, 1998.
The increase is partially attributable to an increase in net interest income
earned on short-term time deposits due to a higher average capital balance over
the relevant periods. The remainder of the increase is attributable to
intermediation profit on amortization of performance guarantee fees compared to
a loss in the third fiscal quarter of 1998. The Company did not recognize any
intermediation profit on new Derivative Transactions due to the aforementioned
review by Group. The Company incurred interest expense of $2.6 million during
the fiscal quarter ended August 27, 1999 relating to equity-linked Medium-Term
Notes.
For the three fiscal months ended August 28, 1998, the Company reported
revenues, net of interest expense, of $1.9 million, consisting principally of
net interest income. For the three fiscal months ended August 28, 1998, 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 three fiscal months ended August 28, 1998 relating to
equity-linked Medium-Term Notes.
Interest income for the three fiscal months ended August 27, 1999 was $4.8
million or 21% less than the same fiscal period of the previous year, primarily
due to a decrease in amounts recorded as interest income on Derivative
Transactions relating to hedges of Medium-Term Notes issued by the Company that
are linked to a single stock. Intermediation profit was $179 thousand for the
three fiscal months ended August 27, 1999 compared to intermediation loss of $59
thousand in the same fiscal period of 1998. The Company recognized $118 thousand
of intermediation profit from amortization of performance guarantee fees,
including $33 thousand related to residual performance guarantee fees on the
related Derivative Transactions which were terminated prior to original maturity
at the request of the counterparties. In addition, the Company recorded
intermediation profit of $61 thousand from an increase in the present value of
the Company's net investment in Derivative Transactions. Interest expense of
$2.6 million for the three fiscal months ended August 27, 1999 decreased from
the $4.1 million incurred in the three fiscal months ended August 28, 1998 due
to a decrease in long-term debt outstanding.
Operating expenses for the three fiscal months ended August 27, 1999 were $733
thousand, compared to $247 thousand in the fiscal quarter ended August 28, 1998.
The increase is due primarily to amounts billed to the Company from Goldman,
Sachs & Co. for technical and administrative services relating to the
aforementioned review by Group. Fees and expense reimbursement to Group
affiliates included within operating expenses were $464 thousand and $39
thousand for the three fiscal months ended August 27, 1999 and August 28, 1998,
respectively.
Net income was $1.6 million for the three fiscal months ended August 27, 1999
compared to $1.6 million for the three fiscal months ended August 28, 1998.
Although there was no change in net income, net interest income earned but was
offset in part by higher operating expenses over the relevant periods. Total
assets as of August 27, 1999 were $355 million, consisting principally of cash
and cash equivalents, securities owned and Derivative Transactions, a decline of
23% from total assets as of November 27, 1998. This decrease
- 19 -
<PAGE>
was primarily attributable to the repurchase and retirement of equity-linked
Medium-Term Notes and a decrease in the number of Derivative Transactions
outstanding.
NINE FISCAL MONTHS ENDED AUGUST 27, 1999 VERSUS NINE FISCAL MONTHS
ENDED AUGUST 28, 1998
For the nine fiscal months ended August 27, 1999, the Company reported revenues
net of interest expense of $6.2 million, consisting principally of net interest
income. This represented a decrease in reported revenues net of interest expense
of 6% compared to the nine fiscal months ended August 28, 1998. During the
period, the Company did not recognize any intermediation profit on new
Derivative Transactions due to the review by Group described above. The
intermediation profit of $255 thousand for this period principally resulted from
the recognition of the residual performance guarantee fees offset in part by a
decrease in the present value of the Company's net investment in Derivative
Transactions. The Company incurred interest expense of $8.0 million during the
nine fiscal months ended August 27, 1999.
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. During the period, the Company did not enter into or
guarantee any new Derivative Transactions 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 28, 1998.
Interest income of $13.9 million for the first nine fiscal months ended August
27, 1999 decreased by $5.3 million, or 27%, over the nine fiscal months ended
August 28, 1998, primarily due to a decrease in amounts recorded as interest
income on Derivative Transactions relating to hedges of Medium-Term Notes issued
by the Company that are linked to a single stock. Intermediation profit
increased $83 thousand to $255 thousand for the nine fiscal months ended August
27, 1999 compared to intermediation profit of $172 thousand in the nine fiscal
months of 1998. In the nine fiscal months ended August 27, 1999, the Company
recognized $329 thousand of intermediation profit from amortization of
performance guarantee fees, including $66 thousand related to 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. This was offset in part by a
loss of $74 thousand from a decrease in the present value of the Company's net
investment in Derivative Transactions. Interest expense of $8.0 million for the
nine fiscal months ended August 27, 1999 decreased from the $12.8 million
incurred in the same nine fiscal months period in 1998 due to a decrease in
long-term debt outstanding. The effective weighted average interest rate for
long-term borrowings was 6.17% and 6.33% for the nine fiscal months ended August
27, 1999 and August 28, 1998, respectively.
Operating expenses for the nine fiscal months ended August 27, 1999 were $2.0
million, compared to $930 thousand in the nine fiscal months ended August 28,
1998. The increase is due primarily to amounts billed to the Company from
Goldman, Sachs & Co. for technical and administrative services relating to the
aforementioned review by Group. Fees and expense reimbursement to Group
affiliates within operating expenses were $1.2 million and
- 20 -
<PAGE>
$172 thousand for each of the nine fiscal month periods ended August 27, 1999
and August 28, 1998.
Net income of $4.1 million for the nine fiscal months ended August 27, 1999
decreased by 25% or $1.4 million from the nine fiscal months ended August 28,
1998 net income of $5.4 million. This decrease is primarily attributable to the
higher operating expenses over the relevant periods.
Net cash provided by operating activities during the nine months ended August
27, 1999 was $26.9 million, which primarily reflected receipts of cash related
to the termination of Derivative Transactions that hedged the S&P Enhanced Stock
Index Growth Notes ($36.5 million face amount were repurchased and retired
during the period), offset in part by unrealized gains on securities used to
hedge the Company's Notes linked to a single stock. In comparison, for the nine
fiscal months ended August 28, 1998 net cash provided by operating activities
was $13.3 million, which primarily reflected receipts exceeding payments on
Derivative Transactions, including the receipt of certain payments under
Derivative Transactions with affiliates that were terminated prior to their
original maturity. Net cash used in financing activities during the nine months
ended August 27, 1999 was $62.8 million, reflecting the repurchase and
retirement of the S&P Enhanced Stock Index Growth Notes as noted above.
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 the fair value 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 certain 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 management 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 condensed statement of financial
condition. 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 of any Derivative
Transactions structured on a limited recourse basis. The Company has
- 21 -
<PAGE>
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 August 27, 1999 and November 27, 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
guarantees 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 August 27, 1999 and November 27,
1998, the Company's counterparties consisted largely of banks located in Europe
and North America, as well as affiliates of Group. It is important to note that
the Company's credit exposures will fluctuate as a result of changes in the
replacement cost of existing transactions due to changes in, among other things,
the level of indices to which transactions are linked, supply and demand for
particular transactions and the time remaining until maturity of the
transactions.
Current Credit Exposure - By S&P Rating of Obligor:
--------------------------------------------------
(U.S. dollars in millions)
AUGUST 27, 1999 NOVEMBER 27, 1998
--------------- ------------------
S&P Rating: $ Percent $ Percent
----------- ------ ------- ------ -------
AAA $ 63.1 20.9% $104.5 25.0%
AA+ 35.0 11.6 78.4 18.8
AA 26.2 8.6 36.9 8.8
AA- 169.8 56.1 158.4 38.0
A+ 0.1 0.0 24.9 6.0
A 2.3 0.8 11.1 2.7
A- and below 6.1 2.0 3.0 0.7
------ ----- ------ -----
Total $302.6 100.0% $417.2 100.0%
====== ===== ====== =====
Current Credit Exposure - By Obligor Industry:
---------------------------------------------
(U.S. dollars in millions)
AUGUST 27, 1999 NOVEMBER 27, 1998
--------------- ------------------
Industry: $ Percent $ Percent
--------- ------ ------- ------ -------
Banks $269.9 89.2% $311.1 74.6%
Financials 7.6 2.5 39.1 9.4
Industrials 6.1 2.0 10.6 2.5
Government Agencies 19.0 6.3 56.4 13.5
------ ----- ------ -----
Total $302.6 100.0% $417.2 100.0%
====== ===== ====== =====
- 22 -
<PAGE>
Current Credit Exposure - By Country of Obligor's Headquarters:
--------------------------------------------------------------
(U.S. dollars in millions)
AUGUST 27, 1999 NOVEMBER 27, 1998
--------------------- ---------------------
Country: $ Percent $ Percent
- ------- ------ ------- ------ -------
U.S. $75.5 25.0% $239.9 57.5%
Switzerland 25.3 8.3 41.2 9.9
France 30.1 9.9 30.1 7.2
Germany 34.7 11.5 62.6 15.0
Japan 0 0 3.0 0.7
Netherlands 64.2 21.2 38.5 9.2
Canada 70.8 23.4 0.0 0.0
Other 2.0 0.7 1.9 0.5
------ ----- ------ -----
Total $302.6 100.0% $417.2 100.0%
====== ===== ====== =====
The Company has entered into transactions with FPI and 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 equity-linked Medium-Term Notes and
interest rate or currency exposure on surplus cash flow from its portfolio, or
which are intended to mitigate total credit risk.) At August 27, 1999, the
Company had no credit exposure to GSCM and FPI as a result of these
transactions. In addition, the Company had $55 thousand of credit exposure to
Goldman Sachs International as a result of transactions guaranteed. In light of
the level of credit exposure to Group and its affiliates at August 27, 1999, the
Company does not believe that financial information with respect to Group is
material to investors in the Company's equity-linked Medium-Term Notes.
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. In addition, this concentration may increase as the
Company begins to retire or transfer its obligations. At August 27, 1999, the
Company had credit exposure net of collateral exceeding 10% of its total assets
to Royal Bank of Canada and Rabobank Nederland. The combined exposures to these
two banks represented 23% of the Company's total assets. Royal Bank of Canada
and Rabobank Nederland were rated AA- and AAA, respectively, by at least one
internationally recognized credit rating agency at August 27, 1999.
As of August 27, 1999, the Company was a party to Derivative Transactions with a
notional amount of $4.6 billion. Of these, $557 million 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 principal amount is not a measure of market or
credit risk.
- 23 -
<PAGE>
Notional Amount of Derivative Transactions with
Potential Credit Exposure - By Maturity:
-----------------------------------------------
(U.S. dollars in millions)
AUGUST 27, 1999 NOVEMBER 27, 1998
--------------------- ----------------------
$ Percent $ Percent
------ ------- ------ -------
1999 $1 0.0% $1,968 24.7%
2000-2002 794 19.4 1,535 19.3
2003-2005 1,388 33.8 1,913 24.1
2006-2008 1,268 30.9 1,624 20.4
2009-2021 653 15.9 915 11.5
------ ------ ------ ------
Total $4,104 100.0% $7,955 100.0%
====== ====== ====== ======
Notional Amount of Derivative Transactions With
Potential Credit Exposure - By Credit Quality of Obligor:
---------------------------------------------------------
(U.S. dollars in millions)
AUGUST 27, 1999 NOVEMBER 27, 1998
-------------------- ----------------------
S&P Rating: $ Percent $ Percent
----------- ------ ------- ------ -------
AAA $1,087 26.5% $1,437 18.1%
AA+ 83 2.0 433 5.4
AA 300 7.3 300 3.8
AA- 134 3.3 189 2.4
A+ 0 0.0 101 1.3
A 200 4.9 453 5.7
A- and below 25 0.6 124(a) 1.6
Affiliates 2,275 55.4 4,918 61.7
------ ----- ------ -----
Total $4,104 100.0% $7,955 100.0%
====== ===== ====== =====
(a) Includes Derivative Transactions which were collateralized in part and
therefore reflects reduced credit exposure.
Notional Amount of Derivative Transactions With Potential
Credit Exposure - By Principal Underlying Index Type:
---------------------------------------------------------
(U.S. dollars in millions)
AUGUST 27, 1999 NOVEMBER 27, 1998
-------------------- ---------------------
$ Percent $ Percent
------ ------- ------ -------
Interest rate $4,045 98.6% $7,059 88.7%
Currency 10 0.2 860 10.8
Other 49 1.2 36 0.5
------ ----- ------ -----
Total $4,104 100.0% $7,955 100.0%
====== ===== ====== =====
The notional amount of currency, expressed in U.S. dollars at August 27, 1999,
to be exchanged under currency forwards outstanding at August 27, 1999 (see
"Currency" in the table above) was Japanese yen (approximately $10 million).
The fair values of Derivative Transactions as of August 27, 1999 and November
27, 1998 and the average monthly fair values of such instruments for the nine
fiscal months ended
- 24 -
<PAGE>
August 27, 1999 and the fiscal year ended November 27, 1998, computed in
accordance with the Company's netting policy, are as follows:
<TABLE>
<CAPTION>
Fair Value
(U.S. dollars in millions)
--------------------------
AUGUST 27, 1999 NOVEMBER 27, 1998
----------------------- -----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Derivative Transactions
Non-affiliates $46.3 $6.2 $115.0 $89.1
Affiliates 0 28.1 11.9 0.0
</TABLE>
<TABLE>
<CAPTION>
Average Monthly Fair Value
--------------------------
(U.S. dollars in millions)
NINE FISCAL MONTHS ENDED FISCAL YEAR ENDED
AUGUST 27, 1999 NOVEMBER 27, 1998
----------------------- -----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Derivative Transactions
Non-affiliates $85.2 $63.9 $148.2 $122.4
Affiliates 12.7 0.0 12.3 0.0
</TABLE>
The Company is also a general partner of FPI and, as such, would ultimately be
liable for all the obligations of FPI if it were insolvent. At August 27, 1999,
FPI had total liabilities of $129 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 27, 1999, FPI's long-term debt securities were rated Aaa, AAA and
AAA by Moody's, S&P and Fitch, respectively.
At August 27, 1999, the Company had $258 million of cash and cash equivalents
available to meet its payment obligations. The Company believes that this 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, the amount of such
distributions will be limited to ensure the Company's ability to meet its
obligations is not adversely affected.
As of August 27, 1999, the Company had issued and outstanding $40 million face
amount of Nikkei 225 Indexed Notes due December 22, 2000, $36.5 million face
amount of S&P Enhanced Stock Index Growth Notes due August 9, 2002, and $48
million principal amount of 3% Citicorp Exchangeable Notes due August 28, 2002
("Citicorp Notes"). The Company had purchased equity securities and had entered
into Derivative Transactions with affiliates of Group and purchased exchange
traded options to eliminate its market risk on the Notes. The hedging of the
Note linked to a single stock has utilized substantially all of the proceeds
from the issuance of such Note. As discussed above under "--Overview", the
Company does not intend to issue new debt securities.
- 25 -
<PAGE>
On August 23, 1999, the Company repurchased and then retired $36.5 million
aggregate principal amount, or 50% of the amount then outstanding, of the S&P
Enhanced Stock Index Growth Notes due August 9, 2002 for approximately $62.8
million. Prior to repurchase, the notes were held by an affiliate. The Company
recorded no gain or loss on the retirement.
On September 8, 1999, the Company repurchased and then retired $33.5 million
aggregate face amount, or approximately 84% of the amount then outstanding, of
the Nikkei Indexed Notes due December 22, 2000 for $34.3 million. Prior to
repurchase, the notes were held by an affiliate. The Company recorded no gain or
loss on the retirement.
On September 14, 1999, the Company redeemed all of the outstanding 3% Citicorp
Exchangeable Notes due August 28, 2002 for approximately $48 million.
Accordingly, the carrying value of the notes of $45.3 million is included in
current portion of long-term borrowings in the August 27, 1999 statement of
financial condition. The Company recorded a $66 thousand gain on the redemption.
As of August 27, 1999, securities owned consisted of shares of common stock of
Citigroup, Inc. (fair value approximately $49.0 million).
At August 27, 1999, the Company had $161 million of partners' capital. The
Company believes that this level of partners' capital is sufficient for it to
support its operations and current portfolio of Derivative Transactions.
YEAR 2000 READINESS DISCLOSURE
As discussed under "Related Party Transactions" under Note 5 to the Company's
condensed financial statements, 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:
YEAR 2000
With the year 2000 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 (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 may read the year
as 1900. Systems that calculate, compare or sort using the incorrect date may
malfunction.
Group, which for purposes of this discussion of Year 2000 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 currently 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, 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 Year 2000 problems could also have a
material adverse effect on the Company.
- 26 -
<PAGE>
Group has completed the remediation, testing and implementation phases for all
of its systems and its mission-critical technology infrastructure that support
critical business functions. Group completed its internal integration testing
which was intended to validate that Group's systems can successfully perform
critical business functions beginning in January 2000 with no material problems.
Group is also addressing Year 2000 issues that may exist outside its own
technology activities, including its facilities, external service providers and
other third parties with which it interfaces. Group has inventoried and ranked
its customers, business and trading partners, utilities, exchanges,
depositories, clearing and custodial banks and other third parties with which
Group has important financial and operational relationships. Group is continuing
to assess the Year 2000 preparedness of these parties.
By the end of September 1999, Group had participated in 165 "external", i.e.,
industry-wide or point-to-point, tests with exchanges, clearing houses and other
industry utilities, including the "Streetwide" test sponsored by the Securities
Industry Association for its U.S. members and completed in April 1999. Group
successfully completed all of these tests with no material problems. By the end
of October 1999, Group expects to have participated in approximately six
additional industry tests in global markets.
Acknowledging that a Year 2000 failure, whether internal or external, could have
an adverse effect on its ability to conduct day-to-day business, Group is also
engaged in contingency planning. Group's contingency plans for its businesses
are substantially complete. Group is also finalizing its event management
program, which includes the processes that will allow senior management to
closely monitor and respond to events as they occur around the date change.
Group has incurred, and expects to continue to incur, expenses allocable to
internal staff, as well as costs for outside consultants, to complete the
remediation and testing of internally developed systems and the replacement and
testing of third-party products and services, including non-technology products
and services, in order to achieve Year 2000 compliance and in connection with
contingency planning for the date change and related activities. Group currently
estimates that these costs will total approximately $173 million, of which $147
million has been spent to date. These estimates include the cost of technology
personnel but do not include the cost of all non-technology personnel involved
in Group's Year 2000 effort. Group expects to incur the remaining cost of its
Year 2000 program during the remainder of 1999 and early 2000.
If third parties with whom the Company interacts have Year 2000 problems that
are not remedied, the Company could be adversely affected in various ways
including the following: (i) in the case of vendors, disruption of important
services upon which the Company depends, such as telecommunications and
electrical power; (ii) in the case of third-party data providers, 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, failed trade settlements, inability to trade in certain
markets and disruption of funding flows; (iv) in the case of banks and other
lenders, disruption of capital flows potentially resulting in liquidity stress;
and (v) in the case of counterparties and customers, financial and accounting
difficulties for those parties that expose the Company to increased credit risk.
Disruption or suspension of activity in the world's financial markets is also
possible.
- 27 -
<PAGE>
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 resources, the timing and effectiveness of third-party remediation plans and
other factors. The Company 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 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 chip
technology, the results of internal and external testing and the timeliness and
effectiveness of remediation efforts of third parties.
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. As
discussed above in "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview", the Company does not intend to enter
into new Derivative Transactions, issue new debt securities, or otherwise engage
in any new business.
The Company has routinely entered into transactions with GSCM and other
affiliates of Group. The obligations of GSCM are guaranteed by Group and the
obligations of other Group affiliates are also 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.
- 28 -
<PAGE>
The Company anticipates that it will continue to depend upon affiliates of Group
for the performance of essential management, operational, and administrative
functions. The failure of the relevant Group affiliate to perform those
functions could prevent the Company from conducting its business, including
making payments to its counterparties and ensuring compliance with its
operational guidelines. In this regard, Group has informed the Company of its
preparations for Year 2000. A failure by the relevant Group affiliates to be
Year 2000 compliant could materially adversely affect the business, results of
operations and financial condition of the Company. See "-- Year 2000 Readiness
Disclosure" for a discussion of the Company's reliance upon Group and its
affiliates with respect to the Year 2000 issue.
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.
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 an enforceable netting agreement or an enforceable security interest. No
assurance can be given, however, that a court under all circumstances would
enforce the netting agreement or recognize the validity of the security
interest.
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"). 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. No
assurance can be given that the recent actions of the Board of Directors of the
corporate general partner of the Company as described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview" will not adversely affect the Company's credit ratings.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" under Item 2 for a description of the Company's
portfolio composition.
INTEREST-RATE RISK MANAGEMENT. Changes in interest rates will change the present
value of any cash flows which the Company is entitled to receive in the future.
At August 27, 1999, the Company's portfolio of Derivative Transactions is
completely "matched" and therefore not sensitive to interest rate risk.
The Company also has outstanding Medium-Term Notes ("Notes") with an aggregate
principal amount of $124.5 million, the principal payments on which are
determined by reference to the performance of a single equity security or an
equity index (see "--Equity-Price Risk Management" below). The interest rate
component on the Notes has been hedged by entering into Derivative Transactions
with affiliates, thereby eliminating the interest-rate risk in respect of the
Notes.
- 29 -
<PAGE>
The above analysis reflects fully the net interest rate exposure of the Company.
FOREIGN-EXCHANGE RISK MANAGEMENT. Although certain of the interest rate swaps in
the Company's current portfolio require payments a currency 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 revenues will be
affected by changes in the value (expressed in U.S. dollars) of such currencies.
As of August 27, 1999, the Company's sole foreign-exchange exposure is comprised
of its Japanese Yen equity investment in FPI. This exposure is not actively
managed. Based on the value of the Company's investment in FPI at August 27,
1999, its reported revenues would be reduced by $792 thousand if the Company
were to realize no value from its investment. As the Company is unable to
predict the movement of foreign currencies, the Company is unable to predict
whether its reported revenues would be reduced as a result of such exposure.
The above analysis reflects fully the net foreign-exchange exposure of the
Company.
EQUITY-PRICE RISK MANAGEMENT. As of August 27, 1999, the Company has three
equity-linked notes outstanding with principal amount of $124.5 million. The
Company has purchased equity securities, has entered into various Derivative
Transactions with affiliates and has purchased exchange traded options to
eliminate its market risk on the Notes. The Company's exposure to fluctuations
in the market price of the equity securities, exchange traded options and
Derivative Transactions with affiliates that it holds is offset by changes in
its liability for the face or principal amount of the equity-linked notes. As a
result, fluctuations in the prices for such securities and options will not
result in a reduction of the Company's reported revenues. As discussed above in
"-- Interest-Rate Risk Management", the interest rate component on the notes has
been hedged by entering into Derivative Transactions with affiliates, thereby
eliminating the remaining market risk in respect of the Notes.
The above analysis reflects fully the net equity-price exposure of the Company.
COMMODITY-PRICE RISK MANAGEMENT. The Company had no positions sensitive to
commodity-price risk as of August 27, 1999.
PART II: OTHER INFORMATION
- --------------------------
ITEM 1: LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding.
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
- 30 -
<PAGE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on August 26, 1999,
announcing its repurchase and cancellation of $36.5 million aggregate principal
amount of the Company's S&P Enhanced Stock Index Growth Notes due August 9,
2002.
- 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, 1999 By: /s/ C. Douglas Fuge
------------------------------------
C. Douglas Fuge
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.
GS FINANCIAL PRODUCTS U.S., L.P.
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FOR THE THREE FISCAL FOR THE NINE FISCAL
MONTHS ENDED MONTHS ENDED
-------------------- -------------------
(Unaudited)
(U.S. dollars in thousands) August 27, 1999 August 28, 1998 August 27, 1999 August 28, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Earnings:
Income (loss) from continuing
Operations before income taxes $1,627 $1,618 $4,243 $5,663
Add: Fixed charges 2,622 4,195 8,076 12,960
------------------------------------------------------------------------
Earnings as adjusted $4,249 $5,813 $12,319 $18,623
Fixed charges:
Interest expense $2,602 $4,137 $7,999 $12,791
Debt amortization expense 20 58 77 169
Interest portion of rent expense 0 0 0 0
------------------------------------------------------------------------
Total fixed charges $2,622 $4,195 $8,076 $12,960
Ratio of earnings to fixed charges 1.6x 1.4x 1.5x 1.4x
</TABLE>
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.
<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 27, 1999.
</LEGEND>
<CIK> 0000914720
<NAME> GS Financial Products U.S., L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-26-1999
<PERIOD-END> Aug-27-1999
<CASH> 257,734
<SECURITIES> 49,048
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 354,697
<CURRENT-LIABILITIES> 45,312
<BONDS> 112,326
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 354,697
<SALES> 0
<TOTAL-REVENUES> 6,195
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,952
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,999
<INCOME-PRETAX> 4,243
<INCOME-TAX> 170
<INCOME-CONTINUING> 4,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,073
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>
Notes
Balances relating to derivative transactions are not reflected in the above
figures.
</FN>
</TABLE>
