Registration Statement No. 000-23745
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Amendment No. 2 to Form 10
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GENERAL FORM FOR REGISTRATION
OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act of 1934
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BNP U.S. FUNDING L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 13-3972207
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
499 Park Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 415-9622
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Securities to be registered pursuant to
Section 12(b) of the Act:
Name of each
exchange on which
Title of each class each class is
to be registered to be registered
---------------- ----------------
None None
Securities to be registered pursuant to
Section 12(g) of the Act:
Noncumulative Preferred Securities, Series A
(Liquidation Preference US$10,000 per
Series A Preferred Security)
(Title of class)
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Item 1. Business
GENERAL
BNP U.S. Funding L.L.C. (the "Company") is a Delaware
limited liability company formed on October 14, 1997 by the
filing of a certificate of formation with the Secretary of State
of the State of Delaware and the execution of the Limited
Liability Company Agreement of the Company by the New York Branch
(the "Branch") of Banque Nationale de Paris, a societe anonyme or
limited liability banking corporation organized under the laws of
The Republic of France ("BNP" or the "Bank"). The Company was
continued pursuant to the Amended and Restated Limited Liability
Company Agreement of the Company (the "Company's Charter" or the
"Charter") entered into on December 5, 1997 by the Branch, as
holder of all of the common limited liability company interests
of the Company (the "Common Securities"), and the holders of the
preferred limited liability company interests of the Company (the
"Preferred Securities"), including the Noncumulative Preferred
Securities, Series A (the "Series A Preferred Securities") as
they may exist and be outstanding from time to time. Neither the
Branch nor the Bank is an issuer or guarantor of the Series A
Preferred Securities. The Bank and the Company entered into a
Contingent Support Agreement (as defined herein) on December 5,
1997, pursuant to which the Bank agreed with the Company, inter
alia, that for so long as any Series A Preferred Securities are
outstanding, the Bank will maintain direct or indirect ownership
of 100% of the outstanding Common Securities. (For a discussion
of the terms of the Contingent Support Agreement, see Item 11,
"Contingent Support Agreement" herein.)
The Company was formed for the purpose of acquiring and
holding Eligible Securities (as defined herein) to generate net
income for distribution to the holders of the Series A Preferred
Securities ("Series A Preferred Securityholders") and the holder
of the Common Securities. On December 5, 1997 (the "Closing
Date"), (i) the Company sold, through the Initial Purchasers (as
defined herein), 50,000 Series A Preferred Securities to
qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933 (the "Securities Act") for aggregate
proceeds of $500,000,000, (ii) the Branch acquired 53,010 Common
Securities (in addition to the single Common Security that it had
acquired upon the formation of the Company) for aggregate
proceeds of approximately $530,000,000 and (iii) the Company used
the aggregate net proceeds of approximately $1,030,000,000
received in connection with the sales referred to in (i) and (ii)
to purchase a portfolio of Eligible Securities (the "Initial
Portfolio") from the Branch.
Subsequent to the acquisition of the Initial Portfolio, the
Company will purchase from time to time in accordance with the
Base Investment Policy Guidelines (as defined in "Management
Policies and Programs--Asset Acquisition and Disposition
Policies") and, at any time when the Series A Preferred
Securities are not registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Additional Investment Policy Guidelines (as defined in
"Management Policies and Programs--Asset Acquisition and
Disposition Policies"), additional securities solely from third
parties unaffiliated with the Bank out of proceeds received in
connection with (i) any issuance of additional Common Securities
and additional Preferred Securities or (ii) the repayment of
securities upon maturity or the prepayment of securities included
in the securities portfolio of the Company (the "Portfolio").
Except in the case of clause (i) above, the Portfolio's size will
not change significantly from the size of the Initial Portfolio
or the Portfolio. The relative proportions of the various types
of Eligible Securities in the Portfolio will be subject to change
from time to time, as the proceeds of principal repayments and
prepayments are reinvested in Eligible Securities. The relative
proportions of the various types of Eligible Securities will not
change significantly prior to the registration of the Series A
Preferred Securities under the Exchange Act since the Additional
Investment Policy Guidelines require the reinvestment of the
proceeds of prepayments in the type of Eligible Security whose
proportionate representation in the Portfolio has decreased the
most as compared to the Initial Portfolio. Such proportions are
subject to more significant change after such registration since
the Company will reinvest the proceeds of repaid or prepaid
securities in Eligible Securities as it deems appropriate in
light of then-current market conditions.
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The Bank formed the Company and caused the Company to issue
the Series A Preferred Securities as a means to obtain regulatory
capital. The Bank intends to treat the Series A Preferred
Securities as Tier 1 capital of the Bank under relevant French
regulatory capital guidelines. (For a discussion of such
guidelines, see Item 11, "Certain Information Regarding BNP --
Capital Adequacy and Financial Condition of the BNP Group,"
herein.) The Bank indicated to the Company prior to the issuance
by the Company of the Series A Preferred Securities that the
capital increase for the Bank resulting from such issuance,
together with the Company's expected treatment as a partnership
for United States federal income tax purposes, would provide the
Bank with a cost-effective means of obtaining regulatory capital.
In addition, approximately 30% of the Bank's consolidated
risk-weighted assets as of June 30, 1997 were denominated in U.S.
dollars and currencies whose value is closely linked to the U.S.
dollar and the issuance of the Series A Preferred Securities was
intended to reduce the Bank's consolidated foreign exchange
exposure with respect to its Tier 1 risk-based capital ratio. The
Branch will benefit from the formation of the Company and the
issuance of the Series A Preferred Securities through its receipt
of dividends on the Common Securities.
The Company entered into a services agreement (the
"Services Agreement") with the Branch on the Closing Date
pursuant to which the Branch maintains the Portfolio and performs
other administrative functions. All of the Company's officers and
employees are officers or employees of the Branch or the Bank.
Conflicts of interest will arise between the discharge by such
individuals of their duties as officers or employees of the
Company on the one hand and the Branch or the Bank on the other
hand. In addition, the Bank and the Branch may have interests
which are not identical to those of the Company. Consequently,
conflicts of interest will arise with respect to transactions,
including the administration of the Company's securities
portfolio and the purchase of Eligible Securities.
The securities in the Portfolio are held by Citibank N.A.,
acting as trustee under the trust agreement between the Company
and Citibank N.A. dated December 1, 1997 (the "Trust Agreement").
Dividends on the Series A Preferred Securities, when, as
and if declared by the Board of Directors of the Company, are
payable on a non-cumulative basis semi-annually in arrears at a
fixed rate per annum of the liquidation preference equal to
7.738% through December 5, 2007 and quarterly in arrears
thereafter at a floating rate of the liquidation preference equal
to 2.8% per annum above one-week LIBOR. BNP does not guarantee
the payment of dividends with respect to the Series A Preferred
Securities. (For a discussion of the dividend rights of Series A
Preferred Securityholders, see Item 11, "Dividends" herein.) If
the Bank's financial condition were to deteriorate with the
consequence that a Shift Event (as defined herein) were to occur,
substantially all of the Common Securities would be redeemed
automatically, without prior redemption of any Series A Preferred
Securities; dividends payable on each share of Series A Preferred
Securities could be substantially reduced or completely
eliminated; and in certain circumstances, all of the Company's
remaining net assets (other than assets having a total market
value of approximately $40 million) would be distributed as a
special dividend to the Bank. (For a discussion of the Shift
Events and their effect, see Item 11, "Shift Events" herein.)
The principal executive offices of the Company are located
at 499 Park Avenue, New York, New York 10022.
GENERAL DESCRIPTION OF ELIGIBLE SECURITIES
Types of Eligible Securities
Eligible Securities consist of (i) mortgage pass-through
securities issued or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC") that represent fractional undivided
interests in pools of the relevant mortgage loans ("Agency
Securities"); (ii) REMIC securities that are issued or guaranteed
by GNMA, FHLMC or FNMA and that represent beneficial ownership
interests in trusts established by GNMA, FHLMC or FNMA, the
assets of which consist directly or indirectly of Agency
Securities or other, previously issued REMIC securities of this
type ("REMIC Agency Securities"); (iii) REMIC securities that are
issued by an unrelated private company and secured directly or
indirectly by Agency Securities and rated AAA by Standard &
Poor's as to creditworthiness, that represent beneficial
ownership interests in a trust established by such private
company, the assets of which consist
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directly or indirectly of Agency Securities, REMIC Agency
Securities, or other previously issued REMIC securities of this
type ("Agency Collateralized Securities"); (iv) U.S. Treasury
securities with a maturity of up to ten years ("Treasuries"); and
(v) specified short-term investments not subject to U.S.
withholding tax ("Short-Term Instruments" and, collectively with
the securities included in (i)-(iv) above, the "Eligible
Securities"). Categories (i) through (iii) above are referred to
herein as "Mortgage-Backed Securities".
The Initial Portfolio and the Portfolio as of March 31,
1998 contained exclusively Mortgage-Backed Securities backed by
single-family residential mortgage loans (i.e., residential
mortgage loans secured by one-to-four family dwellings).
Mortgage-Backed Securities that may be included in the Portfolio
in the future may be backed by single-family residential mortgage
loans and/or multi-family residential mortgage loans (i.e.,
residential mortgage loans secured by five or more dwellings). In
any case, Mortgage-Backed Securities may be backed only by
residential mortgage loans. The precise types of residential
mortgage loans underlying Mortgage-Backed Securities are further
limited by the statutory authority, programs and policies of
GNMA, FHLMC and FNMA. All Mortgage-Backed Securities have the
benefit of a direct or indirect guarantee by the relevant agency.
All Mortgage-Backed Securities issued or guaranteed by GNMA are
backed by the full faith and credit of the United States. No
Mortgage-Backed Securities issued by FHLMC or FNMA are backed,
directly or indirectly, by the full faith and credit of the
United States.
The types of Agency Securities in the Portfolio are (i)
securities backed only by mortgages with adjustable rates that
reset annually at a given rate plus a net margin ("Agency ARMs")
or (ii) securities backed by mortgages with a fixed rate for a
specified period of time, after which they reset annually at a
given rate plus a net margin ("Agency Hybrid ARMs"). REMIC Agency
Securities include GNMA REMIC Securities, FHLMC REMIC Securities
and FNMA REMIC Securities. The trusts set up in connection with
REMIC Agency Securities and Agency Collateralized Securities may
have elected to be treated as real estate mortgage investment
conduits ("REMICs") for federal income tax purposes.
Government National Mortgage Association
GNMA is a wholly-owned corporate instrumentality of the
United States within the United States Department of Housing and
Urban Development. Section 306(g) of Title III of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes
GNMA to guarantee the timely payment of the principal of and
interest on certificates which represent an interest in a pool of
mortgage loans insured by the Federal Housing Administration
("FHA") under the Housing Act, or guaranteed by the Rural Housing
Service ("FHA Loans"), or partially guaranteed by the Department
of Veterans Affairs ("VA Loans").
Section 306(g) of the Housing Act provides that "the full
faith and credit of the United States is pledged to the payment
of all amounts which may be required to be paid under any
guaranty under this subsection." In order to meet its obligations
under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury with no
limitation as to amount.
GNMA Certificates
Each GNMA Certificate held by the Company (which may be
issued under either the GNMA I program or the GNMA II program) is
and will be a "fully modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or
other financial concern ("GNMA Issuer") approved by GNMA or by
FNMA as a seller-servicer of FHA Loans and/or VA Loans. Each GNMA
Certificate represents a fractional undivided interest in a pool
of such mortgage loans. GNMA will approve the issuance of each
such GNMA Certificate in accordance with a guaranty agreement (a
"Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant
to its Guaranty Agreement, a GNMA Issuer is and will be required
to advance its own funds in order to make timely payments of all
amounts due on each such GNMA Certificate, even if the payments
received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts
due on each such GNMA Certificate.
The full and timely payment of principal of and interest on
each GNMA Certificate is and will be guaranteed by GNMA, which
obligation is backed by the full faith and credit of the United
States. Each such GNMA Certificate has and will have an original
maturity of not more than approximately 30 years (but may have an
original maturity of substantially less than 30 years). Each such
GNMA Certificate is and will be based on and backed by a pool of
FHA Loans or VA Loans secured by one- to four-family residential
properties and provides and will provide for the payment by or on
behalf of the GNMA Issuer to the registered holder of such GNMA
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Certificate of scheduled monthly payments of principal and
interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest
payment on each FHA Loan or VA Loan underlying such GNMA
Certificate, less the applicable servicing and guarantee fee
which together equal the difference between the interest on the
FHA Loan or VA Loan and the pass-through rate on the GNMA
Certificate. In addition, each payment includes and will include
proportionate pass-through payments of any prepayments of
principal on the FHA Loans or VA Loans underlying such GNMA
Certificate and liquidation proceeds in the event of a
foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA
Certificate as they become due, it must promptly notify GNMA and
request GNMA to make such payments. Upon notification and
request, GNMA will make such payments directly to the registered
holder of such GNMA Certificate. In the event no payment is made
by a GNMA Issuer and the GNMA Issuer fails to notify and request
GNMA to make such payment, the holder of such GNMA Certificate
will have recourse only against GNMA to obtain such payment. The
Company or its nominee, as registered holder of the GNMA
Certificates held by the Company, has and will have the right to
proceed directly against GNMA under the terms of the Guaranty
Agreements relating to such GNMA Certificates for any amounts
that are not paid when due.
Regular monthly installment payments on each GNMA
Certificate held by the Company are and will be comprised of
interest due as specified on such GNMA Certificate plus the
scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the
month in which the scheduled monthly installment on such GNMA
Certificate is due. Such regular monthly installments on each
such GNMA Certificate are required to be paid to the Company or
its nominee as registered holder by the 15th day of each month in
the case of a GNMA I Certificate and are required to be mailed to
the Company or its nominee by the 20th day of each month in the
case of a GNMA II Certificate. Any principal prepayments on any
FHA Loans or VA Loans underlying a GNMA Certificate held by the
Company, or any other early recovery of principal on such loan,
are and will be passed through to the Company or its nominee as
the registered holder of such GNMA Certificate.
GNMA REMIC Securities
The GNMA REMIC Securities which are sold in one or more
series (each, a "Series") represent interests in separate GNMA
REMIC Trusts (each, a "Trust") established from time to time.
Each Trust is comprised primarily of (i) GNMA Certificates as to
which GNMA has guaranteed the timely payment of principal and
interest pursuant to the GNMA I Program or the GNMA II Program
and/or (ii) certificates backed by GNMA Certificates as to which
GNMA has guaranteed the timely payment of principal and interest
pursuant to the GNMA Platinum Program (each, a "GNMA Platinum
Certificate") (GNMA Certificates and GNMA Platinum Certificates
being collectively referred to herein as "Ginnie Mae
Certificates"), and such Trust may in the future include
previously-issued GNMA REMIC securities. Each Series of GNMA
REMIC Securities is issued in one or more Classes. Each Class of
Securities of a Series evidences an interest in future principal
payments and/or an interest in future interest payments on the
Ginnie Mae Certificates in the related Trust or a group of Ginnie
Mae Certificates in the related Trust.
GNMA guarantees the timely payment of principal and
interest on each Class of GNMA REMIC Securities (the "GNMA
Guaranty"). The GNMA Guaranty is backed by the full faith and
credit of the United States of America.
Federal Home Loan Mortgage Corporation
FHLMC is a publicly-held government-sponsored enterprise
created pursuant to Title III of the Emergency Home Finance Act
of 1970, as amended (the "FHLMC Act"). FHLMC was established
primarily for the purpose of increasing the availability of
mortgage credit for the financing of urgently needed housing. It
seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal
activity of FHLMC currently consists of the purchase of first
lien conventional mortgage loans or participation interests in
such mortgage loans and the sale of the mortgage loans or
participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so
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far as practicable, mortgage loans that it deems to be of such
quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
FHLMC Certificates
Each FHLMC Certificate represents an undivided interest in
a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "FHLMC Certificate
group"). FHLMC Certificates are sold under the terms of a
Mortgage Participation Certificate Agreement. A FHLMC Certificate
may be issued under either FHLMC's Cash Program or Guarantor
Program.
Mortgage loans underlying the FHLMC Certificates will
consist of mortgage loans with original terms to maturity of
between approximately 10 and 30 years. Each such mortgage loan
must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans
and/or participations comprising another FHLMC Certificate group.
Under the Guarantor Program, any such FHLMC Certificate group may
include only whole loans or participation interests in whole
loans.
FHLMC Certificates may be held of record only by the
entities eligible to maintain book-entry accounts with a Federal
Reserve Bank. The holder of a FHLMC Certificate is not
necessarily the beneficial owner thereof. Beneficial owners
ordinarily hold FHLMC Certificates through financial
intermediaries that, in turn, hold the FHLMC Certificates through
an entity eligible to maintain accounts with a Federal Reserve
Bank.
FHLMC guarantees to each registered holder of a FHLMC
Certificate the timely payment of interest on the underlying
mortgage loans to the extent of the applicable Certificate rate
on the registered holder's pro rata share of the unpaid principal
balance outstanding on the underlying mortgage loans in the FHLMC
Certificate group represented by such FHLMC Certificate, whether
or not received. A holder that is not also the beneficial owner
of a FHLMC Certificate, and each other financial intermediary in
the chain between the holder and the beneficial owner, will be
responsible for establishing and maintaining accounts for and
making the relevant payments to their respective customers.
FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the
underlying mortgage loans, without any offset or deduction, to
the extent of such holder's pro rata share thereof, but does not,
except in limited cases, guarantee the timely payment of
scheduled principal. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution
in principal by reason of charges for property repairs,
maintenance and foreclosure. FHLMC may remit the amount due on
account of its guaranty of collection of principal at any time
after default on an underlying mortgage loan, but not later than
(i) 30 days following foreclosure sale, (ii) 30 days following
payment of the claim by any mortgage insurer or (iii) 30 days
following the expiration of any right of redemption, whichever
occurs later, but in any event no later than one year after
demand has been made upon the mortgagor for accelerated payment
of principal. In taking actions regarding the collection of
principal after default on the mortgage loans underlying FHLMC
Certificates, including the timing of demand for acceleration,
FHLMC reserves the right to exercise its judgment with respect to
the mortgage loans in the same manner as for mortgage loans that
it has purchased but not sold. The length of time necessary for
FHLMC to determine that a mortgage loan should be accelerated
varies with the particular circumstances of each mortgagor, and
FHLMC has not adopted standards which require that the demand be
made within any specified period.
FHLMC Certificates are not guaranteed by the United States
or by any Federal Home Loan Bank and do not constitute debts or
obligations of the United States or any Federal Home Loan Bank.
The obligations of FHLMC under its guarantee are obligations
solely of FHLMC and are not backed by, or entitled to, the full
faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC
Certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage
loans.
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Registered holders of FHLMC Certificates are entitled to
receive their monthly pro rata share of all principal payments on
the underlying mortgage loans received by FHLMC, including any
scheduled principal payments, full and partial prepayments of
principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and
repurchases of the mortgage loans by FHLMC or the seller thereof.
FHLMC is required to remit each registered FHLMC
Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through
rate and any other sums such as prepayment fees, within 60 days
of the date on which such payments are deemed to have been
received by FHLMC.
Under FHLMC's Cash Program, with respect to pools formed
prior to June 1, 1987, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a FHLMC
Certificate may exceed the pass-through rate on the FHLMC
Certificate. With respect to FHLMC Certificates issued on or
after June 1, 1987, the maximum interest rate on the mortgage
loans underlying such FHLMC Certificates may exceed the
pass-through rate by 50 to 100 basis points. Under such program,
FHLMC purchases groups of whole mortgage loans from sellers at
specified percentages of their unpaid principal balances,
adjusted for accrued or prepaid interest, which when applied to
the interest rate of the mortgage loans and participations
purchased results in the yield (expressed as a percentage)
required by FHLMC. The required yield, which includes a minimum
servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The rate of interest rates on the
mortgage loans and participations in a FHLMC Certificate group
under the Cash Program will vary since mortgage loans and
participations are purchased and assigned to a FHLMC Certificate
group based upon their yield to FHLMC rather than on the interest
rate on the underlying mortgage loans. Under FHLMC's guarantor
program, interest rates on the mortgage loans underlying a FHLMC
Certificate may range from the pass-through rate plus a minimum
servicing fee) to 250 basis points higher than such rate. FHLMC
Certificates may also be backed by adjustable rate mortgages.
FHLMC Certificates duly presented for registration of
ownership on or before the last business day of a month are
registered effective as of the first day of the month. The first
remittance to a registered holder of a FHLMC Certificate will be
distributed so as to be received normally by the 15th day of the
second month following the month in which the purchaser became a
registered holder of the FHLMC Certificates. Thereafter, such
remittance will be distributed monthly to the registered holder
so as to be received normally by the 15th day of each month. The
Federal Reserve Bank of New York maintains book-entry accounts
with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest
each month to the registered holders thereof in accordance with
such holders' instructions.
FHLMC REMIC Securities
The FHLMC REMIC Securities consist of REMIC securities
issued or guaranteed by FHLMC ("FHLMC REMIC Certificates") which
represent beneficial ownership interests in (i) pools of Freddie
Mac Gold Mortgage Participation Certificates (the "Gold PCs") and
Freddie Mac Gold Giant Mortgage Participation Certificates (the
"Gold Giant PCs"); (ii) other pools of Freddie Mac Mortgage
Participation Certificates ("Freddie Mac PCs"); (iii) one or more
Freddie Mac Stripped Mortgage Participation Certificates
("Stripped Giant PCs"), which represent undivided interests in
the distributions on a "Standard Giant PC", which in turn
represent beneficial ownership interests in one or more pools of
Gold PCs, Gold Giant PCs or FHLMC REMIC Certificates; (iv) one or
more previously-issued FHLMC REMIC Certificates; or (v) one or
more Ginnie Mae Certificates. FHLMC REMIC Securities may also
include other REMIC securities issued or guaranteed by FHLMC
which are secured directly or indirectly by mortgages. The
Freddie Mac PCs, Gold PCs and Gold Giant PCs issued by FHLMC
represent either an undivided interest in a group of residential
mortgages purchased by FHLMC or participations therein. Each
FHLMC REMIC Certificate is a regular interest in a REMIC trust
established by FHLMC and is a part of a series of multiclass
mortgage participation certificates issued by FHLMC.
Distributions on the FHLMC REMIC Securities are made on the 15th
day of each month, of if such day is not a business day, on the
next succeeding business day.
FHLMC guarantees to each holder of a FHLMC REMIC
Certificate the timely payment of interest and the payment of
principal as principal payments are required to be made on the
underlying Gold PCs and Gold Giant PCs in accordance with their
terms. FHLMC guarantees to each holder of the Gold PC or Gold
Giant PC the timely payment of interest and the timely payment of
principal due to be paid on the underlying mortgage loans as
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calculated by FHLMC, to the extent of such holder's pro rata
share of the unpaid principal balance of such mortgage loans.
With respect to Stripped Giant PCs, FHLMC guarantees to each
holder thereof the timely payment of interest, if any, at the
applicable Stripped Giant PC interest rate and payment of
principal, if any, as principal payments are required to be made
on the underlying Gold PCs, Gold Giant PCs or FHLMC REMIC
Certificates. A series of FHLMC REMIC Certificates may be
redeemed in whole, but not in part, at the option of FHLMC on any
distribution date on or after the date on which, after giving
effect to principal payments to be made on such series on such
date, the aggregate outstanding principal amount of such series
is less than 1% of the aggregate original principal amount of
such series. Stripped Giant PCs are not redeemable, but a
Stripped Giant PC backed by a FHLMC Multiclass PC will be retired
if such Multiclass PC is redeemed.
The guarantee of FHLMC is solely the obligation of FHLMC
and is not backed by the full faith and credit of the United
States.
Federal National Mortgage Association
FNMA is a federally-chartered and privately-owned
corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended. FNMA was originally
established in 1938 as a United States government agency to
provide supplemental liquidity to the mortgage market and was
transformed into a stockholder-owned and privately-managed
corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing
their funds for additional lending. FNMA acquires funds to
purchase mortgage loans from many capital market investors that
may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing.
FNMA Certificates
FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a
pool of mortgage loans formed by FNMA. Each mortgage loan must
meet the applicable standards of the FNMA purchase program.
Mortgage loans comprising a pool are either provided by FNMA from
its own portfolio or purchased pursuant to the criteria of the
FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by the
Company may include conventional mortgage loans, FHA Loans or VA
Loans. Original maturities of substantially all of the
conventional, level payment mortgage loans underlying a FNMA
Certificate are expected to be between either 8 to 15 years or 20
to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be
30 years.
Mortgage loans underlying a FNMA Certificate may have
annual interest rates that vary by as much as two percentage
points from each other. The rate of interest payable on a FNMA
Certificate is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's
guaranty fee. Thus, the annual interest rates on the mortgage
loans underlying a FNMA Certificate will generally be between 50
basis points and 250 basis points greater than the annual FNMA
Certificate pass-through rate. FNMA Certificates may also be
backed by adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA
Certificate that it will distribute amounts representing such
holder's proportionate share of scheduled principal and interest
payments at the applicable pass-through rate provided for by such
FNMA Certificate on the underlying mortgage loans, whether or not
received, and such holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated
mortgage loan, whether or not such principal amount is actually
recovered. The obligations of FNMA under its guarantees are
obligations solely of FNMA and are not backed by, nor entitled
to, the full faith and credit of the United States. If FNMA were
unable to satisfy its obligations, distributions to holders of
FNMA Certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of FNMA Certificates would be
affected by delinquent payments and defaults on such mortgage
loans.
8
<PAGE>
FNMA REMIC Securities
The FNMA REMIC Securities consist of REMIC securities
issued or guaranteed by FNMA ("FNMA REMIC Certificates"), which
represent beneficial ownership interests in one or more (i) FNMA
REMIC Trusts, the assets of which consist of primarily FNMA
Guaranteed Mortgage Pass-Through Certificates ("FNMA MBS
Certificates"); (ii) FNMA Stripped Mortgage-Backed Securities
("FNMA SMBS Certificates") which represent beneficial ownership
interests in the principal distributions on certain FNMA MBS
Certificates held in the form of one or more Guaranteed MBS
Pass-Through Securities ("Mega Certificates") representing
interests in a pool of FNMA MBS Certificates; (iii) Ginnie Mae
Certificates; or (iv) previously-issued FNMA REMIC Certificates.
FNMA REMIC Securities may also include other REMIC securities
issued or guaranteed by FNMA which are secured directly or
indirectly by mortgages. FNMA MBS Certificates represent
beneficial ownership interests in pools of residential mortgage
loans.
Each of the FNMA REMIC Certificates is a REMIC regular
interest in a REMIC trust established by FNMA and is part of a
multiclass issuance of REMIC pass-through certificates issued by
each REMIC trust. Distributions on the FNMA Securities are made
on the 25th day of each month or, if such day is not a business
day, on the next succeeding business day.
FNMA guarantees to each holder of a FNMA REMIC Certificate
the timely distribution of required installments of principal and
interest and the distribution of the principal balance of each
FNMA REMIC Certificate in full no later than the final
distribution date specified for such FNMA REMIC Certificate
whether or not sufficient funds are available therefor in the
related trust. FNMA guarantees to each holder of a FNMA MBS
Certificate the timely distribution of scheduled installments of
principal of an interest on the underlying mortgage loans,
whether or not received, and the distribution of the full
principal balance of any foreclosed mortgage loan. With respect
to FNMA SMBS Certificates, FNMA acknowledges that its obligations
to make distributions to holders of FNMA SMBS Certificates are
primary obligations of FNMA ranking on a parity with its
obligations under its guaranty of the related Mega Certificates.
FNMA further acknowledges that FNMA is directly obligated to the
holders of FNMA SMBS Certificates in respect of such guaranty
obligations to the same extent as if such holders were holders of
such Mega Certificates. FNMA may repurchase the underlying
mortgage loans, thus indirectly effecting an early termination of
the related REMIC trust or FNMA SMBS Certificates, if only one
mortgage loan remains in the pool of underlying mortgage loans or
the aggregate principal balance of all underlying mortgage loans
is less than one percent of the aggregate original principal
balance of such mortgage loans.
The guarantee of FNMA is solely the obligation of FNMA and
is not backed by the full faith and credit of the United States.
Agency Collateralized Securities
Agency Collateralized Securities are issued by trusts
established by private companies not related to GNMA, FNMA or
FHLMC ("Sponsors") and are rated AAA by Standard & Poor's as to
creditworthiness. The assets of such trusts are, directly or
indirectly, Agency Securities, REMIC Agency Securities or other
previously issued Agency Collateralized Securities. The Sponsors
do not guarantee the timely payment of principal and interest on
the Agency Collateralized Securities.
The risks generally associated with Agency Collateralized
Securities are the same risks as those associated with Agency
Securities in terms of economic risks such as yield and
prepayment. Such Securities carry an additional risk relating to
the creditworthiness of the private company (the "Sponsor") that
establishes a separate entity (usually a trust). Such entity is
typically interposed to insulate the holders of the Securities
from the risk of bankruptcy of the Sponsor. This structure is
reflected in the AAA rating accorded to Agency Collateralized
Securities by Rating Agencies. It is nonetheless possible that
the bankruptcy of the Sponsor could adversely affect the assets
of the trust and the holders of the Securities.
Agency Collateralized Securities accounted for 0.96% (by
unpaid principal balance) of the Company's portfolio as of
December 31, 1997 and for 0.82% as of March 31, 1998. The two
Agency Collateralized Securities
9
<PAGE>
in the Portfolio as of such date are Collateralized Mortgage
Obligation Trust 66, Class F bonds (issued by a Salomon Brothers
Inc affiliate) (the "Class F Bonds") and Morgan Stanley Mortgage
Trust 41, Class 1 bonds (the "Class 1 Bonds"). Each of these
Agency Collateralized Securities is backed by GNMA certificates
which represent interests in separate pools of mortgages
originated at separate times and that bear different interest
rates. The GNMA certificates backing the Class 1 Bonds have a
pass-through rate of 10% and the GNMA certificates backing the
Class F Bonds have a pass-through rate of 9.5%. Each of these
Agency Collateralized Securities has different rights to
principal prepayments. The interest rate per annum on the Class 1
Bonds is equal to one-month U.S. LIBOR plus 65 basis points and
the interest rate per annum on the Class F Bonds is equal to
one-month U.S. LIBOR plus 60 basis points.
DESCRIPTION OF THE PORTFOLIO
Purchase
The Company acquired the Initial Portfolio on the Closing
Date pursuant to the terms of a securities purchase agreement
with the Branch (the "Portfolio Securities Purchase Agreement").
The Branch represented to the Company that the aggregate
characteristics of the securities purchased from it and included
in the Initial Portfolio were substantially the same as those
described in the Offering Memorandum relating to the Series A
Preferred Securities dated December 1, 1997, and that such
securities were free and clear of any liens, charges and
encumbrances. The Branch is obligated to repurchase any
securities sold by it to the Company as to which there is a
material breach of any such representation or warranty, unless
the Branch elects to substitute a qualified security for such
security or pay damages to the Company compensating the Company
for such breach. The repurchase price for any such security is
the higher of (i) the outstanding unpaid principal amount of such
security as of the most recent date as of which the issuer of
such security (or an authorized person acting on behalf of the
issuer) has announced the outstanding unpaid principal amount of
such security or released information permitting holders of such
security to calculate its outstanding unpaid principal amount
plus accrued and unpaid interest, and (ii) the market value of
such security, as if such security was not impaired due to such
breach, in each case as of the date of repurchase. The damage
payment with respect to any such securities will be equal to the
excess of (i) the higher of the unpaid principal balance plus
accrued and unpaid interest and the market value of such
security, as if such security was not impaired due to such
breach, over (ii) the market value of the Company's interest in
such security given the occurrence of such breach, in each case
as of the date the damage payment is made.
General
Set forth below is a description, as of December 31, 1997
and as of March 31, 1998, of the Portfolio.
As of December 31, 1997, the Eligible Securities included
in the Portfolio had an aggregate unpaid principal balance of
$973,176,760 and an estimated market value of $997,748,181. As of
such date, 26.85% (by aggregate unpaid principal balance) of the
securities in the Portfolio were floating rate REMIC securities
("Floating-rate REMICs"), 4.81% were fixed rate REMIC securities
("Fixed-rate REMICs"), 36.19% were Agency ARMs, 17.76% were
Agency Hybrid ARMs and 14.39% were Treasuries.
As of March 31, 1998, the Eligible Securities included in
the Portfolio had an aggregate unpaid principal balance of
$998,595,586 and an estimated market value of $1,021,541,711. As
of such date, 27.06% (by aggregate unpaid principal balance) of
the securities in the Portfolio were Floating-rate REMICs, 4.69%
were Fixed-rate REMICs, 31.35% were Agency ARMs, 22.87% were
Agency Hybrid ARMs and 14.02% were Treasuries. See "General
Description of Eligible Securities -- Types of Eligible
Securities" for a brief description of the types of underlying
mortgages.
10
<PAGE>
The following table sets forth certain information with
respect to each type of security included in the Portfolio:
<TABLE>
<CAPTION>
Portfolio
As of December 31, 1997
Aggregate Unpaid Percentage of Portfolio Weighted Average
Principal Balance by Aggregate Unpaid Number of Life Range
Type of Security ($000) Principal Balance Securities (years)(1)
- --------------------- ------------------ -------------------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Floating-rate REMICs ........................ $261,330 26.853% 18 0.46 - 4.41
Fixed-rate REMIC ............................ 46,839 4.813 1 10.7
Agency ARMs ................................. 352,204 36.191 22 5.57 - 6.80
Agency Hybrid ARMs .......................... 172,804 17.757 6 5.49 - 5.68
Treasuries .................................. 140,000 14.386 2 8.8-9.4
------- ----- -- -----------
TOTAL ....................................... $973,177 100.00% 49 0.46 - 10.7
======== ====== == ===========
- ----------------
(1) Determined as described under "--Prepayment Analysis"
herein (except for Treasuries where it equals the number of
years to the maturity date), and subject to the assumptions
and qualifications in that section. Prepayments will not
occur at the rate assumed and the actual weighted average
lives of the securities may differ significantly from those
shown.
As of March 31,1998
Aggregate Unpaid Percentage of Portfolio Weighted Average
Principal Balance by Aggregate Unpaid Number of Life Range
Type of Security ($000) Principal Balance Securities (years)(1)
- --------------------- ------------------ -------------------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Floating-rate REMICs ........................ $270,266 27.07% 19 0.33 - 4.05
Fixed-rate REMIC ............................ 46,839 4.69 1 10.31
Agency ARMs ................................. 313,084 31.35 26 5.58 - 6.69
Agency Hybrid ARMs .......................... 228,406 22.87 12 5.14 - 5.69
Treasuries .................................. 140,000 14.02 2 8.5-9.1
------- ------ - ----------
TOTAL ....................................... $998,596 100.00% 60 0.33 -10.31
======== ====== == ===========
</TABLE>
- --------------
(1) Determined as described under "--Prepayment Analysis"
herein (except for Treasuries where it equals the number of
years to the maturity date), and subject to the assumptions
and qualifications in that section. Prepayments will not
occur at the rate assumed and the actual weighted average
lives of the securities may differ significantly from those
shown.
DESCRIPTION OF TYPES OF SECURITIES
Floating-rate REMICs
Floating-rate REMICs are backed by Agency Securities where
a particular portion of the cash flows are directed to the
Floating-rate REMICs. FNMA, FHLMC, and GNMA all guarantee the
full and timely payment of principal and interest on the pools of
mortgages, which flow through to the REMICs. These REMICs are
floating-rate securities that reset monthly at the then-current
rate of one month LIBOR plus a margin (except one Floating-rate
REMIC, see note (2) to the table below). They are subject to a
lifetime cap and floor. The cap, floor, and margin all vary by
security. The Floating-rate REMICs have final remaining periods
to their stated maturities ranging from 8.67 to 29.55 years (as
of December 31, 1997) and from 8.8 to 29.4 years (as of March 31,
1998). The latest stated maturity date of any Floating-rate REMIC
in the Portfolio is July 2027.
11
<PAGE>
<TABLE>
<CAPTION>
FLOATING-RATE REMICS
As of December 31, 1997
Current
Unpaid Margin Weighted Prepayment
Principal Current over LIBOR Average Life Speed
Series Balance($000) Coupon Life Cap (basis points) (years)(1) Assumption
- ---------------------------------------- ------------- ----------- --------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FANNIE MAE 1993-210 FB ................. $ 45,170 6.525% 9% 40 2.84 150% PSA
FHLMC-GNMA 38 F ........................ 8,111 6.625 10 50 3.48 200 PSA
FANNIE MAE 1997-28 FA .................. 26,187 6.02354 10 (2) 1.50 50 CPR
FANNIE MAE 1996-51 FA .................. 16,007 6.625 9 50 2.31 335 PSA
FREDDIE MAC 1933 FR .................... 8,010 6.625 8.5 50 1.01 340 PSA
FANNIE MAE 1990-121 F .................. 21,845 6.925 11.5 80 3.98 335 PSA
Collateralized Mortgage
Obligation Trust 66 F(3) ............ 1,467 6.725 11 60 0.46 290 PSA
FREDDIE MAC 1382 LC .................... 4,221 6.525 10 40 1.15 250 PSA
FANNIE MAE 1992-141 FA ................. 8,017 6.625 10.5 50 2.81 275 PSA
FREDDIE MAC 1256 CA .................... 6,202 6.825 10.5 70 1.84 345 PSA
Morgan Stanley Mortgage
Trust 41 Class 1(4) ................. 7,855 6.775 10 65 4.40 300 PSA
FANNIE MAE 1993-155 FG ................. 5,159 6.625 9.5 50 1.25 172 PSA
FREDDIE MAC 1040 H ..................... 22,586 7.075 11 95 4.02 330 PSA
FANNIE MAE 1997-37 F ................... 31,163 6.525 10 40 2.50 335 PSA
FANNIE MAE 1997-52 F ................... 9,515 6.625 9.5 50 2.69 245 PSA
FANNIE MAE 1997-42 F ................... 9,300 6.625 9 50 3.89 215 PSA
FANNIE MAE 1997-44 F ................... 9,724 6.525 10 40 4.41 225 PSA
FANNIE MAE 1997-67 FB .................. 20,791 6.525 9 40 1.23 320 PSA
Total .................................. $261,330
=========
</TABLE>
- ---------------
(1) Determined as described under "--Prepayment Analysis"
herein, and subject to the assumptions and qualifications
in that section. Prepayments will not occur at the rate
assumed and average lives of the securities may differ
significantly from those shown.
(2) The FANNIE MAE 1997-28 FA security bears interest at a rate
per annum equal to the weighted average coupon of the
underlying ARM pools minus 1.45%. The coupon of each such
ARM pool adjusts annually, reflecting the weighted averages
of the net margins for the underlying mortgages in such
pool and the then-current rate of the One-Year Constant
Maturity Treasury Index, in each case as of the applicable
date.
(3) Collateralized Mortgage Obligation Trust 66 was established
as of June 24, 1991 by Salomon Brothers Mortgage Securities III, Inc.
(4) Morgan Stanley Mortgage Trust 41 was established as of December 1, 1991
by Morgan Stanley Capital I Inc.
12
<PAGE>
<TABLE>
<CAPTION>
FLOATING-RATE REMICS
As of March 31, 1998
Current Margin
Unpaid Prepayments over Weighted
Principal since LIBOR Average Prepayment
Balance January 1, Current (basis Life Speed
Series ($000) 1998(1) Coupon Life Cap points) (years)(2) Assumption
- ---------------------------------------- --------- ---------- --------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FANNIE MAE 1993-210 FB ................. $ 42,052 $ 3,118 6.15% 9% 40 2.83 163 PSA
FHLMC-GNMA 38 F ........................ 7,482 628 6.25 10 50 3.19 215 PSA
FANNIE MAE 1997-28 FA .................. 22,147 4,040 6.048 10 (3) 1.5 50 CPR
FANNIE MAE 1996-51 FA .................. 15,599 408 6.25 9 50 1.82 430 PSA
FREDDIE MAC 1933 FR .................... 0 8,010(4)
FANNIE MAE 1990-121 F .................. 20,302 1,543 6.55 11.5 80 3.87 350 PSA
Collateralized Mortgage
Obligation Trust 66 F ............... 987 479 6.35 11 60 0.33 316 PSA
FREDDIE MAC 1382 LC .................... 3,496 724 6.15 10 40 0.97 285 PSA
FANNIE MAE 1992-141 FA ................. 7,406 611 6.25 10.5 50 2.71 295 PSA
FREDDIE MAC 1256 CA .................... 5,662 540 6.45 10.5 70 1.75 350 PSA
Morgan Stanley Mortgage
Trust 41 Class 1 .................... 7,238 604 6.338 10 65 4.05 320 PSA
FANNIE MAE 1993-155 FG ................. 4,221 938 6.25 9.5 50 1.28 202 PSA
FREDDIE MAC 1040 H ..................... 21,284 1,302 6.7 11 95 3.98 334 PSA
FANNIE MAE 1997-37 F ................... 25,816 5,347 6.15 10 40 1.5 335 PSA
FANNIE MAE 1997-52 F ................... 8,612 903 6.25 9.5 50 2.5 325 PSA
FANNIE MAE 1997-42 F ................... 8,587 713 6.25 9 50 3.52 250 PSA
FANNIE MAE 1997-44 F ................... 9,533 191 6.15 10 40 2.42 275 PSA
FANNIE MAE 1997-67 FB .................. 17,785 3,006 6.15 9 40 0.82 400 PSA
FHR 2020 FB(5) ......................... 18,043 427 6.172 9 50 3.3 205 PSA
FHR 1935 FA(5) ......................... 24,014 1,185 6.35 9 60 2.64 400 PSA
Total .................................. $270,266 $ 34,717
======== ========
</TABLE>
- --------------
(1) Or from the purchase date if the relevant security was
purchased later.
(2) Determined as described under "--Prepayment Analysis"
herein, and subject to the assumptions and qualifications
in that section. Prepayments will not occur at the rate
assumed and average lives of the securities may differ
significantly from those shown.
(3) The FANNIE MAE 1997-28 FA security bears interest at a rate
per annum equal to the weighted average coupon of the
underlying ARM pools minus 1.45%. The coupon of each such
ARM pool adjusts annually, reflecting the weighted averages
of the net margins for the underlying mortgages in such
pool and the then-current rate of the One-Year Constant
Maturity Treasury Index, in each case as of the applicable
date.
(4) This Security was prepaid in full on February 15, 1998.
(5) Security purchased on February 27, 1998.
13
<PAGE>
Fixed-rate REMICs
Fixed-rate REMICs are backed by Agency Securities where a
particular portion of the cash flows is directed to the
Fixed-rate REMICs. FNMA, GNMA and FHLMC all guarantee the full
and timely payment of principal and interest on the pools of
mortgages, which flow through to the Fixed-rate REMIC. The only
Fixed-rate REMIC included in the Portfolio has a coupon of 6.50%.
Its stated maturity date is June 2026.
FIXED-RATE REMIC
As of December 31, 1997
Current Prepayment
Unpaid Weighted Speed
Principal Average Assumption
Series Balance ($000) Coupon Life (years) PSA
- --------------------- --------------- ------- ------------- ----------
FANNIE MAE 1997-56 PE ...... $ 46,839 6.50% 10.7 175%
FIXED-RATE REMIC
As of March 31, 1998
Current Prepayment
Unpaid Weighted Speed
Principal Average Assumption
Series Balance ($000) Coupon Life (years) PSA
- --------------------- --------------- ------- ------------- ----------
FANNIE MAE 1997-56 PE ...... $ 46,839 6.50% 10.31 175%
14
<PAGE>
Agency ARMs
The Agency ARMs in the ARM pools consist of securities
having the timely payment of principal and interest generally
guaranteed by GNMA, FNMA and FHLMC. The pools consist of
adjustable rate mortgages, which reset annually at a rate equal
to the then-current rate of the One-Year Constant Maturity
Treasury Index (as defined below) plus a net margin. Each ARM
pool is subject to a periodic cap and a lifetime cap, which vary
by agency and pool. The latest stated maturity date of any Agency
ARM in the Portfolio is February 2028.
The One-Year Constant Maturity Treasury Index ("CMT") is
the weekly average yield on U.S. Treasury securities adjusted to
a constant maturity of one year as published by the Federal
Reserve Board in Statistical Release H. 15(519) or any similar
publication or, if not so published, as reported by any Federal
Reserve Bank or by any U.S. Government department or agency. The
Three-Year Constant Maturity Treasury Index is the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity
of three years as published in a similar manner as The One-Year
Constant Maturity Treasury Index.
<TABLE>
<CAPTION>
AGENCY ARMs
As of December 31, 1997
Current Unpaid Margin Average Weighted Prepayment
Principal over CMT Number of Average Speed
Balance Current Periodic (basis Months to Life Assumption
Pool No.(1) ($000) Coupon Caps Life Cap points) Rate Reset (years)(2) (CPR)
- -------------- --------------- ------- -------- ------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FN 394850 ............ $ 36,147 6.064% 2% 12.06% 233 5.5 5.63 20%
FN 397901 ............ 44,511 5.887 2 11.89 233 6.6 5.63 20
FH 846384 ............ 15,097 7.340 2 11.73 236 8.5 5.65 30
FN 374711 ............ 8,702 5.716 2 11.68 212 3.6 5.60 20
FN 374773 ............ 12,791 5.836 2 11.82 232 4.9 5.62 20
FH 410544 ............ 6,440 5.914 2 11.91 238 7.6 5.68 20
FH 610727 ............ 12,405 5.742 2 11.74 239 4.6 5.68 18
G2 080094 ............ 49,508 6.000 1 11.00 150 9.0 6.80 8
FN 313242 ............ 7,349 7.716 2 11.86 232 8.1 5.59 30
FN 367349 ............ 12,089 5.929 2 11.93 235 11.0 5.61 30
FN 313311 ............ 7,381 7.408 2 11.77 238 6.8 5.67 30
FN 363057 ............ 10,630 5.449 2 11.39 221 11.9 5.60 30
FN 313190 ............ 7,827 7.911 2 12.08 233 6.3 5.57 30
FN 363070 ............ 6,195 5.494 2 11.50 220 7.3 5.61 18
FN 313377 ............ 23,174 6.106 2 11.56 227 10.2 5.60 30
FN 370479 ............ 9,288 5.328 2 11.33 234 6.8 5.60 30
FN 378243 ............ 3,640 6.221 2 12.22 235 5.6 5.64 18
FN 313432 ............ 32,645 5.954 2 11.81 235 0.5 5.62 30
FN 370478 ............ 9,999 5.353 2 11.35 234 0.9 5.60 30
FN 396355 ............ 8,366 5.600 2 11.80 233 5.5 5.62 18
FN 374774 ............ 8,262 5.427 2 11.39 233 6.5 5.61 18
FN 391247 ............ 19,758 6.561 2 11.38 224 7.9 5.68 30
Total ............. $352,204
========
</TABLE>
(1) "FN"= FNMA; "G"= GNMA; and "FH"= FHLMC.
(2) Determined as described under "--Prepayment Analysis"
herein, and subject to the assumptions and qualifications
in that section. Prepayments will not occur at the rate
assumed and average lives of the securities may differ
significantly from those shown.
15
<PAGE>
<TABLE>
<CAPTION>
AGENCY ARMs
As of March 31, 1998
Current
Unpaid Prepayments Margin Average Prepayment
Principal since over CMT Number of Weighted Speed
Balance January 1, Current Periodic Life (basis Months to Average Life Assumption
Pool No. (1) ($000) 1998(2) Coupon Caps Cap points) Rate Reset (years)(3) (CPR)
- ----------------- ------ ---------- -------- -------- ------ -------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FN 394850 ....... $ 29,188 $ 6,958 6.066 2% 12.06% 233 3 5.64 20 CPR
FN 397901 ....... 38,541 5,970 5.889 2 11.89 233 4 5.64 20 CPR
FH 846384 ....... 12,266 2,831 7.658 2 11.73 236 5 5.66 166 PSA
FN 374711 ....... 7,706 996 5.712 2 11.68 212 3 5.61 20 CPR
FN 374773 ....... 7,682 5,109 6.306 2 11.82 232 12 5.63 20 CPR
FH 410544 ....... 6,136 304 5.917 2 11.91 238 5 5.7 169 PSA
FH 610727 ....... 11,696 709 5.746 2 11.74 239 2 5.69 171 PSA
G2 080094 ....... 48,299 1,209 6.000 1 11.00 150 7 6.71 119 PSA
FN 313242 ....... 4,922 2,427 7.672 2 11.86 232 5 5.6 30 CPR
FN 367349 ....... 6,391 5,699 7.801 2 11.93 235 8 5.62 30 CPR
FN 313311 ....... 5,413 1,968 7.713 2 11.77 238 5 5.57 30 CPR
FN 363057 ....... 6,419 4,211 7.317 2 11.39 221 9 5.6 30 CPR
FN 313190 ....... 6,375 1,452 7.877 2 12.08 233 4 5.58 30 CPR
FN 363070 ....... 4,130 2,066 6.451 2 11.50 220 10 5.62 18 CPR
FN 313377 ....... 16,043 7,130 7.446 2 11.56 227 7 5.6 30 CPR
FN 370479 ....... 7,247 2,041 6.148 2 11.33 234 10 5.61 30 CPR
FN 378243 ....... 3,154 487 6.193 2 12.22 235 3 5.65 18 CPR
FN 313432 ....... 18,678 13,984 7.707 2 11.81 235 9 5.62 30 CPR
FN 370478 ....... 5,145 4,853 7.313 2 11.35 234 10 5.61 30 CPR
FN 396355 ....... 7,701 665 5.8 2 11.80 233 3 5.64 18 CPR
FN 374774 ....... 3,767 4,494 6.189 2 11.39 233 11 5.63 1 CPR
FN 391247 ....... 16,257 3,501 6.983 2 11.38 224 8 5.58 30 CPR
FN 419444 (4) ... 5,045 0 8.409 2 11.58 210 7 5.64 20 CPR
FN 422265 (4) ... 12,000 0 7.74 2 13.26 211 18 5.41 15 CPR
G 28506 (5) ..... 15,951 533 7 1 12.5 150 7 6.49 198 PSA
G 280001 (5) .... 6,931 414 7 1 12.5 150 10 6.49 111 PSA
Total ........ $313,084 $ 80,011
======== ========
</TABLE>
- --------------
(1) "FN"= FNMA; "G"= GNMA; and "FH"= FHLMC.
(2) Or from the purchase date if the relevant security was
purchased later.
(3) Determined as described under "--Prepayment Analysis"
herein, and subject to the assumptions and qualifications
in that section. Prepayments will not occur at the rate
assumed and average lives of the securities may differ
significantly from those shown.
(4) Security purchased on March 31, 1998.
(5) Securities purchased on January 30, 1998.
16
<PAGE>
Agency Hybrid ARMs
The Agency Hybrid ARMs in the ARM pools consist of
securities having the timely payment of principal and interest
guaranteed by FNMA and FHLMC. The pools consist of mortgages that
have a fixed coupon for a specified period of time, after which
they reset annually at a rate equal to the then-current rate of
the One-Year Constant Maturity Treasury Index (as defined above)
plus the security net margin, except that pools underlying the
Fannie Mae 422268 have a coupon that resets every three years at
a rate equal to the then-current rate of the Three-Year Constant
Maturity Treasury Index (as defined above) plus the security net
margin. Each ARM pool is subject to a periodic cap and a lifetime
cap which vary by pool. The length of the fixed period ranges
from 42 to 105 months in the Portfolio, as of December 31, 1997
and from 17 to 103 as of March 31, 1998. The latest stated
maturity date of any Agency Hybrid ARM in the Portfolio is August
2036.
<TABLE>
<CAPTION>
AGENCY HYBRID ARMs
As of December 31, 1997
Periodic Caps
------------------ Average Prepayment
Current Unpaid Sub- Margin Number of Weighted Speed
Principal Balance Current First sequent Life over CMT Months to Average Life Assumption
Pool No.(1) ($ 000) Coupon Reset Resets Cap (basis points) Rate Reset (years)(2) (CPR)
- ----------- ----------------- -------- ------ ------- ----- -------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FN 345856 $ 16,772 6.865% 2% 2% 11.86% 220 42.7 5.68 15%
FN 374138 17,753 6.349 2 2 11.35 221 48.7 5.57 15
FN 361370 48,016 7.559 5 2 13.56 227 53.5 5.50 15
FN 397136 13,014 7.750 2 2 13.75 214 105.6 5.56 15
FN 361372 68,308 7.881 5 2 12.88 226 85.5 5.49 15
FN 312824 8,941 7.375 5 2 12.38 225 84.5 5.49 15
Total $172,804
========
</TABLE>
- ---------------
(1) "FN"= FNMA.
(2) Determined as described under "--Prepayment Analysis" herein,
and subject to the assumptions and qualifications in that
section. Prepayments will not occur at the rate assumed and
average lives of the securities may differ significantly from
those shown.
<TABLE>
<CAPTION>
As of March 31, 1998
Current Periodic Caps Margin
Unpaid Prepayments ---------------- over Average Weighted Prepayment
Principal since Sub- CMT Number of Average Speed
Balance January 1, Current Firsts equent Life (basis Months to Life Assumption
Pool No.(1) ($000) 1998 Coupon Reset Resets Cap points) Rate Reset (years)(2) (CPR)
- ----------- ---------- ------------ ------- ------ ------- ----- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FN 345856 $16,216 $556 6.865 2% 2% 11.86% 220 43 5.69 15%
FN 374138 17,091 663 6.351 2 2 11.35 221 47 5.58 15
FN 361370 43,562 4,455 7.546 5 2 13.56 227 52 5.5 15
FN 397136 12,182 832 7.748 2 2 13.75 214 104 5.58 15
FN 361372 60,093 8,214 7.879 5 2 12.88 226 84 5.49 15
FN 312824 7,884 1,057 7.375 5 2 12.38 225 83 5.49 15
FN 362968(3) 5,966 436 7.75 6 2 12.27 223 85 5.52 15
FN 374917(3) 8,933 661 6.75 5 2 11.74 138 72 5.58 15
FN 403006(3) 9,961 20 6.502 5 2 11.5 147 80 5.6 15
FN 404484(3) 9,958 24 6.501 5 2 11.5 148 80 5.6 15
FN 422276(4) 31,500 0 8.409 2 2 13.23 227 44 5.45 15
FN 422268(4)(5) 5,061 0 8.409 3 3 12.94 238(5) 24 5.14 15
Total $228,406 $16,918
======== =======
</TABLE>
- --------------------
(1) "FN"= FNMA.
(2) Determined as described under "--Prepayment Analysis"
herein, and subject to the assumptions and qualifications in
that section. Prepayments will not occur at the rate assumed
and average lives of the securities may differ significantly
from those shown.
(3) Securities purchased on January 30, 1998.
(4) Securities purchased on March 31, 1998.
(5) The interest rate on this security is reset every three
years on the basis of The Three-Year Constant Maturity
Index.
17
<PAGE>
TREASURIES
As of December 31, 1997
Current Unpaid Number of
Principal Balance Years to
Security Description ($000) Coupon Maturity Maturity
- ------------------------ ----------------- ------- --------- --------
Tnote 6.625 05/15/07 .... $ 70,000 6.625% 05/15/2007 9.4
Tnote 6.5 10/15/06 ...... 70,000 6.500 10/15/2006 8.8
--------
Total ............. $140,000
========
- -------------------
As of March 31, 1998
Current Unpaid Number of
Principal Balance Years to
Security Description ($000) Coupon Maturity Maturity
- ------------------------ ----------------- ------- --------- --------
Tnote 6.625 05/15/07 .... $ 70,000 6.625% 05/15/2007 9.2
Tnote 6.5 10/15/06 ...... 70,000 6.500 10/15/2006 8.6
--------
Total ............. $140,000
========
- -------------------
PREPAYMENT ANALYSIS
Mortgage Prepayments
The rates of principal payments on the Mortgage-Backed
Securities depend indirectly on the rates of principal payments
on the related underlying mortgages. Mortgage principal payments
may be in the form of scheduled amortization or partial or full
prepayments. "Prepayments" include prepayments by the borrower,
liquidations resulting from default, casualty or condemnation and
payments made by the related Agency pursuant to its guarantee of
principal (other than scheduled amortization) on such securities.
The underlying mortgages are subject to prepayment at any time
without penalty.
Mortgage prepayment rates are likely to fluctuate
significantly. In general, when prevailing mortgage interest
rates decline significantly below the interest rates on the
underlying mortgages, the prepayment rate on the underlying
mortgages is likely to increase, although a number of other
factors also may influence the prepayment rate. See Item 2 for a
discussion of the prepayment history of the securities in the
Portfolio.
Prepayment Models
Prepayments on pools of mortgages are commonly measured
relative to a variety of prepayment models. The models used
herein are the standard prepayment model of The Bond Market
Association, an industry trade association, or "Standard
Prepayment Model", and the constant prepayment rate ("CPR"). The
Standard Prepayment Model was used to determine the weighted
average lives of the securities in the Portfolio that are backed
by pools of fixed-rate mortgage loans (all but one of the
Floating-Rate REMICs and the Fixed-Rate REMIC). Such model was
designed for fixed rate collateral and is generally considered
inappropriate for analyzing the prepayment speeds of adjustable
rate mortgage loans. The CPR model was used to determine the
weighted average lives of the securities in the Portfolio that
are backed by pools of adjustable rate mortgage loans (one of the
Floating-Rate REMICs and all of the Agency ARMs and Agency Hybrid
ARMs). Such model is the market standard for analyzing securities
backed by adjustable rate mortgage loans.
The Standard Prepayment Model assumes that mortgages will
prepay at an annual rate of 0.2% in the first month after
origination, that the prepayment rate increases at an annual rate
of 0.2% per month up to the 30th month after origination and that
the prepayment rate is constant at 6% per annum in the 30th and
later months (this assumption is called "100% Prepayment Speed
Assumption" or "100% PSA"). The Standard Prepayment Model assumes
that mortgages of the same age since origination will have the
same prepayment behavior. The percentage
18
<PAGE>
of PSA that is assumed reflects other characteristics of the
mortgages. For example, at 100% PSA, mortgages with a loan age of
three months (i.e., mortgages in their fourth month after
origination) are assumed to prepay at an annual rate of 0.8%. "0%
PSA" assumes no prepayments; "50% PSA" assumes prepayment rates
equal to 0.50 times 100% PSA; "200% PSA" assumes prepayment rates
equal to 2.00 times 100% PSA; and so forth.
The CPR model assumes a constant rate of prepayments on an
annualized basis. For example, at 10% CPR, mortgage loans are
assumed to prepay at a rate of 10% per annum. The CPR assumptions
used assume a stable interest rate environment (i.e., that the
interest rate in effect on the date the calculations were
performed will remain in effect for the life of the security).
The choice of the specific CPR applicable to each of the
securities in the Portfolio that is backed by a pool of
adjustable rate mortgage loans was based on the weighted average
maturity of such pool, as follows:
Weighted Average
Maturity/Other Pool
Characteristics CPR Assumed Description
- ------------------- ----------- ------------------------------------------
> 350 months 18% New loans that do not provide the borrower
non-convertible with the right to convert to a fixed mortgage
rate on an expedited basis
> 350 months 20 New loans that provide the borrower with
convertible the right to convert to a fixed mortgage rate
on an expedited basis and typically
experience faster prepayments
< 350 months 30 Seasoned adjustable rate mortgages, which
typically experience extremely fast
prepayment speeds
GNMA loans 8 Borrowers qualify for FHA mortgages, are
low income borrowers, have lower balances
and higher loan to value ratios than FNMA
or FHLMC borrowers, which factors
typically lead to slower prepayment speeds
Hybrid ARMs 15 Relatively new loans with limited historical
data available
PSA and CPR are not descriptions of historical prepayment
experience or a prediction of the rate of prepayment of the
underlying mortgages.
Weighted Average Life
The weighted average life of a security refers to the
average amount of time that will elapse from the date of its
purchase by the Company until each dollar of principal has been
repaid to the investor. The weighted average life of an issue of
mortgage-backed securities depends primarily on the rate at which
principal is paid on the related mortgages. In each case, the
Company has calculated the weighted average life by (i)
multiplying the assumed net reduction, if any, in the principal
amount on each payment date for such mortgage-backed securities
by the number of years from the date of purchase by the Company
for such mortgage-backed securities to such payment date, (ii)
summing the results and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount.
Modeling Assumptions
The weighted average lives set forth herein have been
prepared on the basis of characteristics of the mortgage-backed
securities and the related underlying mortgages included in the
Portfolio. The weighted average lives are based on the following
assumptions (the "Modeling Assumptions"), among others:
19
<PAGE>
1. as of December 31, 1997 and March 31, 1998, the
mortgage-backed securities have the principal balances set forth
in the tables above;
2. each mortgage loan underlying a mortgage-backed security
has characteristics equal to the weighted average of the
characteristics of the mortgage loans in the applicable pool
as reported on Bloomberg Financial Markets ("Bloomberg") on
December 31, 1997 and on March 31, 1998;
3. scheduled monthly payments of principal and interest on
the underlying mortgages are received on a timely basis and no
defaults occur;
4. principal prepayments on the underlying mortgage loans
for the Floating-rate REMICs and the Fixed-rate REMICs will be
received at the respective percentages of the applicable
prepayment assumption as reported on the Median Dealer
Pre-Payment Forecasts page of Bloomberg on December 31, 1997
and on March 31, 1998 and set forth in the above tables. For
the Agency ARMs, the Agency Hybrid ARMs and the FANNIE MAE
1997-28 FA, prepayments are assumed to be received at the CPR
set forth in the above tables;
5. the applicable issuer and underlying servicer do not
repurchase any underlying mortgage loan and do not make an
optional redemption;
6. with respect to the Agency ARMs and Agency Hybrid ARMs,
the level of the One-Year Treasury Index remains constant at
5.20% per annum (as of December 31, 1997) and at 5.41% per
annum (as of March 31, 1998);
7. with respect to the Agency ARMs and Agency Hybrid ARMs,
the scheduled monthly payment for each underlying mortgage
loan is adjusted on its next payment date, based upon a
security coupon rate equal to the sum of (a) the assumed rate
of the One-Year Treasury Index set forth in item 6 above, and
(b) the applicable security net margin, so that such scheduled
monthly payment would amortize the remaining balance by the
end of the weighted average remaining term to stated maturity
for the mortgage loans in the applicable pool as reported on
Bloomberg on December 31, 1997 and on March 31, 1998.
MANAGEMENT POLICIES AND PROGRAMS
Pursuant to the Services Agreement between the Company and
the Branch, the Branch maintains the Portfolio in accordance with
the Base Investment Policy Guidelines (as described below and as
set forth in Section 6.2(b) of the Charter) and, at any time when
the Series A Preferred Securities are not registered under
Section 12(g) of the Exchange Act, the Additional Investment
Policy Guidelines (as described below and as set forth in Section
6.2(c) of the Charter). In addition, the Company's Charter
specifies certain policies with respect to the acquisition and
disposition of securities, use of capital and leverage. The
amendment of certain policies requires the approval of the
member, or a majority of the members, of the Company's Board of
Directors who are not a current officer or employee of the
Company, the Bank or any affiliate of the Bank or of any person
or persons that, in the aggregate, owns or own more than 50% of
the outstanding Common Securities (an "Independent Director").
See Item 11, "Description of Series A Preferred Securities --
Independent Director Approval".
Asset Acquisition and Disposition Policies
Subsequent to the acquisition of the Initial Portfolio, the
Company will purchase from time to time and in accordance with
the Base Investment Policy Guidelines and, at any time when the
Series A Preferred Securities are not registered under Section
12(g) of the Exchange Act, the Additional Investment Policy
Guidelines, additional securities from third parties unaffiliated
with the Bank out of proceeds received in connection with (i) the
issuance of additional Common Securities and additional Preferred
Securities or (ii) the repayment of securities upon maturity or
the prepayment of securities.
Under the Base Investment Policy Guidelines, (i) the
Company may not acquire any assets other than Eligible
Securities; (ii) subject to limited exceptions, the Company may
not dispose of securities owned by it prior to their maturity
without the consent of a majority of the Independent Directors
(which consent the Company does not expect to be generally
available); and (iii) the Company may not dispose of securities
owned by it primarily for the purpose of realizing gain or
decreasing loss.
20
<PAGE>
Under the Additional Investment Policy Guidelines, the
Company (i) may not acquire assets other than Agency Securities,
Treasuries or Short-Term Instruments and (ii) must comply with
rules concerning (a) the accumulation of amounts of proceeds from
the prepayment or repayment of securities before reinvestment
thereof in Eligible Securities, (b) the procedure to be followed
for such reinvestment and (c) the criteria (as to issuer, type of
securities, weighted average life, maturity and yield) to be
applied in selecting new securities. The Company's Charter
further provides that the Base and the Additional Investment
Policy Guidelines may not be amended without the consent of a
majority of the Independent Directors. On December 19, 1997, the
Board of Directors of the Company adopted resolutions
establishing the Company's policy concerning the short-term
investment of interest payments and payments of principal amounts
with respect to securities pending either reinvestment in
additional Eligible Securities or payment of dividends on the
Company's Securities. Such policy provides that interest amounts
will be invested in the highest yielding fixed-rate certificates
of deposit offered by the Trustee maturing on Dividend Payment
Dates and that principal amounts will be invested in a specified
offshore deposit account offered by the Trustee.
Capital and Leverage Policies
The Company's principal liquidity needs are and will be to
pay dividends on the Series A Preferred Securities and to fund
the acquisition of additional Eligible Securities as securities
held by the Company are repaid. The acquisition of such
additional securities is and will be funded with the proceeds of
principal distributions on the securities included in the
Portfolio or the issuance of additional Common Securities and
additional Preferred Securities. The Company has not had and does
not anticipate that it will have any other material capital
expenditures. The Company believes that the amounts generated
from the payment of interest on securities in the Portfolio will
provide sufficient funds to meet both operating requirements and
payment of dividends by the Company for the foreseeable future.
The Company is prohibited by its Charter from incurring any
indebtedness for borrowed money.
To the extent that the Board of Directors determines that
additional funding is required, the Company may raise such funds
through additional equity offerings or retention of cash flow or
a combination of these methods. The Company may issue additional
series of Preferred Securities. However, the Company may not
issue additional Preferred Securities senior to the Series A
Preferred Securities without the consent of holders of at least
66 2/3% (by liquidation preference) of the outstanding Series A
Preferred Securities at that time, and the Company may not issue
additional Preferred Securities on a parity with the Series A
Preferred Securities without the approval of a majority of the
Company's Independent Directors. The Company may issue additional
Preferred Securities if such issuance would appear to provide the
Bank with cost-effective means of raising capital for bank
regulatory purposes at the time.
Conflict of Interest Policies
Because of the nature of the Company's relationship with
the Bank and its affiliates, conflicts of interest will arise
with respect to certain transactions. The officers of the Company
are (and the Company anticipates that all future officers will
be) officers or employees of the Branch, the Bank or one of its
affiliates. Pursuant to the Services Agreement between the
Company and the Branch, the Branch will maintain the Company's
portfolio of securities as described herein and provide certain
accounting, legal, tax and other support services to the Company.
Conflicts of interest will arise between the discharge by such
individuals of their duties as officers or employees of the
Company on the one hand and the Branch, the Bank or one of its
affiliates on the other hand. It is, however, the Company's
policy that the terms of any financial dealings with the Branch,
the Bank or one of its affiliates will be consistent with those
available from third parties in the securities markets.
It is the intention of the Company and the Bank that any
agreements and transactions between the Company, on the one hand,
and the Bank or its affiliates, on the other hand, including
without limitation the Portfolio Securities Purchase Agreement,
are fair to all parties and are consistent with market terms for
such types of transactions. The requirement in the Company's
Charter that certain actions of the Company be approved by a
majority of the Independent Directors is also intended to ensure
fair dealings between the Company and the Bank
21
<PAGE>
and its affiliates. However, there can be no assurance that any
such agreement or transaction will be on terms as favorable to
the Company as would have been obtained from unaffiliated third
parties.
Other Policies
The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act of 1940
(the "1940 Act"). The Company does not intend to (i) invest in
the securities of other issuers for the purpose of exercising
control over such issuers, (ii) underwrite securities of other
issuers, (iii) actively trade in investments, (iv) offer
securities in exchange for property, or (v) make loans to third
parties, including, without limitation, officers, directors or
other affiliates of the Company. The Company may, under certain
circumstances, purchase the Series A Preferred Securities and
other of its capital securities in the open market or otherwise,
provided, however, that, other than during a Shift Period (as
defined in Item 11), the Company will not redeem or repurchase
any of its Common Securities for so long as any Series A
Preferred Securities are outstanding without the approval of a
majority of the Independent Directors, unless the Company
concurrently redeems an equal proportion of the aggregate
liquidation preference (based on the aggregate redemption price)
of Series A Preferred Securities unless (i) the General
Secretariat of the French Banking Commission (Secretariat general
de la Commission bancaire) shall have approved such redemption or
repurchase and (ii) each of Moody's Investors Service Inc. and
Standard and Poor's (each, a "Rating Agency") then rating the
Series A Preferred Securities shall have informed the Company
that the redemption or repurchase of such Common Securities would
not adversely affect its initial rating of the Series A Preferred
Securities.
COMPETITION
The Company will purchase Eligible Securities in addition
to those in the Portfolio as needed to maintain the Company's
operations and such additional Eligible Securities will be
purchased from third parties that are unaffiliated with the Bank.
The Company competes with investment banking firms, savings and
loan associations, banks, thrift and loan associations, finance
companies, mortgage bankers and insurance companies in acquiring
its additional Eligible Securities. Such competition may result
in the Company purchasing Eligible Securities with lower spreads
than those earned on the securities in the Portfolio. The Company
does not expect any decrease in spreads resulting from increased
competition to have a material adverse effect on its results of
operations. Because of the coverage that the size of the
Portfolio provides for the payment of dividends on the Series A
Preferred Securities, a change in spreads would not significantly
impact the global yield of the Portfolio or the ability of the
Company to pay such dividends, unless both prevailing interest
rates and spreads on Eligible Securities were to decline
dramatically and durably. In such case, the effect of lower
interest rates would significantly outweigh the effect of lower
spreads.
PLAN OF OPERATION FOR THE REMAINDER OF THE 1998 FISCAL YEAR
The Company intends to continue to manage the securities in
the Portfolio in a manner consistent and complying with the Base
and Additional Investment Policy Guidelines in order to generate
revenues commensurate with the payment of dividends on the Series
A Preferred Securities and the Common Securities.
22
<PAGE>
Item 2. Financial Information
SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of
March 31, 1998 and December 31, 1997 and for the three-month
period ended March 31, 1998 and the period from December 5, 1997
(inception) through December 31, 1997.
(in thousands, except per share and yield data)
Period from
December 5, 1997
Three-month period (inception) to
ended March 31, 1998 December 31, 1997
-------------------- -----------------
Statement of Income:
- --------------------
Interest income $12,898 $ 4,188
Net income $12,846 $ 4,142
Average number of redeemable
Common Securities outstanding 53,011 53,011
Net income per redeemable
Common Security $242.32 $ 78.14
Balance Sheet:
- --------------
Investment Securities at fair value $1,021,541 $997,748
Total Assets: 1 $1,912,912 $2,032,914
Series A Preferred Securities
outstanding $500,000 $500,000
Total Redeemable
Common Securities,
Preferred Securities and
Securityholders' Equity $1,046,933 $1,034,258
Other Data:
- -----------
Comprehensive income 2 $12,846 $ 4,142
Dividends paid on Series A
Preferred Securities -- --
Dividends paid on redeemable
Common Securities -- --
Number of Series A
Preferred Securities outstanding 50,000 50,000
Number of redeemable Common
Securities outstanding 53,011 53,011
Average yield on investment securities 5.08% 5.92%
- -------------------------
1 Includes a receivable of $864,204 and $966,260 at March 31,
1998 and December 31, 1997, respectively, arising from the
application of Statement of Financial Accounting Standards
No. 125 ("SFAS 125") to the purchase by the Company of the
Initial Portfolio from the Branch. See Note 3 to the
Financial Statements of the Company included in Item 13
hereof. Neither the Bank nor the Branch, however, has any
obligation to repay any part of the purchase price for the
Initial Portfolio or to repurchase or redeem any of the
securities included therein.
2 Comprehensive income, established in accordance with
Statement of Financial Accounting Standards No. 130,
includes net income, as reported, as well as the change in
unrealized gains and losses on available-for-sale securities
and in the obligation arising from the receipt of
securities, pursuant to the application of SFAS 125.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company was formed on October 14, 1997 and commenced
operations on December 5, 1997. The following discussion pertains
to the period from December 5, 1997 through December 31, 1997 and
to the three-month period ended March 31, 1998.
Results of Operations
Period from December 5, 1997 through December 31, 1997
------------------------------------------------------
During the period from December 5, 1997 through December 31,
1997, the Company had revenues of $4,188,125. This amount
consisted entirely of interest income. Interest on the securities
in the Portfolio amounted to $4,162,524, representing an
aggregate average yield of 5.92%. Interest earned and average
yield with respect to each category of security in the Portfolio
was as follows: Floating-rate REMICs ($1,175,000, 6.34%);
Fixed-rate REMICs ($225,000, 6.92%); Agency ARMs ($1,443,000,
5.62%); Agency Hybrid ARMs ($708,000, 5.66%); and Treasuries
($612,000, 5.86%). The average book value of the Portfolio during
the period was $1,010,016,312, reflecting the following
prepayments: Agency ARMs ($18,597,468), Floating rate REMICs
($6,986,866) and Agency Hybrid ARMs ($3,389,795). The Company
also recorded $25,601 of interest income from the short-term
investment of (i) interest payments on securities in the
Portfolio and (ii) such prepayments of principal.
The aggregate market value of the securities in the
Portfolio at December 31, 1997 was higher than the book value by
approximately 0.24%, due to a net decrease in interest rates.
Because management intends to hold such securities until
maturity, the unrealized net gain of approximately $2,350,000 was
not recognized in reporting income.
Operating expenses for the period totaled $45,877.
Operating expenses consisted of audit fees, an accrued portion of
the fees of Citibank as Trustee and of the Branch under the
Services Agreement, a fee of $8,000 payable to French American
Banking Corporation ("FABC") as dividend paying agent, registrar
and transfer agent, and the independent director's fee of $6,000.
The Company's net income during the period from December 5
to December 31, 1997 was $4,142,248. No dividends were declared
during this period with respect to either the Series A Preferred
Securities or the Common Securities.
Three-Month Period Ended March 31, 1998
---------------------------------------
During the three-month period ended March 31, 1998, the
Company had revenues of $12,897,366. This amount consisted
entirely of interest income. Interest on the securities in the
Portfolio amounted to $12,518,075, representing an aggregate
average yield of 5.08%. Interest earned and average yield with
respect to each category of security in the Portfolio was as
follows: Floating-rate REMICs ($3,797,043, 5.79%); Fixed-rate
REMIC ($756,103, 6.45%); Agency ARMs ($2,826,433, 3.37%); Agency
Hybrid ARMs ($3,046,386, 6.28%); and Treasuries ($2,094,109,
5.79%). The average book value of the Portfolio during the period
was $984,811,170, reflecting the following prepayments and
reinvestments: prepayments of Floating-rate REMICs ($34,717,384),
Agency ARMs ($80,011,697) and Agency Hybrid ARMs ($16,918,979);
reinvestments in Floating-rate REMICs ($43,837,172), Agency ARMs
($29,467,210) and Agency Hybrid ARMs ($86,206,271). The Company
also recorded $379,290 of interest income from the short-term
investment of (i) interest payments on securities in the
Portfolio and (ii) such prepayments of principal pending their
reinvestment.
The decrease in the aggregate yield on the securities in
the Portfolio to 5.08% for the three-month period ended March 31,
1998 from 5.92% for the period from December 5, 1997 to December
31, 1997 was due primarily to prevailing market conditions
resulting in a lower interest rate environment in the United
States. At December 31, 1997, 85% of the Portfolio consisted of
collateralized mortgage obligations (Floating-rate REMICs and
Fixed-rate REMIC) and mortgage backed securities (Agency ARMs and
Agency Hybrid ARMs) and 15% consisted of Treasuries. Floating
rate securities accounted for 94.6% of the portfolio of
collateralized mortgage obligations and
24
<PAGE>
mortgage backed securities. The decline in market interest rates
caused an acceleration of prepayments of principal of
collateralized mortgage obligations and mortgage backed
securities as mortgage holders refinanced to lower rate
obligations. The Company reinvested the proceeds from such
prepayments in lower yielding securities. Furthermore, as a
result of such prepayments, the average portfolio size decreased
from $1,010,016,312 in December 1997 to $984,811,170 for the
three-month period ended March 31, 1998.
The aggregate market value of the securities in the
Portfolio as of March 31, 1998 was higher than the book value by
approximately 0.15%, due to a net decrease in interest rates.
Because management intends to hold such securities until
maturity, the unrealized net gain of approximately $1,580,000 was
not recognized in reporting income.
Operating expenses for the period totaled $51,548.
Operating expenses consisted of accrued audit fees and an accrued
portion of the fees of Citibank as Trustee and of the Branch
under the Services Agreement.
The Company's net income during the three-month period
ended March 31, 1998 was $12,845,817. No dividends were declared
during this period with respect to either the Series A Preferred
Securities or the Common Securities.
General
-------
The Company's sole source of income is interest generated
by the securities in the Portfolio. As seen in the first quarter
of 1998, any decline in prevailing interest rates in the United
States would result in lower revenues for the Company, both due
to lower interest income from the floating-rate securities in the
Portfolio, which constitute approximately 80% thereof, and from
increased prepayments and reinvestment of the proceeds therefrom
in lower-yielding securities. Any rise in prevailing interest
rates in the United States would generate additional revenues for
the Company, both due to an increase in revenues from the
securities currently in the Portfolio ("original securities") and
a higher yield on securities purchased upon the reinvestment of
the proceeds of repaid and prepaid securities ("reinvestment
securities"). Rising interest rates would affect the Company's
revenues variably depending upon the amount of the increase, but
in all cases the result would be increased revenues and the
Company would expect to continue to generate sufficient revenues
to pay dividends on the Series A Preferred Securities. If
interest rates were to rise by an amount less than the periodic
caps of the adjustable rate securities in the Portfolio
(generally 2%), original securities would produce higher revenues
beginning at their next rate reset date, and reinvestment
securities would yield higher revenues and also have a higher
effective periodic cap. If interest rates were to rise above the
periodic caps of the adjustable rate securities but remain below
their lifetime caps, revenues from the original securities would
initially increase, then stabilize at the level of the periodic
cap and then further increase at the next reset date. Yields on
reinvestment securities, which would yield then-current market
rates, would bring the overall yield of the Portfolio closer to
current market yields. If interest rates were to rise above the
lifetime caps of the adjustable rate securities, revenues from
the original securities would stabilize at the lifetime cap
level; however, reinvestment securities would yield then-current
market rates and also have higher lifetime caps, thereby
gradually increasing the yields on the Portfolio to approach
then-current market rates. The increase would be more gradual in
such an environment because securities would tend to be prepaid
more slowly and less often due to the high prevailing interest
rates.
Under SFAS 125, transfers of financial assets that do not
meet certain sale accounting requirements must be accounted for
as a secured borrowing transaction with a pledge of collateral.
Due to the potential consequences of a Shift Event, the Company's
purchase of the Initial Portfolio from the Branch did not meet
certain SFAS 125 sale accounting requirements. Accordingly, the
Company recorded at December 5, 1997 a receivable for the
consideration paid to the Branch for the Initial Portfolio
treated as collateral. Since the Company has the right to sell
and pledge the securities in the Initial Portfolio treated as
collateral, in application of SFAS 125 the Company recognized the
securities in the Initial Portfolio as assets and recorded at
December 5, 1997 a related obligation to return them to the
Branch. As a legal and economic matter, however, there is no such
receivable or obligation since (a) neither the Bank nor the
Branch has any obligation to repay any part of the purchase price
for the Initial Portfolio or to repurchase or redeem any of the
securities included therein, and (b) the Company has no
obligation to return any of such securities to the Bank or the
Branch (except in the limited circumstances and to the extent
that the occurrence of a Shift Event under the Charter would
require the transfer of any assets held by the Company at the
time). As the securities in the Initial Portfolio are paid, the
receivable will be deemed to be realized and the obligation will
be reduced, each by an amount corresponding to the amount of the
payments. See Note 3 to the financial statements of the Company
included in Item 13 hereof. At March 31, 1998 and December 31,
1997, respectively, the receivable arising from payment for
securities amounted to $864,203,751 and $996,259,635, and the
obligation arising from the receipt of securities amounted to
$865,955,947 and $998,609,635. (The slight difference between the
amounts of the receivable and the obligation result from a
requirement to mark the obligation to market in parallel with the
related securities.) The decrease in the amount of such
receivable and such obligation between the two dates reflects the
prepayment of securities in the Initial Portfolio and the
purchase by the Company of securities from third parties with the
proceeds therefrom. The Company recognized the cash proceeds of
such prepayments as a reduction in the receivable and
concurrently reduced the associated obligation. Such decreases in
the receivable and the obligation did not affect the Company's
results of operations or cash flow. Since the purchase of the
Initial Portfolio, the Company has purchased securities only from
unrelated third parties. Such transactions are accounted for as a
purchase under SFAS 125.
25
<PAGE>
Liquidity and Capital Resources
-------------------------------
The objective of liquidity management is to ensure the
availability of sufficient cash flows to meet all of the
Company's financial commitments. The Company's sole liquidity
needs are to acquire reinvestment securities as original
securities repay or prepay and to pay dividends on the Series A
Preferred Securities. The acquisition of reinvestment securities
is funded with the proceeds of principal repayments or
prepayments on original securities, and the payments of dividends
on the Series A Preferred Securities will be funded by revenues
from the securities in the Portfolio. Given the limited scope of
its purpose (acquiring and holding Eligible Securities to fund
the payment of dividends on the Series A Preferred Securities and
the Common Securities), the Company does not anticipate that it
will have any other material expenditures requiring liquidity.
Furthermore, the Company is prohibited from incurring
indebtedness. Accordingly, the Company believes that its
liquidity and capital resources will be sufficient to meet its
liquidity requirements in the short and long term.
Item 3. Properties
The Company does not own or lease any property. It uses the
facilities of the Branch located at 499 Park Avenue, New York, NY
10022.
Item 4. Security Ownership of Certain Beneficial Owners And Management
As shown in the following table, all of the outstanding
Common Securities are owned by the Branch.
- ---------------------------------------------------------------------------
Name And Address Of Amount And Nature Of Percent
Title Of Class Beneficial Owner Beneficial Ownership Of Class
- ---------------------------------------------------------------------------
Common Securities Banque Nationale de 53,011 100%
Paris, New York Branch
499 Park Avenue
New York, NY 10022
- ---------------------------------------------------------------------------
None of the members of the Company's Board of Directors
owns any Common Securities or Series A Preferred Securities.
Item 5. Directors and Executive Officers
The following table sets forth information concerning the
directors and executive officers of the Company. The directors
serve 3-year terms (5 years in the case of the Independent
Director), subject to earlier resignation or removal. The current
term of office of each director commenced on the Closing Date.
Name and Age Position and Offices Held
------------ -------------------------
Jean-Francois Lepetit (55) .........................Chairman and Director
Martine Billeaud (52) ..............................Director
Jean-Pierre Beck (54) ..............................Director
Donald J. Puglisi (52) .............................Independent Director
Eric Deudon (34) ...................................President and Director
Bruno Di Nardo (58) ................................Secretary and Director
Lisa Hermann (37) ..................................Treasurer
The following is a summary of the experience of each of the
executive officers and directors of the Company:
Jean-Francois Lepetit is Advisor to the Chairman of the
Bank and a Member of the General Management Committee. He is
Chairman of the Bank's Market Risk Committee and Co-Chairman of
BNP Prime East. Mr. Lepetit is also in charge of the Bank's Asset
26
<PAGE>
and Liability Management. He was previously Vice Chairman of the
Board and Chief Executive Officer of Banque Indosuez. Mr. Lepetit
was born in 1942.
Martine Billeaud is in charge of the Bank's treasury
activities related to Asset and Liability Management. She was
previously responsible for worldwide foreign exchange and
interest rate products distribution and French franc trading. Ms.
Billeaud was born in 1945 in Choisy le Roi, France.
Jean-Pierre Beck is Executive Vice President in charge of
Asset and Liability Management and Capital Markets activities of
the Bank's U.S. branches. Prior to this position, he was the
Global Market Risk Manager of the Bank. He has worked for the
Bank since 1964. Mr. Beck was born in 1943 in Mulhouse, France.
Donald J. Puglisi, the Independent Director, is the MBNA
America Business Professor and Professor of Finance at the
University of Delaware where he has been on the faculty since
1971. In addition, he is the Managing Director of Puglisi &
Associates, a company which provides investment management,
accounting and other administrative services to a variety of
different companies. Mr. Puglisi holds a Directorship or
Trusteeship in the following companies that are registered under
either the Exchange Act or the 1940 Act: AJL PEPS Trust,
Automatic Common Exchange Security Trust II, DECS Trust, DECS
Trust II, Dole Food Automatic Common Exchange Security Trust,
Great Lakes Fund, Inc., Huron Investment Fund, Inc., Mandatory
Common Exchange Trust, Nextel STRYPES Trust; Select Asset Fund,
Series 1, Inc., Select Asset Fund, Series 2, Inc., Snyder STRYPES
Trust, and, WBK STRYPES Trust.
Eric Deudon is Senior Vice President in charge of Capital
Markets activities of the Branch. Since joining the Bank in 1990
in Tokyo, he has run or supervised securities trading and
investment portfolios and foreign exchange activities. Mr. Deudon
was born in 1963 in Saint Cloud, France.
Bruno Di Nardo is an attorney in New York and has acted as
General Counsel of the Bank and its subsidiary French American
Banking Corporation in New York for the past 24 years. He was
born in 1939.
Lisa Hermann is Assistant Vice President responsible for
securities trading and investment portfolios at the Branch. She
joined the Information Systems Department of the Bank in New York
in 1990 and in 1993 was appointed to the trading room as a
securities trader. Ms. Hermann was born in 1960 in Philadelphia,
Pennsylvania.
Item 6. Executive Compensation
The Independent Director, Donald J. Puglisi, receives
director's fees of $6,000 per year. All of the other members of
the Company's Board of Directors and officers are officers or
employees of the Branch or the Bank and none receives any
compensation from the Company or additional compensation from the
Branch or the Bank for services rendered to the Company.
Item 7. Certain Relationships and Related Transactions
On the Closing Date, the Branch acquired the Common
Securities from the Company for an aggregate purchase price of
$530,110,000, and pursuant to the terms of the Portfolio
Securities Purchase Agreement with the Branch, the Company
purchased the Initial Portfolio for an aggregate purchase price
of $1,030,115,000. See Item 1, "Description of the Portfolio --
Purchase". In addition, the Company entered into the Services
Agreement with the Branch pursuant to which the Branch agreed to
provide certain portfolio management, legal, tax, accounting and
other support services to the Company, and the Company agreed to
pay the Branch an annual fee of $50,000 for such services. This
fee is somewhat less than the fee which would be received in an
arms' length transaction with a third party. Management does not
believe that the difference is material.
The purchase price of the Initial Portfolio was based on
the estimated market value of the securities included therein as
of November 28, 1997. The estimated market value was determined
by representatives of the Branch and the Company, under the
direction of Eric Deudon, Senior Vice President of the Branch and
President of the Company, based on the trading levels of similar
bonds in the market at the time of the pricing noted by the
27
<PAGE>
Branch securities arbitrage desk. The use of "proxy bonds"
trading levels is systematically used by the desk to price its
trading portfolio, and therefore the same methodology was applied
to price the securities in the Initial Portfolio.
The following tables set forth the purchase price and date
of purchase of the securities included in the Initial Portfolio
that were purchased by the Branch in the two years prior to their
sale to the Company on December 5, 1997.
FLOATING-RATE REMICS
Price Paid by
Series the Branch Purchase Date
-------------------------------------------------------------------
FANNIE MAE 1993-210 FB...... $ 49,951,986.53 09/12/97
FHLMC-GNMA 38 F............. $ 9,322,381.60 05/07/97
FANNIE MAE 1997-28 FA....... $ 49,953,125.00 04/30/97
FANNIE MAE 1996-51 FA....... $ 17,197,611.81 07/23/97
FREDDIE MAC 1933 FR......... $ 6,811,115.05 02/28/97
FANNIE MAE 1990-121 F....... $ 27,665,447.29 12/14/96
Collateralized Mortgage
Obligation Trust 66 F..... $ 4,765,718.60 06/19/96
FREDDIE MAC 1382 LC......... $ 7,215,145.09 06/12/96
FANNIE MAE 1992-141 FA...... $ 970,971.93 02/28/97
FREDDIE MAC 1256 CA......... $ 8,950,943.70 11/05/96
Morgan Stanley Mortgage
Trust 41 Class 1.......... $ 9,833,214.64 01/24/97
FANNIE MAE 1993-155 FG...... $ 6,825,933.67 05/16/97
FREDDIE MAC 1040 H.......... $ 24,899,334.03 08/20/97
FANNIE MAE 1997-37 F........ $239,710,218.21 10/09/97
FANNIE MAE 1997-52 F........ $ 9,579,790.00 07/30/97
FANNIE MAE 1997-42 F........ $ 9,735,842.17 10/09/97
FANNIE MAE 1997-44 F........ $ 9,911,047.24 10/09/97
FANNIE MAE 1997-67 FB....... $ 22,623,401.67 10/16/97
FIXED-RATE REMIC
Price Paid by
Series the Branch Purchase Date
- --------------------------------------------------------------------
FANNIE MAE 1997-56 PE.......... $46,121,777.81 10/08/97
28
<PAGE>
AGENCY ARMs
Price Paid by
Series the Branch Purchase Date
- ------------------------------------------------------------
FN 394850...... $40,518,280.54 08/25/97
FN 397901...... $47,984,906.37 08/25/97
FH 846384...... $26,352,260.48 02/24/97
FN 374711...... $10,170,301.97 07/24/97
FN 374773...... $15,081,841.84 07/24/97
FH 410544...... $ 6,919,540.23 09/24/97
FH 610727...... $12,900,058.29 09/24/97
G2 080094...... $50,428,422.91 10/07/97
FN 313242...... $19,803,564.31 01/23/97
FN 367349...... $24,240,937.50 01/23/97
FN 313311...... $22,744,411.89 01/23/97
FN 363057...... $13,725,081.69 03/24/97
FN 313190...... $21,610,810.09 02/25/97
FN 363070...... $ 8,347,462.23 03/24/97
FN 313377...... $44,102,402.00 03/24/97
FN 370479...... $12,538,776.18 04/23/97
FN 378243...... $ 5,117,282.86 07/24/97
FN 313432...... $51,431,093.75 02/28/97
FN 370478...... $11,225,485.24 09/24/97
FN 396355...... $10,066,560.16 09/24/97
FN 374774...... $ 8,701,904.94 09/24/97
FN 391247...... $25,697,362.98 09/25/97
AGENCY HYBRID ARMs
Price Paid by
Series the Branch Purchase Date
- ------------------------------------------------------------
FN 345856....... $17,372,126.92 04/23/97
FN 374138....... $17,816,400.02 04/23/97
FN 361370....... $51,233,613.40 08/24/97
FN 397136....... $14,128,503.65 09/24/97
FN 361372....... $30,165,653.78 10/23/97
FN 312824....... $ 9,521,125.64 11/24/97
TREASURIES
Price Paid by
Series the Branch Purchase Date
- ------------------------------------------------------------
Tnote 6.625
05/15/07........ $71,465,625.00 12/05/97
Tnote 6.5
10/15/06........ $72,850,155.00 10/24/97
29
<PAGE>
Item 8. Legal Proceedings
The Company is not the subject of any litigation.
Item 9. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters
MARKET INFORMATION
There is no established public trading market for the
Common Securities, all of which are held by the Branch. The Bank
has agreed with the Company that, for so long as any Series A
Preferred Securities are outstanding, the Bank will maintain
direct or indirect ownership of 100% of the outstanding Common
Securities.
DIVIDENDS
As of the date of this Form 10, the Company has not
declared any dividends on the Common Securities.
Holders of Common Securities are entitled to receive
dividends if declared by the Company's Board of Directors out of
net gains from the disposition of Securities in the Portfolio and
net income not required to be applied to fund dividends with
respect to the Series A Preferred Securities. (Series A Preferred
Securityholders are entitled to receive dividends if declared by
the Company's Board of Directors as described in Item 11,
"Description of Series A Preferred Securities -- Dividends".)
There are a number of restrictions on the Company's ability
to pay dividends on the Common Securities. First, under the
Delaware Limited Liability Company Act, the Company may not pay
dividends or make other distributions on the Common Securities or
Series A Preferred Securities if, after giving effect to the
distributions, the Company's liabilities would exceed the fair
value of its assets. Second, the Company's Charter provides that
so long as any Series A Preferred Securities are outstanding (i)
other than during a Shift Period (as defined in Item 11) after a
shift in dividend preference, the amount of dividends on the
Common Securities in any fiscal year may not exceed the amount by
which the net income of the Company (determined in accordance
with generally accepted accounting principles) for such fiscal
year exceeds the stated dividends on the Series A Preferred
Securities scheduled to be paid during such fiscal year
irrespective of whether dividends on the Series A Preferred
Securities are in fact declared and paid, and (ii) other than
during a Shift Period, the Company may not redeem or repurchase
Common Securities without the concurrent redemption of an equal
proportion of the aggregate liquidation preference (based upon
the aggregate redemption price) of outstanding Series A Preferred
Securities unless (x) the General Secretariat of the French
Banking Commission (Secretariat general de la Commission
bancaire) shall have approved such redemption or repurchase and
(y) each Rating Agency then rating the Series A Preferred
Securities shall have informed the Company that the redemption or
repurchase of such Common Securities would not adversely affect
its initial rating of the Series A Preferred Securities. These
provisions regarding the limitations on payment of dividends in
respect of Common Securities and redemption or repurchase of
Common Securities may not be modified without the approval of a
majority of the Independent Directors. Third, other than during a
Shift Period after a shift in dividend preference, no dividends
may be declared, paid or set apart for payment on the Common
Securities (a) with respect to any period of time included in any
Dividend Period (as defined in Item 11) unless full dividends
have been or contemporaneously are declared and paid, or declared
and a sum sufficient for the payment thereof is set apart for
such payment on the Series A Preferred Securities for the
then-current Dividend Period and (b) the Company may not declare,
pay or set apart funds for any dividends or other distributions
with respect to any Common Securities or repurchase, redeem or
otherwise acquire, or set apart funds for repurchase, redemption
or other acquisition of, any Common Securities through a sinking
fund or otherwise, unless and until (x) full dividends on the
Series A Preferred Securities for the two most recent preceding
Dividend Periods (or such lesser number of Dividend Periods
during which Series A Preferred Securities have been outstanding)
are declared and paid, or declared and a sum sufficient for
payment has been paid over to the dividend disbursing agent for
payment of such dividends and (y) the Company has declared a cash
dividend on the Series A Preferred Securities at the annual
dividend rate for the then-current Dividend Period, and
sufficient funds have been paid over to the dividend disbursing
agent for the payment of such cash dividend for such then-current
Dividend Period; provided,
30
<PAGE>
however, that notwithstanding the foregoing restrictions the
Company may repurchase or redeem Common Securities as set forth
in (ii) above. Notwithstanding the foregoing limitations, if a
Shift Event (as defined in Item 11) were to occur, the Company
would automatically redeem substantially all of its Common
Securities for an amount equal to the investment of the Branch
attributable to such Securities (initially $530,110,000).
Item 10. Recent Sales of Unregistered Securities
On December 5, 1997, the Company sold 50,000 Series A
Preferred Securities to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, J.P. Morgan Securities Inc. and Salomon Brothers
Inc (the "Initial Purchasers") for an aggregate price of $500
million and the Bank paid the Initial Purchasers an aggregate
commission of $5 million. The Initial Purchasers resold the
50,000 Series A Preferred Securities to qualified institutional
buyers pursuant to Rule 144A under the Securities Act.
On October 14, 1997, the Company sold one Common Security
to the Branch for $10,000 and on December 5, 1997, the Company
sold 53,010 Common Securities to the Branch for $530,100,000.
Each sale was made in reliance on Section 4(2) of the Securities
Act.
The Company used the proceeds of the sale of Series A
Preferred Securities and Common Securities to purchase the
Initial Portfolio.
Item 11. Description of Registrant's Securities to be Registered
The following summary of the terms of the Series A
Preferred Securities does not purport to be complete and is
qualified in its entirety by reference to the Company's Charter.
GENERAL
The Series A Preferred Securities form a series of the
Preferred Securities of the Company, the terms of which are set
forth in the Company's Charter. Additional Preferred Securities
may be issued from time to time in one or more series with such
rights, preferences and limitations as are determined by the
Company's Board of Directors or, if then constituted, a duly
authorized committee thereof, subject to the limitations
described below. The Company has been authorized to issue the
Series A Preferred Securities.
The Series A Preferred Securities are validly issued, fully
paid and nonassessable. The Series A Preferred Securityholders
have no preemptive rights with respect to any capital securities
of the Company or any other securities of the Company convertible
into or carrying rights or options to purchase any such
securities. The Series A Preferred Securities are not convertible
into Common Securities or any other class or series of capital
securities of the Company and are not subject to any sinking fund
or other obligation of the Company for their repurchase or
retirement.
Interests in the Series A Preferred Securities may not be
sold or otherwise transferred, except to institutional investors
that are qualified institutional buyers as defined in Rule 144A
under the Securities Act, and certificates evidencing Series A
Preferred Securities bear a legend to this effect. Each purchaser
will be deemed to have read, and to have made the representations
contained in, "-- Transfer Restrictions; Notice to Investors".
The Series A Preferred Securities rank prior to the Common
Securities and to all other classes and series of equity
securities of the Company now or hereafter issued (collectively,
"Junior Securities"), other than any class or series of equity
securities of the Company expressly designated as being on a
parity with ("Parity Securities") or senior to ("Senior
Securities") the Series A Preferred Securities as to dividend
rights and rights upon dissolution, liquidation or winding up
(subject to the consequences of a Shift Event (as defined below)
occurring). The Company has the power to create and issue
additional Preferred Securities or other classes of securities
that rank on a parity with the Series A Preferred Securities, or
that constitute Junior Securities. So long as any Series A
Preferred Securities remain outstanding, additional shares of
Senior Securities may not be issued without the approval of the
holders of at least two-thirds (by liquidation preference) of the
Series A Preferred Securities. So
31
<PAGE>
long as any Series A Preferred Securities remain outstanding,
additional shares of Parity Securities may not be issued without
the approval of a majority of the Independent Directors.
DIVIDENDS
Series A Preferred Securityholders are entitled to receive
dividends when, as and if declared by the Company's Board of
Directors, out of the Company's net income, determined without
regard to capital gains or losses, and out of amounts contributed
by the Bank to the Company. (The Contingent Support Agreement
requires the contribution of certain amounts by the Bank under
certain circumstances following a Shift Event. See "--The
Contingent Support Agreement". The Bank will have no obligation
to make any contributions to the Company under any other
circumstances.) Dividends on the Series A Preferred Securities
are payable from December 5, 1997 on a non-cumulative basis as
follows: (i) through December 5, 2007, semi-annually in arrears
on the fifth day of June and December of each year, commencing
June 5, 1998, and (ii) thereafter, quarterly in arrears on the
third Wednesday of March, June, September and December of each
year (subject to adjustment of such date under certain
circumstances, as provided below). "Dividend Payment Date" refers
to each date on which dividends are payable in accordance with
the preceding sentence. Dividends payable on each Dividend
Payment Date will be calculated as provided below and will accrue
from and including the immediately preceding Dividend Payment
Date (or from and including December 5, 1997 with respect to the
dividend payable June 5, 1998) to but excluding the relevant
Dividend Payment Date or date fixed for redemption ("Redemption
Date"), as the case may be (each such period, a "Dividend
Period").
On December 19, 1997, the Board of Directors of the Company
adopted resolutions stating that it is the intention of the Board
of Directors to declare and to cause the Company to pay dividends
on the Series A Preferred Securities on each Dividend Payment
Date in the amount payable in accordance with Section 7.3(b)(ii)
of the Charter (and described in the next two paragraphs) out of
the Company's net income for the six calendar months ended
immediately prior to such Dividend Payment Date, determined
without regard to capital gains or losses, and out of any
contributions by the Bank to the capital of the Company
specifically designated as being for such purpose; provided,
however, that such policy will not apply during a Shift Period if
an annual meeting of shareholders of the Bank fails to declare
dividends on the Bank's common stock with respect to the
then-most recent fiscal year or the Board of Directors of the
Bank announces that it does not intend to propose to the
shareholders' meeting the declaration of a dividend on the Bank's
common stock with respect to the then-most recent fiscal year or
the then-current fiscal year, in which case all of the Company's
net income shall be paid on the Common Securities in accordance
with Section 7.3(c)(i)(A) of the Charter (subject to the
condition set forth therein and described in the fourth
succeeding paragraph herein).
With respect to each Dividend Period from December 5, 1997
to December 5, 2007, dividends will be payable on the liquidation
preference of the Series A Preferred Securities at a fixed rate
of 7.738% per annum, calculated on the basis of a 360-day year of
twelve 30-day months. If any Dividend Payment Date or Redemption
Date during such period falls on a day that is not a Business
Day, the relevant dividend will be payable on the next succeeding
Business Day without adjustment, interest or further payment as a
result of the delay. "Business Day" means a day other than
Saturday, Sunday or a day on which banking institutions in The
City of New York are authorized or required by law or order to
remain closed.
With respect to each Dividend Period following December 5,
2007, dividends will be calculated and accrue on the liquidation
preference of the Series A Preferred Securities, on a weekly
basis for each week in such Dividend Period, from and including
the LIBOR Reset Date (as defined below) falling in such week to
but excluding the LIBOR Reset Date falling in the next succeeding
week (each such period, a "Weekly Dividend Period"), at a rate
per annum equal to 2.8% plus One-Week LIBOR (as defined herein)
determined on the related LIBOR Determination Date (as defined
herein) for such Weekly Dividend Period. The dividend in respect
of each Weekly Dividend Period will be calculated on the basis of
a 360-day year and the actual number of days in such Weekly
Dividend Period. "LIBOR Reset Date" means the Wednesday of each
week falling in a Dividend Period commencing December 5, 2007.
Each Dividend Payment Date commencing December 5, 2007 will also
be a LIBOR Reset Date. If any LIBOR Reset Date, Dividend Payment
Date or Redemption Date on or after December 5, 2007 falls on a
day that is not both a Business Day and a London Business Day
such LIBOR Reset Date, Dividend Payment Date or Redemption Date
will be postponed to the next succeeding day which is both a
Business Day and a
32
<PAGE>
London Business Day. "London Business Day" means a day on
which dealings in U.S. dollar deposits are transacted in the
London interbank market.
Each dividend will be payable to holders of record as they
appear on the securities register of the Company on the
corresponding record date. The record dates for the Series A
Preferred Securities will be, for so long as the Series A
Preferred Securities remain in book-entry form, one business day
prior to the relevant Dividend Payment Date and, in the event
that any of the Series A Preferred Securities are not in
book-entry form, the fifteenth day (whether or not a business
day) prior to the relevant Dividend Payment Date.
The Charter provides that during a Shift Period if an
annual meeting of shareholders of the Bank fails to declare
dividends on the Bank's common stock with respect to the
then-most recent fiscal year or the Board of Directors of the
Bank announces that it does not intend to propose to the
shareholder's meeting the declaration of a dividend on the Bank's
common stock with respect to the then-most recent fiscal year or
the then-current fiscal year, the dividend preference will shift
to the Common Securities such that all net income of the Company
will be distributed to the Bank as the holder of the Common
Securities and no dividends will be paid with respect to the
Series A Preferred Securities, unless the Bank, in its capacity
as holder of the Common Securities, determines (subject to the
prior approval of the General Secretariat of the French Banking
Commission (Secretariat general de la Commission bancaire)) to
cause the Company to pay all or part of a dividend on the Series
A Preferred Securities.
The Charter also provides that if the Bank determines to
pay any dividends on its Tier 1 capital stock during or after
termination of a Shift Period, the Company will be required to
pay full dividends on the Series A Preferred Securities on the
Dividend Payment Date immediately following the payment of such
dividends and on the next two Dividend Payment Dates thereafter
without any requirement that such dividends first be declared by
the Board of Directors of the Company. The Bank agreed in the
Contingent Support Agreement to (i) contribute additional funds
to the Company as necessary to ensure that the Company will have
cash in an amount sufficient to pay full dividends on the Series
A Preferred Securities in accordance with the preceding sentence
(provided that the Bank will not be required to contribute funds
with respect to any Dividend Period in an amount greater than (x)
the amount available for distribution to holders of the Bank's
Tier 1 capital stock (determined as of the date on which the
decision to pay the relevant dividend on the Bank's Tier 1
capital stock is made and without giving effect to the
declaration of such dividend) or (y) if the Special Dividend has
been paid, the amount thereof) and (ii) procure payment by the
Company to the Series A Preferred Securityholders of dividends in
the amounts, for the Dividend Periods and in the circumstances
described in this paragraph.
The Charter further provides that if the Bank's Tier 1
risk-based capital ratio declines below the minimum percentage
required by French banking regulations (currently 4%), the
Company will pay the Special Dividend (as defined in "-- Shift
Events") on the Common Securities in an amount equal to the
Company's net assets (other than assets having a total market
value of approximately $40 million).
The Paying Agent will calculate One-Week LIBOR ("One-Week
LIBOR") for each Weekly Dividend Period on the second London
Business Day before the applicable LIBOR Reset Date at the
beginning of such Weekly Dividend Period (a "LIBOR Determination
Date") and will make such rate calculation available upon request
to investors. For this purpose, "London Business Day" means a day
on which dealings in U.S. dollar deposits are transacted in the
London inter-bank market. On each LIBOR Determination Date, the
Paying Agent will determine One-Week LIBOR as follows:
(i) One-Week LIBOR will be determined on the basis of the
offered rates for one-week deposits in U.S. dollars of not less
than U.S.$1,000,000, commencing on the second London Business Day
immediately following such LIBOR Determination Date, which
appears on Telerate Page 3750 (as defined below) as of
approximately 11:00 a.m., London time, on such LIBOR
Determination Date. "Telerate Page 3750" means the display
designated on page "3750" on the Telerate Service (or such other
page as may replace the 3750 page on that service or such other
service or services as may be nominated by the British Bankers'
Association for the purpose of displaying London interbank
offered rates for U.S. Dollar deposits). If no rate appears on
Telerate Page 3750, One-Week LIBOR for such LIBOR Determination
Date will be determined in accordance with the provisions of
paragraph (ii) below.
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(ii) With respect to a LIBOR Determination Date on which no
rate appears on Telerate Page 3750 as of approximately 11:00
a.m., London time, the Paying Agent shall on such LIBOR
Determination Date request the principal London offices of each
of four major reference banks in the London interbank market
selected by the Paying Agent to provide the Paying Agent with a
quotation of the rate at which one-week deposits in U.S. dollars,
commencing on the second London Business Day immediately
following such LIBOR Determination Date, are offered by it to
prime banks in the London interbank market as of approximately
11:00 a.m., London time, on such LIBOR Determination Date and in
a principal amount equal to an amount of not less than
U.S.$1,000,000 that is representative for a single transaction in
such market at such time. If at least two such quotations are
provided, One-Week LIBOR for such LIBOR Determination Date will
be the arithmetic mean of such quotations as calculated by the
Paying Agent. If fewer than two quotations are provided, One-Week
LIBOR for such LIBOR Determination Date will be the arithmetic
mean of the rates quoted as of approximately 11:00 a.m., New York
City time, on such LIBOR Determination Date by three major banks
in The City of New York selected by the Paying Agent (after
consultation with the Company) for loans in U.S. dollars to
leading European banks, having a one-week maturity commencing on
the second London Business Day immediately following such LIBOR
Determination Date and in a principal amount equal to an amount
of not less than U.S.$1,000,000 that is representative for a
single transaction in such market at such time; provided,
however, that if the banks selected as aforesaid by the Paying
Agent are not quoting as mentioned in this sentence, One-Week
LIBOR for such LIBOR Determination Date will be One-Week LIBOR
determined with respect to the immediately preceding LIBOR
Determination Date.
All percentages resulting from any calculation regarding
dividends on the Series A Preferred Securities will be rounded to
the nearest one hundred-thousandth of a percentage point, with
five-one millionths of a percentage point rounded upwards (e.g.,
9.876545% (or .09876545) would be rounded to 9.87655% or
(.0987655)), and all amounts used in or resulting from such
calculation will be rounded, in the case of United States
dollars, to the nearest cent.
The right of Series A Preferred Securityholders to receive
dividends is noncumulative. Accordingly, if, for any reason, the
Board of Directors does not declare a dividend payable in respect
of any Dividend Period, Series A Preferred Securityholders will
have no right to receive a dividend in respect of such Dividend
Period, and the Company will have no obligation to pay a dividend
in respect of such Dividend Period, whether or not dividends are
authorized and declared payable in respect of any future Dividend
Period.
If any Series A Preferred Securities are outstanding, no
dividends or other distributions shall be declared or paid or set
apart on any Parity Securities or Junior Securities (other than
on Common Securities during a Shift Period after a shift in
dividend preference) for any Dividend Period unless full
dividends have been or contemporaneously are paid, or declared
and a sum sufficient for the payment thereof is set apart for
such payments on the Series A Preferred Securities for (i) the
immediately preceding Dividend Period, in the case of Parity
Securities, and (ii) the then-current Dividend Period, in the
case of Junior Securities. When sufficient funds are not
available to pay dividends in full (or a sum sufficient for such
full payment is not so set apart) for any Dividend Period upon
the Series A Preferred Securities and any Parity Securities, all
dividends declared on the Series A Preferred Securities and such
Parity Securities shall only be declared pro rata based upon the
respective amounts that would have been paid on the Series A
Preferred Securities and any Parity Securities, if any, had
dividends been declared in full.
In addition to the foregoing restriction, except during a
Shift Period, the Company shall not declare, pay or set apart
funds for any dividends or other distributions with respect to
any Common Securities or other Junior Securities or repurchase,
redeem or otherwise acquire, or set apart funds for repurchase,
redemption or other acquisition of, any Common Securities or
other Junior Securities through a sinking fund or otherwise,
unless and until (i) full dividends on the Series A Preferred
Securities for the two most recent preceding Dividend Periods (or
such lesser number of Dividend Periods during which shares of
Series A Preferred Securities have been outstanding) are declared
and paid or a sum sufficient for payment has been paid over to
the dividend disbursing agent for payment of such dividends, and
(ii) the Company has declared a dividend on the Series A
Preferred Securities at the annual dividend rate for the
then-current Dividend Period or sufficient funds have been paid
over to the dividend disbursing agent for the payment of such
dividend for the then-current Dividend Period.
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No dividend shall be declared, paid or set aside for Series
A Preferred Securityholders for a Dividend Period unless full
dividends have been declared, paid or set aside for the holders
of each class or series of equity securities, if any, ranking
prior to the Series A Preferred Securities as to dividends for
such Dividend Period.
SHIFT EVENTS
A "Shift Event" would be deemed to have occurred if (i) the
Bank's total risk-based capital ratio or Tier 1 risk-based
capital ratio were to decline below the minimum percentages
required by French banking regulations, (ii) the Bank were to be
declared insolvent (en redressement ou liquidation judiciaire) or
a receiver (administrateur provisoire or a liquidator in
accordance with articles 44 and 46 of the French Banking Law No.
84.46 of January 24, 1984, respectively), were appointed in
relation to the Bank (each, "Receivership Proceedings"), or (iii)
the French Banking Commission (Commission bancaire), in its sole
discretion, were to notify the Bank and the Company that it has
determined that the Bank's financial condition was deteriorating
such that either of the foregoing clauses (i) or (ii) would apply
in the near term. A "Shift Period" refers herein to any period
during which a Shift Event has occurred and is continuing. French
banking regulations currently require French banks to maintain a
minimum total risk-based capital ratio of at least 8.0% and a
minimum Tier 1 risk-based capital ratio of at least 4.0%. As of
June 30, 1997, the Bank's total risk-based capital ratio was 9.6%
and its Tier 1 risk-based capital ratio was 5.6%. For further
information with respect to the Bank and such ratios, see "--
Certain Information Regarding BNP".
A Shift Event occurring pursuant to clause (ii) or (iii) of
the preceding paragraph shall be deemed to have occurred (x) on
the date such Receivership Proceedings were commenced (in the
case of clause (ii)) or (y) on the date the Bank and the Company
receive the French Banking Commission's notice (in the case of
clause (iii)). For purposes of determining when a Shift Event has
occurred as a result of the Bank's total risk-based capital ratio
or Tier 1 risk-based capital ratio falling below the minimum
percentages required by French banking regulations, the Company's
Charter will provide that (i) no later than the tenth Business
Day after each date on which the Bank first publishes its audited
annual financial statements or its semi-annual financial
statements (whether audited or unaudited), the Bank shall deliver
to the Company a certificate (a "Capital Adequacy Certificate")
setting forth the Bank's total risk-based capital ratio and Tier
1 risk-based capital ratio as of the date of the balance sheet
included in such financial statements, (ii) the Bank's
calculations of such ratios shall be deemed to be correct absent
manifest error, and (iii) if a Capital Adequacy Certificate shows
that the Bank's total-risk based capital ratio or Tier 1
risk-based capital ratio is less than the minimum then required
by French banking regulations, the related Shift Event shall be
deemed to occur at the opening of business on the Business Day
immediately succeeding the date of delivery of such Capital
Adequacy Certificate to the Company. The Company shall mail a
written notice of the occurrence of a Shift Event, and of
termination of any Shift Period, to each holder of record of
Series A Preferred Securities at the address for such holder as
shown on the Company's register of holders promptly and in any
event within five Business Days after such occurrence or
termination.
Once a Shift Event has occurred, a Shift Period will
continue until none of the elements of a Shift Event is present.
In the case of a decline in the total risk-based capital ratio or
Tier 1 risk-based capital ratio below the applicable
requirements, that element of a Shift Event will cease to exist
at any time the Bank certifies to the Company that both capital
ratios equal or surpass the applicable requirement. In the case
of a Receivership Proceeding, that element of a Shift Event will
cease to exist at any time such Proceeding is terminated. In the
case of a determination by the French Banking Commission
(Commission bancaire), that element will cease to exist if the
French Banking Commission provides a further notice to the Bank
and to the Company that the relevant Shift Event will not apply
in the near term.
The Charter contains the following provisions with respect
to Shift Events:
(i) upon the occurrence of a Shift Event, the Company will
redeem (no later than the tenth Business Day after such
occurrence) substantially all of the Common Securities held by
the Branch for an amount equal to the investment of the Branch
attributable to such securities (initially $530,110,000) (with
a minimal amount of Common Securities possessing the full
voting, distribution and liquidation rights of the Common
Securities being retained by the Branch);
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(ii) during a Shift Period if the Bank decides not to pay
dividends on its common stock, the dividend preference of the
Series A Preferred Securities will shift to the Common
Securities such that all net income of the Company will be
distributed to the Bank as the holder of the Common Securities
unless the Bank, in its capacity as the holder of the Common
Securities (subject to the prior approval of the General
Secretariat of the French Banking Commission (Secretariat
general de la Commission bancaire)), causes the Company to pay
all or part of a dividend for such Dividend Period on the
Series A Preferred Securities; and
(iii) if the Bank's Tier 1 risk-based capital ratio as
shown on the latest audited financial statements or
semi-annual financial statements (whether audited or
unaudited) of the Bank declines below the minimum percentage
required by French banking regulations (currently 4%), all of
the Company's remaining net assets (other than assets having a
market value of approximately $40 million) will be distributed
to the Bank as holder of the Common Securities (the "Special
Dividend").
The Charter also provides that, if during or after
termination of a Shift Period, the Bank were to determine to pay
any dividends on its Tier 1 capital stock, the Company will be
required to pay dividends on the Series A Preferred Securities
for the then-current and the two subsequent Dividend Periods
without any requirement that such dividends first be declared by
the Board of Directors of the Company. The Bank agreed in the
Contingent Support Agreement to (i) contribute additional funds
to the Company as necessary to ensure that the Company will have
cash in an amount sufficient to pay full dividends on the Series
A Preferred Securities in accordance with the preceding sentence
(provided that the Bank will not be required to contribute funds
with respect to any Dividend Period in an amount greater than (x)
the amount available for distribution to holders of the Bank's
Tier 1 capital stock (determined as of the date on which the
decision to pay the relevant dividend on the Bank's Tier 1
capital stock is made and without giving effect to the
declaration of such dividend) or (y) if the Special Dividend has
been paid, the amount thereof) and (ii) procure payment by the
Company to the Series A Preferred Securityholders of dividends in
the amounts, for the Dividend Periods and under the circumstances
described in this paragraph.
The Charter also contains provisions regarding a
liquidation of the Company and the Bank during a Shift Period and
of the Bank following the occurrence of a Shift Event. See "--
Rights upon Liquidation".
CONTINGENT SUPPORT AGREEMENT
The Bank and the Company entered into a Contingent Support
Agreement on December 5, 1997 (the "Contingent Support
Agreement"). Pursuant to the Contingent Support Agreement, the
Bank agreed to (a) acquire additional Common Securities in an
amount necessary to ensure that the Company will have sufficient
available cash to pay dividends on the Series A Preferred
Securities for the then-current and the two subsequent Dividend
Periods in the event that a Shift Event occurs (whether or not a
Shift Event is then continuing) and the Bank thereafter
determines to pay dividends on its Tier 1 capital stock (provided
that the Bank will not be required to contribute funds with
respect to any Dividend Period in an amount greater than (i) the
amount available for distribution to holders of the Bank's Tier 1
capital stock (determined as of the date on which the decision to
pay the relevant dividend on the Bank's Tier 1 capital stock is
made and without giving effect to the declaration of such
dividend), or (ii) if a Special Dividend has previously been paid
by the Company, the amount thereof) and (b) procure payment of
such amounts by the Company to the Series A Preferred
Securityholders in the circumstances described above. The Charter
provides that any proceeds received from the Bank's purchase of
additional Common Securities will be used to pay such dividends
to the Series A Preferred Securityholders.
In addition, the Bank agreed in the Contingent Support
Agreement that, in the case of liquidation of the Bank following
the occurrence of a Shift Event (whether or not a Shift Period is
then continuing), following a determination by the liquidator of
the Bank, in consultation with the French Banking Commission
(Commission bancaire), that all of the Bank's liabilities
(including any debt instruments, such as titres participatifs and
prets participatifs, constituting Tier 2 capital) have been or
will be paid in full and before making any distribution to
holders of its capital stock, the Bank will acquire additional
Common Securities from the Company in an amount equal to the
lowest of: (i) the amount remaining to the Bank after payment of
all such liabilities, (ii) the difference, if any, between the
aggregate liquidation preference of the outstanding Series A
Preferred Securities and the net assets of the Company
immediately prior to the acquisition of such additional Common
Securities, and (iii) the aggregate amount previously received by
the Bank upon (x) the redemption of Common Securities, (y)
payment of
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a Special Dividend, if any, and (z) a liquidation of the Company.
The Company will waive any potential claim (remise de dette)
against the Bank under the Contingent Support Agreement to the
extent that the Bank's liabilities as described above are not
paid in full. Any amounts received by the Company pursuant to the
Contingent Support Agreement would then be available for
distribution to holders of Series A Preferred Securities as part
of the liquidation of the Company.
The Bank also agreed with the Company in the Contingent
Support Agreement to own directly or indirectly 100% of the
outstanding Common Securities for so long as any shares of Series
A Preferred Securities are outstanding.
Although the Company and the Bank consider it unlikely, it
is nonetheless possible that shareholders of the Bank, creditors
or other persons might try to challenge under French law (i) the
Bank's obligation to make payments to the Company in respect of
dividends on the Series A Preferred Securities, as described
above, on the ground that this obligation impermissibly burdens
the statutory right of the Bank's shareholders to determine the
Bank's dividends, or (ii) the Bank's obligations upon
liquidation, as described above, on the ground that the
subordination of this contract claim to certain subordinated debt
instruments of the Bank contravenes the statutorily mandated
junior ranking of such debt instruments by subordinating such
contract claim to such instruments. Although there is no legal
precedent on these issues, based on the advice of legal counsel,
the Company and the Bank believe that any such challenge, if
made, is unlikely to be successful.
For so long as any Series A Preferred Securities are
outstanding, the Contingent Support Agreement may not be amended
without the consent of two-thirds of the holders (by liquidation
preference and excluding any such securities owned by the Bank or
any of its affiliates) of the Series A Preferred Securities
voting as a class. The Contingent Support Agreement is governed
by the laws of the State of New York.
The Company has the sole right and obligation to enforce
the Contingent Support Agreement. The Independent Director(s) has
the power to cause the Company to enforce the Contingent Support
Agreement. The Series A Preferred Securityholders will not be
third-party beneficiaries of the Contingent Support Agreement and
will not have any direct right against the Bank to perform its
obligations thereunder. They will, however, have the ability to
cause the Company to enforce the Contingent Support Agreement if
the Company does not otherwise do so.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the Company other than during a
Shift Period, the Series A Preferred Securityholders will be
entitled to receive out of assets of the Company available for
distribution to securityholders, before any distribution of
assets is made to holders of Common Securities or any other class
of stock ranking junior to the Series A Preferred Securities upon
liquidation, liquidating distributions in the amount of the
liquidation preference per security, plus unpaid dividends
thereon with respect to the then-current Series A Dividend Period
to the date of liquidation and any declared and unpaid dividends
in respect of prior Series A Dividend Periods (without interest)
but without accumulation of any undeclared and unpaid dividends
for any Series A Dividend Period.
The Charter provides that the Company will be liquidated if
the Bank is liquidated. In the case of a liquidation of the
Company in connection with the liquidation of the Bank during a
Shift Period, the Common Securities will have a preference upon
liquidation of the Company (and the liquidation preference of the
Series A Preferred Securities will be subordinated) to the
extent, if any, that all liabilities of the Bank (including any
debt instruments, such as titres participatifs and prets
participatifs, constituting Tier 2 capital), have not been paid
in full. Following payment of all such Bank liabilities, the
Series A Preferred Securities will have a preference with respect
to any remaining assets of the Company. In the case of a
liquidation of the Bank occurring outside a Shift Period, the
Series A Preferred Securities will be entitled to their normal
liquidation preference upon liquidation of the Company.
After payment of the full amount of the liquidating
distributions to which they are entitled, the Series A Preferred
Securityholders will have no right or claim to any of the
remaining assets of the Company. In the event
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<PAGE>
that, upon any such voluntary or involuntary dissolution,
liquidation or winding up, the available assets of the Company
are insufficient to pay the amount of the liquidation
distributions on all outstanding Series A Preferred Securities
and the corresponding amounts payable on all shares of other
classes or series of capital securities of the Company ranking on
a parity with the Series A Preferred Securities as to the
distribution of assets upon any dissolution, liquidation or
winding up of the affairs of the Company, then the holders of the
Series A Preferred Securities and such other classes or series of
capital securities shall share ratably in any such distribution
of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the
Company with or into any other entity, the consolidation or
merger of any other entity with or into the Company or the sale
of all or substantially all of the property or business of the
Company, shall not be deemed to constitute a dissolution,
liquidation or winding up of the Company.
For a discussion of certain rights of the Company in the
event of a liquidation of the Bank under certain circumstances,
see "-- Contingent Support Agreement".
VOTING RIGHTS
Except as expressly required by applicable law, or except
as indicated below, the Series A Preferred Securityholders are
not entitled to vote. In the event the Series A Preferred
Securityholders are entitled to vote as indicated below, each
Series A Preferred Security will be entitled to one vote on
matters on which Series A Preferred Securityholders are entitled
to vote.
Pursuant to its Charter, the Company has one initial
Independent Director who will serve a five year term from
December 5, 1997. The Series A Preferred Securityholders (along
with the holders of any Parity Securities) will have the right to
remove the initial Independent Director at any time with or
without cause. Removal of, and election of a replacement, initial
Independent Director requires the vote of Series A Preferred
Securityholders (voting together as a class with holders of any
Parity Securities) holding a majority by liquidation preference
of the outstanding Series A Preferred Securities (and any Parity
Securities). A meeting of the Series A Preferred Securityholders
(and holders of any outstanding Parity Securities) may be called
by the holders of at least 25% (by liquidation preference) of the
outstanding Series A Preferred Securities (voting together as a
class with holders of any Parity Securities). The Series A
Preferred Securityholders (along with holders of any Parity
Securities) also have the right to replace the initial
Independent Director at the end of the initial and subsequent
five year term.
If full dividends on Series A Preferred Securities shall
not have been paid for two consecutive Dividend Periods or if a
Shift Period is in effect, the maximum authorized number of
directors of the Company shall be increased by one. Subject to
compliance with any requirement for regulatory approval of (or
non-objection to) persons serving as directors, the Series A
Preferred Securityholders, voting together as a class with the
holders of any Parity Securities, shall have the exclusive right
to elect the additional director at the Company's next meeting of
securityholders and at each subsequent meeting at which such
director's term expires until (x) full dividends have been paid
or declared and a sum sufficient for payment thereof is set apart
for payment on the Series A Preferred Securities for four
consecutive Dividend Periods and (y) if a Shift Event has
occurred, the related Shift Period shall have been terminated.
The term of such director elected thereby shall terminate, and
the total number of directors shall be decreased by one, upon the
first meeting of securityholders after the payment or the
declaration and setting aside for payment of full dividends on
the Series A Preferred Securities for four consecutive Dividend
Periods and if a Shift Period is not then in effect. Any such
director may be removed with or without cause by, and shall not
be removed except by, the vote of the holders of record of a
majority of the outstanding Series A Preferred Securities and
Parity Securities entitled to vote, voting together as a single
class without regard to series, at a meeting of the Company's
securityholders, or of the holders of Series A Preferred
Securities and Parity Securities so entitled to vote thereon,
called for that purpose by holders of at least 25% of the
outstanding Series A Preferred Securities and such Parity
Securities. During any Shift Period or so long as full dividends
on the Series A Preferred Securities shall not have been paid for
two consecutive Dividend Periods, (i) any vacancy in the office
of any such director may be filled (except as provided in the
following clause (ii)) by an instrument in writing signed by any
such remaining director and filed with the Company, and (ii) in
the case of the removal of any such director, the vacancy may be
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filled by vote of the holders of the outstanding Series A
Preferred Securities and Parity Securities entitled to vote,
voting together as a single class without regard to series, at
the same meeting at which such removal shall be voted.
So long as any Series A Preferred Securities are
outstanding, the Company shall not, without the consent or vote
of at least two-thirds (by liquidation preference) of the
outstanding Series A Preferred Securities, voting separately as a
class, (a) amend, alter or repeal or otherwise change any
provision of the Company's Charter (including the terms of the
Series A Preferred Securities) if such amendment, alteration,
repeal or change would materially and adversely affect the
rights, preferences, powers or privileges of the Series A
Preferred Securities, (b) authorize, create or increase the
authorized amount of or issue any class or series of any equity
securities of the Company, or any warrants, options or other
rights convertible or exchangeable into any class or series of
any equity securities of the Company, ranking prior to the Series
A Preferred Securities, either as to dividend rights or rights on
dissolution, liquidation or winding up of the Company, or (c)
merge, consolidate, reorganize or effect any other business
combination involving the Company, unless the resulting entity
will thereafter have no class or series of equity securities
either authorized or outstanding ranking prior to the Series A
Preferred Securities as to dividends or as to the distribution of
assets upon dissolution, liquidation or winding up, except the
same number of shares of such equity securities with the same
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions or redemption as the shares
of equity securities of the Company that are authorized and
outstanding immediately prior to such transaction, and each
Series A Preferred Securityholder immediately prior to such
transaction shall receive securities with the same preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions,
qualifications or terms or conditions or redemption of the
resulting entity as the Series A Preferred Securities held by
such Series A Preferred Securityholders immediately prior
thereto.
The creation or issuance of Parity Securities or Junior
Securities, or an amendment that increases the number of
authorized Preferred Securities, or Series A Preferred Securities
or any Junior Securities or Parity Securities, shall not be
deemed to be a material and adverse change requiring a vote of
the Preferred Securityholders.
REGISTRATION UNDER THE EXCHANGE ACT
As a result of certain considerations under ERISA and the
regulations thereunder, the Company entered into a registration
agreement with the Initial Purchasers (the "Registration
Agreement") for the benefit of the Series A Preferred
Securityholders, wherein it agreed to use its best efforts (i) to
file a registration statement under Section 12(g) of the Exchange
Act with respect to the Series A Preferred Securities (the
"Registration Statement") with the Commission (ii) to cause the
Registration Statement to become effective by May 31, 1998, and
(iii) thereafter, to keep the Registration Statement effective
for so long as any Series A Preferred Securities remain
outstanding.
During any period following May 31, 1998 in which a
Registration Statement is not effective, the Company will pay as
liquidated damages an additional dividend on the liquidation
preference of the Series A Preferred at a rate of 0.25% per annum
from and including the date on which the Registration Statement
ceases to be effective (or May 31, 1998, if it is not effective
on such date) to but excluding the date on which a Registration
Statement again becomes effective. Any additional dividend that
accrues in a Dividend Period shall be payable on the Dividend
Payment Date that ends such Dividend Period, in the same manner
and subject to the same limitations and conditions as the regular
dividends on the Series A Preferred Securities for such Dividend
Period.
Registration of the Series A Preferred Stock under the
Exchange Act will have no effect on the resale restrictions
applicable to the Series A Preferred Stock as described in "--
Transfer Restrictions; Notice to Investors", which resale
restrictions will remain applicable to the Series A Preferred
Stock for so long as it remains outstanding.
The Registration Agreement is governed by the laws of the
State of New York. The foregoing description of the Registration
Agreement is a summary only, does not purport to be complete and
is qualified in its entirety by reference to all provisions of
the Registration Agreement.
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REDEMPTION
The Series A Preferred Securities will not be redeemable
prior to December 5, 2007 (except upon the occurrence of a
Regulatory Event). On or after December 5, 2007, the Series A
Preferred Securities will be redeemable at the option of the
Company, in whole or in part, at any time or from time to time
(except during a Shift Period following the payment by the
Company of a Special Dividend), on not less than 30 nor more than
60 days' notice by mail, at a redemption price of $10,000 per
security, plus unpaid dividends thereon for the current Dividend
Period to the Redemption Date and any declared and unpaid
dividends in respect of prior Dividend Periods, without interest,
but without accumulation of any undeclared and unpaid dividends
for any prior Dividend Period. Any such redemption is subject to
applicable regulatory and other requirements including receipt of
the prior approval of the General Secretariat of the French
Banking Commission (Secretariat general de la Commission
bancaire) (unless at such time such approval is not required). If
the Company has sufficient funds to pay dividends on any Series A
Preferred Securities but dividends are unpaid, no Series A
Preferred Securities shall be redeemed unless all outstanding
Series A Preferred Securities are redeemed and the Company shall
not purchase or otherwise acquire any Series A Preferred
Securities; provided, however, that the Company may purchase or
acquire Series A Preferred Securities pursuant to a purchase or
exchange offer made on the same terms to all Preferred
Securityholders.
In the event that fewer than all of the outstanding Series
A Preferred Securities are to be redeemed, the number of Series A
Preferred Securities to be redeemed shall be determined by the
Board of Directors, and the securities to be redeemed shall be
determined by lot or pro rata as may be determined by the Board
of Directors in its sole discretion to be equitable, provided
that such method satisfies any applicable requirements of any
securities exchange on which the Series A Preferred Securities
may then be listed and, if the Series A Preferred Securities are
then held by The Depository Trust Company ("DTC") or its nominee
in the form of a global security, any applicable requirements of
DTC. The Company shall promptly notify the registrar and transfer
agent for the Series A Preferred Securities in writing of the
Series A Preferred Securities selected for redemption and, in the
case of any Series A Preferred Securities selected for partial
redemption, the liquidation preference thereof to be redeemed.
Except during a Shift Period following the payment by the
Company of a Special Dividend to the Bank as holder of the Common
Securities, the Company will also have the right at any time
prior to December 5, 2007, upon the occurrence of a Regulatory
Event, to redeem the Series A Preferred Securities in whole (but
not in part) at a redemption price equal to the higher of $10,000
per security or the Make-Whole Amount (as defined below) per
security, plus unpaid dividends thereon for the current Dividend
Period and any declared and unpaid dividends in respect of prior
Dividend Periods, without interest, but without accumulation of
any undeclared and unpaid dividends for any prior Dividend
Period.
"Regulatory Event" means a Change of Capital Event or a Tax
Event.
"Change of Capital Event" means a notification to the Bank
by the French Banking Commission (Commission bancaire) of its
determination that the Series A Preferred Securities do not
constitute Tier 1 capital of BNP on a consolidated basis for
purposes of the application of French banking regulations.
"Tax Event" means the receipt by the Company of an opinion
of a nationally recognized law firm experienced in such matters
to the effect that, as a result of (i) any amendment to,
clarification of, or change (including any announced prospective
change) in, the laws or treaties (or any regulations thereunder)
of the United States and France or any political subdivision or
taxing authority thereof or therein affecting taxation, (ii) any
judicial decision, official administrative pronouncement,
published or private ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to
adopt such procedures or regulations) ("Administrative Action"),
or (iii) any amendment to, clarification of, or change in the
official position or the interpretation of such Administrative
Action or any interpretation or pronouncement that provides for a
position with respect to such Administrative Action that differs
from the theretofore generally accepted position, in each case,
by any legislative body, court, governmental authority or
regulatory body, irrespective of the manner in which such
amendment, clarification or change is made known, which
amendment, clarification, or change is effective or such
pronouncement or decision is announced on or after the date of
issuance of the Series A Preferred Securities, there is more than
an insubstantial risk that (i) the Company is, or will be subject
to more than a de minimis amount
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of additional taxes, duties or other governmental charges or
civil claims, or (ii) the payments on the Series A Preferred
Securities will not be respected as payments to Series A
Preferred Securityholders for tax purposes, and, as a result, the
Bank is or will be subject to more than a de minimis amount of
additional taxes, duties, governmental charges or civil claims.
The "Make-Whole Amount" will be equal to the amount as
determined by the Calculation Agent (as defined below), equal to
the sum of the present value of the liquidation preference of the
Series A Preferred Securities at December 5, 2007, together with
the present values of scheduled non-cumulative dividend payments
from the Regulatory Event Redemption Date to December 5, 2007
(the "Remaining Life"), in each case discounted to the Regulatory
Event Redemption Date on a semi-annual basis (assuming a 360-day
year consisting of 30-day months) at the Adjusted Treasury Rate.
"Adjusted Treasury Rate" means, with respect to any
Regulatory Event Redemption Date, (a) the Treasury Rate plus (b)
.25%.
"Treasury Rate" means (i) the yield, under the heading
which represents the average for the immediately prior week,
appearing in the most recently published statistical release
designated "H. 15(519)" or any successor publication which is
published weekly by the Federal Reserve and which establishes
yields on actively traded United States Treasury securities
adjusted to constant maturity under the caption "Treasury
Constant Maturities," for the maturity corresponding to the
Remaining Life (if no maturity is within three months before or
after the Remaining Life, yields for the two published maturities
most closely corresponding to the Remaining Life shall be
determined and the Treasury Rate shall be interpolated or
extrapolated from such yields on a straight-line basis, rounding
to the nearest month), or (ii) if such release (or any successor
release) is not published during the week preceding the
calculation date or does not contain such yields, the rate per
annum equal to the quarterly equivalent yield to maturity of the
Comparable Treasury Issue, calculated using a price for the
Comparable Treasury Issue (expressed as a percentage of its
principal amount) equal to the Comparable Treasury Price for such
Regulatory Event Redemption Date. The Treasury Rate shall be
calculated on the third Business Day preceding the Regulatory
Event Redemption Date.
"Business Day", for purposes of determining the Make-Whole
Amount means a day other than (a) a Saturday or Sunday, or (b) a
day on which banking institutions in The City of New York are
authorized or required by law or executive order to remain
closed.
"Calculation Agent" means FABC, an affiliate of the
Company, and its successors.
"Comparable Treasury Issue" means, with respect to any
Regulatory Event Redemption Date, the United States Treasury
security selected by the Company as having a maturity comparable
to the Remaining Life that would be utilized, at the time of
selection and in accordance with customary financial practice, in
pricing new issues or corporate debt securities of comparable
maturity to the Remaining Life. If no United States Treasury
security has a maturity which is within a period from three
months before to three months after December 5, 2007, the two
most closely corresponding United States Treasury securities
shall be used as the Comparable Treasury Issue, and the Treasury
Rate shall be interpolated or extrapolated on a straight-line
basis, rounding to the nearest month using such securities.
"Comparable Treasury Price" means (a) the average of five
Reference Treasury Dealer Quotations of such Regulatory Event
Redemption Date, after excluding the highest and lowest such
Reference Treasury Dealer Quotations, or (b) if the Calculation
Agent obtains fewer than five such Reference Treasury Dealer
Quotations, the average of all such Quotations.
"Primary Treasury Dealer" means a primary U.S. Government
securities dealer in New York City.
"Reference Treasury Dealer" means any Primary Treasury
Dealer selected by the Calculation Agent after consultation with
the Company.
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"Reference Treasury Dealer Quotations" means, with respect
to each Reference Treasury Dealer and any Regulatory Event
Redemption Date, the average, as determined by the Calculation
Agent, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal
amount) quoted in writing to the Calculation Agent by such
Reference Treasury Dealer at 5:00 p.m. New York City time, on the
third Business Day preceding such Regulatory Event Redemption
Date.
REGISTRATION AND TRANSFER OF SERIES A PREFERRED SECURITIES
The Series A Preferred Securities are represented by three
global certificates registered in the name of DTC or its nominee.
Beneficial interests in the Series A Preferred Securities are
shown on, and transfers thereof may be effected only through,
records maintained by participants in DTC ("Participants").
Except as described below, Series A Preferred Securities in
certificated form will not be issued in exchange for the global
certificates.
A global security shall be exchangeable for Series A
Preferred Securities registered in the names of persons other
than DTC or its nominee only if (i) DTC notifies the Company that
it is unwilling or unable to continue as a depositary for such
global security and no successor depositary shall have been
appointed, or if at any time DTC ceases to be a clearing agency
registered as such under the Exchange Act at a time when DTC is
required to be so registered to act as such depositary, or (ii)
the Company in its sole discretion determines that such global
security shall be so exchangeable. Any global security that is
exchangeable pursuant to the preceding sentence shall be
exchangeable for definitive certificates registered in such names
as DTC shall direct. It is expected that such instructions will
be based upon directions received by DTC from its Participants
with respect to ownership of beneficial interests in such global
security. In the event that Series A Preferred Securities are
issued in definitive form, such Series A Preferred Securities
will be in denominations of $10,000 and integral multiples
thereof and may be transferred or exchanged at the offices
described below.
Purchases and transfers of Series A Preferred Securities
represented by one or more global securities held by DTC or its
nominee may be made as described under "-- Book-Entry Issuance".
None of the Bank, any Paying Agent, or the registrar for the
Series A Preferred Securities will have any responsibility or
liability for any aspect of the records relating to or payments
made on account of beneficial ownership interests of the global
securities or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the
event Series A Preferred Securities are issued in certificated
form, the liquidation preference and dividends will be payable,
the transfer of the Series A Preferred Securities will be
registrable, and Series A Preferred Securities will be
exchangeable for Series A Preferred Securities of other
denominations of a like aggregate liquidation preference, at the
office of the Company in New York City, or at the offices of any
paying agent or transfer agent appointed by the Company provided
that payment of any dividend may be made at the option of the
Company by check mailed to the address of the persons entitled
thereto, by wire transfer or by direct deposit. In addition, if
the Series A Preferred Securities are issued in certificated
form, the record dates for payment of dividends will be fifteen
days prior to the relevant Dividend Payment Date. For a
description of DTC and the terms of the depositary arrangement
relating to payment, transfers, voting rights, redemptions and
other notices and other matters, see "-- Book-Entry Issuance".
PAYMENTS AND PAYING AGENTS
Payments in respect of the Series A Preferred Securities
shall be made to DTC, which shall credit the relevant accounts at
DTC on the applicable Dividend Payment Dates or, if the Series A
Preferred Securities are not held by DTC, such payments shall be
made by wire transfer, direct deposit or check mailed to the
address of the holder entitled thereto as such address shall
appear on the Register. The paying agent (the "Paying Agent")
shall initially be FABC and any co-paying agent chosen by FABC
and acceptable to the Company. The Paying Agent shall be
permitted to resign as Paying Agent upon 30 days' written notice
to the Company. In the event that the Branch shall no longer be
the Paying Agent, the Company shall appoint a successor (which
shall be a bank or trust company acceptable to the Company) to
act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
FABC will act as registrar and transfer agent for the
Series A Preferred Securities.
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Registration of transfers of Series A Preferred Securities
will be effected without charge by or on behalf of the Company,
but upon payment of any tax or other governmental charges that
may be imposed in connection with any transfer or exchange. The
Company will not be required to register or cause to be
registered the transfer of Series A Preferred Securities after
such Series A Preferred Securities have been called for
redemption.
INDEPENDENT DIRECTOR APPROVAL
The Charter provides that, so long as any Series A
Preferred Securities are outstanding, certain actions by the
Company must be approved by a majority of the Independent
Directors. For so long as there is only one Independent Director,
any action that requires the approval of a majority of
Independent Directors must be approved by such Independent
Director. In order to be considered "independent," a director
must not be a current officer or employee of the Company, the
Bank or any affiliate of the Bank or of any person or persons
that, in the aggregate, own more than 50% of the Common
Securities of the Company. In addition, any members of the Board
of Directors elected by holders of the Company's Preferred
Securities, including the Series A Preferred Securities, will be
deemed to be Independent Directors for purposes of approving
actions requiring the approval of a majority of the Independent
Directors.
So long as any Preferred Securities are outstanding, the
following actions require the approval of a majority of the
Independent Directors: (i) the issuance of additional Preferred
Securities ranking on a parity with the Series A Preferred
Securities, (ii) any material amendment to or modification of the
Trust Agreement pursuant to which the securities are held, (iii)
other than during a Shift Period after a shift in dividend
preference, the payment of dividends on the Common Securities in
any fiscal year in an amount exceeding the amount by which the
net income of the Company (determined in accordance with
generally accepted accounting principles) for such fiscal year
exceeds the stated dividends on the Series A Preferred Securities
that would be paid during such fiscal year irrespective of
whether dividends on the Series A Preferred Securities are in
fact declared and paid, (iv) other than during a Shift Period,
redemption or repurchase of Common Securities without the
concurrent redemption of a like proportion (based upon the
aggregate redemption price) of outstanding Series A Preferred
Securities, unless (x) the General Secretariat of the French
Banking Commission (Secretariat general de la Commission bancaire
) shall have approved such redemption or repurchase and (y) each
Rating Agency then rating the Series A Preferred Securities shall
have informed the Company that the redemption or repurchase of
such Common Securities would not adversely affect its initial
rating of the Series A Preferred Securities, (v) any modification
of the Base or the Additional Investment Policy Guidelines, (vi)
payment of dividends on the Series A Preferred Securities other
than out of net income of the Company, determined without regard
to gains and losses resulting from any disposition of securities
owned by the Company, or out of contributions by the Bank to the
capital of the Company, and (vii) other than during a Shift
Period, disposition of any security owned by the Company prior to
its maturity. Additionally, a majority of the Independent
Directors, acting alone and without the vote or consent of the
other members of the Board of Directors, has the power to cause
the Company to enforce the Contingent Support Agreement. Except
with respect to enforcement of the Contingent Support Agreement,
the Company's Charter provides that the Independent Directors
will consider the interests of holders of both the Common
Securities and the Preferred Securities, including the Series A
Preferred Securities, in determining whether any proposed action
requiring their approval is in the best interests of the Company.
TRANSFER RESTRICTIONS; NOTICE TO INVESTORS
Because of the following restrictions, purchasers are
advised to consult legal counsel prior to making any offer,
resale, pledge or other transfer of Series A Preferred
Securities.
Each purchaser of the Series A Preferred Securities
(including the registered holders of, and any persons who have a
beneficial interest in (the "Beneficial Owners"), the Series A
Preferred Securities as they exist from time to time, in each
case as of the time of purchase and with respect to paragraph 4,
on each day from the date of acquisition of the Series A
Preferred Securities through and including the date of
disposition of such securities) will be deemed to have
acknowledged, represented to and agreed with the Company, the
Bank and the Initial Purchasers as follows (terms used in this
paragraph that are defined in Rule 144A under the Securities Act
are used herein as defined therein):
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(1) The purchaser (i) is a qualified institutional buyer, (ii)
is aware that the sale of the Series A Preferred Securities to
it is being made in reliance on Rule 144A, and (iii) is
acquiring such Series A Preferred Securities for its own
account or the account of a qualified institutional buyer.
(2) The purchaser understands and acknowledges that (i) the
Company has not been registered under the 1940 Act in reliance
on Rule 3a-7(a)(2)(ii) thereunder and that the Series A
Preferred Securities have not been registered under the
Securities Act and may not be offered, resold, pledged or
otherwise transferred by such purchaser except to a person who
is a qualified institutional buyer acquiring for its own
account or the account of a person who is a qualified
institutional buyer in a transaction meeting the requirements
of Rule 144A, (ii) the Company has the right, at any time, to
request that any purchaser of Series A Preferred Securities
certify that, as of the time it acquired the Series A
Preferred Securities or an interest therein, such purchaser
was a qualified institutional buyer, and (iii) if the
purchaser was not a qualified institutional buyer at the time
it acquired Series A Preferred Securities or an interest
therein, the purchaser shall, upon demand of the Company and
in any event within ten business days after receiving such
demand, sell all of its Series A Preferred Securities or
interest therein to a transferee whom such purchaser
reasonably believes is a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A.
(3) Certificates evidencing Series A Preferred Securities
will bear a legend to the following effect unless the Company
and the Bank determine otherwise in compliance with applicable
law:
"THE ISSUER OF THE SERIES A PREFERRED SECURITIES EVIDENCED
HEREBY HAS NOT BEEN REGISTERED UNDER THE INVESTMENT COMPANY
ACT OF 1940 AND SUCH SECURITIES HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933 (THE "SECURITIES
ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT TO A PERSON WHO IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER
THE SECURITIES ACT ACQUIRING FOR ITS OWN ACCOUNT OR THE
ACCOUNT OF A PERSON WHO IS A QUALIFIED INSTITUTIONAL BUYER
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
AND, IN EACH CASE, IN COMPLIANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND
OTHER JURISDICTIONS."
(4) The purchaser (A) is not itself, and is not acquiring
Series A Preferred Securities with "plan assets" of, an
employee benefit or other plan subject to Title I of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal Revenue Code of
1986, as amended (the "Code") or an entity whose underlying
assets include "plan assets" by reason of any Plan's
investment in the entity (each, a "Plan"), or (B) (1) is
itself, or is acquiring Series A Preferred Securities with the
assets of, an "investment fund" (within the meaning of Part
V(b) of prohibited transaction class exemption ("PTCE") 84-14)
managed by a "qualified professional asset manager" (within
the meaning of Part V(a) of PTCE 84-14) which has made or
properly authorized the decision of such fund to purchase
Series A Preferred Securities, under circumstances such that
PTCE 84-14 is applicable to the purchase, holding and
disposition of such Series A Preferred Securities, (2) is
itself, or is acquiring Series A Preferred Securities with the
assets of, a Plan managed by an "in-house asset manager"
(within the meaning of Part IV(a) of PTCE 96-23) which has
made or properly authorized the decision for such Plan to
purchase Series A Preferred Securities, under circumstances
such that PTCE 96-23 is applicable to the purchase, holding
and disposition of such Series A Preferred Securities, (3) is
an insurance company pooled separate account purchasing Series
A Preferred Securities pursuant to Part I of PTCE 90-1 or a
bank collective investment fund purchasing Series A Preferred
Securities pursuant to Part I of PTCE 91-38, and in either
case, no Plan owns more than 10% of the assets of such account
or collective fund (when aggregated with other Plans of the
same employer (or its affiliates) or employee organization)
and, in either case, such exemption is applicable to the
purchase, holding and disposition of such Series A Preferred
Securities or (4) is an insurance company using the assets of
its general account to purchase the Series A Preferred
Securities pursuant to Part I of PTCE 95-60, in which case the
reserves and liabilities for the general account contracts
held by or on behalf of any Plan, together with any other
Plans maintained by the same employer (or its affiliates) or
employee organization, do not exceed 10% of the total reserves
and liabilities of the insurance company general account
(exclusive of separate account liabilities), plus surplus as
set forth in the National Association of Insurance
Commissioners Annual Statement filed with the state of
domicile of the
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<PAGE>
insurer and such exemption is applicable to the purchase,
holding and disposition of such Series A Preferred Securities.
THE FOREGOING RESTRICTIONS WILL APPLY NOTWITHSTANDING ANY
FUTURE REGISTRATION OF THE SERIES A PREFERRED SECURITIES UNDER
THE EXCHANGE ACT. THE SERIES A PREFERRED SECURITIES WILL AT ALL
TIMES REMAIN RESTRICTED AS PROVIDED ABOVE.
BOOK-ENTRY ISSUANCE
DTC acts as securities depositary for all of the Series A
Preferred Securities. The Series A Preferred Securities were
issued only as fully-registered securities registered in the name
of Cede & Co. (DTC's nominee). Three fully-registered global
certificates were issued for the Series A Preferred Securities
representing in the aggregate the total number of Series A
Preferred Securities and were deposited with DTC.
DTC has advised the Company as follows: DTC is a limited
purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Exchange Act. DTC holds
securities that its Participants deposit with DTC. DTC also
facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. "Direct Participants"
include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. DTC is
owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the
DTC system is also available to others such as securities brokers
and dealers, banks and trust companies that clear through or
maintain custodial relationships with Direct Participants, either
directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the
Commission.
Purchase of Series A Preferred Securities within the DTC
system must be made by or through Direct Participants, which will
receive a credit for the Series A Preferred Securities on DTC's
records. The ownership interest of each actual purchaser of each
Series A Preferred Security ("Beneficial Owner") is in turn to be
recorded on the Direct and Indirect Participants' records.
Beneficial Owners will not receive written confirmation from DTC
of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as
well as periodic statements of their holdings, from the Direct or
Indirect Participants through which the Beneficial Owners
purchased Series A Preferred Securities. Transfers of ownership
interests in the Series A Preferred Securities are to be
accomplished by entries made on the books of Participants acting
on behalf of Beneficial Owners. Beneficial Owners will not
receive certificates representing their ownership interests in
Series A Preferred Securities, except in the event that use of
the book-entry system for the Series A Preferred Securities is
discontinued.
DTC has no knowledge of the actual Beneficial Owners of the
Series A Preferred Securities; DTC's records reflect only the
identity of the Direct Participants to whose accounts such Series
A Preferred Securities are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to
Direct Participants, by Direct Participants to Indirect
Participants, and by Direct Participants and Indirect
Participants to Beneficial Owners and the voting rights of Direct
Participants, Indirect Participants and Beneficial Owners will be
governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the
registered holder of the Series A Preferred Securities. If less
than all of the Series A Preferred Securities are being redeemed,
DTC's current practice is to determine by lot the amount of the
interest of each Direct Participant to be redeemed.
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Although voting with respect to the Series A Preferred
Securities is limited to the holders of record of the Series A
Preferred Securities, in those instances in which a vote is
required, neither DTC nor Cede & Co. will itself consent or vote
with respect to Series A Preferred Securities. Under its usual
procedures, DTC would mail an omnibus proxy to the registrar as
soon as possible after the record date. Such omnibus proxy
assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Series A Preferred Securities
are credited on the record date (identified in a listing attached
to such omnibus proxy).
Dividend payments on the Series A Preferred Securities will
be made to DTC. DTC's practice is to credit Direct Participants'
accounts on the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has reason
to believe that it will not receive payments on such payment
date. Payments by Participants to Beneficial Owners will be
governed by standing instructions and customary practices and
will be the responsibility of such Participant and not of DTC,
the Paying Agent, the Bank or the Company, subject to any
statutory or regulatory requirements as may be in effect from
time to time. Payment of Dividends to DTC is the responsibility
of the Paying Agent, disbursement of such payments to Direct
Participants is the responsibility of DTC, and disbursements of
such payments to the Beneficial Owners is the responsibility of
Direct and Indirect Participants.
DTC may discontinue providing its services as securities
depositary with respect to the Series A Preferred Securities or
at any time by giving reasonable notice to the registrar and the
Company. In the event that a successor securities depositary is
not obtained, definitive certificates representing the Series A
Preferred Securities are required to be printed and delivered.
The Company, at its option, may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor
depositary). In any such event, definitive certificates for the
Series A Preferred Securities will be printed and delivered.
The information in this section concerning DTC and DTC's
book-entry system has been obtained from sources that the Company
believes to be accurate, but the Company assumes no
responsibility for the accuracy thereof. The Company has no
responsibility for the performance by DTC or its Participants of
their respective obligations as described herein or under the
rules and procedures governing their respective operations.
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<PAGE>
CERTAIN INFORMATION REGARDING BNP
BNP is not an issuer or a guarantor of the Series A
Preferred Securities or a registrant under this Registration
Statement, nor does it provide any credit enhancement with
respect to the Series A Preferred Securities. Holders of the
Series A Preferred Securities will have no recourse against BNP
in the event of non-payment of dividends or the liquidation
preference of the Series A Preferred Securities. If the Bank's
financial condition were to deteriorate with the consequence that
a Shift Event were to occur, the Company and the Series A
Preferred Securityholders would suffer direct and materially
adverse consequences. Substantially all of the Common Securities
would be redeemed automatically without prior redemption of any
Series A Preferred Securities, dividends payable on each share of
Series A Preferred Securities could be substantially reduced or
completely eliminated and in certain circumstances, all of the
Company's remaining net assets (other than assets having a total
market value of approximately $40 million) would be distributed
as a special dividend to the Bank as holder of the Common
Securities. Accordingly, certain information about BNP has been
provided under this heading for additional analysis by
prospective investors. Such information is not a required part of
this Registration Statement and is not intended to, and does not,
contain all of the information that would be required by U.S.
federal securities laws if the Bank were an issuer or guarantor
of the Series A Preferred Securities.
THE BNP GROUP
BNP is a French corporation that conducts retail banking
activities in France and corporate and private banking and other
financial activities both in France and throughout the world. BNP
also has numerous subsidiaries and affiliates inside and outside
of France that engage in banking and other financial activities.
At December 31, 1997, BNP and its subsidiaries and affiliates
(the "BNP Group") had 2,645 offices (i.e., subsidiaries,
branches, agencies, affiliates and representative offices) in
France, French overseas departments and territories and 79
foreign countries. At December 31, 1997, the BNP Group had
consolidated assets of FF 2,034.9 billion, consolidated gross
customer loans of FF 929.5 billion, consolidated customer
deposits (including retail and negotiable certificates of
deposit) of FF 904.6 billion and stockholders' equity (BNP
Group's share) of FF 59 billion.
The BNP Group is engaged in a broad range of banking and
financial services activities both in France and abroad,
functionally organized in two divisions: Domestic Banking and
International Banking and Finance. In France, the retail bank
provides a full range of banking services through a network of
2,098 branches and an extensive home banking network. BNP offers
its domestic customers a comprehensive range of financial
products and services designed to cover a wide variety of needs,
including conventional lending, specialized finance, leasing,
leveraged buyouts, factoring, credit insurance, investment
banking, mortgage and customer lending, life/endowment insurance,
property/casualty insurance (as a broker), savings products and
asset management.
BNP conducts its international corporate and private
banking and finance activities (organized within the functional
division International Banking and Finance) directly and through
an international network of foreign subsidiaries, branches,
agencies, affiliates and representative offices. BNP's
international operations service four main categories of
customers: multinational companies, to which it offers general
financing and advisory services; companies, either French or
local, to which it offers primarily international trade financing
services; individual customers, to whom it offers retail and
private banking services; and banks and institutional investors,
to which it provides capital market and correspondent banking
services.
BNP was formed in 1966 through the merger of Comptoir
National d'Escompte de Paris and Banque Nationale pour le
Commerce et l'Industrie, each of which had been nationalized
along with other major French commercial banks in 1945. In
October 1993, the ownership of BNP was returned to the private
sector through an offering of shares in France and abroad.
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CAPITAL ADEQUACY AND FINANCIAL CONDITION OF THE BNP GROUP
Prior to the occurrence of a Shift Event, the payment of
dividends on the Series A Preferred Securities will depend solely
on the earnings of the Company, which in turn depend on the funds
generated by the portfolio of securities held by the Company. The
occurrence of a Shift Event would have direct and materially
adverse consequences for the Company and the Series A Preferred
Securityholders. In such circumstances, substantially all of the
Common Securities would be redeemed automatically without prior
redemption of any Series A Preferred Securities, dividends
payable on each share of Series A Preferred Securities could be
substantially reduced or completely eliminated and in certain
circumstances, all of the Company's remaining net assets (other
than assets having a total market value of approximately $40
million) would be distributed as a special dividend to the Bank
as holder of the Common Securities. A "Shift Event" will occur
if, among other things, BNP's Solvency Ratio or Tier 1 Capital
Ratio (each as defined below and as amended and in effect at any
given time) declines below the minimum ratio then required. The
minimum required Solvency Ratio and Tier 1 Capital Ratio is
currently 8% and 4%, respectively. See "Description of the Series
A Preferred Securities -- Shift Events." Payment of dividends and
the liquidation preference with respect to the Series A Preferred
Securities could accordingly depend substantially on events
involving the capital adequacy of BNP.
Under French banking regulations, in addition to compliance
with the Solvency Ratio, BNP must maintain a minimum level of
capital known as the CAD Ratio (as defined below). The following
discussion focuses on the Solvency Ratio and the Tier 1 Capital
Ratio since they are the reference ratios under the Shift Events.
The CAD Ratio is also discussed briefly below for informational
purposes.
Overview of Capital Adequacy Regulations
Like other financial institutions, the assets and
liabilities of which are principally monetary in nature, the BNP
Group is exposed to special risks as a result of its worldwide
financing and trading activities. These risks include credit
risk, market risk, interest rate risk and foreign exchange risk.
Changes or volatility in economic conditions that affect the
relative levels of these risks can have rapid and substantial
adverse effects on the value of the assets of a bank, which in
turn can adversely affect its ability to satisfy its debts and
other liabilities and, accordingly, its viability as a going
concern. The primary function of capital is to provide a cushion
to absorb unanticipated losses and declines in asset values so as
to protect against the risk of the insolvency of banking
institutions and to protect depositors and other creditors of the
banking institution in the event of liquidation. Capital also
provides a cushion against unexpected variations in the quality
of a bank's earnings or developing trends in the level of a
bank's deposits and other funding sources.
Bank regulatory authorities in most countries accordingly
impose minimum required levels of capital that must be maintained
by banks within their jurisdiction. Required levels of capital
are determined by reference to the relative risk associated with
specified categories of assets owned by the institutions. These
requirements are generally referred to as "risk-based" capital
requirements, and are regarded by bank regulatory authorities as
an important supervisory tool in measuring the safety and
soundness of banking institutions.
In 1988, the Basle Committee on Banking Regulations and
Supervisory Practices (the "Basle Committee"), a committee
consisting of representatives of the central banks and
supervisory authorities from the "Group of Ten" countries
(Belgium, Canada, France, Germany, Italy, Japan, the Netherlands,
Sweden, the United Kingdom and the United States) and Luxembourg
that meet at the Bank for International Settlements ("BIS")
issued a capital accord setting out standards for risk-weighting
and minimum levels of regulatory capital. The BIS standards
contained in the accord have been widely adopted by bank
regulatory authorities throughout the world, including regulatory
authorities in France. Under the BIS standards, a credit
institution's capital (or "own funds") is divided into two
principal categories, or "tiers." Tier 1 capital consists of
"core" capital items such as common and qualifying perpetual
preferred equity, while Tier 2 capital includes "quasi-capital"
items such as certain perpetual and long-term preferred equity
and subordinated debt. The composition of each tier of capital is
described in more detail under "--The Solvency Ratio and the Tier
1 Capital Ratio -- Determination of the Level of Capital." The
aggregate amount of the credit institution's capital is compared
to the value of the credit institution's assets, weighted to take
into account the counterparty risk inherent in those assets.
Under the BIS standards, credit institutions are required to
maintain a total solvency ratio (total capital to risk-weighted
assets) of at least 8% (the "Solvency Ratio"). Because Tier 2
capital is included in the calculation only to the extent that it
does not exceed the
48
<PAGE>
amount of Tier 1 capital, a credit institution must effectively
maintain a risk-based capital ratio with respect to Tier 1
capital of at least 4% (the "Tier 1 Capital Ratio"). The BIS
standards focus principally on credit risks.
In 1989, the European Community adopted two directives that
set the framework, based on the BIS standards, of capital
adequacy within the European Union with respect to credit risks.
In France, these two directives were implemented through two
regulations adopted by the Banking Regulatory Committee,
Regulation 90-02 dated February 23, 1990 relating to own funds
and Regulation 91-05 dated February 15, 1991 relating to the
solvency ratio.
In 1993, the Council of the European Communities adopted a
Capital Adequacy Directive for credit institutions and investment
enterprises under which member States were required to adopt
regulations to supplement the solvency rules so as to take into
account market risks associated with such institutions' trading
activities and the exposure of both on- and off-balance sheet
items to fluctuations in currency exchange rates in addition to
credit risk. In 1995, the Banking Regulatory Committee adopted
Regulation 95-02 (the "CAD Regulation") to implement the Capital
Adequacy Directive. Effective as of January 1, 1996, the CAD
Regulation subjects French credit institutions to capital
adequacy requirements to cover risks arising from their trading
activities and foreign exchange risks that are supplemental to
the capital adequacy requirements applicable to their credit
extension activities. Under the CAD Regulation, a credit
institution's total capital (including capital classified in Tier
1 and Tier 2, and certain types of interim income and
subordinated debt items (commonly referred to as a "Tier 3"
capital)) is divided by the total amount of capital that the
credit institution is required to maintain according to French
banking regulations. The resulting quotient (expressed as a
percentage) is the credit institution's CAD Ratio, which must be
at least 100%. In essence, the CAD Ratio takes into account
market risks in addition to credit risks already covered by the
Solvency Ratio and the Tier 1 Capital Ratio.
In 1996, the Basle Committee adopted a significant
amendment to the BIS standards called the "amendment to the
capital accord to incorporate market risks". This amendment aims
to provide a specific capital cushion for market risks in
addition to a bank's credit risks. Such amendment defines market
risks as: (i) the risks pertaining to interest rate-related
instruments and equities in a bank's trading book and (ii)
foreign exchange risks and commodities risks held generally on
the bank's books. As amended in 1996 and refined in September
1997 by the Basle Committee, the BIS standards (the "New BIS
standards") continue to require a capital solvency ratio with
respect to a bank's credit risks and, in addition, require a bank
to quantify its market risks in figures equivalent to credit
risks and to maintain an overall capital ratio of 8% with respect
to its credit and market risks (the "New Solvency Ratio") and a
risk-based capital ratio of at least 4% with respect to Tier 1
capital (the "New Tier 1 Capital Ratio"). See "The New BIS
standards". As adopted by the Banking Commission, the New BIS
standards apply to French banks as of January 1, 1998.
Pursuant to the French Banking Law, should a French credit
institution fail to comply with the applicable capital adequacy
regulations, the Banking Commission has the authority to impose
sanctions, including the authority to suspend the banking license
of the credit institution and to prohibit the credit institution
from engaging in certain activities.
The Solvency Ratio and the Tier 1 Capital Ratio
The Solvency Ratio is calculated in a process that includes
four principal steps. First, the overall level of the credit
institution's capital is determined, with capital subdivided into
two tiers, Tier 1 and Tier 2 (and, within Tier 2, two sub-tiers).
Second, the level of the credit institution's assets is adjusted
by multiplying the value of each asset by a percentage designed
to reflect the level of associated credit risk, a process known
as "risk-weighting." Third, the credit institution's off-balance
sheet items are converted to balance sheet equivalents, and most
of those equivalents are then risk-weighted as if they were
balance sheet items. Fourth, the level of the credit
institution's Tier 1 and Tier 2 capital (subject to certain
limitations described herein) is divided by the aggregate amount
of the credit institution's risk-weighted assets and off-balance
sheet items. The resulting quotient (expressed as a percentage)
is the credit institution's Solvency Ratio, which must be equal
to at least 8%. While no specific level of Tier 1 capital is
technically required under French banking regulations, a credit
institution is effectively required to maintain a Tier 1 Capital
Ratio in an amount equal to at least 4% of its risk-weighted
assets in order to comply with the BIS standards, because Tier 2
capital may only be included in this calculation in an amount not
in excess of Tier 1 capital.
49
<PAGE>
Determination of the Level of Capital
For purposes of the BIS standards, a credit institution's
capital is divided into Tier 1 and Tier 2 capital.
Tier 1 capital includes share capital, reserves (other than
revaluation reserves, as described below), share premiums,
retained earnings, unallocated profit from the most recent year
(less the amount of any related dividend proposed for approval to
the shareholders) or interim period and the fund for general
banking risks. Share capital and the related share premium (the
equivalent of additional paid-in capital) include common equity
and qualifying non-cumulative perpetual preferred stock. The fund
for general banking risks is a reserve established to cover risks
that are not accounted for by specific or country risk
provisions. See "Asset Quality, Loan Loss Allowances and Reserves
- -- Fund for General Banking Risks." Because unallocated profit
for the most recent year (less the amount of any proposed
dividend for that year) is included in Tier 1 capital,
fluctuations in net income may have a significant impact on the
Solvency Ratio and the Tier 1 Capital Ratio of a credit
institution. In addition, transfers to or from the fund for
general banking risks may also significantly affect the Solvency
Ratio and the Tier 1 Capital Ratio of a credit institution. See
"--Group Capital Adequacy Compliance." For an institution that
prepares financial statements on a consolidated basis with its
subsidiaries, such as BNP, Tier 1 capital is adjusted to reflect
the result of the consolidation, most notably by the addition of
minority interests in the equity accounts of consolidated
subsidiaries. Goodwill and certain other non-qualifying
intangible and other assets are deducted from the level of Tier 1
capital.
Tier 2 capital includes, among other items, revaluation and
certain other reserves, certain types of perpetual preferred
equity not qualifying for Tier 1 capital treatment, certain types
of perpetual subordinated debt and certain types of subordinated
debt with an original maturity of at least five years.
Revaluation reserves are reserves arising from the revaluation of
assets in accordance with relevant French banking regulations.
Perpetual subordinated debt (including subordinated debt that can
be redeemed only at the option of the issuer and with the prior
approval of the Banking Commission) as to which the issuer has
the right to defer interest payments and to use unpaid principal
and interest to offset losses is classified as "Upper Tier 2"
capital. Subordinated debt that (i) does not qualify as Upper
Tier 2 capital but has an original maturity of at least five
years, (ii) is not subject to early redemption (other than in a
liquidation of the issuer) and (iii) in a liquidation of the
issuer is subordinated as regards repayment of principal to all
other debts of the issuer is classified as "Lower Tier 2"
capital. In the last five years prior to maturity, the amount of
any item of subordinated debt that may be taken into account as
Lower Tier 2 capital must be reduced in accordance with a
schedule approved by the Banking Commission. Usually, the
reduction is made on a straight line basis (regardless of whether
such preferred equity or debt is subject to any actual
amortization), so that no more than 80% is taken into account as
Lower Tier 2 capital in the fourth year prior to maturity, no
more than 60% in the third year prior to maturity, no more than
40% in the second year prior to maturity and no more than 20% in
the year prior to maturity.
Under the BIS standards, credit institutions are required
to deduct certain amounts from total capital, as described below
under "--Calculation of Solvency Ratio and the Tier 1 Capital
Ratio."
Risk-Weighting
As discussed above, the nature of banking operations
involves a variety of risks that depend on credit quality and
market conditions. To determine the risk-weighted value of the
assets in the banking portfolio under the Solvency Ratio and the
Tier 1 Capital Ratio, a specific weighting is assigned to each
such asset, based on the credit risk of the relevant obligor,
guarantor or other counterparty. The weighting is expressed as a
percentage, which is multiplied by the value at which the
relevant asset is carried on the credit institution's balance
sheet. For risk-weighting purposes, commercial loans are taken as
a benchmark with a risk weighting of 100%. Certain other
transactions qualify for reduced weightings. The following table
sets forth the risk-weightings applicable to various types of
assets. If the relevant obligation is fully guaranteed, the risk
weighting of the guarantor is applied (except as specified in the
table below).
50
<PAGE>
Type of Asset or Counterparty Risk Weighting
----------------------------- --------------
Cash and equivalents; government or
central bank obligations of OECD
countries and certain other countries
("Zone A" countries); government or
central bank obligations of non-Zone
A countries ("Zone B" countries) and
obligations of a borrower of a Zone B
country guaranteed by the government
or central bank of such country, in
each case that are payable and funded
in local currency; obligations of the
European Communities and of certain
local governments of the European
Economic Area; and assets secured by
securities of a Zone A government or
central bank or the European
Communities, deposits lodged with the
lending credit institution or
certificates of deposit issued by,
and deposited with, the lending
credit institution .................. 0%
Obligations of certain multilateral
development banks; claims on certain
regional or local governments of Zone
A countries; obligations of credit
institutions in Zone A countries
(unless classified as qualifying
capital by those institutions);
obligations of Zone B credit
institutions with a residual maturity
of one year or less (unless
classified as qualifying capital by
those institutions); and assets
secured by securities of certain
multilateral development banks or
regional or local governments of Zone
A countries ......................... 20%
Obligations secured by residential
mortgages on owner-occupied or leased
properties; real estate leasing
operations; prepayments and accrued
income when the counterparty cannot
be determined ....................... 50%
All other assets .................... 100%
Off-balance sheet items are converted to balance sheet
equivalents by applying specified conversion factors, except in
the case of off-balance sheet items relating to interest rates,
currency exchange rates, securities, precious metals and
commodities, which are discussed separately below. The converted
balance sheet equivalent amounts are then multiplied by the
applicable risk-weighting percentages described above, and the
product is the risk-weighted equivalent value of the relevant
item. If the relevant obligations are fully guaranteed, then the
risk weighting of the guarantor is applied. For purposes of
determining the applicable conversion factors, off-balance sheet
items other than those relating to interest rates, currency
exchange rates, securities, precious metals and commodities are
first classified in four categories, with higher levels of
capital required for the categories perceived as representing
greater risk. Each off-balance sheet item is classified in the
category that are deemed appropriate (according to instructions
of the Banking Commission). The following table sets forth a
description (which is not limitative) of the items in each
category and the corresponding risk weighting.
51
<PAGE>
Type of Off-Balance Sheet Item Conversion Factor
------------------------------ -----------------
Limited Risk
------------
Undrawn commitments which are for an
initial maturity less than or equal
to one year or that may be canceled
unconditionally at any time by the
relevant entity of the credit insti-
tution member without notice ........ 0%
Moderate Risk
-------------
Documentary credits secured by the
underlying goods and other similar
transactions ........................ 20%
Average Risk
------------
Unsecured documentary credits,
guarantees (including performance
bonds and similar non-payment
guarantees), standby facilities
and undrawn credit lines with an
initial maturity of more than one
year, note issuance facilities
and revolving underwriting
facilities .......................... 50%
High Risk
---------
Loan guarantees, acceptances,
(including endorsements with the
character of acceptances),
transfers with recourse, irrevocable
credit lines or guarantees that are
credit substitutes, forward purchase
agreements, sale and repurchase
agreements, forward deposits, and
non-paid up share capital or other
securities .......................... 100%
Off-balance sheet items relating to interest rates,
exchange rates, securities, precious metals and commodities, such
as forward exchange operations, interest rate or exchange rate
futures and other similar items, are valued on the basis of
marking to market. Under this mark-to-market method, the net
exposure of the credit institution to each counterparty is
calculated, and is equal to the amount (not less than zero) that
the counterparty would have to pay to the credit institution if
the relevant agreement or other arrangement were terminated on
the date of calculation. An additional amount is then added,
determined by multiplying the notional principal amount of the
relevant contract by a certain coefficient as follows:
52
<PAGE>
- ---------------------------------------------------------------------
Interest Exchange Securi- Precious Commodi-
Residual rate rate ties Metals ties
maturity items items items items items
- ---------------------------------------------------------------------
One year or less 0.0% 1.0% 6.0% 7.0% 10.0%
One to five years 0.5% 5.0% 8.0% 7.0% 12.0%
More than five
years 1.5% 7.5% 10.0% 8.0% 15.0%
- ---------------------------------------------------------------------
The resulting amounts are multiplied by the risk weighting
for the applicable type of counterparty, except that the maximum
risk-weighting is 50%. Interest rate and currency options sold
(subject to certain exceptions), contracts traded on a regulated
market that requires daily margin posting and exchange rate
contracts with an initial maturity of 14 days or less are not
converted to balance sheet equivalents.
Calculation of Solvency Ratio and Tier 1 Capital Ratio
The Solvency Ratio of a credit institution is determined by
dividing the aggregate amount of the credit institution's Tier 1
and Tier 2 capital (subject to the limitations discussed below)
by the aggregate amount of the credit institution's risk-weighted
assets and off-balance sheet items. Under the BIS standards, the
Solvency Ratio must be at least equal to 8%. The Tier 1 Capital
Ratio must be at least 4%.
For purposes of this calculation, Tier 2 capital is
included in the calculation only to the extent that it does not
exceed Tier 1 capital, and Lower Tier 2 capital is included in
the calculation only to the extent that it does not exceed 50% of
Tier 1 capital. In addition, the aggregate amount of Tier 1 and
Tier 2 capital is reduced by deductions equal to the amount of
equity and subordinated debt held by the BNP Group in
non-consolidated credit institutions. See "--Calculation of the
Solvency Ratio and Tier 1 Capital Ratio of the BNP Group."
Calculation of the Solvency Ratio and Tier 1 Capital Ratio of the
BNP Group
The following table sets forth the components used to
calculate the Tier 1 Capital Ratio and Solvency Ratio of the BNP
Group as of December 31, 1995, 1996 and 1997.
53
<PAGE>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
(FF in millions, except percentages)
Total Capital:
Tier 1 Capital.......... 68,990 60,813 56,122
--------- --------- ---------
Upper Tier 2 Capital.... 13,519 13,122 11,870
Lower Tier 2 Capital.... 34,495 30,406 26,040
Deductions.............. -1,308 -1,446 -1,205
--------- --------- ---------
Total Tier 2 Capital.... 46,706 42,082 36,705
Available Tier 1 and
Tier 2 Capital.......... 115,696 102,895 92,827
========= ========= =========
Risk-Weighted Assets.... 1,131,504 1,101,655 998,433
Risk-Weighted Off-
Balance Sheet Items..... 33,165 27,651 22,923
--------- --------- ---------
Risk-Weighted Assets and
Off-Balance Sheet Items. 1,164,669 1,129,306 1,021,356
========= ========= =========
Solvency Ratio.......... 9.9% 9.1% 9.1%
Tier 1 Capital Ratio.... 5.9% 5.4% 5.5%
The New BIS standards
Under the New BIS standards applied by the Banking
Commission to French banks since January 1, 1998, the New
Solvency Ratio is calculated in a process that includes five
principal steps. First, the overall level of the credit
institution's capital is determined, with capital subdivided into
three tiers, Tier 1, Tier 2 and Tier 3. Second, the bank's assets
and off balance sheet commitments are divided into a commercial
banking portfolio and a trading portfolio. Third, the components
of the commercial banking portfolio (including the relevant off
balance sheet items converted to balance sheet equivalents) are
"risk weighted" in the same way as under the BIS standards. See
"The Solvency Ratio and the Tier 1 Capital Ratio--Risk
Weighting". Fourth, a credit institution's market risks are
measured by using either a standardized method or its internal
model and are converted to credit risk equivalents. Fifth, the
level of the credit institution's Tier 1, Tier 2 and Tier 3
capital (subject to certain limitations described herein) is
divided by the aggregate amount of the credit institution's
risk-weighted assets, off-balance sheet items and market risks
measures. The resulting quotient (expressed as a percentage) is
the credit institution's New Solvency Ratio, which must be equal
to at least 8%. The New BIS standards also require credit
institutions to have a New Tier 1 Capital Ratio of at least 4%.
Determination of the Level of Capital
Under the New BIS standards, a bank's total capital
includes Tier 1 capital, Tier 2 capital and Tier 3 capital.
Tier 1 capital and Tier 2 capital are defined as in the BIS
tandards. See "The Solvency Ratio and the Tier 1 Capital
Ratio--Determination of the Level of Capital".
Tier 3 capital consists of short-term subordinated debt
that needs, if circumstances demand, to be capable of becoming
part of a bank's permanent capital and thus be available to
absorb losses in the event of insolvency. It must therefore, at a
minimum:
- be unsecured, subordinated and fully paid-up;
- have an original maturity of at least two years;
- not be repayable before the agreed repayment date
unless the supervisory authority agrees; and
54
<PAGE>
- be subject to a lock-in clause which stipulates that
neither interest nor principal may be paid (even
upon maturity) if such payment means that the bank
falls below or remains below its minimum capital
requirements.
Tier 3 capital will be earmarked exclusively to support
market risks. Accordingly, any capital requirement arising in
respect of credit and counterparty risk, including counterparty
credit risk in respect of derivatives in both trading and banking
books, must be met by the existing definition of capital in the
BIS standards (i.e., Tiers 1 and 2).
Tier 3 capital will be limited to 250% of a bank's residual
Tier 1 capital (i.e., Tier 1 capital above that required to cover
credit risks).
Determination of the commercial banking portfolio and the trading
portfolio
A bank's commercial banking portfolio includes all of its
assets and off-balance sheet items, other than those included in
its trading portfolio. The trading portfolio includes trading
securities, securities held for sale (subject to certain
exceptions) and derivative instruments the purpose of which is
either to maintain open positions to benefit from price
variations or to manage the bank's trading portfolio. Derivatives
include financial futures, forward rate agreements, interest
rate, currency, equity and equity index swaps and options for the
purchase or sale of securities or other derivative contracts.
Items in the commercial banking portfolio are recorded at
historical cost in accordance with the manner in which such items
are recorded on the bank's consolidated balance sheet. Items in
the trading portfolio are marked to market.
Risk Weighting
Assets in the commercial banking portfolio (including the
relevant off balance sheet items converted to balance sheet
equivalents) are "risk weighted" in the same manner as under the
BIS standards. See "The Solvency Ratio and the Tier 1 Capital
Ratio--Risk Weighting".
Determination of market risks
In measuring its market risks, a bank may apply one of two
general methodologies, subject to the approval of the Banking
Commission.
One method is to measure the risks in a standardized
manner, using a "building block approach" with respect to the
various risks: interest rate, equity position, foreign exchange,
commodities risk and the price risk in options of all kinds. The
capital charge under the standardized measurement method will be
the measures of risks obtained for the various risks set forth in
the table below, summed arithmetically.
- -----------------------------------------------------------
Risk category Assets concerned
- -----------------------------------------------------------
Interest rate risk Trading portfolio
Specific and general
market risks
- -----------------------------------------------------------
Equity position risk Trading portfolio
Specific and general
market risks
- -----------------------------------------------------------
Foreign Exchange risk All assets
- -----------------------------------------------------------
Commodities risk All assets
- -----------------------------------------------------------
Options Options related to any of the
above risk category
- -----------------------------------------------------------
55
<PAGE>
The alternative method allows banks to use risk measures
derived from their own risk management model, subject to a number
of conditions, including: certain general criteria concerning the
adequacy of the risk management system; qualitative standards for
internal oversight of the use of the models; guidelines for
specifying an appropriate set of market risk factors, i.e., the
market rates and prices that affect the value of the banks'
positions; quantitative standards setting out the use of common
minimum parameters for measuring risks; guidelines for stress
testing; and rules for banks which use a mixture of models and
the standardized approach.
BNP is currently preparing its own risk management model
and considering the implications of its implementation.
Certain Financial Information Related to BNP Group's Capital
Adequacy
The following tables present certain financial information
concerning the BNP Group at, and for the years ended, December
31, 1995, 1996 and 1997. Such information has been derived from
the consolidated financial statements of the BNP Group for the
year ended December 31, 1997 (including income statement items
for the years ended December 31, 1995 and 1996) and at December
31, 1997 (including balance sheet items at December 31, 1995 and
1996). Such financial statements were prepared in accordance with
generally accepted accounting principles in France ("French
GAAP"). French GAAP differ in certain significant respects from
generally accepted accounting principles in the United States.
Year ended December 31,
-----------------------
1997 1996 1995
------- ------- -------
(FF in millions)
Income Statement Items
Net banking income............ 44,066 39,502 37,708
Gross operating income........ 13,435 10,844 9,500
Net addition to allowance
for credit risks and
country risks................. (6,785) (3,793) (5,533)
Net income attributable
to BNP Group.................. 5,962 3,856 1,784
Balance Sheet Items
Assets
Interbank and money
market items.................. 752,264 713,067 567,870
Customer items................ 888,083 793,986 747,726
Other......................... 248,435 182,761 146,296
--------- --------- ---------
Total assets................ 2,034,871 1,861,053 1,593,723
========= ========= =========
Liabilities and Stockholders'
Equity(1)
Interbank and money
market items.................. 668,239 623,378 510,797
Customer deposits............. 717,741 638,049 578,062
Bonds and negotiable
debt instruments.............. 240,248 255,276 270,737
Other accounts................ 285,528 237,216 138,298
Subordinated debt............. 52,473 43,120 36,622
Reserve for general
banking risks................. 6,718 6,580 8,353
Stockholders' equity.......... 63,924 57,434 50,854
--------- --------- ---------
Total liabilities and
stockholders' equity........ 2,034,871 1,861,053 1,593,723
========= ========= =========
- ----------
(1) After appropriation of income.
Financial Condition
Assets
General. The main components of the BNP Group's assets are
customer items, comprising "items due from customers" (i.e.,
loans and leasing transactions), and interbank and money market
items, which together accounted
56
<PAGE>
for approximately 81% of total assets at December 31, 1997 and
1996. At December 31, 1997, consolidated assets of the BNP Group
amounted to FF 2,035 billion, up 9.3% from FF 1,861 billion at
December 31, 1996, which in turn represented an increase of 16.8%
from FF 1,594 billion at December 31, 1995. The increase from
1996 to 1997 was due primarily to a 11.4% increase in gross
customer loans and a 5.5% increase in interbank and money market
items, which more than offset a 6.2% decrease in bonds and equity
securities (not including equity securities held for investment).
Notwithstanding the significant increases in net banking income
in 1997 compared with 1996, consolidated weighted assets
increased only by 3.1% due to a selective policy focusing both on
strengthening capital ratios and increasing profitability.
Interbank and Money Market Items. Interbank and money
market items increased by only 5.5% to FF 752.3 billion at
December 31, 1997 compared with FF 713.1 billion at December 31,
1996, itself a 25.6% increase from FF 567.9 billion at December
31, 1995. The 5.5% increase in the amount of interbank and money
market items in 1997 reflected two opposing trends: a 60.6%
increase in treasury bills and money market instruments resulting
primarily from a substantial increase in BNP's French Treasury
Security repo business, and a 9.8% decrease in term loans and
time deposits due from credit institutions, resulting from the
BNP Group's strategy to strengthen capital ratios by closely
monitoring consolidated weighted assets.
Gross Customer Loans. Gross customer loans outstanding
increased by 11.4% to FF 929.5 billion at December 31, 1997 from
FF 834.1 billion at December 31, 1996, which in turn represented
a 6.1% increase from FF 786.2 billion as at December 31, 1995. In
contrast to a 3.9% contraction in 1996, gross customer loans
granted in France increased by 1.3% in 1997, reflecting a 1.4%
increase in the average loan portfolio of the French domestic
network (the average portfolio of loans to corporations and loans
to individuals increased by 1.9% and 1.3%, respectively). This
increase illustrated the upturn of the demand for credit in
France in 1997 following the acceleration of economic growth and
the rebound in household consumption. Of the average balances of
French franc customer loans granted by BNP France (i.e., the
French domestic network excluding French subsidiaries of the BNP
Group) for the year 1997, 58.8% related to commercial and
industrial loans (including 39.3% for investment loans, 51.6% for
treasury loans and 9.1% for export and other loans) and 41.2%
related to loans to individuals (including 81.2% for mortgage
loans and 18.8% for short-term customer loans). On the
international level, the improved economic environment and the
extension of the activities of the network led to a 25.3%
increase (including the effect of favorable exchange rate
fluctuations) in gross customer loans in 1997.
Securities Portfolio. At December 31, 1997, BNP held
securities (bonds and other fixed-income instruments and equity
and other non-fixed income instruments, not including treasury
bills and money market instruments) having a book value of FF
146.1 billion, a 6.2% decrease from FF 155.8 billion at December
31, 1996, itself representing a 51.6% increase from year-end 1995
(FF 102.7 billion). The market value of such securities was FF
148.4 billion at December 31, 1997. BNP's trading account
securities (other than treasury bills and money market
instruments) amounted to FF 77.6 billion, a 0.9% increase from
76.9 billion at December 31, 1996, itself representing a 93.4%
increase from FF 39.8 billion at year-end 1995.
Liabilities
General. Total liabilities of the BNP Group reached FF
1,971 billion as at December 31, 1997, up 9.3% from 1,804 billion
at December 31, 1996, itself a 16.9% increase from FF 1,543
billion at December 31, 1995. The principal liability categories
were interbank and money market items, customer deposits and
bonds and negotiable debt instruments, which together accounted
for approximately 82.5% of the total at year-end 1997, 84.1% of
the total at year-end 1996 and 88.1% of the total at year-end
1995. The increase in total liabilities in 1997 was due mainly to
a significant increase (12.5%) in customer deposits and a more
limited increase in interbank and money market items (7.2%).
Interbank and Money Market Items. Interbank and money
market items increased 7.2% to FF 668.2 billion at December 31,
1997 from FF 623.4 billion at December 31, 1996, itself an
increase of 22.0% from FF 510.8 billion at December 31, 1995. The
increase in interbank and money market liabilities in 1997, as on
the asset side, was related to the substantial increase in BNP's
French Treasury Security repo business.
Customer Deposits. Customer deposits, retail certificates
of deposit and negotiable certificates of deposit together
amounted to FF 904.6 billion at December 31, 1997, up 8.7% from
FF 832.1 billion at December 31, 1996,
57
<PAGE>
itself a 6.8% increase from FF 779.2 billion at December 31,
1995. The increase in 1997 was due mainly to a 12.5% increase in
customer deposits to FF 717.7 billion at December 31, 1997 from
FF 638.0 billion at December 31, 1996. Total customer deposits,
retail certificates of deposit and negotiable certificates of
deposit collected by BNP in France (FF 445.0 billion), French
subsidiaries (FF 72.1 billion) and outside France (FF 387.5
billion) increased by 2.7%, 54.2% and 10.1%, respectively.
Other. At December 31, 1997, the BNP Group's bond and
negotiable debt instruments amounted to FF 240.2 billion, down
5.9% from FF 255.3 billion at December 31, 1996, itself a 5.7%
decline from FF 270.7 billion at December 31, 1995. The BNP
Group's subordinated debt amounted to FF 52.5 billion at December
31, 1997, up 21.7% from FF 43.1 billion at December 31, 1996,
reflecting the continued development of issuances of subordinated
debt designed to increase the BNP Group's Tier 2 capital.
Stockholders' Equity
At December 31,
---------------- ---------
1997 1996 % change
-------- ------- ---------
(FF in millions)
Consolidated stockholders'
equity, BNP Group's share* 59,040 55,552 6.3
Minority interests* 4,884 1,882 n/m
------ ------
Consolidated stockholders' equity,
including minority interests* 63,924 57,434 11.3
====== ======
- ----------
* After appropriation of income.
The 6.3% increase in stockholders' equity (BNP Group's
share) in 1997 resulted, in addition to the increase in
appropriations to reserves of undistributed earnings in 1997 (FF
4.5 billion), principally from (i) a FF 761 million capital
increase pursuant to the payment of dividends in the form of
shares, (ii) a capital increase reserved to employees (FF 178
million), (iii) a FF 229 million capital increase pursuant to the
stock-for-stock public tender offer launched by BNP on its
subsidiary BNP Intercontinentale, and (iv) the effects of
exchange rate fluctuations and other (FF 608 million), which
together more than offset a write-down of capital gain on real
estate restructuring of FF 2.758 billion (net of deferred tax
liabilities posted to deferred tax liabilities) which was posted
directly to stockholders' equity, as was the case for the
original revaluation transaction effected in 1991-92. The
increase in minority interests in BNP's consolidated
stockholders' equity resulted from the issuance by BNP U.S.
Funding L.L.C., a newly-created subsidiary, of U.S.$500 million
of noncumulative preferred securities. See "Capital Adequacy" for
a discussion of BNP's capital ratios as at December 31, 1997.
Off-Balance Sheet Items
Off-balance sheet items (including the notional amount of
derivative instruments) totaled FF 15,360.9 billion at December
31, 1997, up 25.3% from FF 12,254.7 billion at December 31, 1996,
itself representing an increase of 29.1% from FF 9,493.1 billion
at December 31, 1995. The substantial majority of such items
consisted of commitments on forward financial instruments and of
foreign exchange transactions. Risks on those transactions are
minimized by taking matched positions.
58
<PAGE>
The following table sets forth the composition of the BNP Group's
off-balance sheet items at December 31, 1997 and 1996.
At December 31,
----------------
1997 1996
------- -------
(FF in billions)
Commitments given:
Financing commitments given................ 397.0 324.5
Guaranties and endorsements given.......... 189.3 174.6
Commitments given on securities............ 63.6 55.5
Commitments incurred on forward
and options contracts...................... 14,490.1 11,516.4
Commitments received:
Financing commitments received............. 9.9 9.4
Guaranties and endorsements received....... 158.8 118.3
Commitments received on securities......... 52.2 55.9
The increase in financing commitments given is consistent
with the evolution of the balance sheet as a whole. The increase
in guaranties and endorsements given resulted in particular from
BNP's role in international financing.
After weighing by nature of counterparty risk, off-balance
sheet credit risks totaled FF 286 billion at December 31, 1997
(compared with FF 234 billion at December 31, 1996), of which FF
33.2 billion concerned commitments relating to forward financial
instruments (compared to FF 27.7 billion at December 31, 1996).
Asset Quality, Loan Loss Allowances and Reserves
The BNP Group seeks to minimize, and to protect itself
from, credit risk by applying specific procedures in monitoring
credit risk and making and maintaining adequate allowances to
cover loans losses.
Procedures for Monitoring Loans
The procedures discussed below are applied by BNP in
France. BNP's branches and subsidiaries in France's overseas
territories areas and outside France apply the same principles,
while taking into account local practices and host country
banking regulations.
Financial responsibility for commitments is assumed by the
profit centers that carry the commitments in their books; they
are directly responsible for monitoring their outstanding loans,
making provisions as needed and recording gains and losses.
All credits are reviewed on a yearly basis by the units
that originate the loans (except for the highest rated loans,
which are reviewed every year and a half). BNP has in place a
comprehensive credit risk rating system to analyze both current
and potential borrowers. The system classifies loans into six
categories of healthy risks--four categories of good risks and
two categories which, under specific circumstances, are
considered to be of a lower risk quality--and into two categories
of doubtful loans (as described more fully below). In addition to
this credit rating procedure, BNP has in place specific warning
procedures designed to monitor risks and prompt the Bank to react
promptly to important events affecting its commitments.
Based on information obtained from warning indicators, it
is the responsibility of the director of the unit concerned, or
his hierarchical superior, to decide whether to change a
customer's credit risk rating. Customer loans classified as
doubtful are specifically monitored according to the significance
of the commitments with or without the involvement of the Legal
and Tax Affairs Division or the Specialized Commitments and Debt
Collection Division. If a customer loan becomes subject to debt
collection, its management is transferred to the Specialized
Commitments and Debt Collection Division.
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<PAGE>
Customer loans are classified as doubtful accounts if they
(i) are unpaid for three months (six months for real estate),
irrespective of whether full or partial recovery is in doubt,
(ii) present a probable or certain risk of total or partial
nonrecovery that warrants the establishment of a loan loss
allowance, or (iii) are in the process of recovery through
litigation. Doubtful accounts include substandard risks, which
are risks as to which in management's judgment recovery is for
any reason in doubt but a provision is not yet considered
necessary. In BNP's domestic network, once the relationship with
the customer has been severed, the loan is for risk management
purposes classified as "debt in recovery", irrespective of
whether full or partial recovery is in doubt.
Loan Loss Allowances
Provisioning/Allowance Policy
The accounting procedures of the BNP Group regarding
problem credits, which are based on French regulations, differ in
certain significant respects from those followed by banks in the
United States.
Customer loans are recorded on the BNP Group's consolidated
balance sheet net of the allowance for possible loan losses. The
establishment of an allowance, or an increase in its amount, is
reflected in the Group's consolidated statements of income by a
provision. The reversal of an allowance is reflected by a credit
to income. The amount of new provisions (less reversals of
allowances and recoveries of loans written-off) is recorded under
"Net addition to allowance for credit risks and country risks."
On a monthly basis, management establishes and modifies
allowances for possible loan losses relating to particular loans
that appear to present a significant risk of loss. Lending
offices may establish allowances in amounts up to FF 2.5 million;
allowances above such amounts may be established only by the
central management of BNP. The amount of the allowance in respect
of a particular loan is determined based on the degree of risk of
loss, taking all of the circumstances into account and
principally the financial condition of the borrower, the nature
of the loan and any security or guarantees supporting such loan.
Allowances in amounts greater than the previously mentioned
threshold are reviewed by central management twice a year to
determine (i) whether they should be increased or reduced in
light of then existing circumstances and (ii) whether there
should be any write-down, write-up or write-off. Certain
non-French branches and subsidiaries may, in accordance with
local regulations, establish allowances on a statistical or
lump-sum basis, and the amount of such allowances that is not
attributable to specific loans is reflected in retained earnings
in the consolidated financial statements of the Group. In
addition to allowances relating to particular problem loans, the
BNP Group maintains allowances for country risk.
A loan is generally written down or off only when the loss
has become final and certain. Interest on a doubtful loan
normally continues to be recorded as accruing, and is included in
net banking income, until such loan is written down or off, but a
provision is taken for the full amount of each unpaid interest
payment. When a loan is written down or off, any related
allowance is eliminated and a net charge to income is made for
any portion of the loan not covered by an allowance.
Allowances: General
The following table sets forth the balances of BNP's
allowances designated to cover specific risks, banking risks and
country risks at the dates indicated.
60
<PAGE>
At December 31,
-----------------------
1997 1996 1995
------ ------ ------
(FF in millions)
Allowances reflected under assets:(a)
On interbank items(b)................... 6,717 7,573 7,787
On customer items....................... 41,439 40,082 38,489
On securities(b)........................ 2,940 2,784 2,515
------ ------ ------
Total allowances reflected
under assets.......................... 51,096 50,439 48,791
Allowances reflected under
liabilities:
On off-balance sheet commitments........ 2,553 2,108 2,041
For other credit risks(c)............... 2,545 2,851 3,418
------ ------ ------
Total allowances reflected under
liabilities........................... 5,098 4,959 5,459
------ ------ ------
Total allowance for credit risks
and country risks..................... 56,194 55,398 54,250
------ ------ ------
Allowances reflected under
assets:(a)
Designated to cover country risks....... 13,393 12,830 12,974
Designated to cover specific risks...... 37,703 37,609 35,817
------ ------ ------
Total allowances reflected
under assets.......................... 51,096 50,439 48,791
Allowances reflected under
liabilities:
Designated to cover country risks....... 1,146 308 139
Designated to cover specific risks
and banking risks(c).................... 3,952 4,651 5,320
------ ------ ------
Total allowances reflected
under liabilities..................... 5,098 4,959 5,459
------ ------ ------
Total allowance for credit risks
and country risks..................... 56,194 55,398 54,250
====== ====== ======
- ----------
(a) As receivables purchased or swapped are carried at their
face value, premiums and differences between purchase price
and face value are recorded as allowances.
(b) Allowances on loans to credit institutions mainly concern
financial credits exposed to country risk. Allowances on
securities shown in this table cover the country risk
affecting securities held by the BNP Group.
(c) Including the reserve for unforeseen sectorial risks
described below.
The following table sets forth certain information
concerning the net addition to BNP's allowance for specific risks
and country risks during the periods presented. Additions to such
allowance are sometimes referred to herein as "provisions".
Year ended December 31,
-----------------------
% change % change
1997 1996 1995 in 1997 in 1996
---- ---- ---- -------- --------
(FF in millions)
Net addition to allowance for
specific risks: 3,965(a) 4,599 5,828 (13.8) (21.1)
Net addition to (deduction from)
allowance for country risks: 2,820(b) (806) (295) n/a n/m
Total net addition to allowance
for specific risks and
country risks: 6,785(c) 3,793 5,533 78.9 (31.4)
- ----------
(a) Including FF 592 million related to South Korea, Indonesia,
Thailand, Malaysia and the Philippines.
(b) Including FF 2,428 million related to South Korea, Indonesia,
Thailand, Malaysia and the Philippines.
(c) Including FF 3,020 million related to South Korea, Indonesia,
Thailand, Malaysia and the Philippines.
The 78.9% increase in net additions to allowances for
credit risks and country risks in 1997 was due to the impact of
the crisis in Asia. Excluding the effects of the recent
developments in Asia, which are discussed separately below, net
addition to allowances for credit risks and country risks
decreased by 0.7% in 1997 as compared to 1996, and by 31.4% in
1996 as compared to 1995. The decreases throughout the period
related both to generally improving economic conditions and to
BNP's implementation since its privatization in 1993 of improved
and more strict procedures for granting, monitoring and
provisioning loans. With respect to country risks, BNP increased
its sovereign debt sales, particularly in the second half of 1996
and in 1997, which led to deductions from country risk
allowances throughout the period (offset in 1997 by an allowance
following the securitization of certain sovereign debt and
additions resulting from the Asian crisis).
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<PAGE>
Specific Risks
The following table and discussion set forth information
concerning the coverage with loan loss allowances of the BNP
Group's specific risks.
At December 31,
-----------------------
1997 1996 1995
---- ---- ----
(FF in billions, except
percentages)
Doubtful specific risks outstanding(1)........ 61.8 63.5 63.2
Allowances for specific risks(2).............. 39.5 40.1 38.0
Total coverage.............................. 64% 63% 60%
- ----------
(1) Doubtful specific risks include essentially customer loans
classified as doubtful, but also a small amount of troubled
bank borrowings and securities of troubled borrowers.
(2) Does not include the reserve for unforeseen sectorial risks
described below.
At December 31, 1997, the BNP Group's total allowance for
specific risks (where it is believed that all or part of the loan
may not be collected) in France and abroad amounted to FF 39.5
billion, a decrease of FF 0.6 billion from December 31, 1996.
Notwithstanding the slight decrease in the total allowance for
specific risks in 1997, total coverage with respect to specific
risks increased to 64% of doubtful specific risks at year-end
1997, from 63% a year earlier and 60% at December 31, 1995. At
December 31, 1997, BNP's total doubtful specific risks
outstanding amounted to FF 61.8 billion (including FF 39.6
billion in France), a 2.7% decrease from FF 63.5 billion at
December 31, 1996 (including FF 40.7 billion in France). The
overall decrease was due to a 2.7% decrease in doubtful specific
domestic risks associated with the improvement in the situation
of corporate borrowers, and a 2.7% decrease in doubtful
international specific risks notwithstanding the impact of the
economic crisis in Asia.
The following table sets forth certain ratios concerning
the BNP Group's doubtful specific risks to its consolidated gross
customer loans.
At December 31,
------------------
1997 1996 1995
---- ---- ----
Allowances for specific risks as a
percentage of gross customer loans(1)....... 4.2% 4.8% 4.8%
Doubtful specific risks outstanding
as a percentage of gross customer loans..... 6.7% 7.6% 8.0%
- ----------------
(1) Allowances for specific risks include essentially
allowances linked to customer loans but also include a
minimal amount of allowances relating to troubled bank
borrowings and securities of troubled borrowers.
Additions to Allowance for Specific Risks. In 1997,
provisions for specific risks overall decreased by 13.8% to FF
3.965 billion from FF 4.599 billion in 1996. Excluding the
effects of the Asian crisis, provisions for specific risks
decreased 26.7% in 1997 as compared to 1996, due to an
improvement in the situation of corporate borrowers and the
rigorous application of lending and risk monitoring procedures.
The decrease was especially significant in Domestic Banking, and
in particular with respect to real estate risks. In Domestic
Banking, provisions for specific risks decreased 29.6% compared
with 1996. BNP's provisions with respect to troubled loans to
real estate professionals ("REPs") in France decreased from FF
693 million in 1996 to FF 101 million in 1997. Notwithstanding
the overall decrease in provisions, coverage of BNP's doubtful
cash outstandings to REPs in France at December 31, 1997 was 70%
as compared to 69% at December 31, 1996. In International Banking
and Finance, provisions with respect to specific risks increased
as a result of the FF 592 million provision recorded to cover
specific risks in Asia. In 1996, provisions relating to specific
risks overall decreased significantly (21.1%) as compared with
1995, with the decrease relating principally to specific risks in
France (provisions with respect to troubled loans to REPs in
France had been FF 1.621 billion in 1995), while provisions with
respect to risks outside of France increased in line with the
growth in the international loan portfolio.
REPs. BNP's real estate operations comprise all forms of
financing for operations conducted by REPs, as well as guarantees
and endorsements carried as off-balance sheet commitments. REPs
include developers engaged in building or renovating buildings
for subsequent sale, transfer or rental, brokers, and all other
nonfinancial agents engaged in real estate development on a
regular basis. Total commitments to the real estate sector
amounted to FF 32.0 billion at December 31, 1997, including FF
8.0 billion in off-balance sheet commitments. BNP's analytical
62
<PAGE>
definition of its commitments to the real estate sector does not
include real estate commitments (amounting to FF 5.6 billion at
December 31, 1997) given to major industrial corporations whose
main business is not real estate and on which risk is not related
to developments in the real estate sector.
For BNP, risks arising from real estate lending relate
principally to loans to REPs in France, where the real estate
market (particularly the market for commercial real estate)
remained depressed in 1995 and 1996, thus continuing to require
substantial provisions in these years. By contrast, in 1997, new
provisions with respect to troubled REP loans in France were only
FF 101 million, reflecting both the substantial provisioning
efforts of previous years and the stabilization of the real
estate sector in France.
At December 31, 1997, cash outstandings to REPs in France
amounted to FF 12.5 billion, a 2.5% decrease from December 31,
1996, itself representing a 2.1% decrease from December 31, 1995.
The following table breaks down by type BNP's cash outstandings
to REPs in France at the dates indicated.
At December 31,
------------------------------------
1997 1996 1995
------------ ----------- -----------
(FF in millions, except percentages)
Securities (stocks and bonds).... 3,075 2,294 1,671
Loans granted.................... 9,547 10,557 11,451
----- ------ ------
Total cash outstandings.......... 12,532 12,851 13,122
====== ======
% of gross customer loans........ 1.3% 1.5% 1.7%
At December 31, 1997, doubtful cash outstandings to REPs in
France decreased by 8.2% compared with December 31, 1996 to FF
6.2 billion. The following table sets forth information
concerning the coverage with specific allowances of BNP's risks
to REPs in France at the dates indicated.
At December 31,
----------------------
1997 1996 1995
----- ----- ------
(FF in billions, except
percentages)
Cash outstandings............................... 12.5 12.9 13.1
Doubtful cash outstandings...................... 6.2 6.7 6.5
Allowances for specific risks attributable
to doubtful cash outstandings................... 4.3 4.6 4.4
Coverage of doubtful cash outstandings.......... 70% 69% 67%
Coverage of doubtful cash outstandings to REPs in France by
specific allowances increased to 70% of exposure at December 31,
1997, compared with 69% of exposure at December 31, 1996. Such
percentages do not include allowances with respect to risks on
off-balance sheet commitments to REPs (which commitments totaled
FF 5.404 billion at December 31, 1997 and FF 6.006 billion at
December 31, 1996). Considering the coverage of risks to REPs in
France, allowances with respect to risks on off-balance sheet
commitments to REPs were reduced to zero at December 31, 1997
(compared with FF 307 million at December 31, 1996).
At December 31, 1997, coverage of doubtful real estate
loans of the BNP Group worldwide (which loans totaled FF 9.8
billion at December 31, 1997 and FF 11.0 billion at December 31,
1996) by specific allowances amounted to 60.8% of exposure,
compared with 58.7% at year-end 1996. The level of coverage
outside France increased to 45.5% at December 31, 1997 from 42.8%
at December 31, 1996.
Asian Exposure
In 1997, the BNP Group recorded a FF 3.020 billion
provision to cover its exposure to five of the countries which
were principally affected (to varying degrees) by the recent
economic crisis in Asia: South Korea, Indonesia, Thailand,
Malaysia and the Philippines. In an attempt to assess its
exposure in these five countries conservatively, BNP adopted a
comprehensive definition of its commitments to such countries.
Specifically, BNP's commitments to these five countries comprise
balance sheet and off-balance sheet commitments, credits of all
maturities, including short-term and trade financing, equity
investments and trading accounts and loans in local and foreign
currencies. These commitments include all transactions with
governments, financial institutions and corporations (excluding
subsidiaries of multinational corporations headquartered outside
these countries) and exclude the portion
63
<PAGE>
of risks secured by formally pledged cash collateral or
guaranteed outside these countries by supranational or national
government institutions. Based on such definition, the BNP
Group's exposure in these five countries stood at FF 28.4 billion
at January 31, 1998 (FF 29.8 billion at December 31, 1997, and
such exposure as of January 31, 1998 was broken down as follows:
South Korea (35.6%), Indonesia (21.5%), Thailand (19.7%),
Malaysia (13.0%) and the Philippines (10.2%). Based on an
analysis of each of its commitments to borrowers in such
countries, and applying its general procedures for monitoring
credit risks, BNP recorded in 1997 a provision for specific risks
of FF 592 million to cover the risk of losses on troubled loans
to customers located in these countries. In addition, based on a
multicriteria analysis designed to assess the impact of a
worsening of the crisis, BNP, as a prudential measure, recorded
in 1997 a provision of FF 2.428 billion to cover the more serious
consequences that a possible worsening of these countries'
economic and financial condition would have on BNP's risks.
BNP has long been active in Asia, particularly in trade
finance, which involves primarily short-term and self-liquidating
types of commitments. A further 30% of BNP's outstanding
commitments in the five countries are off-balance sheet items.
BNP's real estate commitments in the region are immaterial.
Furthermore, none of BNP's Asian entities in the five countries
incurred any losses on the financial markets in 1997. When the
first warning signs appeared, BNP conducted a complete review of
its commitments and further tightened its credit review
procedures. While BNP considers the coverage policy adopted in
response to the crisis in Asia to be conservative, an extension
of the crisis to neighboring countries, currently unforeseen,
could materially and adversely affect the BNP Group's results of
operations.
Country Risks
Following a reduction of FF 806 million in 1996, the
allowance for country risks was increased in 1997 by FF 2.820
billion, due primarily to the general allowance of FF 2.428
billion recorded in 1997 as a result of the crisis in Asia. See
"-- Asian Exposure." The allowance for country risks stood at FF
14.5 billion at December 31, 1997. The BNP Group's sovereign loan
portfolio rose in value due to the widespread increase in
secondary market prices of sovereign debt throughout the
1995-1997 period. In 1997, BNP took advantage of favorable market
conditions to continue to sell selected loans. These sales
allowed BNP to make deductions from country risk allowances
totaling FF 1.1 billion. These deductions were more than offset
by additions, amounting to FF 1.3 billion, resulting from the
securitization of Peru's and Russia's debt. The positive
differential between the book value of BNP's sovereign loans and
their market value continued to increase in 1997. These improved
conditions reinforced BNP's protection considering the loans'
discount in the secondary market, and BNP considers its coverage
of sovereign risks to be particularly conservative compared with
such discount.
Allowance for Unforeseen Sectorial Risks
Starting in 1994, BNP took steps to protect its
stockholders' equity and capital ratios from the emergence of
unforeseen sectorial risks. In this respect, BNP created a FF 2.6
billion allowance as of December 31, 1994 by reversing an
equivalent sum from its reserve for general banking risks (see
the description of such reserve below). The allowance for
unforeseen sectorial risks is accounted for on the balance sheet
of the BNP Group under the line item "Allowances for liabilities
and charges." In 1996, BNP transferred FF 1.79 billion (which
originally corresponded to country risk allowances included in
the reserve for general banking risks) to such allowance. In
1996, the allowance for unforeseen sectorial risks was used in
part to offset the impact of Axa's stock-for-stock public tender
offer for Union des Assurances de Paris ("UAP") (FF 1.157
billion) and to cover the deterioration of BNP's equity risk on
Pechiney and possible risks on Eurotunnel commitments (FF 901
million). An additional amount was also transferred from the
allowance for unforeseen sectorial risks to country risk
allowances. Following the addition to and the several deductions
from the allowance in 1996, the allowance for unforeseen
sectorial risks amounted to FF 1.430 billion at December 31,
1996. No addition to or deduction from the allowance for
unforeseen sectorial risks was made in 1997. No portion of this
allowance is allocated to cover any specific risks.
Reserve for General Banking Risks
In 1993, BNP established a reserve for general banking
risks amounting to FF 10.761 billion, corresponding to the
following items: general risk reserves, which were transferred
from the line item "Allowance for liabilities and charges" on the
BNP Group's balance sheet; the transfer of a significant amount
deducted from stockholder's equity, corresponding to the general
risk related to the expected imbalance between BNP's active and
64
<PAGE>
retired staff members; and country risk allowances. Following the
FF 2.6 billion reversal from the reserve in 1994 to create the
allowance for unforeseen sectorial risks and the further transfer
in 1996 of FF 1.79 billion to such allowance, the reserve for
general banking risks covers exclusively the general risk related
to the expected imbalance between BNP's active and retired staff
members.
At December 31, 1997, the reserve for general banking risks
amounted to FF 6.72 billion, a FF 138 million increase from
year-end 1996 reflecting additions made by subsidiaries abroad.
Allowance for Pension and other Post-Employment Benefits
The BNP Group's staff is entitled to collective or
contractual seniority and post-employment benefits, such as
retirement and seniority bonuses. In addition, in France, BNP
encourages voluntary departures and early retirement among
employees who meet certain eligibility criteria. BNP has
established an allowance to cover future charges associated with
these commitments. Such reserve amounted to FF 4.522 billion at
December 31, 1997.
Results of Operations
The BNP Group's net banking income in 1997 was FF 44.066
billion, an 11.6% increase over 1996. Overall, net commissions
increased 12.5%, particularly in the French domestic network, and
gains on financial operations increased 90.0%, resulting from the
exceptionally favorable stock market environment, while net
interest and assimilated income decreased 2.8%, primarily due to
severe competition on margins in the domestic market despite the
upturn in demand for credit. Operating expenses (including
certain depreciation and amortization items) increased 6.9% to FF
30.631 billion in 1997 compared with 1996, reflecting two
continuing and offsetting trends: a decrease in operating
expenses in the Domestic Banking division and an increase in
operating expenses in the International Banking and Finance
division due to continued development of the worldwide lines of
business and the impact of inflation and exchange rate
fluctuations worldwide. Gross operating income rose 23.9% to FF
13.435 billion, reflecting increases of 13.2% from Domestic
Banking and 46.0% from International Banking and Finance. Net
additions to allowances for specific risks and country risks
almost doubled in 1997, due to the provisions discussed above
relating to Asian commitments. Excluding the effects of the Asian
crisis, net additions to allowances for specific risks and
country risks in 1997 were FF 3.765 billion, a 0.7% decrease from
1996. Consolidated net income increased by 50.6% to FF 6.219
billion in 1997, due to the increase in gross operating income
and gains on disposals of long-term investments of FF 2.4
billion, which were partially offset by nonrecurring costs of FF
1.4 billion and a two-fold increase in income taxes (to FF 1.997
billion). After deduction of minority interests, net income
attributable to the BNP Group was FF 5.962 billion in 1997, a
54.6% increase over 1996.
The BNP Group generated net banking income of FF 39.502
billion in 1996, an increase of 4.8% over 1995, reflecting
increased revenues from both Domestic Banking and, especially,
International Banking and Finance. Operating expenses increased
by 1.6%, at the same rate as year-on-year inflation in France.
The increase in revenues and control over operating expense
accounted for a 14.1% increase in gross operating income. Net
additions to allowances for credit risks and country risks
decreased by 31.4% compared to 1995. Consolidated net income rose
to FF 4.129 billion after taking into account in particular a FF
1.572 billion increase in net nonrecurring nonoperating expenses
and a FF 501 million increase in the contribution of companies
carried under the equity method. After deduction of minority
interests, net income attributable to the BNP Group in 1996 rose
by 116.1% to FF 3.856 billion.
65
<PAGE>
GOVERNMENTAL SUPERVISION AND REGULATION OF BNP IN FRANCE
The French Banking System
The French banking system consists primarily of
privately-owned banks and financial institutions, as well as a
number of state-owned banks and financial institutions, all of
which are subject to the same banking laws and regulations. As a
result of nationalizations which occurred in 1945 and 1982,
ownership of most French banks and of certain French financial
institutions was formerly held by the French State. Since 1986,
ten have been privatized, including BNP in 1993.
All French credit institutions are required to belong to a
professional organization or central body affiliated with the
French Credit Institutions and Investment Firms Association
(Association Francaise des Etablissements de Credit et des
Entreprises d'Investissement), which represents the interests of
credit institutions with the public authorities, provides
consultative advice, disseminates information and studies
questions relating to banking activities. All registered banks,
including BNP, are members of the French Banking Association
(Association Francaise des Banques).
French Supervisory Bodies
The French banking law (the "Banking Law") sets forth the
conditions under which credit institutions (etablissements de
credit), including banks, may operate. The Banking Law vests
related supervisory and regulatory powers in certain
administrative authorities.
The National Credit and Securities Council (Conseil
national du credit et du titre), which is chaired by the Minister
of the Economy, Finance and Industry with the Governor of the
Bank of France (Banque de France), the French central bank, as
its vice chairman, is made up of 53 members, consisting of
representatives of the French Government and credit institutions,
representatives of regions and overseas territories,
representatives of unions and qualified personnel and
representatives of various economic sectors. The Council is a
consultative organization that studies the operation of the
banking and financial service industries and participates in the
formulation of national credit and monetary policy.
The Banking and Finance Regulatory Committee (Comite de la
reglementation bancaire et financiere), which is chaired by the
Minister of the Economy, Finance and Industry establishes general
rules for the conditions under which credit institutions operate,
including accounting principles, management standards, financial
ratios and credit policy, determination of capital requirements
and accounting standards applicable to investment companies.
The Credit Institutions and Investment Firms Committee
(Comite des etablissements de credit et des entreprises
d'investissement) grants banking licenses and makes other
specific decisions and grants specific exemptions as provided in
applicable banking regulations.
The Banking Commission (Commission bancaire), which is
chaired by the Governor of the Bank of France, is responsible for
the supervision of credit institutions. It supervises the
enforcement of laws and regulations applicable to banks and other
credit institutions. Banks are required to submit periodic
(either monthly or quarterly) accounting reports to the Banking
Commission concerning the principal areas of their activity. The
Banking Commission may also request additional information which
it deems necessary and may carry out on-site inspections. The
reports permit close monitoring of the condition of each bank and
also facilitate computation of the total deposits of all banks
and their use. Where regulations have been violated, the Banking
Commission may act as an administrative court and impose
sanctions which may include deregistration of a bank, resulting
in closure. The Banking Commission also has the power to appoint
a temporary administrator to manage provisionally a bank which it
deems to be mismanaged. In addition, in its administrative
capacity the Commission Bancaire may impose disciplinary
sanctions, or appoint a liquidator. These decisions of the
Banking Commission may be appealed to the French Supreme
Administrative Court (Conseil d'Etat).
66
<PAGE>
Banking Regulations
For a discussion of the minimum capital ratio requirements
applicable to the BNP Group, see "--Capital Adequacy of the BNP
Group." In addition to the requirements discussed therein, the
principal regulations applicable to deposit banks such as BNP
concern equity and permanent resources ratios, risk
diversification and liquidity, as well as monetary policy,
restrictions on equity investments and reporting requirements.
An equity and permanent resources ratio (coefficient de
fonds propres et de ressources permanentes) requires French
credit institutions to maintain, as of the end of December of
each year, a minimum ratio of 60% between amounts representing
equity and related items and amounts representing certain
long-term assets denominated in French francs. At December 31,
1997, BNP was in compliance with such requirement.
French credit institutions must satisfy, on a consolidated
basis, certain restrictions relating to concentration of risks
(ratio de controle des grands risques). The aggregate of a French
credit institution's loans and a portion of certain other
exposure (risques) to a single customer may not exceed 40% (25%
as of January 1, 1999) of the credit institution's regulatory
capital as defined by French capital ratio requirements. If a
credit institution has exposure with any customer in amounts
exceeding 15% (10% as of January 1, 1999) of the credit
institution's regulatory capital, the aggregate amount of
exposure with all such customers may not exceed eight times the
credit institution's regulatory capital. BNP currently complies
with the reduced thresholds.
Each French credit institution is required to calculate, as
of the end of each month, the ratio of the weighted total of
certain short-term and liquid assets to the weighted total of
short-term liabilities. This liquidity ratio (coefficient de
liquidite) is required to exceed 100%. At February 27, 1998, BNP
was in compliance with this requirement.
French credit institutions are required to maintain on
deposit in non-interest bearing accounts with the Bank of France
(Banque de France) a percentage, fixed by the Bank of France and
calculated monthly, of various categories of demand and
short-term deposits, currently equal to 1% of deposits with
maturities of less than 10 days and pass-book account deposits
and 0.5% of various kinds of term deposits with maturities of up
to one year.
French credit institutions are subject to restrictions on
equity investments and, subject to certain specified exemptions
for short-term investments and investments in financial
institutions and insurance companies, "qualifying shareholdings"
held by credit institutions must comply with the following
requirements: (a) no qualifying shareholding may exceed 15% of
regulatory capital of the concerned credit institution and (b)
aggregate qualifying shareholdings may not exceed 60% of
regulatory capital of the concerned credit institution. An equity
investment is a qualifying shareholding for purposes of these
provisions if (i) it represents more than 10% of the share
capital or votes available to the shareholdings of the company in
which the investment is made or (ii) it provides, or is acquired
with a view to providing, a "significant influence" in such
company.
Examination
The principal means used by the Banking Commission to
ensure compliance by large deposit banks with applicable
regulations is the examination of the detailed periodic (monthly
or quarterly) financial statements and other documents that such
banks are required to submit to the Banking Commission on a
regular basis. In the event that any such examination reveals a
material adverse change in the financial condition of a bank, an
inquiry would be made, which could be followed by an inspection.
The Banking Commission may also inspect banks on an unannounced
basis.
In addition, the process of regulation and inspection of
French credit institutions is supplemented by the requirement
that the financial statements of credit institutions be audited
by independent auditors.
Reporting Requirements
In addition to furnishing to the Banking Commission the
detailed monthly report mentioned above, credit institutions must
also report monthly (and, with respect to lease financings,
quarterly) to the Bank of France the names (and related amounts
of certain customers (principally companies and individuals
engaged in commercial
67
<PAGE>
activities)) having loan utilization exceeding FF 500,000. The
Bank of France then returns to each credit institution a list
stating, as to that credit institution's customers, total loan
utilizations from all reporting credit institutions. In BNP's
case the information to and from the Bank of France is supplied
at the branch level.
Credit institutions must make periodic reports,
collectively referred to as etats periodiques, to the Banking
Commission. The etats periodiques comprise principally (i) a
statement of the activity of the concerned institution during the
relevant period (situation), to which are attached exhibits that
provide a more detailed breakdown of the amounts involved in each
category, (ii) a statement of income, together with exhibits, and
(iii) certain additional data relating to operations (indicateurs
d'activite) such as the number of employees, client accounts and
branches.
68
<PAGE>
Item 12. Indemnification of Directors and Officers
The Company's By-Laws, which are filed as Exhibit 3.3 to
this Form 10, provide that the Company will indemnify its
directors and officers to the full extent permitted under the
Delaware Limited Liability Company Act for damages incurred as a
result of such director or officer being made or being threatened
to be made a party to any action, suit or proceeding, whether
civil criminal, administrative or investigative, except as a
result of such director's or officer's gross negligence or
willful misconduct.
In addition, the Bank also maintains group insurance
coverage for the benefit of directors and officers of its direct
and indirect subsidiaries, including the Company, with respect to
many types of claims that may be made against them.
69
<PAGE>
Item 13. Financial Statements
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of BNP U.S. Funding
L.L.C.
In our opinion, the accompanying balance sheet and the related
statements of income, comprehensive income, changes in
redeemable common securities, preferred securities and
securityholders' equity, and of cash flows present fairly, in all
material respects, the financial position of BNP U.S. Funding
L.L.C. at March 31, 1998 and December 31, 1997, and the results
of its operations and its cash flows for the three-month period
ended March 31, 1998 and for the period from December 5, 1997
(inception) through December 31, 1997, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 3 to the financial statements, the Company
changed its method of accounting for the receivable arising from
payment for securities and the obligation arising from the
receipt of securities.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
May 22, 1998, except for Note 3,
as to which the date is August 14, 1998
70
<PAGE>
BNP U.S. FUNDING L.L.C.
BALANCE SHEET
(in thousands, except per share data)
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS:
Cash and cash equivalents ............. $ 19,293 $ 33,762
Investment securities
(Notes 3 and 4)
Available-for-sale,
at fair value ...................... 1,021,541 997,748
Receivable arising from payment
for securities, pursuant
to the application of
SFAS 125 (Note 3) ..................... 864,204 966,260
Accrued interest receivable ........... 7,874 5,144
----------- -----------
TOTAL ASSETS .......................... $ 1,912,912 $ 2,032,914
=========== ===========
LIABILITIES:
Obligation arising from the
receipt of securities, pursuant
to the application of SFAS 125 (Note 3) $ 865,955 $ 998,610
Accrued expenses ...................... 24 34
Due to affiliates ..................... -- 12
----------- -----------
TOTAL LIABILITIES ..................... 865,979 998,656
----------- -----------
Redeemable common securities,
par value and redeemable value
$10,000 per security; 150,000
securities authorized, 53,011
securities issued and
outstanding (Note 5) .................. 530,110 530,110
Preferred securities, liquidation
preference $10,000 per security;
150,000 securities authorized, 50,000
securities issued and outstanding ..... 500,000 500,000
Additional paid in capital ............ 6 6
Accumulated other comprehensive income (171) --
Retained earnings ..................... 16,988 4,142
----------- -----------
TOTAL REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND
SECURITYHOLDERS' EQUITY ............... 1,046,933 1,034,258
----------- -----------
TOTAL LIABILITIES AND TOTAL REDEEMABLE
COMMON SECURITIES, PREFERRED
SECURITIES AND SECURITYHOLDERS' EQUITY
$ 1,912,912 $ 2,032,914
=========== ===========
The accompanying Notes to Financial Statements are an integral
part of these Statements.
71
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF INCOME
(in thousands, except per share data)
Period from
December 5, 1997
Three-month period (inception) to
ended March 31, 1998 December 31, 1997
-------------------- -----------------
INTEREST INCOME:
Collateralized Mortgage Obligations:
Floating-rate REMICs $ 3,797 $ 1,175
Fixed-rate REMIC 756 225
Mortgage Backed Securities:
Agency ARMs 2,826 1,443
Agency Hybrid ARMs 3,046 708
Treasury Notes 2,094 612
Interest on Deposits 379 25
-------- --------
Total 12,898 4,188
-------- --------
NONINTEREST EXPENSE:
Fees and expenses 52 46
-------- --------
NET INCOME APPLICABLE TO PREFERRED AND
REDEEMABLE COMMON SECURITIES
$ 12,846 $ 4,142
======== ========
NET INCOME PER REDEEMABLE COMMON SECURITY
$ 242.32 $ 78.14
======== ========
The accompanying Notes to Financial Statements are an integral
part of these Statements.
72
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
Period from
December 5, 1997
Three-month period (inception) to
ended March 31, 1998 December 31, 1997
-------------------- -----------------
NET INCOME $ 12,846 $ 4,142
OTHER COMPREHENSIVE INCOME:
Net change in unrealized gain
(loss) in fair value of
securities available-for-sale
treated as collateral (Note 3) 599 2,350
Net change in unrealized loss
in fair value of obligation
arising from the receipt of
securities pursuant to the
application of SFAS 125 (Note 3) (599) (2,350)
------- -------
Net change in unrealized gain
(loss) in fair value of securities
available-for-sale treated as
collateral (Note 3) (171) --
OTHER COMPREHENSIVE INCOME (171) --
------- -------
COMPREHENSIVE INCOME $12,846 $ 4,142
======= =======
The accompanying Notes to Financial Statements are an
integral part of these Statements.
73
<PAGE>
<TABLE>
<CAPTION>
BNP U.S. FUNDING L.L.C.
STATEMENT OF CHANGES IN REDEEMABLE COMMON SECURITIES, PREFERRED SECURITIES
AND SECURITYHOLDERS' EQUITY
(in thousands)
TOTAL REDEEMABLE
COMMON SECURITIES,
ACCUMULATED PREFERRED
REDEEMABLE ADDITIONAL OTHER SECURITIES AND
COMMON PREFERRED PAID IN COMPREHENSIVE RETAINED SECURITYHOLDERS'
SECURITIES SECURITIES CAPITAL INCOME EARNINGS EQUITY
---------- ---------- ------- ------ -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 10 $ -- $ -- $ -- $ -- $ 10
Issuance on December 5, 1997
(inception) 530,100 -- 6 -- -- 530,106
Private placement on
December 5, 1997 -- 500,000 -- -- -- 500,000
Net income -- -- -- -- 4,142 4,142
Other comprehensive
income -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 530,110 500,000 6 -- 4,142 1,034,258
----------- ----------- ----------- ----------- ----------- -----------
Net income -- -- -- -- 12,846 12,846
Other comprehensive income -- -- -- (171) -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1998 $ 530,110 $ 500,000 $ 6 $ (171) $ 16,988 $1,046,933
=========== =========== ========== =========== ============ ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral
part of these Statements.
74
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF CASH FLOWS
(in thousands)
Period from
Three-month period December 5, 1997
ended March 31, (inception) to
1998 December 31, 1997
------------------ -----------------
OPERATING ACTIVITIES:
Net income $ 12,846 $ 4,142
Adjustments to reconcile net income
to cash provided from operating
activities:
Premium amortization 3,299 262
Net change in interest receivable (1,941) 337
Net change in accrued expenses (10) 34
Net change in due to affiliates (12) 12
----------- -----------
Net cash provided from
operating activities 14,182 4,787
----------- -----------
INVESTING ACTIVITIES:
Purchase of investment securities:
Floating-rate REMICs (43,668) --
Agency ARMs (40,874) --
Agency Hybrid ARMs (72,521) --
Premium paid (2,447) --
Interest receivable (789) --
Payment for securities treated
as collateral -- (1,030,115)
Decrease in receivable arising from
payment for securities, pursuant to
the application of SFAS 125 (Note 3) 132,056 33,855
Proceeds from principal payments
of securities available-for-sale,
not treated as collateral 3,702 --
Proceeds from principal payments of
securities available-for-sale,
treated as collateral 127,946 28,974
Net cash provided (used) by
investing activities 103,405 (967,286)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from preferred securities
issuance -- 500,000
Proceeds from common securities
issuance -- 530,106
Decrease in obligation arising from
the receipt of securities, pursuant
to the application of SFAS 125
(Note 3) (132,056) (33,855)
Net cash provided (used)
by financing activities (132,056) 996,251
----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (14,469) 33,752
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 33,762 10
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 19,293 $ 33,762
============ ===========
The accompanying Notes to Financial Statements are an integral
part of these Statements.
75
<PAGE>
BNP U.S. FUNDING L.L.C.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
BNP U.S. Funding L.L.C. (the "Company") is a Delaware limited
liability company formed on October 14, 1997 for the purpose of
acquiring and holding Eligible Securities (as defined in Item 1,
herein) that will generate net income for distribution to the
holders of its Series A Preferred Securities and its redeemable
Common Securities. The Company is a wholly owned subsidiary of
the New York Branch (the "Branch") of Banque Nationale de Paris
(the "Bank" or "BNP"). BNP is a French corporation that conducts
retail banking activities in France and corporate and private
banking and other financial activities both in France and
throughout the world.
The Company was initially capitalized on October 14, 1997 with
the issuance to the Branch of one share of the Company's
redeemable common securities, $10,000 par value (the "Common
Securities"). On December 5, 1997 (inception), the Company
commenced operations concurrent with the issuance of 50,000
noncumulative preferred securities, Series A, liquidation
preference $10,000 per security, (the "Series A Preferred
Securities") to qualified institutional buyers, and the issuance
of 53,010 Common Securities to the Branch. These issuances raised
in the aggregate $1,030,115,873 of net capital (including $5,873
of additional paid in capital). This entire amount was used to
acquire from the Branch a portfolio of debt securities (including
accrued interest) at their fair values (the "Initial Portfolio").
The accounting and financial reporting policies of the Company
conform to U.S. generally accepted accounting principles and
current industry practices. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and
revenues during the reporting periods. Actual results could
differ from those estimates.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITIES:
Investments in debt securities, both collateral and non-collateral
(see Note 3), are classified as available for sale and are
carried at fair value. Unrealized gains and losses on these
securities are reported as a component of other comprehensive
income.
Interest on securities is included in interest income and is
recognized using the interest method. Premiums and discounts are
amortized using the effective interest method and are recognized
in interest income.
COMPREHENSIVE INCOME:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires the Company to report items of
other comprehensive income by their nature in a financial
statement and display the accumulated balance of other
comprehensive income separately in Total Redeemable Common
Securities, Preferred Securities and Securityholders' Equity.
Comprehensive income includes net income, as reported, as well as
the change in unrealized gains and losses on available-for-sale
securities and in the obligation arising from the receipt of
securities, pursuant to the application of SFAS 125.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash and short-term deposits
with original maturities of three months or less.
ISSUANCE COSTS:
All costs of issuance were incurred by BNP directly and not
through the Branch or Company.
76
<PAGE>
BNP U.S. FUNDING L.L.C.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
DIVIDENDS:
Dividends on the Series A Preferred Securities, when, as and if
declared by the Company's Board of Directors, are payable, out of
the Company's net income, determined without regard to capital
gains or losses, semi-annually in arrears on a non-cumulative
basis on the fifth day of June and December of each year,
commencing June 5, 1998, at a rate per annum of 7.738% of the
liquidation preference through and including December 5, 2007.
Thereafter, dividends, when, as and if declared by the Company's
Board of Directors, will be payable quarterly in arrears on the
third Wednesday of March, June, September, and December of each
year and will be calculated on a weekly basis in each quarter at
a rate per annum of the liquidation preference equal to 2.8% per
annum above one-week LIBOR for the week concerned as determined
on the related LIBOR Determination Date (see Item 11, herein).
Holders of Common Securities are entitled to receive dividends
when, as and if declared by the Company's Board of Directors out
of the Company's net income not required to be applied to fund
dividends with respect to the Series A Preferred Securities.
No dividends were declared on the Series A Preferred Securities
or the Common Securities for the period from December 5, 1997
(inception) to March 31, 1998.
If the Bank's financial condition were to deteriorate with the
consequence that a Shift Event (as defined below) were to occur,
substantially all of the Common Securities would be redeemed
automatically without prior redemption of the Series A Preferred
Securities and dividends payable on each Series A Preferred
Security could be substantially reduced or completely eliminated.
In addition, if the Bank's Tier 1 risk-based capital ratio were
to decline below the minimum percentage required by French
banking regulations (currently 4%), the Company would pay a
special dividend consisting of all of the Company's net assets
(other than assets having a total market value of approximately
$40 million) to the Bank as holder of the Common Securities.
A "Shift Event" would be deemed to have occurred if (i) the
Bank's total risk-based capital ratio or Tier 1 risk-based
capital ratio were to decline below the minimum percentages
required by French banking regulations, (ii) the Bank were to
become subject to certain specified receivership proceedings or
(iii) the French Banking Commission (Commission bancaire), in its
sole discretion, were to notify the Bank and the Company that it
has determined that the Bank's financial condition was
deteriorating such that either of the foregoing clauses (i) or
(ii) would apply in the near term. French banking regulations
currently require French banks to maintain a minimum total
risk-based capital ratio of at least 8.0% and a minimum Tier 1
risk-based capital ratio of at least 4.0%.
The Company may not pay dividends or make other distributions on
the Common Securities or the Series A Preferred Securities if,
after giving effect to the distributions, the Company's
liabilities would exceed the fair value of its assets.
Additionally, as long as any Series A Preferred Securities are
outstanding, except during a Shift Period (i.e., following the
occurrence of a Shift Event causing a shift in dividend
preference and before the termination thereof), the amount of
dividends on the Common Securities in any fiscal year may not
exceed the amount by which the net income of the Company for such
fiscal year exceeds the stated dividends on the Series A
Preferred Securities scheduled to be paid during such fiscal year
irrespective of whether dividends on the Series A Preferred
Securities are in fact declared and paid. Additionally, other
than during a Shift Period, no dividends may be declared, paid or
set apart for payment on the Common Securities (a) with respect
to any period of time included in any Dividend Period unless full
dividends have been or contemporaneously are declared and paid,
or declared and a sum sufficient for the payment thereof is set
apart for such payment on the Series A Preferred Securities for
the then-current Dividend Period and (b) the Company may not
declare, pay or set apart funds for any dividends or other
distributions with respect to any Common Securities unless and
until (x) full dividends on the Series A Preferred Securities for
the two most recent preceding Dividend Periods are declared and
paid, or declared and a sum sufficient for payment has been paid
over to the dividend disbursing agent for payment of such
dividends and (y) the Company has declared a cash dividend on the
Series A Preferred Securities at the annual dividend rate for the
77
<PAGE>
BNP U.S. FUNDING L.L.C.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
then-current Dividend Period, and sufficient funds have been paid
over to the dividend disbursing agent for payment of such cash
dividends for such then-current Dividend Period.
NET INCOME PER REDEEMABLE COMMON SECURITY:
Net income per redeemable common security is calculated by
dividing net income after preferred dividends by the weighted
average number of Common Securities outstanding. For the period
December 5, 1997 (inception) through December 31, 1997 and for
the three-month period ended March 31, 1998, there were no
preferred dividends.
INCOME TAXES:
The Company expects to be treated as a partnership for U.S.
Federal income tax purposes. Because a partnership is not a
taxable entity, the Company will not be subject to U.S. federal,
state and local income tax on its income. Instead, each
securityholder is required to take into account its allocable
share of items of income, gain, loss and deduction of the
partnership in computing its U.S. Federal tax liability.
Accordingly, the Company has made no provision for income taxes
in the accompanying statement of income.
NOTE 3--RECEIVABLE ARISING FROM PAYMENT FOR SECURITIES, PURSUANT
TO THE APPLICATION OF SFAS 125, AND OBLIGATION ARISING FROM THE
RECEIPT OF SECURITIES, PURSUANT TO THE APPLICATION OF SFAS 125
Statement of Financial Accounting Standards No. 125 "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") governs the
accounting for the transfer of financial assets. Under SFAS 125,
transfers of financial assets that do not meet certain sale
accounting requirements must be accounted for as a secured
borrowing transaction with a pledge of collateral.
Due to the potential consequences of a Shift Event (as described
above), the Company's purchase of the Initial Portfolio from the
Branch did not meet certain SFAS 125 sale accounting
requirements. Therefore, the purchase of the Initial Portfolio
has been accounted for as a secured borrowing transaction with a
pledge of collateral. In accounting for this transaction as a
secured borrowing transaction in accordance with SFAS 125, the
Company has recorded a receivable in an amount equal to the cash
amount paid to the Branch to acquire the Initial Portfolio. In
this case, however, having delivered the securities in the
Initial Portfolio to the Company, neither the Branch nor BNP has
any further obligation to the Company to repay any part of the
purchase price for the Initial Portfolio or otherwise to
repurchase or redeem any securities in the Initial Portfolio.
Other provisions of SFAS 125 govern the accounting for financial
assets treated as collateral that an entity has the right to sell
or repledge. In accordance with such provisions, the Company has
recognized the securities in the Initial Portfolio and recorded a
related obligation. In this case, the Company has in fact no
obligation to return any such securities to the Branch or to BNP,
except to the extent that the consequences of a Shift Event (as
described above) might affect securities still held by the
Company at the time.
In June 1998, the Company changed its method of accounting for
the receivable arising from payment for securities and the
obligation arising from the receipt of securities. Under the new
accounting policy, as securities within the Initial Portfolio
mature or prepay, the Company recognizes cash proceeds as a
reduction in the receivable arising from payment for securities.
Concurrent with the receipt of such cash proceeds, the Company
will adjust the fair value of the securities and reduce the
associated obligation. In prior periods, the Company recognized
cash proceeds and adjusted the fair value of the securities with
no change to the receivable arising from payment for securities
or obligation arising from the receipt of securities. The new
method of accounting reduced the receivable as those securities
which initially gave rise to the receivable and the obligation
mature or prepay. The financial statements of prior periods have
been restated to apply the new method retroactively. There was no
effect from this change on net income as previously reported.
The obligation arising from the receipt of securities is stated
at the fair value of the related securities. Changes in the value
of the obligation due to corresponding changes in the fair value
of the related securities are reported as an element of other
comprehensive income.
78
<PAGE>
BNP U.S. FUNDING L.L.C.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NOTE 4--INVESTMENT SECURITIES:
The amortized cost and estimated fair value of available-for-sale
securities were as follows ($ in 000's) based on management's
prepayment assumptions:
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1998 Cost Gains Losses Value
- -------------- --------- ---------- ---------- ----------
Collateralized Mortgage
Obligations:
Floating-rate REMICs $ 272,165 $ 144 $ 730 $ 271,579
Fixed-rate REMIC 46,837 -- 342 46,495
Mortgage Backed Securities:
Agency ARMs 319,752 908 1,312 319,348
Agency Hybrid ARMs 234,787 1,848 280 236,355
U.S. Treasury Notes 146,420 1,344 -- 147,764
---------- ---------- ---------- ----------
Total $1,019,961 $ 4,244 $ 2,664 $1,021,541
========== ========== ========== ==========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- ----------
Collateralized Mortgage
Obligations:
Floating-rate REMICs $263,209 $ 118 $ 585 $262,742
Fixed-rate REMIC 46,837 -- 607 46,230
Mortgage Backed Securities:
Agency ARMs 360,343 1,283 909 360,717
Agency Hybrid ARMs 178,405 2,271 -- 180,676
U.S. Treasury Notes 146,604 779 -- 147,383
-------- -------- -------- --------
Total $995,398 $ 4,451 $ 2,101 $997,748
======== ======== ======== ========
79
<PAGE>
BNP U.S. FUNDING L.L.C.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
The breakdown of the Company's available-for-sale securities by
category and expected maturity distribution (stated in terms of
amortized cost) is summarized below ($ in 000's) based on
management's prepayment assumptions (See Item 1, herein):
<TABLE>
<CAPTION>
Due in 1 Due after Due after
year 1 through 5 through Due after
March 31, 1998 or less 5 years 10 years 10 years Total
- -------------- -------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Collateralized Mortgage
Obligations:
Floating-rate REMICs $ 22,317 $ 249,848 $ -- $ -- $ 272,165
Fixed-rate REMIC -- -- -- 46,837 46,837
Mortgage Backed
Securities:
Agency ARMs -- -- 319,752 -- 319,752
Agency Hybrid ARMs -- -- 234,787 -- 234,787
U.S. Treasury Notes -- -- 146,420 -- 146,420
---------- ---------- ---------- ---------- ----------
Total $ 22,317 $ 249,848 $ 700,959 $ 46,837 $1,019,961
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Due in 1 Due after Due after
year 1 through 5 through Due after
December 31, 1997 or less 5 years 10 years 10 years Total
- ----------------- -------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Collateralized Mortgage
Obligations:
Floating-rate REMICs $ 1,470 $ 261,739 $ -- $ -- $ 263,209
Fixed-rate REMIC -- -- -- 46,837 46,837
Mortgage Backed
Securities:
Agency ARMs -- -- 360,343 -- 360,343
Agency Hybrid ARMs -- -- 178,405 -- 178,405
U.S. Treasury Notes -- -- 146,604 -- 146,604
---------- ---------- ---------- ---------- ----------
Total $ 1,470 $ 261,739 $ 685,352 $ 46,837 $ 995,398
========== ========== ========== ========== ==========
</TABLE>
Actual maturities may differ from maturities shown above due to
prepayments.
80
<PAGE>
BNP U.S. FUNDING L.L.C.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
The breakdown of the Company's available-for-sale securities by
category and yield is summarized below:
<TABLE>
<CAPTION>
Due in 1 Due after Due after
year 1 through 5 through Due after
March 31, 1998 or less 5 years 10 years 10 years Total
- -------------- -------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Collateralized Mortgage
Obligations:
Floating-rate REMICs 6.98% 5.66% --% --% 5.79%
Fixed-rate REMIC -- -- -- 6.45 6.45
Mortgage Backed Securities:
Agency ARMs -- -- 3.37 -- 3.37
Agency Hybrid ARMs -- -- 6.28 -- 6.28
U.S. Treasury Notes -- -- 5.79 -- 5.79
----- ----- ----- ----- -----
Total 6.98% 5.66% 4.71% 6.45% 5.08%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Due in 1 Due after Due after
year 1 through 5 through Due after
December 31, 1997 or less 5 years 10 years 10 years Total
- ----------------- -------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Collateralized Mortgage
Obligations:
Floating-rate REMICs 6.22% 6.34% --% --% 6.34%
Fixed-rate REMIC -- -- -- 6.92 6.92
Mortgage Backed Securities:
Agency ARMs -- -- 5.62 -- 5.62
Agency Hybrid ARMs -- -- 5.66 -- 5.66
U.S. Treasury Notes -- -- 5.86 -- 5.86
----- ----- ----- ----- -----
Total 6.22% 6.34% 5.68% 6.92% 5.92%
===== ===== ===== ===== =====
</TABLE>
There were no sales of available-for-sale securities from
December 5, 1997 (inception) to March 31, 1998.
81
<PAGE>
BNP U.S. FUNDING L.L.C.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NOTE 5--REDEEMABLE COMMON SECURITIES:
General
The Company is authorized to issue up to 150,000 Common
Securities; as of March 31, 1998 and December 31, 1997, the
Company had outstanding 53,011 Common Securities, all of which
were held by the Branch. The Bank has agreed with the Company in
the Contingent Support Agreement that, so long as any Series A
Preferred Securities are outstanding, it will maintain direct or
indirect ownership of 100% of the outstanding Common Securities
(see Item 11, "Contingent Support Agreement", herein).
Dividends
Holders of Common Securities are entitled to receive dividends
when, as and if declared by the Company's Board of Directors out
of the Company's net income not required to be applied to fund
dividends with respect to the Series A Preferred Securities;
provided that so long as any Series A Preferred Securities are
outstanding, no dividends or other distributions (including
redemptions and purchases) may be made with respect to the Common
Securities unless full dividends on all Series A Preferred
Securities have been paid for the current and the two immediately
preceding Dividend Periods (except during a Shift Period if the
Bank does not distribute dividends on its common stock).
Redemption Requirements
If the Bank's financial condition were to deteriorate with the
consequence that a Shift Event were to occur, substantially all
the Common Securities would be redeemed automatically without
prior redemption of any Series A Preferred Securities.
Voting Rights
Subject to the rights, if any, of the holders of Series A
Preferred Securities (in particular the right to remove and
replace any Independent Director and to elect an additional
director, in certain circumstances), all voting rights are vested
in the Common Securities. The Holders of Common Securities are
entitled to one vote per security.
Rights Upon Liquidation
In the event of the dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, after there shall have
been paid or set aside for the holders of all Series A Preferred
Securities the full preferential amounts to which such holders
are entitled, the holders of Common Securities will be entitled
to share equally and ratably in any assets remaining after the
payment of all debts and liabilities. Upon a liquidation of the
Company during a Shift Period, the Common Securities will have a
preference over the Series A Preferred Securities to the extent,
if any, that the liabilities of the Bank (including any debt
instruments, such as titres participatifs and prets
participatifs) have not been paid in full.
NOTE 6--RELATED PARTY TRANSACTIONS:
The Company entered into a Services Agreement with the Branch on
December 5, 1997 pursuant to which the Branch manages the
securities portfolio of the Company and performs other
administrative functions for a fee of $50,000 per annum. Expenses
incurred under such Agreement were $12,500 and $3,750 for the
three-month period ended March 31, 1998, and for the period from
December 5, 1997 (inception) to December 31, 1997, respectively.
While the amount of the fee payable under the Agreement is
somewhat less than the fee which would be payable in an arms'
length transaction with a third party, Management does not
believe that the difference is material.
82
<PAGE>
BNP U.S. FUNDING L.L.C.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
French American Banking Corporation (FABC), an affiliate of BNP,
serves as the dividend paying agent, registrar, and transfer
agent with respect to the Series A Preferred Securities. The
Company paid FABC an upfront fee of $4,000 and will pay a fee of
$4,000 per annum for these services.
The Company maintains a credit balance account with the Branch
for clearing certain transactions.
All of the Company's officers and employees and all but one of
the members of the Company's Board of Directors are officers and
employees of the Branch or BNP.
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair values of securities at March 31, 1998 and December 31,
1997 were obtained from independent market sources and are
summarized in Note 4. The carrying value of cash and cash
equivalents, accrued interest receivable, accrued expenses, and
due to affiliates approximates fair value. The carrying values of
investment securities, as shown in Note 4, and the obligation
arising from the receipt of securities, pursuant to the
application of SFAS 125, approximate their fair value. The fair
value of the receivable arising from payment for securities,
pursuant to the application of SFAS 125, approximates the
aggregate carrying value of the investment securities treated as
collateral including accrued interest which at March 31, 1998 and
December 31, 1997 was $865,955 and $998,610, respectively.
83
<PAGE>
Item 14. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Item 15. Financial Statements and Exhibits
(a) Financial Statements filed as part of this Form 10
The following are included in Item 13 of this Form 10:
Report of Independent Auditors;
Consolidated Balance Sheet at December 31, 1997;
Consolidated Statement of Income for the period from
December 5, 1997 (inception) through December 31,
1997;
Consolidated Statement of Changes in Redeemable
Common Securities, Preferred Securities and
Securityholders' Equity for the period from December
5, 1997 (inception) through December 31, 1997;
Consolidated Statement of Cash Flows for the period
from December 5, 1997 (inception) through December
31, 1997; and
Notes to the Consolidated Financial Statements.
(b) Exhibits filed as part of this Form 10
The Exhibits described in the Exhibit List immediately
following the signature page of this Form 10 (which is
incorporated by reference) are hereby filed as part of this
Form 10.
(c) Financial Statement Schedules
None.
84
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
BNP U.S. Funding L.L.C.
By: /s/ Lisa Hermann
------------------------------
Name: Lisa Hermann
Title: Treasurer
Date: August 14, 1998
By: /s/ Jean-Pierre Beck
------------------------------
Name: Jean-Pierre Beck
Title: Director
Date: August 14, 1998
85
<PAGE>
Exhibit Index
-------------
Exhibit Number Description
3.1* Certificate of Formation of the Company,
dated October 14, 1997
3.2* Amended and Restated Limited Liability Company
Agreement of the Company dated December 5,
1997
3.3* By-Laws of the Company
4.1* Form of Series A Preferred Security Global
Certificate
10.1* Trust Agreement between the Company and
Citibank N.A. dated December 1, 1997
10.2* Portfolio Securities Purchase Agreement
between the Company and the Branch dated
December 1, 1997
10.3* Services Agreement between the Company and the
Branch dated December 5, 1997
10.4* Contingent Support Agreement between the
Company and the Bank dated December 5, 1997
10.5* Registration Agreement among the Company, the
Bank and the Initial Purchasers dated
December 5, 1997
- ------------
* Previously filed as exhibits to the Registration Statement on
Form 10 of the Company on February 9, 1998.
86
