Registration Statement No. 0-23745
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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 jurisdiction (I.R.S. Employer
of incorporation Identification No.)
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:
Title of each Name of each exchange
class to be on which each class
registered is to be registered
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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 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 primarily 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 --
Solvency Ratios" 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". 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 within the Initial 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
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 Certifi-
cate, 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.
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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
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.
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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.
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.
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FHLMC is required to remit each registered FHLMC Certificate-
holder'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
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
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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.
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
8
<PAGE>
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.
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
9
<PAGE>
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,
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.
The following table sets forth certain information with
respect to each type of security included in the Portfolio:
Portfolio
As of December 31, 1997
Aggregate
Unpaid Percentage of
Principal Portfolio by
Balance Aggregate Unpaid
Type of Security ($000) Principal Balance
- -------------------- --------- -----------------
Floating-rate REMICs $261,330 26.853%
Fixed-rate REMIC.... 46,839 4.813
Agency ARMs......... 352,204 36.191
Agency Hybrid ARMs.. 172,804 17.757
Treasuries.......... 140,000 14.386
--------- --------
TOTAL $973,177 100.00%
========
Weighted Average
Number of Life Range
Type of Security Securities (years)(1)
- -------------------- ---------- ----------------
Floating-rate REMICs 18 0.46 - 4.41
Fixed-rate REMIC.... 1 10.7
Agency ARMs......... 22 5.57 - 6.80
Agency Hybrid ARMs.. 6 5.49 - 5.68
Treasuries.......... 2 8.8 - 9.4
-----------
TOTAL 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.
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 (i) 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. The latest stated maturity date of any Floating-
rate REMIC in the Portfolio is July 2027.
10
<PAGE>
FLOATING-RATE REMICS
As of December 31, 1997
Current
Unpaid
Principal Current
Series Balance ($000) Coupon Life Cap
- ---------------------------- -------------- ------- --------
FANNIE MAE 1993-210 FB...... $45,170 6.525% 9%
FHLMC-GNMA 38 F............. $8,111 6.625 10
FANNIE MAE 1997-28 FA....... $26,187 6.02354 10
FANNIE MAE 1996-51 FA....... $16,007 6.625 9
FREDDIE MAC 1933 FR......... $8,010 6.625 8.5
FANNIE MAE 1990-121 F....... $21,845 6.925 11.5
Collateralized Mortgage
Obligation Trust 66 F... $1,467 6.725 11
FREDDIE MAC 1382 LC......... $4,221 6.525 10
FANNIE MAE 1992-141 FA...... $8,017 6.625 10.5
FREDDIE MAC 1256 CA......... $6,202 6.825 10.5
Morgan Stanley Mortgage
Trust 41 Class 1........ $7,855 6.775 10
FANNIE MAE 1993-155 FG...... $5,159 6.625 9.5
FREDDIE MAC 1040 H.......... $22,586 7.075 11
FANNIE MAE 1997-37 F........ $31,163 6.525 10
FANNIE MAE 1997-52 F........ $9,515 6.625 9.5
FANNIE MAE 1997-42 F........ $9,300 6.625 9
FANNIE MAE 1997-44 F........ $9,724 6.525 10
FANNIE MAE 1997-67 FB....... $20,791 6.525 9
Total....................... $261,330
========
Margin Weighted Prepayment
over LIBOR Average Life Speed
Series (basis points) (years)(1) Assumption
- ---------------------------- -------------- ------------ -----------
FANNIE MAE 1993-210 FB...... 40 2.84 150%PSA
FHLMC-GNMA 38 F............. 50 3.48 200 PSA
FANNIE MAE 1997-28 FA....... (2) 1.50 50 CPR
FANNIE MAE 1996-51 FA....... 50 2.31 335 PSA
FREDDIE MAC 1933 FR......... 50 1.01 340 PSA
FANNIE MAE 1990-121 F....... 80 3.98 335 PSA
Collateralized Mortgage
Obligation Trust 66 F... 60 0.46 290 PSA
FREDDIE MAC 1382 LC......... 40 1.15 250 PSA
FANNIE MAE 1992-141 FA...... 50 2.81 275 PSA
FREDDIE MAC 1256 CA......... 70 1.84 345 PSA
Morgan Stanley Mortgage
Trust 41 Class 1........ 65 4.40 300 PSA
FANNIE MAE 1993-155 FG...... 50 1.25 172 PSA
FREDDIE MAC 1040 H.......... 95 4.02 330 PSA
FANNIE MAE 1997-37 F........ 40 2.50 335 PSA
FANNIE MAE 1997-52 F........ 50 2.69 245 PSA
FANNIE MAE 1997-42 F........ 50 3.89 215 PSA
FANNIE MAE 1997-44 F........ 40 4.41 225 PSA
FANNIE MAE 1997-67 FB....... 40 1.23 320 PSA
Total.......................
- ----------------
(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.
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%
11
<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 September 2027.
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.
AGENCY ARMs
As of December 31, 1997
Current
Unpaid
Principal
Balance Current Periodic
Pool No. ($000) Coupon Caps
- --------------- --------- ------- --------
FN 394850...... $36,147 6.064% 2%
FN 397901...... $44,511 5.887 2
FH 846384...... $15,097 7.340 2
FN 374711...... $8,702 5.716 2
FN 374773...... $12,791 5.836 2
FH 410544...... $6,440 5.914 2
FH 610727...... $12,405 5.742 2
G2 080094...... $49,508 6.000 1
FN 313242...... $7,349 7.716 2
FN 367349...... $12,089 5.929 2
FN 313311...... $7,381 7.408 2
FN 363057...... $10,630 5.449 2
FN 313190...... $7,827 7.911 2
FN 363070...... $6,195 5.494 2
FN 313377...... $23,174 6.106 2
FN 370479...... $9,288 5.328 2
FN 378243...... $3,640 6.221 2
FN 313432...... $32,645 5.954 2
FN 370478...... $9,999 5.353 2
FN 396355...... $8,366 5.600 2
FN 374774...... $8,262 5.427 2
FN 391247...... $19,758 6.561 2
Total....... $352,204
========
Average
Number Pre-
Margin of payment
over Months Weighted Speed
CMT to Average Assump-
Life (basis Rate Life tion
Pool No. Cap points) Reset (years)(1) (CPR)
- --------------- ------ ------- ----- ---------- -------
FN 394850...... 12.06% 233 5.5 5.63 20%
FN 397901...... 11.89 233 6.6 5.63 20
FH 846384...... 11.73 236 8.5 5.65 30
FN 374711...... 11.68 212 3.6 5.60 20
FN 374773...... 11.82 232 4.9 5.62 20
FH 410544...... 11.91 238 7.6 5.68 20
FH 610727...... 11.74 239 4.6 5.68 18
G2 080094...... 11.00 150 9.0 6.80 8
FN 313242...... 11.86 232 8.1 5.59 30
FN 367349...... 11.93 235 11.0 5.61 30
FN 313311...... 11.77 238 6.8 5.67 30
FN 363057...... 11.39 221 11.9 5.60 30
FN 313190...... 12.08 233 6.3 5.57 30
FN 363070...... 11.50 220 7.3 5.61 18
FN 313377...... 11.56 227 10.2 5.60 30
FN 370479...... 11.33 234 6.8 5.60 30
FN 378243...... 12.22 235 5.6 5.64 18
FN 313432...... 11.81 235 0.5 5.62 30
FN 370478...... 11.35 234 0.9 5.60 30
FN 396355...... 11.80 233 5.5 5.62 18
FN 374774...... 11.39 233 6.5 5.61 18
FN 391247...... 11.38 224 7.9 5.68 30
Total.......
---------------
(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.
12
<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. 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. The latest stated maturity date of any
Agency Hybrid ARM in the Portfolio is August 2036.
AGENCY HYBRID ARMs
As of December 31, 1997
Periodic Caps
-------------
Current
Unpaid Margin
Principal Sub- over CMT
Balance Current First sequent Life (basis
Pool No. ($000) Coupon Reset Resets Cap points)
- ---------------- --------- ------- ----- ------- ------ -------
FN 345856....... $16,772 6.865% 2% 2% 11.86% 220
FN 374138....... $17,753 6.349 2 2 11.35 221
FN 361370....... $48,016 7.559 5 2 13.56 227
FN 397136....... $13,014 7.750 2 2 13.75 214
FN 361372....... $68,308 7.881 5 2 12.88 226
FN 312824....... $8,941 7.375 5 2 12.38 225
Total........... $172,804
========
Average
Number Pre-
of payment
Months Weighted Speed
to Average Assump-
Rate Life tion
Pool No. Reset (years)(1) (CPR)
- ---------------- ------- ---------- -------
FN 345856....... 42.7 5.68 15%
FN 374138....... 48.7 5.57 15
FN 361370....... 53.5 5.50 15
FN 397136....... 105.6 5.56 15
FN 361372....... 85.5 5.49 15
FN 312824....... 84.5 5.49 15
Total...........
- ----------
(1) Determined as described under "--Prepayment Analysis" herein,
and subject to the assumptions and qualifications in that
section. Prepayments will not occur at the rate assumed and
average lives of the securities may differ significantly from
those shown.
TREASURIES
As of December 31, 1997
Current
Unpaid
Principal Number of
Balance Years to
Security Description ($ 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
========
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.
13
<PAGE>
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 Bond Market Association's standard prepayment
model, or "PSA", and the constant prepayment rate ("CPR"). The PSA
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 PSA 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% PSA"). 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
non-convertible provide the borrower
with the right to
convert to a fixed
mortgage rate on an
expedited basis
>350 months 20 New loans that provide
convertible the borrower with 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
14
<PAGE>
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:
1. as of December 31, 1997, 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;
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 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;
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.
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
15
<PAGE>
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.
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
16
<PAGE>
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 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
17
<PAGE>
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 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.
Item 2. Financial Information
SELECTED FINANCIAL DATA
As of December 31, 1997 and for the period from December 5, 1997
(inception) through December 31, 1997.
(in thousands, except per share and yield data)
INCOME STATEMENT:
Interest Income $ 4,188
Net Income $ 4,142
Average number of redeemable
Common Securities outstanding 53,011
Net Income per redeemable Common Security $ 78.14
BALANCE SHEET:
Investment Securities $ 996,969
Total assets $1,035,875
Series A Preferred Securities outstanding $ 500,000
Total redeemable Common Securities,
Preferred Securities and
Securityholders' equity $1,035,829
OTHER DATA:
Dividends paid on Series A Preferred Securities -
Dividends paid on redeemable Common Securities -
Number of Series A Preferred Securities
outstanding 50,000
Number of redeemable Common Securities outstanding 53,011
Average yield on investment securities 5.92%
18
<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. Consequently, the following
discussion pertains only to the period from December 5, 1997
through December 31, 1997. Due to the Company's brief operating
history, trends with respect to revenue and expenses have not yet
become apparent and therefore are not analyzed in the following
discussion.
Results of Operations
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, however, with respect to either the Series A
Preferred Securities or the Common Securities.
The Company's sole source of income is interest generated
by the securities in the Portfolio. 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
19
<PAGE>
environment because securities would tend to be prepaid more
slowly and less often due to the high prevailing interest rates.
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.
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
Title Of Class Beneficial Owner Beneficial Ownership Percent Of Class
- ------------------------------------------------------------------------------
Common Banque Nationale de 53,011 100%
Securities 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:
20
<PAGE>
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 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 $1,030,110,000. See Item 1, "Decription 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.
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
21
<PAGE>
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 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................. $ 9,332,381.60 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
22
<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
23
<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
24
<PAGE>
dividend disbursing agent for the payment of such cash dividend
for such then-current Dividend Period; provided, 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
25
<PAGE>
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 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
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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 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
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<PAGE>
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.
(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
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<PAGE>
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.
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.
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<PAGE>
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);
(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.
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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 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, 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.
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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 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
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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
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
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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.
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.
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"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 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
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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.
"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".
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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.
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,
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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):
(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
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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 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
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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.
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.
40
<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.
FOR ADDITIONAL INFORMATION WITH RESPECT TO BNP, REFERENCE
IS MADE TO THE ANNUAL AND SEMI-ANNUAL REPORTS AND OTHER DOCUMENTS
SENT BY BNP TO THE COMMISSION PURSUANT TO RULE 12G3-2(B) UNDER
THE EXCHANGE ACT. THE COMPANY WILL SEND A COPY OF ANY SUCH ANNUAL
OR SEMI-ANNUAL REPORT TO A SERIES A PREFERRED SECURITYHOLDER UPON
REQUEST.
THE FINANCIAL INFORMATION REGARDING BNP SET FORTH UNDER
THIS HEADING AS AT AND FOR THE YEAR ENDED DECEMBER 31, 1996 HAS
BEEN DERIVED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF THE
BNP GROUP AT AND FOR THE YEAR ENDED DECEMBER 31, 1996 (THE "BNP
CONSOLIDATED FINANCIAL STATEMENTS"), AND SUCH INFORMATION AS AT
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 HAS BEEN DERIVED FROM
THE CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF THE BNP
GROUP AS OF JUNE 30, 1997 (THE "BNP INTERIM CONSOLIDATED
FINANCIAL INFORMATION"). THE BNP CONSOLIDATED FINANCIAL
STATEMENTS AND THE BNP INTERIM CONSOLIDATED FINANCIAL INFORMATION
ARE INCLUDED IN THE DOCUMENTS SENT BY BNP TO THE COMMISSION
PURSUANT TO RULE 12g3-2(b) UNDER THE EXCHANGE ACT. THE BNP
CONSOLIDATED FINANCIAL STATEMENTS AND THE BNP INTERIM
CONSOLIDATED FINANCIAL INFORMATION WERE PREPARED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN FRANCE ("FRENCH
GAAP"). FRENCH GAAP DIFFERS IN CERTAIN SIGNIFICANT RESPECTS FROM
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES
("U.S. GAAP"). FOR A DISCUSSION OF CERTAIN SIGNIFICANT
DIFFERENCES BETWEEN FRENCH GAAP AND U.S. GAAP, SEE "--SUMMARY OF
DIFFERENCES BETWEEN FRENCH GAAP AND U.S. GAAP."
General
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, 1996, BNP and its consolidated subsidiaries (the
"BNP Group") had 2,585 offices (i.e., subsidiaries, branches,
agencies, affiliates and representative offices) in France,
French overseas departments and territories and 76 foreign
countries. At December 31, 1996, the BNP Group had consolidated
assets of FF 1,861 billion ($355 billion), consolidated gross
customer loans of FF 834 billion ($159.3 billion), consolidated
customer deposits (including retail and negotiable certificates
of deposit) of FF 832 billion ($158.9 billion) and stockholders'
equity (BNP Group's share) of FF 55.6 billion ($10.6 billion).
According to the ranking published in July 1997 by The Banker,
based on total assets at December 31, 1996, the BNP Group was the
second largest banking group in France, the sixth largest banking
group in Europe and the fourteenth largest banking group in the
world, and based on Tier 1 capital, was the third, ninth and
twenty-first largest banking group in France, Europe and the
world, respectively, as of such date.
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
2,030 branches and an extensive home banking network. BNP's
domestic customers include approximately one-third of France's
small and medium-sized companies, roughly 400,000 self-employed
customers, private banking customers and approximately 5.3
million retail customers. 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.
41
<PAGE>
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; high net-worth individual customers, to whom it offers
private banking services; and banks and institutional investors,
to which it provides capital market and correspondent banking
services.
Recent Development
The French Government commenced in December 1997 the
process of selling a 67% stake in Credit Industriel et Commercial,
a French bank with approximately FF 604 billion in assets. BNP
submitted a binding offer to acquire such stake. The Government
announced on March 23, 1998 that BNP's offer was not selected.
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,
eight state-owned banks 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,
regionally or nationally elected representatives, 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 Regulatory and Finance 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.
42
<PAGE>
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).
Banking Regulations
For a discussion of certain regulations relating to capital
and solvency applicable to BNP, see "--Solvency Ratios". 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,
1996, 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 June 30, 1997, 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.
BNP's commercial banking operations in France are also
significantly affected by monetary policies established from time
to time by the Bank of France. In addition to the reserve
requirements outlined above, measures currently in force to carry
out such policies include a prohibition of interest on certain
demand deposits and a ceiling on interest rates for various forms
of deposits with a maturity of less than one month. Commercial
banking operations, particularly in their fixing of short-term
interest rates, are also affected in practice by the rates at
which the Bank of France intervenes in the French domestic
interbank market.
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
43
<PAGE>
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" (as defined below)
in such company.
French regulations permit only licensed credit institutions
to engage in banking activities on a regular basis. Correlative-
ly, institutions licensed as credit institutions may not, on a
regular basis, engage in activities other than banking,
bank-related activities and a limited number of non-banking
activities determined pursuant to the regulations issued by the
Banking Regulatory Committee. A regulation issued in November
1986 by the Committee sets forth an exhaustive list of such
non-banking activities and requires revenues from such activities
to be limited in the aggregate to a maximum of 10% of total net
revenues.
Accounting Rules
French credit institutions are subject to special
accounting rules, including rules requiring specific methods of
presenting financial statements, the full, proportional or equity
method consolidation of other entities controlled singly or
jointly by them or in which they have a "significant influence"
(influence notable, usually construed as controlling at least 20%
of voting rights), a fiscal year corresponding to the calendar
year, the availability of audited accounts no later than May 31
of the following year, the filing on a regular basis of financial
statements and other documents with the Banking Commission, and
the publication of financial statements in a legal publication.
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 activities)) having loan utilization
exceeding FF 700,000. 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.
44
<PAGE>
Stockholders' Equity and Solvency Ratios
Stockholders' Equity
At December 31,
---------------
1996 1995
---- ----
(FF in millions)
----------------
Consolidated stockholders' equity, BNP Group's
share*........................................... 55,552 48,642
Minority interests*.............................. 1,882 2,212
------- -------
Consolidated stockholders' equity, including
minority interests*.............................. 57,434 50,854
====== ======
- --------------
* After appropriation of income.
The BNP Group's share of consolidated stockholders' equity
amounted to FF 55.6 billion at December 31, 1996, up 14.2% from
December 31, 1995. This increase resulted principally from the
increase in appropriations to reserves of undistributed earnings
in 1996 (FF 2.7 billion) and a FF 2.4 billion capital increase
pursuant to the stock-for-stock public tender offer launched by
BNP for its subsidiaries BNP Espana and Compagnie
d'Investissements de Paris. Other items accounting for the
increase were (i) the payment of dividends in the form of shares
and a capital increase reserved to employees (totaling FF 0.4
billion), (ii) the effect of ceasing to carry Union des
Assurances de Paris ("UAP") under the equity method, and thus
eliminating the impact on the BNP Group's financial statements of
holding its own stock via the reciprocal shareholding with UAP
(FF 1.0 billion), and (iii) the effects of exchange rate
fluctuations and other (FF 0.4 billion).
At December 31, 1996, the BNP Group's consolidated
stockholders' equity including minority interests amounted to FF
57.4 billion. Minority interests in BNP's consolidated
stockholders' equity decreased by 14.9% primarily due to the
acquisition of the stockholders' equity of Compagnie
d'Investissements de Paris following the stock-for-stock public
tender offer. This factor more than offset the impact of the
issue of FF 393 million of preferred shares by BNP's U.S.
subsidiary BancWest Corporation.
At June 30, 1997 At December 31, 1996
---------------- --------------------
(FF in millions) (FF in millions)
Consolidated stockholders' equity,
BNP Group's share*.................. 59,803 56,672
Minority interests*................. 1,902 1,959
----- -----
Consolidated stockholders' equity,
including minority interests*....... 61,705 58,631
====== ======
- --------------
* Before appropriation of income.
The BNP Group's share of consolidated stockholders' equity
amounted to FF 59.8 billion at June 30, 1997, up 5.5% from
December 31, 1996. This increase resulted principally from the FF
229 million capital increase pursuant to the stock-for-stock
public tender offer launched by BNP on its subsidiary BNP
Intercontinentale, the effects of exchange rate fluctuations and
other items (FF 978 million) and net income attributable to the
BNP Group for the six months ended June 30, 1997 (FF 3.044
billion), which more than offset the dividend paid with respect
to the 1996 fiscal year (FF 1.120 billion). At June 30, 1997, the
BNP Group's consolidated stockholders' equity including minority
interests amounted to FF 61.7 billion, up 5.2% from December 31,
1996.
Solvency Ratios
BIS Ratios
In 1988, the Basle Committee on Banking Regulations and
Supervisory Practices, a committee consisting of representatives
of the central banks and supervisory authorities from the
so-called "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, issued a capital accord
setting out standards for risk-weighting and minimum ratios of
regulatory capital to risk-weighted assets. The BIS standards
45
<PAGE>
contained in the accord have been widely adopted by bank
regulatory authorities throughout the world, including regulatory
authorities in France. Under the BIS standards, the risk-based
capital ratio is determined by allocating assets and specified
off-balance sheet financial instruments into four weighted
categories, with higher levels of capital being required for the
categories perceived as representing greater risk. Banks located
in the Group of Ten countries that conduct activities in foreign
currencies amounting to more than one-third of their consolidated
assets must comply with a minimum ratio of total capital to
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital
to risk-weighted assets of 4%.
The total risk-based capital ratio represents the ratio of
total capital (Tier 1 capital plus supplementary capital) to
risk-weighted assets (which equals assets plus the credit risk
equivalent of certain off-balance sheet items, each multiplied by
the appropriate risk weight). Tier 1 capital essentially consists
of stockholders' equity, noncumulative perpetual preferred stock
and minority interests in consolidated subsidiaries, less certain
intangible assets. Supplementary capital includes, among other
things, certain qualifying subordinated debt and a portion of
general loan loss reserves. The Tier 1 risk-based capital ratio
represents the ratio of Tier 1 capital to risk-weighted assets.
The following table sets forth BNP's risk-weighted assets,
Tier 1 and Tier 2 capital and BIS ratios for the dates indicated:
At June 30, At December 31,
----------- ------------------
1997 1996 1995
(FF in billions, except percentages)
Weighted risks............. 1,162.1 1,129.3 1,022.1
Tier 1 capital.......... 65.5 60.8 56.1
Tier 2 capital.......... 45.9 42.1 36.7
Total capital ratio..... 9.6% 9.1% 9.1%
Tier 1 capital ratio.... 5.6% 5.4% 5.5%
In 1996 BNP's Tier 1 and 2 capital increased in line with
its weighted risks (10.8% or FF 10.1 billion, and 10.5%,
respectively). As a result, the Total Capital ratio remained
unchanged as compared to 1995 at 9.1%. Tier 1 capital increased
by FRF 4.7 billion; the increase in stockholders' equity (FF 6.6
billion) more than offset the decrease in the reserve for general
banking risks (FF 1.8 billion). Tier 2 capital increased by FRF
5.4 billion as a result of the issuance of undated floating-rate
subordinated notes and other subordinated debt securities. The
increase in weighted assets resulted from the sharp increase in
business conducted by the international network, as well as the
effect of fluctuating exchange rates.
BNP closely monitored its capital ratios during the six
months ended June 30, 1997 and weighted risks accordingly
increased by only 2.9%. BNP reinforced its Tier 1 and Total
Capital by 7.8% and 8.3%, respectively. The FF 4.7 billion
increase in Tier 1 capital was due to the increase in
stockholders' equity, itself due particularly to net income for
the six months ended June 30, 1997. The FF 3.8 billion increase
in Tier 2 capital resulted from the issuance of undated
floating-rate subordinated notes and other subordinated debt
securities.
CAD Ratio
In 1993, the Council of the European Community 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 risks associated with a bank's trading activities in
addition to credit risk. In 1995, the Banking Regulatory and
Finance 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 banks to
capital adequacy requirements with respect to their trading
activities that are supplemental to the capital adequacy
requirements applicable to a bank's commercial banking
activities. The CAD Regulation specifies standards for a bank's
trading activities designed to reflect interest rate risk, market
risk and settlement risk. The CAD Regulation also requires banks
to maintain additional capital measured by reference to the
foreign exchange risk of all their activities, including
commercial banking and trading. The minimum CAD ratio is 100%.
46
<PAGE>
At June 30, 1997 and December 31, 1996, the BNP Group's
total need for stockholders' equity, determined in accordance
with the CAD Regulation, may be analyzed as shown in the
following table:
At June 30, At December 31,
----------- ---------------
1997 1996
---- ----
(FF in billions)
For credit risk exposure (excluding the
trading portfolio)......................... 85.3 82.1
For market risk exposure:
For interest-rate risk exposure......... 4.8 4.3
For stock price risk exposure........... 1.0 1.2
For settlement/counterparty risk
exposure................................ 1.7 1.6
For currency risk exposure.............. 0.4 0.2
------- ------
Total for market risk
exposure............................ 7.9 7.3
------- ------
For large risk exposure.................... -- --
------- ------
Total............................... 93.2 89.4
BNP's ratio of available stockholders' equity to required
stockholders' equity, determined in accordance with the CAD
Regulation, stood at 127% at June 30, 1997 and 120% at December
31, 1996.
Summary of Differences Between French GAAP and U.S. GAAP
The BNP Consolidated Financial Statements and the BNP
Interim Consolidated Financial Information have been prepared in
accordance with French GAAP, which differ in certain respects
from U.S. GAAP. Certain significant differences between French
GAAP and U.S. GAAP, as they relate to BNP, are summarized below.
U.S. GAAP as applied to banks is detailed and complex and varies
from French GAAP in numerous respects. Accordingly, no attempt
has been made to identify all disclosure, presentation and
classification differences that would affect the manner in which
transactions and events are presented in the BNP Consolidated
Financial Statements or the BNP Interim Consolidated Financial
Statements.
THE CAPITAL RATIOS OF BNP THAT DETERMINE WHETHER A SHIFT
EVENT WILL OCCUR ARE BASED EXCLUSIVELY ON THE FINANCIAL
STATEMENTS OF BNP PREPARED IN ACCORDANCE WITH FRENCH GAAP.
ALTHOUGH A DISCUSSION OF CERTAIN SIGNIFICANT DIFFERENCES
BETWEEN U.S. GAAP AND FRENCH GAAP IS PRESENTED BELOW, SUCH
DIFFERENCES WILL NOT HAVE ANY IMPACT ON SUCH CAPITAL RATIOS AND
THUS WILL NOT BE RELEVANT TO THE DETERMINATION OF WHETHER A SHIFT
EVENT HAS OCCURRED.
Consolidation of Majority-Owned Subsidiaries
Under French GAAP, BNP does not fully consolidate
majority-owned subsidiaries whose activities are of a non-banking
nature (mainly insurance). Those investments are accounted for
using the equity method. Under U.S. GAAP (SFAS 94), those
subsidiaries would be fully consolidated.
Treasury Shares
Shares or non-voting investment certificates of BNP held by
the Group are recorded as assets on the consolidated balance
sheet. Under U.S. GAAP, such shares or certificates would be
deducted from stockholders' equity on the balance sheet.
Investment Securities
Investments in non-consolidated subsidiaries and affiliates
are recorded individually at the lower of cost or fair value,
with unrealized losses included in earnings. Fair value is
determined as follows: according to average market price over the
past two fiscal years for listed securities, and according to net
asset value per share for unlisted securities. Under U.S. GAAP
(SFAS 115), investments in listed non-consolidated subsidiaries
and
47
<PAGE>
affiliates would be considered "available-for-sale"
securities and recorded at their fair value, based on year-end
market prices. Changes in fair value would be recorded directly
in stockholders' equity.
Under French GAAP, investment securities (other than those
described in the preceding paragraph) are classified under
various categories, and are valued according to their
<PAGE>
classification: lower of cost or market (available for sale
investment securities), amortized cost (debt securities held for
investment), lower of cost or fair value (equity securities held
for investment). The changes in valuation of investment
securities are reflected in net income. Under U.S. GAAP,
investment securities available for sale, equity securities held
for investment and some of the debt securities held for
investment would be classified as "available for sale" and would
be accounted for at fair value. Changes in fair value would be
recorded directly in stockholders' equity.
Loan Fees and Costs
Under French GAAP, BNP generally records non-refundable
fees and costs associated with the origination of loans in the
income statement as incurred. Under U.S. GAAP (SFAS 91), such
fees and costs must be amortized over the life of the related
loans.
Allowance for Loan Losses
Under French GAAP, BNP records an allowance for probable
losses on specific doubtful loans based on an estimate of the
amount of outstanding principal which will not be recovered. BNP
also has recorded allowances for risks not specifically
identified and an allowance for unforeseen sectoral risks. Under
U.S. GAAP, the allowance for specific doubtful loans would be
based on the difference between the carrying amount of the loans
and the present value of expected future cash flows to be
recovered on the loans, determined using the historical effective
interest rate on the loans. An additional allowance would also be
calculated for losses inherent, but not yet identified, in the
existing portfolio of loans.
Reserve for General Banking Risks
In 1993 BNP set up a reserve for general banking risks. At
June 30, 1997, this reserve included: general risk reserves,
which were transferred from "Allowance for liabilities and
charges", and a significant amount deducted from stockholders'
equity corresponding to the general risk related to the expected
imbalance between BNP's active and retired staff members. Under
U.S. GAAP, general contingency reserves would have been presented
as part of stockholders' equity. The rest of the reserves
included in the reserve for general banking risks would have
been adjusted to comply with the requirements of SFAS 87
(Employers' Accounting For Pensions).
Provisions and Allowances
Certain allowances included under "Allowance for
liabilities and charges" could be considered as in excess of
those required or permitted by SFAS 5 as they do not relate to
specific probable losses that can be reliably estimated at the
balance sheet date. In 1993, a portion of these allowances was
transferred to the reserve for general banking risks. Additions
to, and reversals of, such allowance would not be recognized
under U.S. GAAP.
48
<PAGE>
Fixed assets
Restructuring
In 1991 and 1992 BNP restructured its real estate holdings
by transferring them to a subsidiary. The revaluation surplus
arising from this transaction has been posted to stockholders'
equity net of the related deferred tax effect. A deferred tax
allowance has been provided for. Under U.S. GAAP, this surplus
would have been eliminated.
Revaluation
BNP and some of its French subsidiaries carried out in 1978
a revaluation of their land and buildings and of investments in
affiliates and subsidiaries. In addition, in 1982 and 1988 the
British subsidiary BNP Plc and in 1992 certain foreign branches
(Bombay and Sydney) revalued their respective buildings based on
independent appraisals. At the revaluation date, the portion of
the revaluation reserve relating to non-depreciable assets was
recorded in stockholders' equity. Under U.S. GAAP, such
revaluations would not have been recognized.
Long-lived assets
Under U.S. GAAP (SFAS 121), an impairment loss may have to
be recognized for long-lived assets which do not meet certain
cash flow requirements. Such loss would be measured based on the
fair value of the asset itself based on the market value if an
active market exists. Under French GAAP, the impairment loss, if
any, is generally measured based on the value in use of the
asset.
Income Taxes
Under French GAAP, the BNP Group's policy is to provide for
the deferred tax effects of temporary differences using the
liability method. BNP's policy and U.S. GAAP differ notably in
the following respects.
In order to reflect the long-term nature of reserves
related to lease finance transactions and therefore the permanent
nature of the corresponding tax difference, deferred tax
on these reserves is recognized on 50% of such reserves. Under
U.S. GAAP, the full deferred tax liability would be recorded.
BNP took into account for the determination of its deferred
tax position (i) a 10% surcharge in effect since 1995 and which
will continue to apply for an undetermined period of time and
(ii) a 15% surcharge for fiscal years 1997 and 1998, reduced
thereafter to 10% for a period of time undetermined as of the
date of preparation of the consolidated financial statements of
the BNP Group for the first half of 1997. Under U.S. GAAP,
deferred taxes would have been computed using the enacted tax
rate and not the expected tax rate.
BNP does not record any net deferred tax assets; under U.S.
GAAP, all deferred tax assets would be recorded and a valuation
allowance would be recognized for the amount that is "more likely
than not" not to be realized.
U.S. GAAP requires that a deferred tax liability be
recognized for the temporary difference between the carrying
amount of investments accounted for using the equity method and
their tax basis. BNP does not recognize a deferred tax liability
for this difference.
Pension and Retirement Costs
Under U.S. GAAP (SFAS 87 and SFAS 88), accounting for
pension costs and similar benefits is more prescriptive as to the
use of actuarial assumptions and methods.
49
<PAGE>
Presentation
Significant differences exist between French and U.S. GAAP
in the format of financial statements and in the nature and
extent of the related disclosures.
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.
50
<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 and and cash flows present
fairly, in all material respects, the financial position of BNP
U.S. Funding L.L.C. as of December 31, 1997, and the results of
its operations and its cash flows 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 audit. We conducted our audit of these
financial statements 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 audit provides a reasonable basis for the
opinion expressed above.
/s/ PRICE WATERHOUSE LLP
New York, New York
February 4, 1998
51
<PAGE>
BNP U.S. FUNDING L.LC.
BALANCE SHEET
at December 31, 1997
(in thousands, except share data)
ASSETS:
Cash and cash equivalents $ 33,762
Investment securities
Available-for-sale, at fair value 850,365
Held-to-maturity, at cost (fair value $147,383) 146,604
Accrued interest receivable 5,144
----------
TOTAL ASSETS $1,035,875
==========
LIABILITIES:
Accrued expenses $ 34
Due to affiliates 12
----------
TOTAL LIABILITIES 46
----------
Redeemeable common securities, par value
and redeemable value $10,000 per security;
150,000 securities authorized, 53,011
securities issued and outstanding 530,110
----------
Preferred securities, liquidation preference
$10,000 per security; 150,000 securities
authorized, 50,000 securities issued and
outstanding 500,000
Additional paid in capital 6
Net unrealized gains on available-for-sale securities 1,571
Retained earnings 4,142
----------
TOTAL REDEEMABLE COMMON SECURITIES, PREFERRED
SECURITIES AND SECURITYHOLDERS' EQUITY 1,035,829
----------
TOTAL LIABILITIES AND TOTAL REDEEMABLE
COMMON SECURITIES, PREFERRED SECURITIES AND
SECURITYHOLDERS' EQUITY $1,035,875
==========
The accompanying Notes to Financial Statements are an integral
part of these Statements.
52
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF INCOME
For the period from December 5, 1997 (inception) through
December 31, 1997
(in thousands, except share data)
INTEREST INCOME:
Collateralized Mortgage Obligations:
Floating-rate REMICs $ 1,175
Fixed-rate REMIC 225
Mortgage Backed Securities:
Agency ARMs 1,443
Agency Hybrid ARMs 708
Treasury Notes 612
Interest on deposits 25
-----------
4,188
-----------
NONINTEREST EXPENSE:
Fees and expenses 46
-----------
NET INCOME APPLICABLE TO PREFERRED AND
REDEEMABLE COMMON SECURITIES $ 4,142
===========
NET INCOME PER REDEEMABLE COMMON SECURITY $ 78.14
===========
The accompanying Notes to Financial Statements are an integral
part of these Statements.
53
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF CHANGES IN REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND SECURITYHOLDERS' EQUITY
For the period from December 5, 1997 (inception)
through December 31, 1997
(in thousands)
REDEEMABLE COMMON SECURITIES:
Issuance upon incorporation (October 14, 1997) $ 10
Issuance on December 5, 1997 530,100
-------------
Balance at December 31, 1997 530,110
-------------
PREFERRED SECURITIES:
Private placement on December 5, 1997 $ 500,000
-------------
Balance at December 31, 1997 500,000
-------------
ADDITIONAL PAID IN CAPITAL:
Issuance of Common Securities on December 5, 1997 6
-------------
Balance at December 31, 1997 6
-------------
NET UNREALIZED GAIN ON SECURITIES
AVAILABLE-FOR-SALE
Net change in fair value of securities
available-for-sale 1,571
-------------
Balance at December 31, 1997 1,571
-------------
RETAINED EARNINGS:
Net income 4,142
-------------
Balance at December 31, 1997 4,142
-------------
TOTAL REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND SECURITYHOLDERS'
EQUITY $ 1,035,258
=============
The accompanying Notes to Financial Statements are an integral
part of these Statements.
54
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF CASH FLOWS
For the period from December 5, 1997 (inception)
through December 31, 1997
(in thousands)
OPERATING ACTIVITIES:
Net income $ 4,142
Adjustments to reconcile net income to cash
provided by operations:
Decrease in interest receivable 337
Decrease in unamortized premium 262
Increase in accrued expenses 34
Increase in due to affiliates 12
----------
Net cash provided from operations 4,787
INVESTING ACTIVITIES:
Purchase of investment securities portfolio:
Floating-rate REMICs (268,316)
Fixed-rate REMIC (46,839)
Agency ARMs (370,801)
Agency Hybrid ARMs (176,194)
U.S. Treasury Notes (140,000)
Premium paid (22,484)
Interest receivable (5,481)
Principal payments received 28,974
----------
Net cash used by investing activities (1,001,141)
----------
FINANCING ACTIVITIES:
Proceeds from preferred securities issuance 500,000
Proceeds from common securities issuance 530,106
----------
Net cash provided by financing activities 1,030,106
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 33,752
CASH AND CASH EQUIVALENTS AT DECEMBER 5, 1997 10
----------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1997
$33,762
==========
The accompanying Notes to Financial Statements are an integral
part of these Statements.
55
<PAGE>
BNP U.S. FUNDING L.L.C.
December 31, 1997
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
BNP U.S. Funding L.L.C. (the "Company") is a Delaware limited
liability corporation formed on October 14, 1997 for the purpose
of acquiring and holding Eligible Securities (as defined in Item
1 of this Form 10) 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, 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 of 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 purchase from
the Branch a portfolio of securities at their estimated fair
values.
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 period. Actual results could differ
from those estimates.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITIES:
Statement of Financial Accounting Standards No. 115
("SFAS 115"), Accounting for Certain Debt and Equity Securities,
as amended, requires management to classify its debt and equity
securities into the following categories, held-to-maturity,
available-for-sale and trading. SFAS 115, as amended, requires
securities that can be contractually prepaid to be classified as
either available-for-sale or trading. BNP classifies its
collateralized mortgage obligations (Floating-Rate REMICs and
Fixed-Rate REMIC) and mortgage-backed securities (Agency ARMs and
Agency Hybrid ARMs) as available for sale due to their
contractual ability to be prepaid even though management does not
intend to sell these securities prior to maturity or date of
prepayment. Available-for-sale securities are carried at fair
value. Unrealized gains and losses on these securities are
reported in Total Redeemable Common Securities, Preferred
Securities and Securityholders' Equity. Securities which cannot
be contractually prepaid and which management has the positive
intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost.
Interest on securities is included in interest income and is
recognized using the interest method.
Premiums and discounts are amortized based on the weighted
average life of the securities and are recognized in interest
income.
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.
56
<PAGE>
BNP U.S. FUNDING L.L.C.
December 31, 1997
NOTES TO FINANCIAL STATEMENTS
DIVIDENDS:
Dividends on the Series A Preferred Securities, when, as and if
declared by the Company's Board of Directors, are payable
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.
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 December 31, 1997.
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 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-
57
<PAGE>
BNP U.S. FUNDING L.L.C.
December 31, 1997
NOTES TO FINANCIAL STATEMENTS
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 COMMON SECURITY:
Net income per 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, 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
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 income
statement.
NOTE 3--INVESTMENT SECURITIES:
The amortized cost and estimated fair value of available-for-sale
securities and held-to-maturity securities on December 31, 1997
were as follows ($ in 000's):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
========= ========== ========== =====
Available-For-Sale
Securities
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
-------- ------ ------ --------
Total Available-For-
Sale Securities 848,794 3,672 2,101 850,365
======== ====== ====== ========
Held-to-Maturity
Securities
U.S. Treasury Notes 146,604 779 -- 147,383
-------- ------ ------ --------
Total Held-to-
Maturity Securities 146,604 779 -- 147,383
-------- ------ ------ --------
Total Investment
Securities $995,398 $4,451 $2,101 $997,748
======== ====== ====== ========
58
<PAGE>
BNP U.S. FUNDING L.L.C.
December 31, 1997
NOTES TO FINANCIAL STATEMENTS
The breakdown of the Company's available-for-sale securities and
held-to-maturity securities at December 31, 1997 by category and
expected maturity distribution (stated in terms of amortized
cost), is summarized below ($ in 000's):
Due in Due after
1 1 Due after
year through 5 through Due after
or less 5 years 10 years 10 years Total
-------- -------- --------- --------- -----
Available-For-Sale
Securities
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
------- ------- -------- ------- --------
Total Available-For-
Sale Securities 1,470 261,739 538,748 46,837 848,794
======= ======== ======== ======= ========
Held-to-Maturity
Securities
U.S. Treasury Notes -- -- 146,604 -- 146,604
------- ------- -------- ------- --------
Total Held-to-
Maturity Securities -- -- 146,604 -- 146,604
------- ------- -------- ------- --------
Total Investment
Securities $ 1,470 $261,739 $685,352 $46,837 $995,398
======= ======== ======== ======= ========
Actual maturities may differ from maturities shown above due to
prepayments.
The breakdown of the Company's available-for-sale securities and
held-to-maturity securities at December 31, 1997 by category and
yield is summarized below:
Due in Due after
1 1 Due after
year through 5 through Due after
or less 5 years 10 years 10 years Total
-------- -------- --------- --------- -----
Available-For-Sale
Securities
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
----- ----- ----- ----- -----
Total Available-For-
Sale Securities 6.22 6.34 5.63 6.92 5.92
===== ===== ===== ===== =====
Held-to-Maturity
Securities
U.S. Treasury Notes - - 5.86 - 5.86
----- ----- ----- ----- -----
Total Held-to-
Maturity Securities - - 5.86 - 5.86
----- ----- ----- ----- -----
Total Investment
Securities 6.22% 6.34% 5.68% 6.92% 5.92%
===== ===== ===== ===== =====
59
<PAGE>
BNP U.S. FUNDING L.L.C.
December 31, 1997
NOTES TO FINANCIAL STATEMENTS
NOTE 4--REDEEMABLE COMMON SECURITIES:
General
The Company is authorized to issue up to 150,000 Common
Securities; as of 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
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 5--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.
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 will pay FABC an upfront fee of $4,000 and a fee of
$4,000 per annum for these services.
59
<PAGE>
BNP U.S. FUNDING L.L.C.
December 31, 1997
NOTES TO FINANCIAL STATEMENTS
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 6--FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair values of securities at December 31, 1997 were obtained
from independent market sources and are summarized in Note 3. The
fair value of cash and cash equivalents, accrued interest
receivable, accrued expenses, and due to affiliates approximates
carrying value. The fair value of investment securities, as shown
in Note 3, approximates the market value.
60
<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 Consolidate 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.
<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/ Eric Deudon
---------------------------
Name: Eric Deudon
Title: President and Director
Date: March 30, 1998
By: /s/ Jean-Pierre Beck
---------------------------
Name: Jean-Pierre Beck
Title: Director
Date: March 30, 1998
<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.
