Form 10-Q/A
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report pursuant to Section 13 or 15 (d)
of The Securities Exchange Act of 1934
For the quarterly Commission File Number 000-23745
period ended June 30, 1998
BNP U.S. FUNDING L.L.C.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3972207
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
499 Park Avenue, New York, New York
-----------------------------------
(Address of principal executive offices)
10022
-----
(Zip Code)
(212) 449-9600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15 (d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Common Stock, $10,000 Par Value 53,011
- ------------------------------- ------
Number of shares outstanding of each of the issuer's classes of
common stock on June 30, 1998
<PAGE>
Form 10-Q Index
Part I Page
- ------ ----
Item l. Financial Statements - BNP U.S. FUNDING L.L.C.:
Balance Sheet at June 30, 1998 and December 31, 1997 3
Statement of Income for the quarter ended June 30,
1998 and six months ended June 30, 1998 4
Statement of Comprehensive Income for the quarter
ended June 30, 1998 and six months ended June 30, 1998 5
Statement of Changes in Redeemable Common Securities,
Preferred Securities and Securityholders' Equity for
the six months ended June 30, 1998 6
Statement of Cash Flows for the six months ended
June 30, 1998 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 18
Part II
- -------
Item l. Legal Proceedings 19
Item 2. Changes in Securities and Use of the Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Current Reports on Form 8-K 19
2
<PAGE>
Part I
Item 1.
BNP U.S. FUNDING L.L.C.
BALANCE SHEET
(in thousands, except per share data)
June 30, December 31,
1998 1997
------------- ------------
(unaudited) (audited)
ASSETS:
Cash and cash equivalents $ 33,559 $ 33,762
Investment securities (Notes 3 and 4)
Available-for-sale, at fair value 998,772 997,748
Receivable arising from payment
for securities, pursuant to
the application of SFAS 125 (Note 3) 723,208 996,260
Prepaid asset 3 --
Accrued interest receivable 5,557 5,144
----------- -----------
TOTAL ASSETS $ 1,761,099 $ 2,032,914
=========== ===========
LIABILITIES:
Obligation arising from the receipt
of securities, pursuant to the
application of SFAS 125 (Note 3) $ 726,955 $ 998,610
Due to affiliates -- 12
Accrued expenses -- 34
----------- -----------
TOTAL LIABILITIES 726,955 998,656
----------- -----------
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 (673) --
Retained earnings 4,701 4,142
----------- -----------
TOTAL REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND
SECURITYHOLDERS' EQUITY 1,034,144 1,034,258
----------- -----------
TOTAL LIABILITIES AND TOTAL REDEEMABLE
COMMON SECURITIES, PREFERRED SECURITIES
AND SECURITYHOLDERS' EQUITY $ 1,761,099 $ 2,032,914
=========== ===========
The accompanying Notes to Financial Statements are an
integral part of these Statements.
3
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF INCOME
(in thousands, except per share data)
Six-month period Three-month period
ended June 30, ended June 30,
1998 1998
---------------- ------------------
(unaudited) (unaudited)
INTEREST INCOME:
Collateralized Mortgage Obligations:
Floating-rate REMICs $ 7,625 $ 3,828
Fixed-rate REMICs 1,517 761
Mortgage Backed Securities
Agency ARMs 4,997 2,171
Agency Hybrid ARMs 6,277 3,231
Treasury Notes 4,139 2,045
Interest on Deposits 813 434
------ ------
Total 25,368 12,470
------ ------
NONINTEREST EXPENSE:
Fees and expenses 117 65
NET INCOME APPLICABLE TO PREFERRED AND
REDEEMABLE COMMON SECURITIES $ 25,251 $ 12,405
-------- --------
NET INCOME PER REDEEMABLE COMMON
SECURITY $ 476.34 $ 234.00
======== ========
The accompanying Notes to Financial Statements are an
integral part of these Statements.
4
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
Six-month period Three-month period
ended June 30, 1998 ended June 30, 1998
------------------- -------------------
(unaudited) (unaudited)
NET INCOME $ 25,251 $ 12,405
OTHER COMPREHENSIVE INCOME:
Net change in unrealized gain
(loss) in fair value of
securities available-
for-sale treated as
collateral (Note 3) 1,397 1,994
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) (1,397) (1,994)
Net change in unrealized gain
(loss) in fair value of securities
available-for-sale not treated as
collateral (Note 3) (673) (502)
-------- --------
OTHER COMPREHENSIVE INCOME (673) (502)
-------- --------
COMPREHENSIVE INCOME $ 24,578 $ 11,903
======== ========
The accompanying Notes to Financial Statements are an
integral part of these Statements.
5
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF CHANGES IN REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND SECURITYHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
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>
Balance at December 31, 1997
(audited) $530,110 $500,000 $6 $ -- $4,142 $1,034,258
Net income -- -- -- -- 25,251 25,251
Other comprehensive income -- -- -- (673) -- (673)
Dividends Paid - Preferred
Securities (19,345) (19,345)
Dividends Paid - Common
Securities (5,347) (5,347)
Balance at June 30, 1998 -------- -------- -- ------ ------ ----------
(unaudited) $530,110 $500,000 $6 $(673) $4,701 $1,034,144
======== ======== == ====== ====== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral
part of these Statements.
6
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF CASH FLOWS
(in thousands)
Six-month period
ended June 30, 1998
-------------------
(unaudited)
OPERATING ACTIVITIES:
Net income $25,251
Adjustments to reconcile net income to
cash provided from operating activities:
Premium amortization 7,158
Net change in interest receivable 937
Net change in accrued expenses (34)
Net change in due to affiliates (12)
------
Net change in prepaid asset (3)
------
Net cash provided from operating activities 33,297
------
INVESTING ACTIVITIES:
Purchase of investment securities:
Floating-rate REMICs (118,423)
Fixed-rate REMICs (5,420)
Agency ARMs (40,874)
Agency Hybrid ARMs (128,511)
Premium paid (2,700)
Interest receivable (1,352)
Decrease in receivable arising from
payment for securities,
pursuant to the application of SFAS 125 (Note 3) 273,052
Proceeds from principal payments of
securities available-for-sale,
not treated as collateral 23,124
Proceeds from principal payments of
securities available-for-sale,
treated as collateral 265,348
-------
Net cash provided (used) by investing activities 264,244
-------
FINANCING ACTIVITIES:
Cash dividends - Preferred Securities (19,345)
Cash dividends - Common Securities (5,347)
Decrease in obligation arising
from receipt of securities,
pursuant to the application of SFAS 125 (Note 3) (273,052)
-------
Net cash provided (used) by financing activities (297,744)
--------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (203)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,762
-------
CASH AND CASH EQUIVALENTS, END OF PERIOD $33,559
=======
The accompanying Notes to Financial Statements are an integral
part of these Statements.
7
<PAGE>
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 certain types of eligible
securities 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
noncollateral (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.
8
<PAGE>
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash and short-term
deposits with original maturities of three months or less.
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, 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.
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.
To date, the Company has declared and paid dividends as
follows:
Security Amount Date Paid
- -------- ------ ---------
Series A Preferred
Securities $19,345,000 June 5, 1998
Common Securities $ 5,347,365 June 22, 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
9
<PAGE>
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
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 semiannually in arrears after preferred
dividends by the weighted average number of Common Securities
outstanding.
INCOME TAXES:
The Company expects to be treated as a partnership for U.S.
Federal income tax purposes. As such, 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 recorded a receivable in an amount equal to the remaining
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
10
<PAGE>
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.
As securities within the Initial Portfolio mature or
prepay, the Company recognizes the cash proceeds as a reduction
in a receivable arising from payment for securities. Concurrent
with the receipt of such cash proceeds, the Company derecognizes
such securities and reduces the obligation. Accordingly, the
receivable amounted to $723,207,884 at June 30, 1998.
The obligation arising from the receipt of securities is
stated at the fair value of the related securities. Changes in
the value of the obligation due to corresponding changes in the
fair value of the related securities are reported as an element
of other comprehensive income.
NOTE 4--INVESTMENT SECURITIES:
The amortized cost and estimated fair value of
available-for-sale securities were as follows ($ in 000's) based
on management's prepayment assumptions:
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1998 Cost Gains Losses Value
- ------------- ---- ----- ------ -----
Collateralized Mortgage
Obligations:
Floating-rate REMICs $297,476 $ 236 $ 1,454 $296,258
Fixed-rate REMICs 52,266 257 52,523
Mortgage Backed Securities
Agency ARMs 226,796 3,274 2,574 227,496
Agency Hybrid ARMs 272,983 913 916 272,980
U.S. Treasury Notes 146,177 3,338 -- 149,515
-------- -------- -------- --------
Total $995,698 $ 8,018 $ 4,944 $998,772
======== ======== ======== ========
11
<PAGE>
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 $997,748
======== ======== ======== ========
The breakdown of the Company's available-for-sale
securities by category and expected maturity distribution
(stated in terms of amortized cost) is summarized below ($ in
000s) based on management's prepayment assumptions:
Due in Due after Due after
1 year 1 through 5 through Due after
June 30, 1998 or less 5 years 10 years 10 years Total
- ------------- ------- ------- -------- -------- -----
Collateralized Mortgage
Obligations:
Floating-rate REMICs $ 31,791 $265,685 $ -- $ -- $297,476
Fixed-rate REMICs -- 5,429 -- 46,837 52,266
Mortgage Backed
Securities:
Agency ARMs -- 159,039 67,757 -- 226,796
Agency Hybrid ARMs -- 21,862 251,121 -- 272,983
U.S. Treasury Notes -- -- 146,177 -- 146,177
-------- -------- -------- -------- --------
Total $ 31,791 $452,015 $465,055 $ 46,837 $995,698
======== ======== ======== ======== ========
Due in Due after Due after
1 year 1 through 5 through Due after
December 31, 1997 or less 5 years 10 years 10 years Total
- ----------------- ------- ------- -------- -------- -----
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
======== ======== ======== ======== ========
Actual maturities may differ from maturities shown above
due to prepayments.
12
<PAGE>
The breakdown of the Company's available-for-sale
securities by category and yield is summarized below:
Due in Due after Due after
1 year 1 through 5 through Due after
June 30, 1998 or less 5 years 10 years 10 years Total
- ------------- ------- ------- -------- -------- -----
Collateralized Mortgage
Obligations:
Floating-rate REMICs 6.27% 5.86% --% --% 5.87%
Fixed-rate REMICs -- 6.49 -- 6.48 6.48
Mortgage Backed Securities:
Agency ARMs -- 2.46 5.88 -- 3.27
Agency Hybrid ARMs -- -- 5.81 -- 5.81
U.S. Treasury Notes -- -- 5.65 -- 5.65
---- ---- ---- ---- ----
Total 6.27% 4.07% 5.76% 6.48% 5.03%
==== ==== ==== ==== ====
Due in Due after Due after
1 year 1 through 5 through Due after
December 31, 1997 or less 5 years 10 years 10 years Total
- ----------------- ------- --------- --------- --------- -----
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%
==== ==== ==== ==== ====
There were no sales of available-for-sale securities from
December 5, 1997 (inception) to June 30, 1998.
NOTE 5--REDEEMABLE COMMON SECURITIES:
General
The Company is authorized to issue up to 150,000 Common
Securities; as of June 30, 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.
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
13
<PAGE>
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 $25,000 as of June 30, 1998.
While the amount of the fee payable under the Agreement is
somewhat less than the fee which would be payable in an arm's
length transaction with a third party, Management does not
believe that the difference is material.
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.
14
<PAGE>
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair values of securities at June 30, 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, approximates 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 June 30, 1998 and
December 31, 1997 was $726,954,485 and $998,610,000 respectively
15
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion pertains to the six-month period
ended June 30, 1998 (the "six-month period") and the three-month
period ended June 30, 1998 (the "three-month period").
General
-------
The Company was formed on October 14, 1997 and commenced
operations on December 5, 1997 by the sale to qualified
institutional buyers of 50,000 noncumulative preferred
securities, Series A, liquidation preference $10,000 per
security, (the "Series A Preferred Securities") and the sale to
the New York Branch of Banque National de Paris (the "Branch") of
53,011 Common Securities, $10,000 par value per share (the "Common
Securities"). Together, such sales raised net capital of
$1,030,115,873, which the Company used to purchase a portfolio of
securities (the "Portfolio") from the branch.
The Company's sole business is to acquire, hold and manage
debt instruments largely consisting of mortgage obligations,
which generate net income for distribution to securityholders. The
Company's sole source of income is interest generated by the
securities in the Portfolio.
Results of Operations
---------------------
During the six-month period and the three-month period the
Company had revenues of $25,368,306 and $12,470,940, respectively.
This amount consisted entirely of interest income. Interest on the
securities in the Portfolio for the six and three-month periods
amounted to $24,555,531 and $12,037,956, respectively, representing
an aggregate average yield of 5.03% and 4.98%, respectively. Interest
earned and average yield with respect to each category of security
in the Portfolio was as follows:
SIX-MONTH PERIOD THREE-MONTH PERIOD
---------------- ------------------
Floating-rate REMICs $7,625,110 5.87% $3,830,068 5.66%
Fixed-rate REMICs $1,517,280 6.48% $761,177 6.50%
Agency ARMs $4,997,192 3.27% $2,170,758 2.79%
Agency Hybrid ARMs $6,276,502 5.81% $3,230,116 5.50%
U.S. Treasuries $4,139,443 5.65% $2,045,333 5.60%
The average book value of the Portfolio during the six and
three-month periods was $975,064,704 and $983,572,172,
respectively. This reflects the following prepayments and
reinvestments:
PREPAYMENTS SIX-MONTH PERIOD THREE-MONTH PERIOD
- ----------- ---------------- ------------------
Floating-Rate REMICs $83,680,285 $48,962,901
Agency ARMs $158,400,697 $78,389,000
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Agency Hybrid ARMs $46,390,618 $29,471,639
REINVESTMENTS SIX-MONTH PERIOD THREE-MONTH PERIOD
- ------------- ---------------- ------------------
Floating-Rate REMICs $118,589,682 $74,752,510
Fixed-Rate REMICs $5,420,457 $5,420,457
Agency ARMs $40,874,409 $11,407,199
Agency Hybrid ARMs $128,512,591 $42,306,320
The Company also recorded interest income from the
short-term investment for the six and three-month periods of
$812,775 and $433,484, respectively. This amount is attributable
to (i) interest payments on securities in the Portfolio and (ii)
prepayments of principal pending their reinvestment.
The decrease in the aggregate yield on the securities in
the Portfolio to 5.03% for the six-month period ended June 30,
1998 from 5.92% for the period from December 31, 1997 was due
primarily to prevailing market conditions resulting in a lower
interest rate environment in the United States.
During the period from January 1, 1998 to June 30, 1998,
approximately 85% of the Portfolio consisted of collateralized
mortgage obligations (Floating-rate REMICs and Fixed-rate REMICs)
and mortgage backed securities (Agency ARMs and Agency Hybrid
ARMs) and approximately 15% consisted of Treasuries. Floating
rate securities accounted for approximately 94.19% of the
portfolio of collateralized mortgage obligations and 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 aggregate market value of the securities in the
Portfolio as of June 30, 1998 was higher than the book value by
approximately 0.308%, due to a net decrease in interest rates.
Because management intends to hold such securities until
maturity, the unrealized net gain of approximately $3,073,887 was
not recognized in reporting net income.
Operating expenses for the six and three-month periods
totaled $116,815 and $65,266, respectively. 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 six and three-month
periods was $25,251,491 and $12,405,673, respectively. As of June
30, 1998, the Company had declared and paid dividends as follows:
Security Amount Date Paid
------ ---------
Series A Preferred
Securities $19,345,000 June 5, 1998
Common Securities $ 5,347,365 June 22, 1998
These amounts were paid from the Company's retained earnings,
consisting of net income generated during the period from
December 5, 1997 to May 31, 1998.
17
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Interest Rate Risk
The Company's income consists primarily of interest on
collateralized mortgage obligations, mortgage backed securities
and Treasuries. Currently, the Company does not use any
derivative products to manage its interest rate risk. If there is
a decline in market interest rates, as occurred in the first six
months of 1998, the Company may experience a reduction in
interest income on its collateralized mortgage obligations and
its mortgage backed securities and a corresponding decrease in
funds available to be distributed to its securityholders. The
reduction in interest income may result from downward adjustments
of the indices upon which the interest rates on ARM mortgage
loans are based and from prepayment of mortgage loans with fixed
interest rates, resulting in reinvestment of the proceeds in
lower yielding securities. There can be no assurance that an
interest rate environment in which there is a significant decline
in interest rates over an extended period of time would not
adversely affect the Company's ability to pay dividends on the
Series A Preferred Securities.
SFAS 125 Receivable and Obligation
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. At June 30, 1998 and December 31, 1997, respectively,
the receivable arising from payment for securities amounted to
$723,207,884 and $996,259,635, and the obligation arising from
the receipt of securities amounted to $726,954,485 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. Such transactions are
accounted for as a purchase under SFAS 125.
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.
18
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Item 3.
Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
19
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Part II
- -------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of the Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Current Reports on Form 8-K
A) Exhibits:
11) Computation of net income per share
12) (a) Computation of ratio of earnings to fixed
charges
(b) Computation of ratio of earnings to fixed
charges and preferred security
dividends
B) Reports on Form 8-K: NONE
20
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Signature
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereto duly authorized.
BNP U.S. FUNDING L.L.C.
-----------------------
Registrant
Date: August 14, 1998 By /s/ Eric Deudon
--------------------------
Eric Deudon
President and Director
Date: August 14, 1998 By /s/ Lisa Hermann
---------------------
Lisa Hermann
Treasurer
21
<PAGE>
Exhibit 11
BNP U.S. FUNDING L.L.C.
-----------------------
Computation of net income per share
(in thousands, except per share data)
Six-month
period ended
June 30, 1998
-------------
Net Income $25,251
Less: Preferred Securities
Dividends 19,345
Net Income Applicable to Common Securities $5,906
======
Securities:
Weighted Average Number of Common
Securities Outstanding 53,011
Net Income per Common Security $111.42
=======
22
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Exhibit 12(a)
BNP U.S. FUNDING L.L.C.
-----------------------
Computation of ratio of earnings to fixed charges
(in thousands, except ratios)
Six-month
period ended
June 30, 1998
-------------
Net Income $25,251
Fixed Charges
Audit Fees 29
Administrative Fees 25
-----
Total Fixed Charges 54
-----
Earnings before fixed charges 25,197
Fixed charges, as above 54
-----
Ratio of earnings to fixed charges 466.61
======
23
<PAGE>
Exhibit 12(b)
BNP U.S. FUNDING L.L.C.
-----------------------
Computation of ratio earnings to fixed charges
and preferred securities dividends
(in thousands, except ratios)
Six-month
period ended
June 30, 1998
-------------
Net Income $25,251
Fixed Charges
Audit Fees 29
Administrative Fees 25
-------
Total Fixed Charges 54
-------
Earnings before fixed charges 25,197
Fixed charges, as above 54
Preferred securities dividends 19,345
Fixed charges including
preferred securities dividends 19,399
=======
Ratio of earnings to fixed
charges and preferred
securities dividend requirement 1.30
=======
24
