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 February 26, 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
------.
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
Form 10-Q
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION Page No.
- ------------------------------- --------
<S> <C>
Item 1: Financial Statements (Unaudited):
Condensed Statements of Income for the Three Fiscal Months
Ended February 26, 1999 and February 27, 1998 3
Condensed Statements of Financial Condition as of February 26, 1999
and November 27, 1998 4
Condensed Statement of Changes in Partners' Capital for the Three
Fiscal Months Ended February 26, 1999 5
Condensed Statements of Cash Flows for the Three Fiscal Months
Ended February 26, 1999 and February 27, 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 20
Item 3: Quantitative and Qualitative Disclosures About Market Risk 30
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 33
</TABLE>
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<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
---------------------------------
FEBRUARY 26, 1999 FEBRUARY 27, 1998
----------------- -----------------
<S> <C> <C>
REVENUES:
Intermediation (loss) profit $(16) $218
Interest 4,641 5,553
Equity in loss of affiliate 0 (2)
------ ------
Total revenues 4,625 5,769
Interest expense 2,740 3,312
------ ------
Revenues, net of interest expense 1,885 2,457
EXPENSES:
Operating 638 376
------ ------
Income before taxes 1,247 2,081
Income taxes 50 84
------ ------
Net Income $1,197 $1,997
====== ======
The accompanying notes are an integral part of the unaudited condensed financial statements.
-3-
</TABLE>
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(U.S. dollars in thousands)
(Unaudited)
---------
<TABLE>
<CAPTION>
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $181,790 $293,636
Short-term Investments 115,905 0
Securities owned, at fair value 44,026 38,828
Derivative transactions, at fair value:
Affiliate 14,509 11,865
Non-affiliate 94,536 114,958
Investment in affiliate 831 804
Other assets 479 703
------- -------
Total assets $452,076 $460,794
======== ========
LIABILITIES AND PARTNERS' CAPITAL:
Current portion of long-term borrowings $3,441 $2,573
Derivative transactions, at fair value:
Non-affiliate 73,118 89,078
Long-term borrowings 214,322 209,033
Other liabilities and accrued expenses 2,652 2,791
-------- --------
Total liabilities 293,533 303,475
Commitments and contingencies
Partners' capital:
Limited Partners 157,743 156,525
General Partner 800 794
-------- --------
Total partners' capital 158,543 157,319
-------- --------
Total liabilities and partners' capital $452,076 $460,794
======== ========
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 THREE FISCAL MONTHS ENDED FEBRUARY 26, 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 6 1,191 1,197
Foreign currency translation adjustment 0 27 27
-------- -------- --------
Balance, February 26, 1999 $800 $157,743 $158,543
======== ======== ========
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 THREE FISCAL MONTHS ENDED
---------------------------------
FEBRUARY 26, 1999 FEBRUARY 27, 1998
Cash flows from operating activities: ----------------- -----------------
<S> <C> <C>
Net Income $1,197 $1,997
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in loss of affiliate 0 2
Unrealized gain on securities owned (5,198) (5,449)
Increase in long-term borrowings due to
embedded derivative transactions, net 6,157 6,329
(Increases) decreases in operating assets:
Derivative transactions, at fair value:
Affiliate (2,644) 13,609
Non-affiliate 20,422 11,730
Other assets 224 (101)
(Decreases) increases in operating liabilities:
Derivative transactions, at fair value:
Non-affiliate (15,960) (18,608)
Other liabilities and accrued expenses (139) 4,072
----------- ---------
Net cash provided by operating activities 4,059 13,581
Cash flows from investing activities:
Short-term investments (115,905) 0
----------- ---------
Net cash used in investing activities (115,905) 0
----------- ---------
Net (decrease) increase in cash and cash
equivalents (111,846) 13,581
----------- ---------
Cash and cash equivalents, beginning of period 293,636 291,375
----------- ---------
Cash and cash equivalents, end of period $181,790 $304,956
=========== =========
Supplemental disclosure of cash flow information:
Interest paid $1,239 $1,780
Income taxes paid 125 0
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 an affiliate of the Company) 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. 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). 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 business and 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 fiscal quarter
of 1999. In addition, this lack of activity is expected to have a
significant negative effect on the Company's results of operations for the
second fiscal quarter of 1999, and it may affect later quarters depending
upon the timing of the completion of the review and the implementation of
any findings.
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 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
-7-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
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 data 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.
SHORT-TERM INVESTMENTS
Short-term investments are short-term, highly liquid investments and
include time deposits at banks with original maturities of six months or
less and are carried at cost plus accrued interest, which approximates
market value.
FINANCIAL INSTRUMENTS
The Company's Derivative Transactions and securities owned are recorded on
a trade date basis.
Securities owned are recorded at fair value. Derivative Transactions are
recorded at estimated fair value. As a result, due to the nature of the
Company's activities, a
-8-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
substantial portion of the intermediation profit from credit enhancing new
Derivative Transactions may be recognized upon entering into such
transactions. The Company did not recognize such intermediation profit for
the fiscal quarters ended February 26, 1999 and February 27, 1998 because
it did not enter into any new transactions due to the aforementioned
review.
Intermediation losses were $16 thousand for the fiscal quarter ended
February 26, 1999. The Company recognized a loss of $111 thousand from a
decrease in the present value of the expected cash flows of the Company's
portfolio due to a reduction in the time remaining until those cash flows
are realized (including the impact of all hedges). This was offset in part
by $95 thousand of other intermediation profit from amortization of
performance guarantee fees. The intermediation profit for the fiscal
quarter ended February 27, 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 February 26, 1999 and February 27, 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 February 26, 1999, the Company had no Credit Exposure (as defined in
Note 4 below) exceeding 10% of its total assets to any single counterparty.
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 THREE FISCAL MONTHS ENDED
---------------------------------
FEBRUARY 26, 1999 FEBRUARY 27, 1998
------------------ -----------------
<S> <C> <C>
Net income $1,197 $1,997
Other comprehensive income:
Foreign currency translation adjustment 27 10
------ ------
Total comprehensive income $1,224 $2,007
====== ======
</TABLE>
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 on the
balance sheet 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 February 26, 1999 and November 27, 1998, securities owned consisted
of shares of common stock of Oxford Health Plans, Inc. (fair value
approximately $3.0 million and $1.9 million, respectively) and shares of
common stock of Citigroup, Inc. (fair value approximately $41.0 million and
$36.9 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
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 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 in "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 in "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.
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 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 February 26,
1999 and November 27, 1998, the Company's
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<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
aggregate Credit Exposure in respect of Derivative Transactions was
approximately $97 million and approximately $124 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 $3 million related to Derivative
Transactions as of February 26, 1999.
The Company also limits its Credit Exposure by observing certain
limitations on new Derivative Transactions. If its Credit Exposure exceeds
such limits, the Company will not enter into any transaction which
increases that risk. The calculation of these limitations incorporates the
net assets of the Company's general partner which is ultimately liable for
the Company's obligations (see Note 8).
A summary of the notional or contractual amounts ($ in millions) of the
Company's Derivative Transactions by principal characteristic follows. It
should be noted that notional principal amount is not a measure of market
or credit risk.
<TABLE>
<CAPTION>
FEBRUARY 26, 1999 NOVEMBER 27, 1998
Non-affiliates ----------------- -----------------
<S> <C> <C>
Interest rate swap agreements $2,358 $2,385
Currency options written 123 304
Currency options purchased 108 108
Interest rate options written 805 826
Interest rate options purchased 1,394 1,450
Currency and other swap agreements 162 162
Foreign currency forwards 20 66
Equity options purchased 41 37
Affiliates
Interest rate swap agreements $3,361 $3,413
Currency options written 108 108
Currency options purchased 123 304
Interest rate options written 1,394 1,450
Interest rate options purchased 805 826
Currency and other swap agreements 312 312
Foreign currency forwards 19 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.
-12-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
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 February 26, 1999 and November 27, 1998 and the average
monthly fair values of such instruments for the fiscal quarter ended
February 26, 1999 and the fiscal year ended November 27, 1998, computed in
accordance with the Company's netting policy, are as follows:
<TABLE>
<CAPTION>
(U.S. dollars in millions) AS OF FEBRUARY 26, 1999 AS OF NOVEMBER 27, 1998
-------------------------- -------------------------- ----------------------------
Assets Liabilities Assets Liabilities
------- ----------- --------- -----------
Derivative Transactions
-----------------------
<S> <C> <C> <C> <C>
Non-affiliates $94.5 $73.1 $115.0 $89.1
Affiliates 14.5 0.0 11.9 0.0
</TABLE>
<TABLE>
<CAPTION>
Average Monthly Fair Value
--------------------------
(U.S. dollars in millions)
FISCAL QUARTER ENDED FISCAL YEAR ENDED
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
Assets Liabilities Assets Liabilities
-------- ----------- --------- -----------
Derivative Transactions
-----------------------
<S> <C> <C> <C> <C>
Non-affiliates $111.6 $82.0 $148.2 $122.4
Affiliates 8.8 0.0 12.3 0.0
</TABLE>
5. RELATED PARTY TRANSACTIONS:
--------------------------
In the ordinary course of business, the Company enters into hedging and
performance guarantee transactions with affiliates. Through February 26,
1999, substantially all of the Company's Derivative Transactions involved
some degree of hedging with affiliates.
In accordance with agreements with certain affiliates, technical and
administrative services may be provided to the Company for an amount
representing 105% of the cost incurred. In addition, the Company has
entered into a custodian and space sharing agreement with 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
fiscal quarters ended February 26, 1999 and February 27, 1998,
approximately $353 thousand and $38 thousand, respectively, were charged
for such services. The significant increase is primarily due to additional
expenses billed to the Company as a result of the aforementioned review.
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.
13
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
FPI is engaged in a business similar to that of the Company. As of February
26, 1999, its assets consist principally of cash and cash equivalents and
equity securities of entities organized under Japanese 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 February 26, 1999, FPI had total liabilities of $124
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 February 26, 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):
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
1999 1998
---- ----
Total assets $158 $170
Total liabilities 124 137
Partners' capital 34 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 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 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
14
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
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 fiscal quarter ended February 26, 1999, interest expense on Notes
linked to a single stock was approximately $1 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>
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
<S> <C> <C>
Nikkei Indexed Notes due December 22, 2000(1) $49,993 $49,818
S&P Enhanced Stock Index Growth Notes due August 9, 2002(2) 120,313 116,399
7% Mandatorily Exchangeable Notes due July 23, 1999(3) 3,441 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) 44,016 42,816
--------- -----------
Total long-term borrowings 217,763 211,606
Current portion of long-term borrowings(3) 3,441 2,573
---------- -----------
Long-term borrowings, less current portion $214,322 $209,033
========== ===========
<FN>
(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 $14.3 million as at February 26, 1999
and $14.7 million as at November 27, 1998.
(2) The $73 million face amount 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 $61.6 million as at February 26, 1999 and $58.6 million as at
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.
(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. 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 $3.4 million
is included in current portion of long-term borrowings in the February 26,
1999 statement of financial condition. The principal repayment amount at
maturity 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 holders of such notes 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 ($10.1) million and
($10.9) million as at February 26, 1999 and November 27, 1998,
respectively.
(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 3,637.5 shares 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 of ($0.1) million and ($0.7)
million as at February 26, 1999 and November 27, 1998, respectively.
</FN>
</TABLE>
-15-
<PAGE>
GS FINANCIAL PRODUCTS U.S., L.P.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
-----------
Including the impact of the Derivative Transactions, the weighted average
interest rate for the Notes was 6.28% as of February 26, 1999 and 5.99% as
of November 27,1998.
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.
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
February 26, 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
The Company is a derivative products company engaged in the business of
entering into, as principal or guarantor, a variety of types of Derivative
Transactions, principally interest rate swaps, interest rate options (e.g.,
interest rate caps, interest rate floors and options on interest rate
swaps), currency swaps and options, index swaps, commodity swaps and
options, and forward contracts. Generally, the Company enters into or
guarantees Derivative Transactions in situations where two or more
counterparties (typically including an affiliate of the Company) 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.
Since October 1997, Group has undertaken a review of the business and
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 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 fiscal quarter
of 1999. In addition, this lack of activity is expected to have a
significant negative effect on the Company's results of operations for the
second fiscal quarter of 1999, and it may affect later quarters depending
upon the timing of the completion of the review and the implementation of
any findings.
At February 26, 1999, the Company had entered into or guaranteed $10.1
billion notional amount of interest rate swaps and options, $973 million
notional amount of currency options, forwards and swaps and $41.0 million
notional amount of equity options with a total of 33 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.
-17-
<PAGE>
Substantially all of the Company's Derivative Transactions involved some
degree of hedging with affiliates. As of February 26, 1999, the Company has
entered into or guaranteed $6.1 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 February 26, 1999, the Company had equity-linked Medium-Term Notes
outstanding with a carrying value of $218 million. Subject to the outcome
of the review of the Company's business and operations discussed above, the
Company may issue equity-linked Medium-Term Notes in the future. The
Company intends to utilize substantially all 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.
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.
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 fiscal quarters
ended February 26, 1999 and February 27, 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.
THREE FISCAL MONTHS ENDED FEBRUARY 26, 1999 VERSUS THREE FISCAL MONTHS
ENDED FEBRUARY 27, 1998
As described in "-- Overview" above, Group has undertaken a review of the
operations of the Company and certain other affiliates of Group engaged in
the derivative products
-18-
<PAGE>
business. Since the commencement of this review, the Company has not
entered into nor guaranteed any new Derivative Transactions. This lack of
activity by the Company has negatively affected the Company's results of
operations in the first quarter of both fiscal 1999 and fiscal 1998.
For the fiscal quarter ended February 26, 1999, 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 23.3% compared to the fiscal quarter ended
February 27, 1998. The decrease is primarily attributable to a reduction in
interest income earned on cash balances invested in short-term time
deposits, as short-term interest rates were lower over the relevant
periods. In addition, the Company recognized $0.2 million in the fiscal
quarter ended February 27, 1998 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 thereto. The Company did not recognize any
such revenues during the fiscal quarter ended February 26, 1999. During the
period, the Company did not enter into or guarantee any new Derivative
Transactions. The Company incurred interest expense of $2.7 million during
the fiscal quarter ended February 26, 1999 relating to equity-linked
Medium-Term Notes.
For the fiscal quarter ended February 27, 1998, the Company reported
revenues, net of interest expense of $2.5 million, consisting principally
of net interest income of $2.2 million. During the period, the Company did
not enter into or guarantee any new Derivative Transactions. The Company
incurred interest expense of $3.3 million during the fiscal quarter ended
February 27, 1998 relating to equity-linked Medium-Term Notes.
Interest income for the fiscal quarter ended February 26, 1999 was $4.6
million or 16.4% 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. This decrease was the result
of the reduction in the size of the hedges of such Notes, which is
consistent with the reduced principal outstanding of such Notes as compared
to the fiscal quarter of 1998. As a result of the aforementioned review by
Group, the Company did not earn any initial intermediation profit during
the fiscal quarter ended February 26, 1999. Intermediation losses were $16
thousand for the fiscal quarter ended February 26, 1999 compared to
intermediation profit of $218 thousand in the first fiscal quarter of 1998.
The Company recognized a loss of $111 thousand from a decrease in the
present value of the expected cash flows of the Company's portfolio due to
a reduction in the time remaining until those cash flows are realized
(including the impact of all hedges). This was offset in part by $95
thousand of intermediation profit from amortization of performance
guarantee fees. Interest expense of $2.7 million for the fiscal quarter
ended February 26, 1999 decreased from the $3.3 million incurred in the
same fiscal period in 1998. This decrease was the result of the reduction
in the long-term debt outstanding. The effective weighted average interest
rate for long-term borrowings was 6.28% for the fiscal quarter ended
February 26, 1999.
Operating expenses for the three fiscal months ended February 26, 1999 were
$638 thousand, compared to $376 thousand in the fiscal quarter ended
February 27, 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
-19-
<PAGE>
$353 thousand and $38 thousand for the fiscal quarters ended February 26,
1999 and February 27, 1998, respectively.
Net income of $1.2 million for the fiscal quarter ended February 26, 1999
decreased by 40.0% or $800 thousand from the fiscal quarter ended February
27, 1998 net income of $2.0 million. The decrease is primarily attributable
to a reduction in interest income earned on cash balances invested in
short-term time deposits, as short-term interest rates were lower over the
relevant periods. In addition, the Company recognized $0.2 million in the
fiscal quarter ended February 27, 1998 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 thereto. The Company did
not recognize any such revenues during the fiscal quarter ended February
26, 1999. Total assets as of February 26, 1999 were $452 million,
consisting principally of cash and cash equivalents, securities owned and
Derivative Transactions, a decline of 1.9% from total assets as of November
27, 1998.
Net cash provided by operating activities during the fiscal quarter ended
February 26, 1999 was $4.1 million, which primarily reflected receipts of
cash which reduced the Company's net investment in Derivative Transactions
and net income. In comparison, for the fiscal quarter ended February 27,
1998, net cash provided by operating activities was $13.6 million and
principally reflected receipts of cash which reduced the Company's net
investment in Derivative Transactions. Net cash used in investing
activities was $115.9 million, reflecting the Company's investment in
short-term time deposits.
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 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 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
-20-
<PAGE>
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
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 February 26, 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
February 26, 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 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.
<TABLE>
<CAPTION>
Current Credit Exposure - By S&P Rating of Obligor:
--------------------------------------------------
(U.S. dollars in millions)
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
S&P Rating: $ Percent $ Percent
----------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
AAA $89.8 22.7% $104.5 25.0%
AA+ 80.1 20.3 78.4 18.8
AA 25.0 6.3 36.9 8.8
AA- 173.2 43.9 158.4 38.0
A+ 16.3 4.1 24.9 6.0
A 9.0 2.3 11.1 2.7
A- and below 1.5 0.4 3.0 0.7
--------------- -------------- ------------- -------------
Total $394.9 100.0% $417.2 100.0%
=============== ============== ============= =============
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
Current Credit Exposure - By Country of Obligor's Headquarters:
--------------------------------------------------------------
(U.S. dollars in millions)
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
Country: $ Percent $ Percent
------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
U.S. $218.9 55.4% $239.9 57.5%
Switzerland 41.2 10.4 41.2 9.9
France 30.1 7.6 30.1 7.2
Germany 39.2 10.0 62.6 15.0
Japan 1.5 0.4 3.0 0.7
Netherlands 62.5 15.8 38.5 9.2
Other 1.5 0.4 1.9 0.5
------------ ------------ ----------- ------------
Total $394.9 100.0% $417.2 100.0%
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Current Credit Exposure - By Obligor Industry:
--------------------------------------------
(U.S. dollars in millions)
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
Industry: $ Percent $ Percent
--------- ------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
Banks $314.0 79.5% $311.1 74.6%
Financials 29.0 2.1 39.1 9.4
Industrials 8.4 7.4 10.6 2.5
Government Agencies 43.5 11.0 56.4 13.5
----------- ------------ --------- ----------
Total $394.9 100.0% $417.2 100.0%
============ ============ ========= ==========
</TABLE>
The Company has entered into and, subject to the conclusion and findings of
Group's review of the Company's operations, 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. (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
February 26, 1999, the Company had $12.8 million and $1.7 million of credit
exposure to GSCM and FPI, respectively, as a result of these transactions.
In addition, the Company had $1.8 million of credit exposure to Goldman
Sachs International as a result of transactions guaranteed. Due to the
level of credit exposure to Group or its affiliates at February 26, 1999,
the Company does not believe that financial information with respect to
Group is material to investors in the Company's debt securities.
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 February 26, 1999,
the Company had no credit exposure net of collateral exceeding 10% of its
total assets to any single counterparty. The Company's largest credit
22
<PAGE>
exposure to any one counterparty was $41 million, or 9% of total assets, to
Union Bank of Switzerland. However, Union Bank of Switzerland was rated AA+
by S&P at February 26, 1999, and the Company currently does not anticipate
any loss as a result of this exposure. Additionally, since the Company's
credit exposure to any one counterparty does not exceed the Company's net
worth, the Company does not consider its credit exposure excessive.
As of February 26, 1999, the Company was a party to Derivative Transactions
with a notional amount of $11.1 billion. Of these, $3.6 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 principal
amount is not a measure of market or credit risk.
<TABLE>
<CAPTION>
Notional Amount of Derivative Transactions with
-----------------------------------------------
Potential Credit Exposure - By Maturity:
---------------------------------------
(U.S. dollars in millions)
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
$ Percent $ Percent
--------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
1998-1999 $1,726 22.8% $ 1,968 24.7%
2000-2002 1,455 19.3 1,535 19.3
2003-2005 1,874 24.8 1,913 24.1
2006-2008 1,624 21.5 1,624 20.4
2009-2021 876 11.6 915 11.5
--------- ---------- ========= -----
Total $7,555 100.0% $7,955 100.0%
========= =========== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Notional Amount of Derivative Transactions With
---------------------------------------------------
Potential Credit Exposure - By Credit Quality of Obligor:
--------------------------------------------------------
(U.S. dollars in millions)
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
S&P Rating: $ Percent $ Percent
---------- ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C>
AAA $1,392 18.4% $1,437 18.1%
AA+ 433 5.7 433 5.4
AA 300 4.0 300 3.8
AA- 134 1.8 189 2.4
A+ 101 1.3 101 1.3
A 453 6.0 453 5.7
A- and below 124(a) 1.7 124(a) 1.6
Affiliates 4,618 61.1 4,918 61.7
---------- -------- --------- --------
Total $7,555 100.0% $7,955 100.0%
========== =========== ========= ========
<FN>
(a) Includes Derivative Transactions which were collateralized in part and therefore reflects reduced credit exposure.
</FN>
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
Notional Amount of Derivative Transactions With Potential
---------------------------------------------------------
Credit Exposure - By Principal Underlying Index Type:
----------------------------------------------------
(U.S. dollars in millions)
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
$ Percent $ Percent
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Interest rate $6,899 91.3% $ 7,059 88.7%
Currency 615 8.1 860 10.8
Other 41 0.6 36 0.5
----------- ----------- --------- ------------
Total $7,555 100.0% $ 7,955 100.0%
=========== =========== ========= ============
</TABLE>
The notional amount of currencies, expressed in U.S. dollars at February
26, 1999, to be exchanged under currency options and currency swaps
outstanding at February 26, 1999 (see "Currency" in the table above) were
U.S. dollars ($150 million), Japanese yen (approximately $19 million),
British pounds (approximately $15 million), Dutch guilders (approximately
$162 million), European currency units (approximately $107 million), and
German marks (approximately $162 million).
The fair values of Derivative Transactions as of February 26, 1999 and
November 27,1998 and the average monthly fair values of such instruments
for the three fiscal months ended February 26, 1999 and the fiscal year
ended November 27, 1998, computed in accordance with the Company's netting
policy, are as follows:
<TABLE>
<CAPTION>
(U.S. dollars in millions) FEBRUARY 26, 1999 NOVEMBER 27, 1998
-------------------------- ----------------- -----------------
Assets Liabilities Assets Liabilities
Derivative Transactions ------- ----------- -------- -----------
-----------------------
<S> <C> <C> <C> <C>
Non-affiliates $94.5 $73.1 $115.0 $89.1
Affiliates 14.5 0.0 11.9 0.0
</TABLE>
<TABLE>
<CAPTION>
Average Monthly Fair Value
---------------------------
(U.S. dollars in millions)
FISCAL QUARTER ENDED FISCAL YEAR ENDED
FEBRUARY 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
Assets Liabilities Assets Liabilities
Derivative Transactions -------- ------------ --------- -----------
-----------------------
<S> <C> <C> <C> <C>
Non-affiliates $111.6 $82.0 $148.2 $122.4
Affiliates 8.8 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 February
26, 1999, FPI had total liabilities of $124 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 February 26, 1999, FPI's long-term debt securities were rated Aaa,
AAA and AAA by Moody's, S&P and Fitch, respectively.
-24-
<PAGE>
At February 26, 1999, the Company had $182 million of cash and cash
equivalents available to meet its payment obligations. The Company believes
that such level of cash and cash equivalents is sufficient to enable it to
meet all of its current payment obligations. The Company anticipates that
it will make distributions to partners in the future. However, the amount
of such distributions will be limited to ensure the Company's ability to
meet its obligations is not adversely affected.
Subject to the outcome of Group's review of the operations of the Company
as described above under "-- Overview", 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
February 26, 1999, 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 initial
principal amount 7% Mandatorily Exchangeable Notes due July 23, 1999
(Subject to Mandatory Exchange into Shares of Common Stock of Oxford Health
Plans, Inc.) ("Oxford Notes"), and $48 million principal amount of 3%
Citicorp Exchangeable Notes due August 28, 2002 ("Citicorp Notes"). The
single stock related Note issuances (i.e., the Oxford Notes and Citicorp
Notes) 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. The hedging of equity-linked
Notes has utilized substantially all of the proceeds from the issuance of
such Notes. Subject to the completion of the review of the Company's
business and operations discussed above, the Company may continue to issue
equity-linked Notes. As a result, the Company's leverage may 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.
As of February 26, 1999, securities owned consisted of shares of common
stock of Oxford Health Plans, Inc. (fair value approximately $3.0 million)
and shares of common stock of Citigroup, Inc. (fair value approximately
$41.0 million).
Partners' capital is not subject to withdrawal or redemption on demand by
the partners. All net income during the three month periods ending February
26, 1999 and February 27, 1998, respectively, was retained in partners'
capital. At February 26, 1999, the Company had $159 million of partners'
capital. The Company believes that this level of partners' capital is
sufficient for it to expand both the type and the volume of its Derivative
Transactions.
-25-
<PAGE>
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 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, the Year 2000 issue would 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 would also have a material adverse effect on
the Company.
Group's Year 2000 plans are based on a five phase approach, which includes
awareness; inventory, assessment and planning; remediation; testing; and
implementation. The awareness phase (in which Group defined the scope and
components of the problem, its methodology and approach and obtained senior
management support and funding) was completed in September 1997. Group also
completed the inventory, assessment and planning phase for its systems in
September 1997. By the end of March 1999, Group had completed the
remediation, testing and implementation phases for 99% of its
mission-critical systems. Group plans to complete these three phases for
the remaining 1% by the end of June 1999. In March 1999, Group completed
the first cycle of its internal integration testing with respect to
critical securities and transaction flows. This cycle, which related to
U.S. products, was completed successfully with no material problem. The
remaining cycle, which will relate primarily to non-U.S. products, is to be
completed in June 1999. This testing is intended to validate that Group's
systems can successfully perform critical business functions beginning in
January 2000. With respect to its non-mission-critical systems, Group
expects to complete its Year 2000 efforts during calendar 1999.
For technology products that are supplied by third-party vendors, Group has
completed an inventory, ranked products according to their importance, and
developed a strategy for achieving Year 2000 readiness for substantially
all non-compliant versions of software and hardware. While this process
included collecting information from vendors, Group is not
-26-
<PAGE>
relying solely on vendors' verifications that their products are Year 2000
compliant or ready. As of March 31, 1999, Group had substantially completed
testing and implementation of vendor-supplied technology products that it
considers mission-critical. With respect to telecommunications carriers,
Group is relying on information provided by these vendors as to whether
they are Year 2000 compliant because these vendors have indicated that they
will not test with individual companies.
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 customers,
business and trading partners and other third parties.
By the end of March 1999, Group had participated in approximately 115
"external", i.e., industry-wide or point-to-point, tests with exchanges,
clearing houses and other industry utilities, as well as the "Beta" test
sponsored by the Securities Industry Association ("SIA") for its U.S.
members in July 1998. Group successfully completed all of these tests with
no material problems. By the end of June 1999, Group expects to have
participated in approximately 75 additional external tests, including the
SIA "Streetwide" test scheduled to be completed in April 1999 and other
major industry tests in those global markets where Group conducts
significant business.
If third parties with whom the Company interacts have Year 2000 problems
that are not remedied, problems could include 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 and lost business. Disruption or
suspension of activity in the world's financial markets is also possible.
Acknowledging that a Year 2000 failure, whether internal or external, could
have an adverse effect on the ability to conduct day-to-day business, Group
is employing a comprehensive and global approach to contingency planning.
Group's contingency planning objective is to identify potential system
failure points that support processes that are critical to Group's mission
and to develop contingency plans for those failures that may reasonably be
expected to occur, with the general goal of ensuring, to the maximum extent
practical, that minimum acceptable levels of service can be maintained by
Group. In the event of system failures, Group's contingency plans will not
guarantee that existing levels of service will be fully maintained,
especially if these failures involve external systems or processes over
which Group or which the Company has little or no direct control or involve
multiple
-27-
<PAGE>
failures across a variety of systems. Group anticipates that contingency
plans covering the businesses of the Company will be completed by September
30, 1999.
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. Group
currently estimates that these costs will total approximately $150 million,
a substantial majority of which has been spent to date. These estimates
include the cost of technology personnel but do not include the cost of
most non-technology personnel involved in Group's Year 2000 effort. The
remaining cost of Group's Year 2000 program is expected to be incurred
during the remainder of 1999 and early 2000.
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. 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.
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. Further, Group has been engaged in a review of the Company's
operations since
-28-
<PAGE>
October 1997 and there can be no assurances as to the outcome of this
review. See "-- Overview" for a discussion of the ongoing 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.
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 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 "-- Overview" 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.
One of the ways the Company expects to make profits, if any, is from the
spread between hedge transactions, which spread is expected to be a small
percentage of the notional amount of such transactions. The size of the
spread between transactions is subject to market forces and may be
materially adversely impacted by competitive or other economic conditions.
The Company's 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
-29-
<PAGE>
would materially adversely impact its ability to compete successfully. The
Company's ratings may be changed or withdrawn at any time by either of the
Rating Agencies, based upon factors selected solely by the Rating Agencies.
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. As a result, the Company may experience fluctuations in
reported revenues. The aggregate hypothetical reduction in reported
revenues from the Company's portfolio as of February 26, 1999 that would
have resulted from a hypothetical 100 basis point increase in interest
rates across the entire yield curve is estimated to be $6 thousand. Because
the Company is unable to predict the movement of interest rates, the
Company is unable to predict whether its reported revenues would be reduced
as a result of such exposure.
In addition, the Company has oustanding Medium-Term Notes ("Notes") with an
aggregate principal amount of $175 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.
FOREIGN-EXCHANGE RISK MANAGEMENT. 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 revenues will be affected by changes in the value
(expressed in U.S. dollars) of such currencies. However, as of February 26,
1999, the Company does not consider its exposure to currencies other than
the U.S. dollar to be material to its financial condition. Based on the
value of the Company's non-U.S. dollar net assets as of February 26, 1999,
its reported revenues would be reduced by $747 thousand if the Company were
to realize no value from such currencies. 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.
EQUITY-PRICE RISK MANAGEMENT. As of February 26, 1999, the Company has
equity-linked Notes outstanding with an aggregate principal amount of $175
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. Fluctuations in the prices for such
securities and options will not result in a reduction of the Company's
-30-
<PAGE>
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.
COMMODITY-PRICE RISK MANAGEMENT. The Company had no positions sensitive to
commodity-price risk as of February 26, 1999.
PART II: OTHER INFORMATION
--------------------------
ITEM 1: LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
The partners of Group have approved a plan for an initial public offering,
which would likely occur in the early summer of 1999 and represent between
10% and 15% of the firm's common equity. Under the plan, Group would be
reorganized into corporate form and the corporate successor, to be known as
The Goldman Sachs Group, Inc. ("GS Inc."), would assume the liabilities and
obligations of Group. The reorganization would occur at the same time as
completion of the equity offering. GS Inc. has filed a registration
statement with the Securities and Exchange Commission relating to the
equity offering. The registration statement outlines Group's plan to
reorganize. It is not certain that an initial public offering will occur or
what the timing or final terms of any such transactions would be or whether
the offering and reorganization will have any effect on any debt securities
of the Company.
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
The Company filed a Report on Form 8-K, dated December 7, 1998, announcing
the appointment of C. Douglas Fuge, Kenneth A. Miller and Noel B. Donohoe
as directors of the Company's corporate general partner, GS Financial
Products US Co. ("GSFPUS Co."), and the concurrent removals of Richard E.
Witten, Kipp M. Nelson and Oki Matsumoto as directors thereof.
The Company filed a Report on Form 8-K, dated February 23, 1999, announcing
the appointment of C. Douglas Fuge as President, Principal Financial
Officer and Principal Accounting Officer of GSFPUS Co., the appointment of
Denis Dennehy and Jay J. Ryan as Vice Presidents of GSFPUS Co., the
appointment of Brian J. Lee as Treasurer of GSFPUS Co., the appointment of
Patrick E. Harris as Secretary of GSFPUS Co., and the removal of
-31-
<PAGE>
Greg Swart as President of GSFPUS Co., Daphine Campbell as Vice President
of GSFPUS Co. and Amy Furman as Secretary of GSFPUS Co.
The Company filed a Report on Form 8-K, dated February 25, 1999, relating
to the audited balance sheets of GSFPUS Co. as of November 27, 1998 and
November 28, 1997.
-32-
<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: April 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.
-33-
GS FINANCIAL PRODUCTS U.S., L.P.
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FISCAL QUARTERS ENDED
--------------------------------------------
(Unaudited U.S. dollars in thousands) February 26, 1999 February 27, 1998
----------------- -----------------
Earnings:
<S> <C> <C>
Income from continuing operations
before income taxes $1,247 $2,081
Add: Fixed charges 2,756 3,402
-------- ---------
Earnings as adjusted $4,003 $5,483
Fixed charges:
Interest expense $2,740 $3,312
Debt amortization expense 16 90
Interest portion of rent expense 0 0
-------- ---------
Total fixed charges $2,756 $3,402
Ratio of earnings to fixed charges 1.5x 1.6x
</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.
-34-
<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
three fiscal months ended February 26, 1999.
</LEGEND>
<CIK> 0000914720
<NAME> GS Financial Products U.S., L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-26-1999
<PERIOD-END> FEB-26-1999
<CASH> 181,790
<SECURITIES> 44,026
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 115,905
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 452,076
<CURRENT-LIABILITIES> 3,441
<BONDS> 214,322
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 452,076
<SALES> 0
<TOTAL-REVENUES> 4,625
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 638
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,740
<INCOME-PRETAX> 1,247
<INCOME-TAX> 50
<INCOME-CONTINUING> 1,197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,197
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>
NOTES
-----
Balances relating to derivative transactions are not reflected in the above figures.
</FN>
</TABLE>
