UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
Commission file number: 000-23745
BNP U.S. Funding L.L.C.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3972207
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
787 Seventh Avenue, New York, N.Y. 10019
---------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 841-2000
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Name of Each Exchange on
Title of Each Class which Registered
------------------------------ ------------------------------
None None
Securities 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)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No| |
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes|_| No |X|
All outstanding shares of Common Stock were held by BNP PARIBAS at
December 31, 2004.
Number of Shares of Common Stock outstanding on December 31, 2004:
53,011
Form 10-K Index
PAGE
----
PART I
Item 1: Business 3
Item 2: Properties 8
Item 3: Legal Proceedings 8
Item 4: Submission of Matters to a Vote of Securityholders 8
PART II
Item 5: Market for Registrant's Common Equity, Related
Securityholder Matters and Issuer
Purchases of Equity Securities 8
Item 6: Selected Financial Data 8
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 13
Item 8: Financial Statements and Supplementary Data 17
Item 9: Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 32
Item 9A: Controls and Procedures 32
Item 9B: Other Information 33
PART III
Item 10: Directors and Executive Officers of the Company 33
Item 11: Executive Compensation 34
Item 12: Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 34
Item 13: Certain Relationships and Related Transactions 34
Item 14: Principal Accountant Fees and Services 34
PART IV
Item 15: Exhibits and Financial Statement Schedules 35
FORWARD LOOKING DISCLOSURE STATEMENT
From time to time, the Company may publish, verbally or in written form,
forward-looking statements relating to such matters as anticipated financial
performance, economic conditions, interest rate levels, investment prospects and
similar matters. In fact, this annual report on Form 10-K (or any other periodic
reporting documents required by the Securities Exchange Act of 1934 Act, as
amended (the "Exchange Act")) may contain forward-looking statements reflecting
the current views of the Company concerning potential future events or
developments. The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements. In order to comply with
the terms of the "safe harbor," the Company cautions investors that any
forward-looking statements made by the Company are not guarantees of future
performance and that a variety of factors could cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. The
risks and uncertainties which may affect the operations, performance,
development and results of the Company's business include, but are not limited
to, the following: uncertainties relating to economic conditions and interest
rate levels, and uncertainties relating to government and regulatory policies.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date the statements were made.
Item 1: Business
General
- -------
BNP U.S. Funding L.L.C. (the "Company" or the "Registrant") is a Delaware
limited liability company formed on October 14, 1997, for the purpose of
acquiring and holding certain types of eligible securities that generate net
income for distribution to the holders of its Series A Preferred Securities (as
defined below) and its redeemable Common Securities (as defined below). The
Company has no subsidiaries and is a wholly owned subsidiary of the New York
Branch (the "Branch") of BNP PARIBAS (formerly, Banque Nationale de Paris), a
societe anonyme or limited liability corporation organized under the laws of the
Republic of France (the "Bank", "BNP PARIBAS" or "BNPP"). 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.
The Company was initially capitalized on October 14, 1997, with the issuance to
the Branch of one share of the Company's redeemable common securities, $10,000
par value (the "Common Securities"). On December 5, 1997 (inception), the
Company commenced operations concurrent with the issuance of 50,000
non-cumulative preferred securities, Series A, liquidation preference $10,000
per security (the "Series A Preferred Securities"), to qualified institutional
buyers, and the issuance of an additional 53,010 Common Securities to the
Branch. These issuances raised in the aggregate $1,030,115,873 of net capital
(including $5,873 of additional paid-in capital). This entire amount was used to
acquire a portfolio of debt securities (the "Initial Portfolio") at their fair
values from the Branch. The Branch contributed additional paid-in capital of
$6,800,000, $8,500,000, $7,500,000, $5,500,000 and $3,000,000, on December 2,
2004, June 3, 2004, December 3, 2003, June 3, 2003, and December 3, 2002,
respectively.
The Company entered into a services agreement (the "Services Agreement") with
the Branch on December 5, 1997, pursuant to which the Branch maintains the
securities portfolio of the Company (the "Portfolio") and performs other
administrative functions. The Company has no employees. All of the Company's
officers are officers or employees of the Branch or the Bank or their
affiliates. The securities in the Portfolio are held by Citibank N.A., acting as
trustee (the "Trustee") under the trust agreement between the Company and
Citibank N.A. dated December 1, 1997 (the "Trust Agreement").
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 and disclosures and may vary from
actual results.
General Description of the Portfolio
Types of Eligible Securities
- ----------------------------
Pursuant to its Charter and resolutions adopted by its Board of Directors, the
Company may invest only in specified types of securities ("Eligible
Securities"). Eligible Securities currently 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 directly or indirectly of Agency Securities, REMIC Agency Securities, or
other previously issued REMIC securities of this type ("Agency Collateralized
Securities"); (iv) unsecured, current pay, direct debt obligations of FNMA and
FHLMC ("Agency Debentures"); (v) U.S. Treasury securities with a maturity of up
to ten years ("Treasuries"); and (vi) specified short-term investments not
subject to U.S. withholding tax ("Short-Term Instruments" and, collectively with
the securities included in (i)-(v) above, the "Eligible Securities"). Categories
(i) through (iii) above are referred to herein as "Mortgage-Backed Securities".
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.
The types of Agency Securities in the Portfolio are (i) securities backed only
by mortgages with adjustable rates that reset annually at a given rate plus a
net margin ("Agency ARMs"); (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"); (iii) unsubordinated debentures
which bear interest at a fixed rate and are not redeemable by the issuer prior
to maturity ("Agency Debentures"); and (iv) securities backed by fixed rate
loans on multifamily properties ("Agency DUSs").
Set forth below is a description, as of December 31, 2004, of the Portfolio. As
of December 31, 2004, the Eligible Securities included in the Portfolio had an
aggregate amortized cost of $915,913,378 and an estimated fair value of
$1,007,062,522. The composition of the Portfolio, stated in terms of amortized
cost, is presented in the following table:
December 31, 2004
- -----------------
Percentage of
Portfolio by Aggregate
Aggregate Number of Amortized Cost
Type of Security Amortized Cost Securities ($000)
- ------------------------------------------ ----------------- ------------ ----------------
Floating-Rate REMICs...................... 0.67% 7 $ 6,213
Fixed-Rate REMICs......................... 3.38 1
30,915
Agency ARMs............................... 0.95 24 8,679
Agency Hybrid ARMs........................ 1.76 17 16,097
Agency DUSs............................... 38.03 31 348,349
Agency Debentures......................... 55.21 13 505,660
----- -- -------
December 31, 2004 Total Portfolio 100.00% 93 $915,913
======== === =======
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 whose interest rates reset monthly at the then-current
rate of one-month LIBOR plus a margin. The interest ratio is subject to a
lifetime cap and floor. The interest cap, floor, and margin all vary by
security. The amortized cost of securities (in thousands):
December 31, 2004
- -----------------
Weighted
Current Average
Series Coupon Life Cap Life (Years) Maturity Date Amortized Cost
- -------------------------------------------- --------- ---------- ------------- --------------- ----------------
FANNIE MAE 1993-210 FB...................... 2.84% 9.00% .32 10-25-2022 $ 930
FANNIE MAE 1997-28 FA....................... 1.94 10.00 4.86 5-25-2027 902
FANNIE MAE 1990-121 F....................... 3.24 11.50 2.77 10-25-2020 1,385
FANNIE MAE 1992-141 FA...................... 2.94 10.50 .94 8-25-2007 277
Morgan Stanley Mortgage Trust 41 Class 1(1). 3.06 10.00 2.36 2-20-2022 665
FREDDIE MAC 1040 H.......................... 3.39 11.00 2.66 2-15-2021 1,522
FANNIE MAE G92 60 F......................... 2.61 10.00 2.46 10-25-2022 532
-----
Total Floating-Rate REMICs $ 6,213
=====
(1) Morgan Stanley Mortgage Trust 41 was established as of December 1, 1991 by
Morgan Stanley Capital I Inc.
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 REMICs. The amortized cost of
securities (in thousands):
December 31, 2004
- -----------------
Weighted
Average Amortized
Series Current Coupon Life Cap Life (Years) Maturity Date Cost
- --------------------------- ---------------- ---------- -------------- --------------- -------------
FANNIE MAE 1997-M5 C....... 6.74. 11.50 2.65 8-25-2007 $30,915
======
Agency ARMs
- -----------
The Agency ARMs in the Adjustable Rate Mortgage ("ARM") pools consist of
securities having the timely payment of principal and interest generally
guaranteed by GNMA, FNMA and FHLMC. The securities consist of pools of
adjustable rate mortgages, whose interest rates 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. The interest ratio for each ARM pool is
subject to a periodic cap and a lifetime cap, which vary by agency and pool.
The One-Year Constant Maturity Treasury Index ("CMT") is the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of one year as
published by the Federal Reserve Board in Statistical Release H. 15(519) or any
similar publication or, if not so published, as reported by any Federal Reserve
Bank or by any U.S. Government department or agency. The Three-Year Constant
Maturity Treasury Index is the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of three years as published in a similar manner
as The One-Year Constant Maturity Treasury Index. The amortized cost of
securities (in thousands):
December 31, 2004
- -----------------
Weighted
Average
Life Maturity
Pool No. (1) Current Coupon Life Cap (Years) Date Amortized Cost
------------- ---------------- ---------- ----------- ------------ -----------------
FH 846384 3.87% 11.77% 11.12 12-1-2026 $ 520
FN 313190 4.04 12.12 10.80 9-1-2026 785
FN 313242 4.17 11.96 3.23 11-1-2026 217
FN 313311 3.85 11.86 10.48 12-1-2026 225
FN 313377 3.79 11.74 1.31 2-1-2027 522
FN 313432 4.09 11.84 12.74 2-1-2027 157
FN 363057 3.58 11.38 13.26 2-1-2027 51
FN 363070 3.45 11.49 13.38 3-1-2027 71
FN 367349 3.60 11.98 .93 12-1-2026 15
FN 370478 3.59 11.37 13.37 2-1-2027 72
FN 370479 3.59 11.31 6.13 3-1-2027 94
FN 374711 3.40 11.72 13.15 7-1-2027 230
FN 378243 3.73 12.23 13.52 7-1-2027 56
FN 391247 3.71 11.37 12.51 4-1-2027 790
FN 394850 4.21 12.07 13.65 7-1-2027 34
FN 397901 4.30 11.89 .49 8-1-2027 88
FH 610727 3.64 12.35 11.43 5-1-2027 164
G 280094 3.75 11.00 2.75 7-20-2027 1,351
G 28506 6.75 12.50 2.35 9-20-2024 1,637
G 280001 4.63 11.00 1.37 10-20-2026 96
FH 786213 6.84 12.55 2.34 12-1-2027 624
FH 785825 3.41 12.18 1.80 5-1-2027 252
FH 786088 5.28 12.26 4.93 12-1-2027 514
FN 396355 4.36 11.80 12.54 8-1-2027 114
------
Total Agency ARMs $ 8,679
======
(1)"FN"= FNMA; "G"= GNMA; and "FH"= FHLMC
Agency Hybrid ARMs
- ------------------
The Agency Hybrid ARMs consist of securities having the timely payment of
principal and interest generally guaranteed by FNMA and FHLMC. The securities
consist of mortgages that have a fixed interest rate for a specified period of
time, after which the interest rate resets annually at a rate equal to the
then-current rate of the One-Year Constant Maturity Treasury Index (as defined
above) plus a security net margin, except that pools underlying the Fannie Mae
422268 have a coupon that resets every three years at a rate equal to the
then-current rate of the Three-Year Constant Maturity Treasury Index (as defined
above) plus a security net margin. The interest rate of each ARM pool is subject
to a periodic cap and a lifetime cap which vary by pool. The amortized cost of
securities (in thousands):
December 31, 2004
- -----------------
Weighted
Average
Life Maturity
Pool No. (1) Current Coupon Life Cap (Years) Date Amortized Cost
------------- ---------------- ---------- ----------- ------------ -----------------
FN 312824 7.38% 12.38% 7.90 6-1-2025 $ 139
FN 345856 4.29 11.87 13.73 8-1-2036 1,545
FN 361370 3.71 13.57 7.55 7-1-2026 2,990
FN 361372 7.31 12.90 2.94 7-1-2026 2,142
FN 374138 3.42 11.35 2.52 3-1-2027 1,877
FN 397136 8.04 13.76 4.12 6-1-2027 938
FN 362968 7.94 12.24 9.13 1-1-2026 214
FN 374917 2.53 11.75 2.53 4-1-2027 355
FN 403006 4.13 11.50 9.96 11-1-2027 194
FN 404484 4.24 11.50 13.12 11-1-2027 163
FN 422265 5.39 13.26 3.92 1-1-2026 1,137
FN 422268 5.57 12.94 6.03 12-1-2024 358
FN 422276 4.05 13.23 4.19 12-1-2027 2,897
FN 409850 6.64 11.63 .92 3-1-2028 184
FN 415286 3.60 12.38 1.89 2-1-2028 465
FN 417833 4.86 11.45 13.45 3-1-2028 412
FH 786414 6.39 12.03 0.60 7-1-2028 87
------
Total Agency Hybris ARMs $ 16,097
======
(1) "FN"= FNMA; and "FH"= FHLMC
Agency DUSs
- -----------
Pursuant to a Board of Directors resolution of November 4, 1998, the Company may
invest in Agency DUSs. A Delegated Underwriting and Servicing (DUS) pool is 100%
guaranteed by FNMA and backed by loans on multifamily properties. These are
fixed-rate loans ranging in size from $1 million to $70 million. FNMA guarantees
timely payment of interest and principal, including any balloon payments. Loans
include yield maintenance provisions that permit the borrower to prepay his
mortgage but only with a penalty that is sufficient to compensate the investor
for early prepayment. Any yield maintenance collected is passed through to the
investor. The amortized cost of securities (in thousands):
December 31, 2004
- -----------------
Security Current Weighted Average Maturity
Description Coupon Life (Years) Date Amortized Cost
----------------- ----------------- ----------------- ----------------- -----------------
FNMA 380491 6.11% 3.45 7-1-2008 $ 5,503
FNMA 380583 6.15 3.45 8-1-2008 18,356
FNMA 381608 5.93 4.25 5-1-2009 6,841
FNMA 381640 5.86 4.17 4-1-2009 5,541
FNMA 380933 5.92 3.84 12-1-2008 7,659
FNMA 381152 5.88 4.00 1-1-2009 4,947
FNMA 381294 5.81 3.99 2-1-2009 1,871
FNMA 381488 6.19 4.17 4-1-2009 4,167
FNMA 381514 6.19 4.17 4-1-2009 4,790
FNMA 381730 6.39 4.33 6-1-2009 15,195
FNMA 381705 6.26 4.33 6-1-2009 3,868
FNMA 381450 5.78 4.15 3-1-2009 11,339
FNMA 381115 5.97 3.84 12-1-2008 11,103
FNMA 381117 5.80 3.99 1-1-2009 4,751
FNMA 380115 6.29 3.14 3-1-2008 41,451
FNMA 381556 6.04 4.16 4-1-2009 14,920
FNMA 380798 5.64 3.68 10-1-2008 4,399
FNMA 375433 6.68 2.75 10-1-2007 7,999
FNMA 375618 6.42 2.99 12-1-2007 7,000
FNMA 375385 6.87 2.67 9-1-2007 4,577
FNMA 20021 7.20 1.77 10-1-2006 20,338
FNMA 535642 6.95 2.12 10-1-2007 6,234
FNMA 313672 6.981 2.43 6-1-2007 16,243
FNMA 382497 7.41 2.53 7-1-2007 7,416
FNMA 375471 6.63 2.75 10-1-2007 8,951
FNMA 460685 4.90 2.58 8-1-2007 26,500
FNMA 73558 7.24 1.55 7-1-2006 10,762
FNMA 313744 6.86 2.35 10-1-2007 20,884
FNMA 382741 6.96 2.77 10-1-2007 16,060
FNMA 360600 6.57 3.32 4-1-2008 12,950
FNMA 323539 5.96 3.91 2-1-2009 15,734
-------
Total Agency DUSs $ 348,349
=======
Agency Debentures
- -----------------
Pursuant to a Board of Directors resolution of November 4, 1998, the Company may
invest in Agency Debentures. The Agency Debentures consist of conventional debt
securities issued periodically directly by either FNMA or FHLMC. Such Agency
Debentures are not secured by any collateral and represent general unsecured
obligations of FNMA or FHLMC. The Company is permitted to purchase only
unsubordinated debentures which pay interest on a current basis. The Agency
Debentures purchased by the Company bear interest at a fixed rate and are not
redeemable by the issuer prior to maturity. The amortized cost of securities (in
thousands):
December 31, 2004
- -----------------
Security Current Weighted Average Maturity
Description Coupon Life (Years) Date Amortized Cost
----------------- ----------------- ----------------- ----------------- -----------------
FHLMC 3134A2DT2 5.75% 3.28 4-15-2008 $ 24,785
FNMA 31359MCY7 2.13 2.77 10-9-2007 129,400
FNMA 31359MDR1 1.75 3.23 3-26-2008 60,364
FNMA 31359MDU4 6.00 3.37 5-15-2008 46,522
FNMA 31364C5BO 6.44 2.61 8-14-2007 23,954
FNMA 31364C6C7 6.48 2.65 8-27-2007 7,498
FNMA 31364CU55 6.70 2.46 6-19-2007 12,168
FNMA 31364CYE2 6.68 2.17 3-5-2007 50,000
FNMA 31359MGH0 6.63 2.78 10-15-2007 51,934
FNMA 31364CYX0 6.80 2.19 3-14-2007 50,000
FNMA 31364C5Q7 6.55 2.63 8-20-2007 19,030
FNMA 31359MPZ0 3.25 2.87 11-15-2007 20,023
FHLMC 3134A4NW0 4.88 2.20 3-15-2007 9,982
-------
Total Agency Debentures $ 505,660
=======
Available Information
- ---------------------
The Company files reports and other information with the Securities and Exchange
Commission (the "SEC") pursuant to Section 13 or 15(d) of the Exchange Act. All
such reports and other information may be read and copied at the Public
Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains a website
(http://www.sec.gov) that contains reports and other information regarding
registrants that file electronically with the SEC, including the Company.
Item 2: Properties
The Company does not own or lease any property. It uses the facilities of the
Branch located at 787 Seventh Avenue, New York, New York 10019.
Item 3: Legal Proceedings
None.
Item 4: Submission of Matters to a Vote of Securityholders
None.
Item 5: Market for Registrant's Common Equity, Related Securityholder
Matters and Issuer Purchases of Equity Securities
Market Information
- ------------------
There is no established public trading market for the Company's Common
Securities, all of which are held by the Branch. The Bank has agreed with the
Company 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 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.
During 2004, the Company did not declare or pay any dividends with respect to
Common Securities.
Item 6: Selected Financial Data
The following table sets forth selected financial data for the years then ended
(in thousands, except share and yield data):
December 31, December 31, December 31, December 31, December 31,
2004 2003 2002 2001 2000
--------------- ---------------- --------------- --------------- ----------------
Income Statement:
- -----------------
Interest income $ 26,091 $ 26,219 $ 34,548 $ 52,568 $ 67,330
Net income 23,365 22,759 32,894 52,277 66,341
Average number of Redeemable
Common Securities outstanding 53,011 53,011 53,011 53,011 53,011
Net income (loss) per Redeemable
Common Security (289.09) (300.52) (109.34) 256.31 521.61
Balance Sheet:
Investment securities at carrying value 1,007,087 1,119,539 1,099,570 1,041,244 1,019,696
Total assets 1,127,852 1,153,073 1,150,885 1,081,823 1,056,505
Series A Preferred Securities outstanding 500,000 500,000 500,000 500,000 500,000
Total Redeemable Common Securities,
Preferred Securities, and
Securityholders' Equity $ 1,049,350 $ 1,055,514 $ 1,062,024 $ 1,051,702 $ 1,039,143
Other Data:
- -----------
Comprehensive income $ 17,226 $ 19,180 $ 46,012 $ 61,968 $ 75,003
Dividends paid on Series A
Preferred Securities $ 38,690 $ 38,690 $ 38,690 $ 38,690 $ 38,690
Dividends paid on Redeemable
Common Securities $ - $ - $ - $ 10,719 $ 27,301
Number of Series A Preferred
Securities outstanding 50,000 50,000 50,000 50,000 50,000
Number of Redeemable Common
Securities outstanding 53,011 53,011 53,011 53,011 53,011
Average yield on investment securities
(before results of hedging activities) 6.20% 6.03% 6.02% 6.40% 6.39%
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Set forth on the following pages is management's discussion and analysis of the
results of operations for the years ended December 31, 2004, 2003 and 2002. Such
information should be read in conjunction with our Financial Statements together
with the Notes to the Financial Statements.
General
The Company was formed on October 14, 1997, and commenced operations on December
5, 1997, by the sale to qualified institutional buyers of 50,000 Series A
Preferred Securities and the sale to the Branch of 53,010 Common Securities.
Together, such sales raised net capital of $1,030,115,873, which the Company
used to purchase the Initial Portfolio from the Branch. The Branch has
contributed $6,800,000, $8,500,000, $7,500,000, $5,500,000, and $3,000,000 of
additional paid-in capital on December 2, 2004, June 3, 2004, December 3, 2003,
June 3, 2003 and December 3, 2002, respectively.
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
Paribas or their affiliates.
The Company's sole business is to acquire, hold and manage debt instruments,
largely consisting of mortgage obligations, in the Portfolio, which generate net
income for distribution to securityholders. The Company's major source of income
is interest generated by the securities in the Portfolio.
Critical Accounting Policies
The Notes to the Financial Statements contain a summary of the Company's
significant accounting policies, including a discussion of recently issued
accounting pronouncements. Certain of these policies as well as estimates made
by management are considered to be important to the portrayal of the Company's
financial condition, since they require management to make difficult, complex or
subjective judgments and estimates, some of which may relate to matters that are
inherently uncertain. Additional information about these policies can be found
in Note 2 to the Financial Statements.
Valuations of Financial Instruments
Investments include mortgage backed securities and derivatives. The Company
carries its investments at fair value if they are considered to be
available-for-sale. For a substantial majority of the Company's investments,
fair values are determined based upon quoted prices or validated models with
externally verifiable model inputs. If available, quoted market prices provide
the best indication of fair value. If quoted market prices are not available for
mortgage backed securities and derivatives, the Company discounts the expected
cash flows using market interest rates commensurate with the duration of the
investment.
The Company has made an assessment of all its financial instruments and
concluded that it holds freestanding derivative instruments but no embedded
derivative instruments at December 31, 2004. As part of its asset management
activities the Company uses foreign exchange and interest rate swaps to modify
the interest rate and foreign exchange characteristics of existing assets. The
interest rate swaps have a high correlation between the instrument and the asset
being hedged, both at inception and throughout the hedge period.
All of the Company's outstanding hedging transactions are fair value hedges. For
years ended December 31, 2004 and 2003, the Company recognized gains of $462,428
and $534,474, respectively, in earnings related to the ineffective portion of
fair value hedges. The fair value of these hedging instruments was $(73,672,428)
and $(94,253,884) at December 31, 2004 and December 31, 2003, respectively, and
has been recorded in "Other liabilities". It has been offset, except for the
ineffective portion of the hedge, by the revaluation of the respective hedged
investment securities. The fair value of the hedging instruments does not
include accrued interest receivable and payable, which are shown separately on
the balance sheet.
Results of Operations
The following discussion pertains to the years ended December 31, 2004, December
31, 2003, and December 31, 2002 (the "2004 Period", the "2003 Period" and the
"2002 Period", respectively).
Portfolio
---------
The average amortized cost of the Portfolio during the 2004 Period, 2003 Period
and 2002 Period was $984,859,956, $996,713,866 and $993,381,314, respectively.
This reflects the following prepayments and reinvestments:
PREPAYMENTS 2004 2003 2002
- -------------------------- ------------ ------------ ------------
Floating-Rate REMICs...... $ 5,209,663 $ 13,857,026 $ 26,744,870
Fixed-Rate REMICs......... $ 298,027 $ 36,011,701 $ 11,464,773
Agency ARMs............... $ 3,667,678 $ 13,080,189 $ 21,818,440
Agency Hybrid ARMs........ $ 5,567,144 $ 15,560,694 $ 33,963,351
Agency DUS................ $ 91,556,388 $ 17,763,221 $ 3,652,294
Agency Debentures......... $ --- $ --- $ ---
REINVESTMENTS 2004 2003 2002
- -------------------------- ------------ ------------ ------------
Floating-Rate REMICs...... $ --- $ --- $ ---
Fixed-Rate REMICs......... $ 20,915,000 $ --- $ 10,000,000
Agency ARMs............... $ --- $ --- $ ---
Agency Hybrid ARMs........ $ --- $ --- $ ---
Agency DUS................ $ --- $ 92,159,666 $ 58,069,532
Agency Debentures......... $ --- $ 20,038,400 $ 9,960,584
As of December 31, 2004, 2003, and 2002, as calculated by aggregate amortized
cost, approximately 44.79%, 49.48% and 50.70%, respectively, of the Portfolio
consisted of collateralized mortgage obligations (Floating-Rate REMICs and
Fixed-Rate REMICs) and mortgage backed securities (Agency ARMs, Agency Hybrid
ARMs and Agency DUSs), and approximately 55.21%, 50.52%, and 49.30%,
respectively, consisted of Agency Debentures. As of December 31, 2004, 2003 and
2002, floating rate securities accounted for approximately 3.38%, 4.56% and
8.99%, respectively, of the Portfolio's collateralized mortgage obligations and
mortgage backed securities. In addition, a significant portion of the Agency
Debentures and the Agency DUSs are hedged so that in all but one case, the fixed
interest rates received on the bonds are converted into prevailing floating
rates.
The aggregate market value of the securities in the Portfolio as of December 31,
2004, 2003 and 2002 was higher than the amortized cost by approximately 9.95%,
11.74%, and 11.47%, respectively, due to a net decrease in interest rates from
the time of their original purchase. For the hedged securities, changes in the
fair market value of both the securities and the derivatives used as hedging
instruments (cross currency and interest rate swaps) are reported in current
earnings in the Statements of Income, pursuant to application of SFAS 133 (Note
2). Unrealized gains and losses on the non-hedged securities are reported as a
component of Other Comprehensive Income.
Revenue
-------
For the 2004 Period, 2003 Period and 2002 Period, the Company had revenues of
$26,091,163, $26,219,327 and $34,548,021, respectively. These amounts consisted
of interest income on the investment securities, the unrealized gain/loss on
hedged securities and derivatives used as hedging instruments, and interest on
deposits. The Company believes the factor having the greatest impact on revenues
is the interest rate environment. The decrease in revenues is mainly due to the
derivatives used as hedging instruments. The floating rate component of the
swaps has generated less income due to decreasing interest rates in the 2002
Period continuing through the beginning of the 2004 Period.
The Company's net income for the 2004 Period, 2003 Period and 2002 Period was
$23,365,027, $22,759,655 and $32,893,445, respectively. The Company has declared
and paid dividends for the 2004 Period, 2003 Period and 2002 Period as follows:
- --------------------------------------------------------------------------------
Security Amount Date Paid
- --------------------------------------------------------------------------------
Series A Preferred $19,345,000 December 5, 2004
- --------------------------------------------------------------------------------
Series A Preferred $19,345,000 June 5, 2004
- --------------------------------------------------------------------------------
Series A Preferred $19,345,000 December 5, 2003
- --------------------------------------------------------------------------------
Series A Preferred $19,345,000 June 5, 2003
- --------------------------------------------------------------------------------
Series A Preferred $19,345,000 December 5, 2002
- --------------------------------------------------------------------------------
Series A Preferred $19,345,000 June 5, 2002
- --------------------------------------------------------------------------------
Interest Income and Yields
--------------------------
For the 2004 Period, 2003 Period and 2002 Period, interest on the securities in
the Portfolio amounted to $49,291,242, $48,647,380 and $48,742,745,
respectively, representing an aggregate yield of 6.20%, 6.03% and 6.02%,
respectively. Interest earned and average yield with respect to each category of
security in the Portfolio was as follows (yield based on average amortized
cost):
2004 2003 2002
------------------------- ------------------------- --------------------------
Floating-Rate REMICs...... $ 130,041 1.58% $ 363,945 2.02% $ 965,385 2.73%
Fixed-Rate REMICs......... $ 1,748,437 6.81% $ 1,506,191 6.61% $ 3,462,521 6.18%
Agency ARMs............... $ 374,310 3.71% $ 702,677 4.07% $ 1,989,080 5.87%
Agency Hybrid ARMs........ $ 760,707 4.18% $ 1,220,873 4.35% $ 2,568,276 5.04%
Agency DUS................ $ 27,190,649 6.53% $ 25,913,738 6.41% $ 21,435,634 6.31%
Agency Debentures......... $ 19,087,098 6.04% $ 18,939,956 5.98% $ 18,321,849 6.24%
The yield on Agency Debentures is based on U.S. dollar denominated securities
which excludes the Japanese Yen denominated securities.
During the 2004 Period, the yields on the Agency DUSs, Agency Debentures and
Fixed-Rate REMICs were approximately 1.48%, 3.49% and 1.91%, respectively, when
taking into account the income and expense from the derivative products used to
hedge these securities. During the 2003 Period, the yields on the Agency DUSs,
Agency Debentures and Fixed-Rate REMICS were approximately 1.34%, 3.40% and
4.19%, respectively, when taking into account the income and expense from the
derivative products used to hedge these securities. During the 2002 Period, the
yields on the Agency DUSs, Agency Debentures and Fixed-Rate REMICS were
approximately 1.84%, 3.93% and 5.65%, respectively, when taking into account the
income and expense from the derivative products used to hedge these securities.
The Company also recorded interest income from short-term investments for the
2004 Period, 2003 Period and 2002 Period of $515,903, $309,122 and $615,341,
respectively. These amounts are attributable to the interest earned on (i)
interest payments on securities in the Portfolio, (ii) prepayments of principal
pending their reinvestment and (iii) short-term investments classified as cash
equivalents. Beginning in 2004, the Company began reinvesting prepayments mainly
into short-term Certificates of Deposits.
Operating Expenses
------------------
Operating expenses for the 2004 Period 2003 Period and 2002 Period totaled
$1,327,138, $1,432,696 and $1,406,521, respectively. Operating expenses
consisted largely of fees paid to the Branch under the Services Agreement, fees
to Citibank as Trustee, consulting fees and audit fees. The cost of Branch
personnel servicing the Company is based on actual man-hours devoted to the
activities of the Company and remains at arms length. Expenses incurred under
the Services Agreement for the 2004 Period, 2003 Period and 2002 Period totaled
$938,513, $961,073 and $1,109,960, respectively.
Receivable Arising from Payment for Securities
Due to the potential consequences of a Shift Event (as defined in Item 8 Note 2
herein), the Company's purchase of the Initial Portfolio (as defined in Item 8
herein) from the Branch did not meet certain SFAS 125, as replaced by SFAS 140,
sale accounting requirements. Accordingly, the Company recorded at December 5,
1997 a receivable for the consideration paid to the Branch for the Initial
Portfolio treated as collateral. As a legal and economic matter, however, there
is no such receivable since (a) neither the Bank nor the Branch has any
obligation to repay any part of the purchase price for the Initial Portfolio or
to repurchase or redeem any of the securities included therein, and (b) the
Company has no obligation to return any of such securities to the Bank or the
Branch (except in the limited circumstances and to the extent that the
occurrence of a Shift Event under the Charter would require the transfer of any
assets held by the Company at the time). As the securities in the Initial
Portfolio are paid, the receivable will be deemed to be realized by an amount
corresponding to the amount of the payments received. At December 31, 2004 and
December 31, 2003, the receivable arising from payment for securities amounted
to $20,868,801 and $30,662,719, respectively. The decrease in the amount of such
receivable between the two dates reflects the prepayment of securities in the
Initial Portfolio. The Company recognized the cash proceeds of such prepayments
as a reduction in the receivable. Such decreases in the receivable did not
affect the Company's results of operations or cash flow. Disclosures required
under SFAS 125, as replaced by SFAS 140, are included in Note 3.
Investment Income
The interest income on the investment securities includes interest income on the
remaining securities in the Initial Portfolio, which are considered to be
collateral held by the Company and which are no longer recognized on the balance
sheet pursuant to guidance in Statement of Financial Accounting Standards No.
140 ("SFAS 140"), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, a replacement of SFAS 125", which modified
SFAS 125 in this respect, as explained in Note 3 to the financial statements.
The receivable for the consideration paid to the Branch for the Initial
Portfolio is recognized on the balance sheet and is an asset of similar size as
the remaining securities in the Initial Portfolio. The balance sheet
presentation results from compliance with SFAS 140 but does not reflect the
economic substance of the transaction, as further explained in the section on
the application of SFAS 125, as replaced by SFAS 140, below. For all economic
intent and purposes, the securities in the Initial Portfolio are owned by the
Company and managed as any other investment security, with related revenues
belonging to the Company and recorded as such in the income statements.
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 are funded
through interest income from the securities in the Portfolio.
The low interest rate environment has adversely affected the Company's income.
The Company has not declared dividends on the Common Securities since June 2001
in order to retain earnings available for the payment of dividends to the
holders of the Series A Preferred Securities. Dividends to the Preferred
Securityholders may be paid out of (i) net income, determined without regard to
capital gains or losses, or (ii) amounts contributed by the Bank or the Branch
to the Company's capital. As of December 31, 2004, the Branch has contributed a
total of $31,300,000 of additional paid-in capital, which was used to facilitate
the semi-annual payments of dividends to the holders of the Series A Preferred
Securities.
The Company cannot make any assurances that a decrease in interest rates, only a
modest increase in interest rates or the sustained low interest rate environment
will not adversely effect the Company's future income. Based on 2005 projected
earnings, the Company may require additional cash contributions from the Branch
to facilitate payment of preferred dividends.
BNP PARIBAS Group's total and Tier 1 risk-based capital ratios at December 31,
2004 were 10.6% and 8.1%, and at December 31, 2003 were 12.9% and 9.4%, which
are well above the minimum standards required by French banking regulations,
currently 8% for total risk-based capital and 4% for Tier 1 risk-based capital.
A "Shift Event" would occur if BNP PARIBAS' risk-based capital fell below these
minimum standards of 8% and 4%, respectively. See Note 2 of the attached
financial statements for a detailed explanation of "Shift Events".
Accounting and Reporting Developments
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". The statement requires that an issuer classify financial instruments
that are within its scope as a liability. Many of those instruments were
classified as equity under previous guidance. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003. Otherwise, it
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company's
Balance Sheet or Statement of Income.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS No. 149"), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149").
SFAS 149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, and decisions made in connection with other FASB
projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition of
a derivative and characteristics of a derivative that contains financing
components. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
149 is effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. SFAS 149 did not have
a material impact on our Balance Sheet or Statement of Income.
SFAS 133 requires that an entity measure all derivatives at fair value and
recognize those derivatives as either assets or liabilities on the balance
sheet. The change in the derivative's fair value is generally to be recognized
in current period earnings. However, if certain conditions are met, a derivative
may be specifically designated as a hedge of an exposure to changes in fair
value, variability of cash flows, or certain foreign currency exposures.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The Company's principal market risk exposure is to changes in interest rates.
This exposure arises from its investments in collateralized mortgage
obligations, mortgage-backed securities, agency debentures, agency DUSs and
certain derivative instruments used by the Company to modify interest rate
exposure.
The outstanding principal amount and estimated fair value as of December 31,
2004, by each category of investment, is depicted in Item 8.
Interest Rate Risk
The Company's income consists primarily of interest payments on collateralized
mortgage obligations, mortgage-backed securities, agency debentures and agency
DUSs. Currently, the Company uses derivative products to manage a portion of its
interest rate risk.
For the year ended December 31, 2004, the interest rate environment remained at
a low level. This situation continues to affect the Company's income through the
floating rate component of the portfolio (floating-rate securities and
fixed-rate securities converted to floating-rate instruments through interest
rate swaps based upon LIBOR). This situation will likely prevail as long as
LIBOR rates remain at or below the December 31, 2004 rate.
The Company regularly reviews its hedging requirements. In the future, the
Company may enter into additional swaps and unwind part or all of the initial
and any future swaps. This strategy is implemented in order to rebalance the
fixed and floating mix of interest obligations (including those arising as a
result of previous interest rate swaps entered into) and the fixed and floating
mix of interest payments.
The Company's interest rate management strategy will continue to be rebalanced
with any purchases of new investments. There can be no assurance, however, that
the Company's interest rate risk management strategies will be effective in this
regard.
The Company is a party to twenty-nine interest rate swaps and six cross currency
swaps with BNP PARIBAS, as set out in the table below. In all but one of these
swaps, the Company pays a fixed coupon and receives floating rate payments on
the notional balances. The notional amount of each swap is tied to the
outstanding principal of the securities they hedge. The maturity dates of the
swaps reflect the maturity of these securities. However, the maturity date maybe
earlier due to prepayments on some of these securities.
Fair Value at
December 31, 2004 Notional Balance
Value Date Maturity Date Fixed Rate Receive Rate (in 000's) (in 000's)
- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
November 25, 1998 March 26, 2008 JPY 1.75 U.S. Three Month LIBOR $ (9,005) $ 42,000
Plus Six Basis Points
November 25, 1998 October 9, 2007 JPY 2.125 U.S. Three Month LIBOR (13,282) 58,000
Plus Six Basis Points
November 25, 1998 August 25, 2008 U.S. 6.15 U.S. One Month LIBOR (1,431) 18,356
Plus Five Basis Points
February 11, 1999 March 14, 2007 U.S. 6.80 U.S. Three Month LIBOR (4,338) 50,000
Minus Two Basis Points
February 12, 1999 March 5, 2007 U.S. 6.68 U.S. Three Month LIBOR (4,453) 50,000
Minus Two Basis Points
February 25, 1999 February 25, 2009 U.S. 5.95 U.S. One Month LIBOR (1,543) 19,980
Plus Three Basis Points
March 29, 1999 October 9, 2007 JPY 2.125 U.S. Three Month LIBOR (5,857) 30,000
Minus Two and Half
Basis Points
April 6, 1999 October 9, 2007 JPY 2.125 U.S. Three Month LIBOR (6,068) 26,400
Minus One Basis Point
June 25, 1999 June 25, 2009 U.S. 6.06 U.S. One Month LIBOR (2,144) 25,207
Plus Three and Half
Basis Points
July 1, 1999 June 25, 2009 U.S. 6.39 U.S. One Month LIBOR (1,497) 15,195
Plus Three and Half
Basis Points
September 27, 1999 March 25, 2008 U.S. 6.29 U.S. One Month LIBOR (3,175) 41,451
Plus Five Basis Points
September 27, 1999 March 25, 2009 U.S. 5.858 U.S. One Month LIBOR (2,029) 27,193
Plus Four Basis Points
November 26, 1999 April 25, 2009 U.S. 6.04 U.S. One Month LIBOR (1,226) 14,921
Plus Four Basis Points
June 26, 2000 October 1, 2007 U.S. 6.68 U.S. One Month LIBOR (639) 7,999
Plus One and Half Basis
Points
June 26, 2000 October 1, 2008 U.S. 6.26 U.S. One Month LIBOR (764) 8,976
August 1, 2000 December 25, 2007 U.S. 6.42 U.S. One Month LIBOR (557) 7,000
August 1, 2000 October 1, 2006 U.S. 7.20 U.S. One Month LIBOR (592) 8,716
Minus Two Basis Points
October 2, 2000 June 1, 2007 U.S. 7.024 U.S. One Month LIBOR (487) 5,952
Minus Two Basis Points
October 2, 2000 July 1, 2007 U.S. 7.405 U.S. One Month LIBOR (701) 7,416
Minus Two Basis Points
November 2, 2000 October 9, 2007 JPY 2.125 U.S. Three Month LIBOR (1,593) 15,000
Minus Two Basis Points
March 25, 2001 October 25, 2007 U.S. 6.94 U.S. One Month LIBOR (552) 6,234
Plus Two Basis Points
September 4, 2001 October 16, 2006 U.S. 7.20 U.S. One Month LIBOR (390) 5,811
Plus Two Basis Points
October 2, 2001 October 16, 2006 U.S. 7.20 U.S. One Month LIBOR (193) 2,905
Plus Seven Basis Points
January 2, 2002 October 16, 2006 U.S. 7.20 U.S. One Month LIBOR (190) 2,905
Plus Ten Basis Points
May 1, 2002 October 25, 2007 U.S. 6.63 U.S. One Month LIBOR (713) 8,951
Plus One Basis Point
May 3, 2002 August 25, 2007 U.S. 6.74 U.S. One Month LIBOR (804) 10,000
Plus One Basis Point
August 25, 2002 August 25, 2007 U.S. 4.90 U.S. One Month LIBOR (888) 26,500
Plus Five Basis Points
September 25, 2002 June 25, 2007 U.S. 7.007 U.S. One Month LIBOR (820) 10,291
Plus Seven Basis Points
March 21, 2003 February 25, 2009 U.S. 5.945 U.S. One Month LIBOR (1,179) 15,734
Plus Nine Basis Points
May 8, 2003 July 25, 2006 U.S. 7.239 U.S. One Month LIBOR (634) 10,762
Plus Seven Basis Points
August 1, 2003 April 25, 2008 U.S. 6.568 U.S. One Month LIBOR (1,127) 12,950
Plus Ten Basis Points
August 1, 2003 October 25, 2007 U.S. 6.812 U.S. One Month LIBOR (1,732) 20,884
Plus Ten Basis Points
October 9, 2003 October 25, 2007 U.S. 6.96 U.S. One Month LIBOR (1,409) 16,060
Plus Five Basis Points
April 1, 2004 August 25, 2007 U.S. 6.74 U.S. One Month LIBOR (1,660) 20,915
Plus Five Basis Points ------- ------
Total Swaps- Fair Value Hedges $ (73,672) $ 650,664
- ------------------------------ ---------- ----------
January 17, 2001 March 26, 2008 JPY 1.750 U.S. 5.80 (1,743) 18,000
----------- -----------
Other Swap $ (1,743) $ 18,000
- ---------- ----------- -----------
Total Swap Portfolio (Other liabilities) $ (75,415) $ 668,664
- ---------------------------------------- ========== ===========
The fair value of the swap portfolio was $(75,415,299) and $(94,597,757) at
December 31, 2004 and December 31, 2003, respectively. The change in fair value
was primarily due to changes in prevailing market interest rates.
The main feature of the mortgage securities is their sensitivity to the
prepayment of mortgage loans, creating a contraction risk when interest rates
decline and an extension risk when interest rates increase. The estimate of the
prepayment rate is given either by the CPR (Conditional Prepayment Rate) or the
PSA (Public Securities Association) prepayment model. Because of this risk, the
securities are valued based on their average life rather than on their stated
maturity date. The prepayment risk is evaluated and analyzed as this impacts the
structure of the portfolio and the re-investment policy.
The breakdown of the Company's securities by category and weighted average life
distribution (stated in terms of amortized cost) is summarized below based on
management's prepayment assumptions (see Note 4 under Item 1 for yield
information) (actual maturities may differ from maturities shown below due to
prepayments) (in thousands):
December 31, 2004
-----------------
Due Due Due Due
In after Due after Due after Due after After After
Non-Collateral 2005 2005 2006 2007 2008 2009 2010 Total
- -------------- ---------- --------- ----------- ---------- ------------ -------- --------- ----------
Fixed-Rate Instruments:
Fixed-Rate REMICs ................... $ --- $ --- $ --- $ 30,915 $ --- $ --- $ --- $ 30,915
Agency DUS .......................... --- --- 31,100 121,864 128,724 66,661 --- 348,349
Agency Debentures ................... --- --- --- 373,989 131,671 --- --- 505,660
------- ------ ------- -------- -------- ------- ------ ---------
Total Fixed-Rate Instruments .......... --- --- 31,100 526,768 260,395 66,661 --- 884,924
------- ------ ------- -------- -------- ------- ------ ---------
Floating-Rate Instruments:
Floating-Rate REMICs ................ --- --- --- 532 --- --- --- 532
Agency ARMs ......................... --- --- 348 2,260 --- 514 --- 3,122
Agency Hybrid ARMs .................. --- 271 465 355 1,137 2,897 1,341 6,466
------- ----- ------- -------- -------- ------- ------ ---------
Total Floating-Rate Instruments ....... --- 271 813 3,147 1,137 3,411 1,341 10,120
------- ----- ------- -------- -------- ------- ------ ---------
Total Non-Collateral .................. $ --- $ 271 $ 31,913 $ 529,915 $ 261,532 $ 70,072 $ 1,341 $ 895,044
------- ------ ------- -------- -------- ------- ------ ---------
Collateral
- ----------
Fixed-Rate Instruments:
Fixed-Rate REMICs ................... $ --- $ --- $ --- $ --- $ --- $ --- $ --- $ ---
Agency DUS .......................... --- --- --- --- --- --- --- ---
Agency Debentures ................... --- --- --- --- --- --- --- ---
------- ------ ------- -------- -------- ------- ------ ---------
Total Fixed-Rate Instruments .......... --- --- --- --- --- --- --- ---
------- ------ ------- -------- -------- ------- ------ ---------
Floating-Rate Instruments:
Floating-Rate REMICs ................ --- 1,207 --- 3,572 --- 903 --- 5,682
Agency ARMs ......................... --- 103 522 1,351 217 --- 3,363 5,556
Agency Hybrid ARMs .................. --- --- --- 4,019 --- 938 4,674 9,631
------- ----- ------- -------- -------- ------- ------ ---------
Total Floating-Rate Instruments ....... --- 1,310 522 8,942 217 1,841 8,037 20,869
------- ----- ------- -------- -------- ------- ------ ---------
Total Collateral ...................... $ --- $ 1,310 $ 522 $ 8,942 $ 217 $ 1,841 $ 8,037 $ 20,869
------- ------ -------- -------- -------- ------- ------ ---------
December 31, 2004 Total Portfolio ..... $ --- $ 1,581 $ 32,435 $ 538,857 $ 261,749 $ 71,913 $ 9,378 $ 915,913
======= ====== ======= ======== ======== ======= ====== =========
December 31, 2003
-----------------
Due Due Due
in after Due after Due after Due after Due after After
Non-Collateral 2004 2004 2005 2006 2007 2008 2009 Total
- -------------- ---------- --------- ----------- ---------- ------------ -------- --------- ----------
Fixed-Rate Instruments:
Fixed-Rate REMICs ................... $ --- $ --- $ --- $ 10,000 $ --- $ --- $ --- $ 10,000
Agency DUS .......................... --- --- 111,830 106,861 152,963 68,251 --- 439,905
Agency Debentures ................... --- --- 109,974 335,760 60,496 --- --- 506,230
------- ------ ------- -------- -------- ------- ------ ---------
Total Fixed-Rate Instruments .......... --- --- 221,804 452,621 213,459 68,251 --- 956,135
------- ------ ------- -------- -------- ------- ------ ---------
Floating-Rate Instruments:
Floating-Rate REMICs ................ --- --- 797 --- --- --- --- 797
Agency ARMs ......................... 1,978 2,505 588 --- --- --- --- 5,071
Agency Hybrid ARMs .................. 979 3,430 644 772 3,617 --- --- 9,442
------- ------ ------- -------- -------- ------- ------ ---------
Total Floating-Rate Instruments ....... 2,957 5,935 2,029 772 3,617 --- --- 15,310
------- ------ ------ -------- -------- ------- ------ ---------
Total Non-Collateral .................. $ 2,957 $ 5,935 $223,833 $ 453,393 $ 217,076 $ 68,251 $ --- $ 971,445
------- ------ ------- -------- -------- ------- ------ ---------
Collateral
- ----------
Fixed-Rate Instruments:
Fixed-Rate REMICs ................... $ 298 $ --- $ --- $ --- $ --- $ --- $ --- $ 298
Agency DUS .......................... --- --- --- --- --- --- --- ---
Agency Debentures ................... --- --- --- --- --- --- --- ---
------- ------ ------- -------- -------- ------- ------ ---------
Total Fixed-Rate Instruments .......... 298 --- --- --- --- --- --- 298
------- ------ ------- -------- -------- ------- ------ ---------
Floating-Rate Instruments:
Floating-Rate REMICs ................ 3,387 552 5,511 --- --- 1,223 --- 10,673
Agency ARMs ......................... 125 2,608 920 1,008 819 245 1,622 7,347
Agency Hybrid ARMs .................. 180 4,541 --- --- 3,499 4,125 --- 12,345
------- ------ ------- -------- -------- ------- ------ ---------
Total Floating-Rate Instruments ....... 3,692 7,701 6,431 1,008 4,318 5,593 1,622 30,365
------- ------ ------- -------- -------- ------- ------ ---------
Total Collateral ...................... $ 3,990 $ 7,701 $ 6,431 $ 1,008 $ 4,318 $ 5,593 $ 1,622 $ 30,663
------- ------ ------- -------- -------- ------- ------ ---------
December 31, 2003 Total Portfolio ..... $ 6,947 $13,636 $230,264 $ 454,401 $ 221,394 $ 73,844 $ 1,622 $1,002,108
======= ====== ======= ======== ======== ======= ====== =========
Item 8: Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Securityholders
of BNP U.S. Funding L.L.C.:
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of BNP U.S.
Funding L.L.C. at December 31, 2004 and 2003, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2004 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules listed in the accompanying index present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 22, 2005
Part II
Item 8.
FINANCIAL STATEMENTS
BNP U.S. FUNDING L.L.C.
BALANCE SHEETS
(in thousands, except per share data)
December 31, 2004 December 31, 2003
----------------- -----------------
ASSETS
Cash and cash equivalents $ 112,207 $ 25,181
Investment securities (Notes 3 and 4)
Available-for-sale, at fair value 986,218 1,088,876
Receivable arising from payment for securities, pursuant
to the application of SFAS 125, as replaced by
SFAS 140 (Note 3) 20,869 30,663
Accounts receivable 27 54
Accrued interest receivable 8,531 8,299
---------------- ----------------
TOTAL ASSETS $ 1,127,852 $ 1,153,073
================ ================
LIABILITIES
Accrued interest payable $ 2,749 $ 2,719
Accrued expenses 338 242
Other liabilities 75,415 94,598
---------------- ----------------
TOTAL LIABILITIES 78,502 97,559
---------------- ----------------
Redeemable common securities, par value and redeemable
value $10,000 per security; 150,000 securities
authorized, 53,011 securities issued and
outstanding (Note 5) 530,110 530,110
Preferred securities, liquidation preference $10,000
per security; 150,000 securities authorized,
50,000 securities issued and outstanding 500,000 500,000
Additional paid-in capital 651 229
Accumulated other comprehensive income 16,830 22,969
Retained earnings 1,759 2,206
---------------- ----------------
TOTAL REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND
SECURITYHOLDERS' EQUITY 1,049,350 1,055,514
---------------- ----------------
TOTAL LIABILITIES AND TOTAL REDEEMABLE
COMMON SECURITIES, PREFERRED
SECURITIES AND SECURITYHOLDERS' EQUITY $ 1,127,852 $ 1,153,073
================ ================
The accompanying Notes to Financial Statements are an integral part of these
statements.
BNP U.S. FUNDING L.L.C.
STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended December 31,
--------------------------------
INTEREST INCOME 2004 2003 2002
----------- ----------- -----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 130 $ 364 $ 965
Fixed-Rate REMICs 492 956 3,165
Mortgage Backed Securities:
Agency ARMs 374 703 1,989
Agency Hybrid ARMs 761 1,221 2,568
Agency DUSs 6,160 5,413 6,251
Agency Debentures 17,658 17,253 18,995
Interest on deposits 516 309 615
----------- ----------- ------------
Total 26,091 26,219 34,548
----------- ----------- ------------
NONINTEREST EXPENSE
Other financial instrument (1,399) (2,027) (248)
Fees and expenses (1,327) (1,433) (1,406)
----------- ----------- ------------
(2,726) (3,460) (1,654)
----------- ----------- ------------
NET INCOME APPLICABLE TO PREFERRED AND
REDEEMABLE COMMON SECURITIES $ 23,365 $ 22,759 $ 32,894
=========== =========== ============
NET LOSS PER REDEEMABLE
COMMON SECURITY $ (289.09) $ (300.52) $ (109.34)
=========== =========== ============
The accompanying Notes to Financial Statements are an integral part of these
statements.
BNP U.S. FUNDING L.L.C.
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years Ended December 31,
--------------------------------
2004 2003 2002
------------- ------------ ------------
NET INCOME $ 23,365 $ 22,759 $ 32,894
OTHER COMPREHENSIVE INCOME (LOSS)
Net change in unrealized gain (loss) in fair
value of available-for-sale securities
that are not treated as collateral
(Note 3) and that are not hedged by
derivative instruments (6,139) (3,579) 13,118
------------- ------------ ------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (6,139) (3,579) 13,118
------------- ------------ ------------
COMPREHENSIVE INCOME $ 17,226 $ 19,180 $ 46,012
============= ============ ============
The accompanying Notes to Financial Statements are an integral part of these
statements.
BNP U.S. FUNDING L.L.C.
STATEMENT OF CHANGES IN REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND SECURITYHOLDERS' EQUITY
(in thousands)
For the Years Ended December 31, 2004, 2003 and 2002
----------------------------------------------------
Total
Redeemable
Accumulated Common Securities,
Redeemable Additional Other Preferred Securities
Common Preferred Paid-in Comprehensive Retained and Securityholders'
Securities Securities Capital Income Earnings Equity
------------ ------------ ---------- ------------- ---------- --------------------
Balance at December 31, 2001 $ 530,110 $ 500,000 $ 6 $ 13,430 $ 8,156 $ 1,051,702
Net income 32,894 32,894
Other comprehensive income 13,118 13,118
Additional paid-in capital 3,000 3,000
Dividends paid - preferred securities (1,962) (36,728) (38,690)
------------ ------------ ---------- ------------ ---------- ----------------
Balance at December 31, 2002 $ 530,110 $ 500,000 $ 1,044 $ 26,548 $ 4,322 $ 1,062,024
============ ============ ========== ============ ========== ================
Net income 22,759 22,759
Other comprehensive loss (3,579) (3,579)
Additional paid-in capital 13,000 13,000
Dividends paid - preferred securities (13,815) (24,875) (38,690)
------------ ------------ ---------- ------------ ---------- ----------------
Balance at December 31, 2003 $ 530,110 $ 500,000 $ 229 $ 22,969 $ 2,206 $ 1,055,514
============ ============ ========== ============ ========== ================
Net income 23,365 23,365
Other comprehensive loss (6,139) (6,139)
Additional paid-in capital 15,300 15,300
Dividends paid - preferred securities (14,878) (23,812) (38,690)
------------ ------------ ---------- ------------ ---------- ----------------
Balance at December 31, 2004 $ 530,110 $ 500,000 $ 651 $ 16,830 $ 1,759 $ 1,049,350
============ ============ ========== ============ ========== ================
The accompanying Notes to Financial Statements are an integral part of these
statements.
BNP U.S. FUNDING L.L.C.
STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
--------------------------------
2004 2003 2002
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 23,365 $ 22,759 $ 32,894
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 811 1,143 1,491
Loss on other financial instrument 1,399 2,027 248
Gain on hedge activity (462) (534) (1,225)
Changes in assets and liabilities:
Interest receivable (232) 101 (1,076)
Accounts receivable 27 996 1,119
Accrued expenses 94 39 67
Accrued interest payable 30 85 1,456
Payable for securities purchased - - (9,802)
----------- ----------- -----------
Net cash provided by operating activities 25,032 26,616 25,172
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of investment securities:
Agency DUSs - (92,160) (58,069)
Agency Debentures - (20,038) (9,961)
Fixed-Rate REMICs (20,915) - (10,000)
Proceeds from principal payments of securities,
not treated as collateral 96,672 41,654 48,749
Proceeds from principal payments of securities,
treated as collateral 9,627 54,619 48,895
----------- ----------- -----------
Net cash provided by (used in) investing activities 85,384 (15,925) 19,614
----------- ----------- -----------
FINANCING ACTIVITIES
Additional paid-in capital 15,300 13,000 3,000
Cash dividends - preferred securities (38,690) (38,690) (38,690)
----------- ----------- -----------
Net cash used in financing activities (23,390) (25,690) (35,690)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 87,026 (14,999) 9,096
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,181 40,180 31,084
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 112,207 $ 25,181 $ 40,180
=========== =========== ===========
NONCASH FINANCING AND INVESTING ACTIVITIES
Decrease in receivable arising from payment for
securities, pursuant to the application of SFAS
125, as replaced by SFAS 140 (Note 3) $ 9,794 $ 54,997 $ 49,595
The accompanying Notes to Financial Statements are an integral part of these
statements.
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
BNP U.S. Funding L.L.C. (the "Company" or the "Registrant") is a Delaware
limited liability company formed on October 14, 1997, for the purpose of
acquiring and holding certain types of eligible securities that generate net
income for distribution to the holders of its Series A Preferred Securities (as
defined below) and its redeemable Common Securities (as defined below). The
Company has no subsidiaries and is a wholly owned subsidiary of the New York
Branch (the "Branch") of BNP PARIBAS (formerly, Banque Nationale de Paris), a
societe anonyme or limited liability corporation organized under the laws of the
Republic of France (the "Bank", "BNP PARIBAS" or "BNPP"). 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.
The Company was initially capitalized on October 14, 1997, with the issuance to
the Branch of one share of the Company's redeemable common securities, $10,000
par value (the "Common Securities"). On December 5, 1997 (inception), the
Company commenced operations concurrent with the issuance of 50,000
noncumulative preferred securities, Series A, liquidation preference $10,000 per
security (the "Series A Preferred Securities"), to qualified institutional
buyers, and the issuance of an additional 53,010 Common Securities to the
Branch. These issuances raised in the aggregate $1,030,115,873 of net capital
(including $5,873 of additional paid-in capital). This entire amount was used to
acquire a portfolio of debt securities (the "Initial Portfolio") at their fair
values from the Branch. The Branch contributed additional paid-in capital of
$3,000,000, $5,500,000, $7,500,000 and $8,500,000, $6,800,000, on December 3,
2002, June 3, 2003, December 3, 2003, and June 3, 2004, and December 2, 2004,
respectively.
The Company entered into a services agreement (the "Services Agreement") with
the Branch on December 5, 1997, pursuant to which the Branch maintains the
securities portfolio of the Company (the "Portfolio") and performs other
administrative functions. The Company has no employees. All of the Company's
officers are officers or employees of the Branch or the Bank or their
affiliates. The securities in the Portfolio are held by Citibank N.A., acting as
trustee (the "Trustee") under the trust agreement between the Company and
Citibank N.A. dated December 1, 1997 (the "Trust Agreement").
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 and disclosures and may vary from
actual results.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITIES
Investments in debt securities are classified as available-for-sale (recorded on
trade-date basis) and are carried at fair value. The debt securities can be
categorized as hedged or non-hedged securities. Fair values of non-hedged debt
securities are estimated based on quoted market price for these securities. For
the hedged securities, changes in the fair market value of both the securities
and the derivatives used as hedging instruments (cross currency and interest
rate swaps) are reported in current earnings in the Statements of Income,
pursuant to application of SFAS 133, (see below, "Accounting for Derivatives and
Hedging Activities"). Unrealized gains and losses on the non-hedged securities
are reported as a component of "Other Comprehensive Income". The hedged
securities are generally valued using discounted cash flows in a yield-curve
model based on LIBOR. Interest on securities is included in interest income and
is recognized using the interest method. Premiums and discounts are amortized in
a manner that approximates the constant yield method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at acquisition date to be cash equivalents. Cash equivalents
amounted to approximately $45,000,000 at December 31, 2004.
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. Dividends to the Preferred
Securityholders may be paid out of (i) net income, determined without regard to
capital gains or losses, or (ii) amounts contributed by the Bank or the Branch
to the Company's capital. As of December 31, 2004, the Branch has contributed a
total of $31,300,000 of additional paid-in capital, which was used to facilitate
the semi-annual payments of dividends to the holders of the Series A Preferred
Securities.
To date, the Company has declared and paid dividends as follows:
Security Amount Date Paid
- ----------------------------- ------------ --------------
Series A Preferred Securities $ 19,345,000 June 5, 1998
Common Securities $ 5,347,365 June 22, 1998
Series A Preferred Securities $ 19,345,000 December 5, 1998
Common Securities $ 8,787,127 December 15, 1998
Series A Preferred Securities $ 19,345,000 June 5, 1999
Common Securities $ 8,454,284 June 15, 1999
Series A Preferred Securities $ 19,345,000 December 5, 1999
Common Securities $ 10,352,672 December 15, 1999
Series A Preferred Securities $ 19,345,000 June 5, 2000
Common Securities $ 12,508,486 June 19, 2000
Series A Preferred Securities $ 19,345,000 December 5, 2000
Common Securities $ 14,792,297 December 19, 2000
Series A Preferred Securities $ 19,345,000 June 5, 2001
Common Securities $ 10,718,708 June 19, 2001
Series A Preferred Securities $ 19,345,000 December 5, 2001
Series A Preferred Securities $ 19,345,000 June 5, 2002
Series A Preferred Securities $ 19,345,000 December 5, 2002
Series A Preferred Securities $ 19,345,000 June 5, 2003
Series A Preferred Securities $ 19,345,000 December 5, 2003
Series A Preferred Securities $ 19,345,000 June 5, 2004
Series A Preferred Securities $ 19,345,000 December 5, 2004
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 $40,000,000) to
the Branch as holder of the Common Securities.
A "Shift Event" would be deemed to have occurred if (i) the Bank's total
risk-based capital ratio or Tier 1 risk-based capital ratio were to decline
below the minimum percentages required by French banking regulations, (ii) the
Bank were to become subject to certain specified receivership proceedings or
(iii) the French Banking Commission (Commission Bancaire), in its sole
discretion, were to notify the Bank and the Company that it has determined that
the Bank's financial condition was deteriorating such that either of the
foregoing clauses (i) or (ii) would apply in the near term. French banking
regulations currently require French banks to maintain a minimum total
risk-based capital ratio of at least 8.0% and a minimum Tier 1 risk-based
capital ratio of at least 4.0%.
The Company may not pay dividends or make other distributions on the Common
Securities or the Series A Preferred Securities if, after giving effect to the
distributions, the Company's liabilities would exceed the fair value of its
assets. Additionally, as long as any Series A Preferred Securities are
outstanding, except during a Shift Period (i.e., following the occurrence of a
Shift Event causing a shift in dividend preference and before the termination
thereof), the amount of dividends on the Common Securities in any fiscal year
may not exceed the amount by which the net income of the Company for such fiscal
year exceeds the stated dividends on the Series A Preferred Securities scheduled
to be paid during such fiscal year irrespective of whether dividends on the
Series A Preferred Securities are in fact declared and paid. Additionally, other
than during a Shift Period, no dividends may be declared, paid or set apart for
payment on the Common Securities (a) with respect to any period of time included
in any Dividend Period unless full dividends have been or contemporaneously are
declared and paid, or declared and a sum sufficient for the payment thereof is
set apart for such payment on the Series A Preferred Securities for the
then-current Dividend Period and (b) the Company may not declare, pay or set
apart funds for any dividends or other distributions with respect to any Common
Securities unless and until (x) full dividends on the Series A Preferred
Securities for the two most recent preceding Dividend Periods are declared and
paid, or declared and a sum sufficient for payment has been paid over to the
dividend disbursing agent for payment of such dividends and (y) the Company has
declared a cash dividend on the Series A Preferred Securities at the annual
dividend rate for the then-current Dividend Period, and sufficient funds have
been paid over to the dividend disbursing agent for payment of such cash
dividends for such then-current Dividend Period.
NET INCOME PER REDEEMABLE COMMON SECURITY
Net income per redeemable common security is calculated by dividing net income
after preferred dividends by the weighted average number of Common Securities
outstanding.
INCOME TAXES
The Company expects to be treated as a partnership for U.S. federal income tax
purposes. As a partnership is not a taxable entity, the Company will not be
subject to U.S. federal, state and local income tax on its income. Instead, each
securityholder is required to take into account its allocable share of items of
income, gain, loss and deduction of the partnership in computing its U.S.
federal tax liability. Accordingly, the Company has made no provision for income
taxes in the accompanying statements of income.
ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities", requires that an entity
measure all derivatives at fair value and recognize those derivatives as either
assets or liabilities on the balance sheet. The change in the derivative's fair
value is generally to be recognized in current period earnings. However, if
certain conditions are met, a derivative may be specifically designated as a
hedge of an exposure to changes in fair value, variability of cash flows, or
certain foreign currency exposures.
The Company has made an assessment of all its financial instruments and
concluded that it holds freestanding derivative instruments but no embedded
derivative instruments at December 31, 2004. As part of its asset management
activities the Company uses foreign exchange and interest rate swaps to modify
the interest rate and foreign exchange characteristics of existing assets. The
interest rate swaps have a high correlation between the instrument and the asset
being hedged, both at inception and throughout the hedge period.
FOREIGN CURRENCY TRANSLATION
Assets denominated in foreign currencies are translated to U.S. dollars using
applicable rates of exchange.
All of the Company's assets denominated in a foreign currency are included in
its available-for-sale securities portfolio, and their foreign currency exchange
risk is hedged by means of cross currency swaps. In accordance with the
requirements of SFAS 133, the change in fair value, due to the change in the
foreign currency exchange rate, of both the hedged securities and the hedging
instruments is recorded in current period earnings.
Revenues and expenses are translated monthly at amounts which approximate
weighted average exchange rates.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, ("SFAS 130"), "Reporting
Comprehensive Income," established standards for reporting and display of
comprehensive income and its components. Components of comprehensive income
include net income. Other comprehensive income consists of unrealized gains and
losses on marketable securities available for sale.
NOTE 3--RECEIVABLE ARISING FROM PAYMENT FOR SECURITIES
Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" addresses the accounting for the transfer of financial assets.
Under SFAS 140, transfers of financial assets that do not meet certain sale
accounting requirements must be accounted for as a secured borrowing transaction
with a pledge of collateral. Due to the potential consequences of a Shift Event
(as described above), the Company's purchase of the Initial Portfolio from the
Branch did not meet certain SFAS 125, as replaced by SFAS 140, sale accounting
requirements. Therefore, the purchase of the Initial Portfolio has been
accounted for as a secured borrowing transaction with a pledge of collateral. In
accounting for this transaction as a secured borrowing transaction in accordance
with SFAS 125, as replaced by SFAS 140, the Company has recorded a receivable in
an amount equal to the remaining amount paid to the Branch to acquire the
Initial Portfolio. In this case, however, having delivered the securities in the
Initial Portfolio to the Company, neither the Branch nor BNPP has any further
obligation to the Company to repay any part of the purchase price for the
Initial Portfolio or otherwise to repurchase or redeem any securities in the
Initial Portfolio.
The Company has not sold or repledged the collateral; the securities within the
Initial Portfolio mature or prepay over time. As they do, the Company recognizes
the cash proceeds as a reduction in the receivable arising from payment for
securities. The collateral at December 31, 2004 and December 31, 2003 is
reported in Note 4 below.
NOTE 4--INVESTMENT SECURITIES
The amortized cost and estimated fair value of the securities were as follows
based on management's prepayment assumptions (in thousands):
December 31, 2004
- -----------------
Gross Gross
Non-Collateral Amortized Cost Unrealized Gains Unrealized Losses Fair Value
-------------- -------------- ---------------- ----------------- ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 532 $ 3 $ --- $ 535
Fixed-Rate REMICs 30,915 2,464 --- 33,379
Mortgage Backed Securities:
Agency ARMs 3,122 10 40 3,092
Agency Hybrid ARMs 6,466 74 2 6,538
Agency DUSs 348,349 26,613 --- 374,962
Agency Debentures 505,660 62,187 135 567,712
--------- --------- --------- ---------
Total Non-Collateral $ 895,044 $ 91,351 $ 177 $ 986,218
--------- --------- --------- ---------
Collateral
- ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 5,682 $ --- $ 62 $ 5,620
Fixed-Rate REMICs --- --- --- ---
Mortgage Backed Securities:
Agency ARMs 5,556 52 --- 5,608
Agency Hybrid ARMs 9,631 51 65 9,617
Agency DUSs --- --- --- ---
Agency Debentures --- --- --- ---
--------- --------- --------- ---------
Total Collateral $ 20,869 $ 103 $ 127 $ 20,845
--------- --------- --------- ---------
December 31, 2004 Total Portfolio $ 915,913 $ 91,454 $ 304 $ 1,007,063
- --------------------------------- ========= ======== ========= =========
December 31, 2003
- -----------------
Gross Gross
Non-Collateral Amortized Cost Unrealized Gains Unrealized Losses Fair Value
-------------- -------------- ---------------- ----------------- ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 797 $ --- $ 8 $ 789
Fixed-Rate REMICs 10,000 1,276 --- 11,276
Mortgage Backed Securities:
Agency ARMs 5,071 6 18 5,059
Agency Hybrid ARMs 9,442 182 15 9,609
Agency DUSs 439,905 50,006 --- 489,911
Agency Debentures 506,230 66,002 --- 572,232
--------- --------- --------- ---------
Total Non-Collateral $ 971,445 $ 117,472 $ 41 $ 1,088,876
--------- --------- --------- ---------
Collateral
- ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 10,673 $ --- $ 117 $ 10,556
Fixed-Rate REMICs 298 --- --- 298
Mortgage Backed Securities:
Agency ARMs 7,347 138 3 7,482
Agency Hybrid ARMs 12,345 255 42 12,558
Agency DUSs --- --- --- ---
Agency Debentures --- --- --- ---
--------- --------- --------- ----------
Total Collateral $ 30,663 $ 393 $ 162 $ 30,894
--------- --------- --------- ---------
December 31, 2003 Total Portfolio $ 1,002,108 $ 117,865 $ 203 $ 1,119,770
- --------------------------------- ========= ======== ========= ==========
The breakdown of the Company's securities by category and weighted average life
distribution (stated in terms of amortized cost) is summarized below based on
management's prepayment assumptions (Actual maturities may differ from
maturities shown below due to prepayments) (in thousands):
December 31, 2004
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after 10
Non-Collateral or less years years years Total
- -------------- ------------ ---------- ---------- ------------ -----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ --- $ 532 $ --- $ --- $ 532
Fixed-Rate REMICs --- 30,915 --- --- 30,915
Mortgage Backed Securities:
Agency ARMs --- 3,122 --- --- 3,122
Agency Hybrid ARMs 271 4,854 766 575 6,466
Agency DUSs --- 348,349 --- --- 348,349
Agency Debentures --- 505,660 --- --- 505,660
--------- --------- --------- --------- ---------
Total Non-Collateral $ 271 $ 893,432 $ 766 $ 575 $ 895,044
--------- --------- --------- --------- ---------
Collateral
- ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 1,208 $ 4,474 $ --- $ --- $ 5,682
Fixed-Rate REMICs --- --- --- --- ---
Mortgage Backed Securities:
Agency ARMs 102 2,090 95 3,269 5,556
Agency Hybrid ARMs --- 4,957 3,129 1,545 9,631
Agency DUSs --- --- --- --- ---
Agency Debentures --- --- --- --- ---
--------- --------- --------- --------- ---------
Total Collateral $ 1,310 $ 11,521 $ 3,224 $ 4,814 $ 20,869
--------- --------- --------- --------- ---------
December 31, 2004 Total Portfolio $ 1,581 $ 904,953 $ 3,990 $ 5,389 $ 915,913
========= ========= ========= ========= =========
December 31, 2003
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after 10
Non-Collateral or less years years years Total
- -------------- ------------ ---------- ---------- ------------ -----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ --- $ 797 $ --- $ --- $ 797
Fixed-Rate REMICs --- 10,000 --- --- 10,000
Mortgage Backed Securities:
Agency ARMs 1,978 3,093 --- --- 5,071
Agency Hybrid ARMs 979 8,463 --- --- 9,442
Agency DUSs --- 371,653 68,252 --- 439,905
Agency Debentures --- 506,230 --- --- 506,230
--------- --------- --------- --------- ---------
Total Non-Collateral $ 2,957 $ 900,236 $ 68,252 $ --- $ 971,445
--------- --------- --------- --------- ---------
Collateral
- ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 3,387 $ 6,064 $ 1,222 $ --- $ 10,673
Fixed-Rate REMICs 298 --- --- --- 298
Mortgage Backed Securities:
Agency ARMs 125 5,355 246 1,621 7,347
Agency Hybrid ARMs 180 8,040 4,125 --- 12,345
Agency DUSs --- --- --- --- ---
Agency Debentures --- --- --- --- ---
--------- --------- --------- --------- ---------
Total Collateral $ 3,990 $ 19,459 $ 5,593 $ 1,621 $ 30,663
--------- --------- --------- --------- ---------
December 31, 2003 Total Portfolio $ 6,947 $ 919,695 $ 73,845 $ 1,621 $1,002,108
========= ========= ========= ========= =========
The breakdown of the Company's securities by category and yield, before the
result of hedges, is summarized below:
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after 10 Yield after
December 31, 2004 or less years years years Total Hedging
- ----------------- ----------- ----------- ----------- ---------- -------- ----------
Collateralized Mortgage
Obligations:
Floating-Rate REMICs 1.14% 1.75% ---% ---% 1.58% 1.58%
Fixed-Rate REMICs --- 6.80 --- --- 6.81 1.91
Mortgage Backed Securities:
Agency ARMs 1.13 3.98 3.35 3.37 3.71 3.71
Agency Hybrid ARMs 6.19 4.35 3.62 3.92 4.18 4.18
Agency DUSs 6.58 6.52 --- --- 6.53 1.48
Agency Debentures --- 6.04 --- --- 6.04 3.49
------- ------- ------- ------- ------- ------
5.79% 6.24% 3.61% 3.58% 6.20% 2.60%
Total ======= ======= ======= ======= ======= ======
December 31, 2003
- -----------------
Collateralized Mortgage
Obligations:
Floating-Rate REMICs 2.33% 1.59% ---% ---% 2.02% 2.02%
Fixed-Rate REMICs 6.50 6.74 --- --- 6.61 4.19
Mortgage Backed Securities:
Agency ARMs 4.30 4.10 3.49 3.38 4.07 4.07
Agency Hybrid ARMs 5.25 4.47 --- --- 4.35 4.35
Agency DUSs --- 6.45 6.23 --- 6.41 1.34
Agency Debentures --- 5.98 --- --- 5.98 3.40
------- ------- ------- ------- ------- ------
4.84% 6.09% 6.00% 3.38% 6.03% 2.60%
Total ======= ======= ======= ======= ======= ======
NOTE 5--REDEEMABLE COMMON SECURITIES AND PREFERRED SECURITIES
REDEEMABLE COMMON SECURITIES
General
The Company is authorized to issue up to 150,000 Common Securities; as of
December 31, 2004 and December 31, 2003, 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). As disclosed in
Note 1, the Branch contributed additional paid-in capital of $31,300,000 to
date. In the event the dividends to the Series A Preferred Securities cannot be
funded out of net income, determined without regard to capital gains or losses,
or out of contributions by the Bank or the Branch to the Company's capital, such
dividends would not be accrued as they are noncumulative.
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.
PREFERRED SECURITIES
The Series A Preferred Securities will not be redeemable prior to December 5,
2007. 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 a redemption
price of $10,000 per security. Prior to December 5, 2007, the Company will also
have the right to redeem the Series A Preferred Securities upon the occurrence
of a Regulatory Event, which is defined as either a Change of Capital Event or a
Tax Event, for a redemption price equal to the higher of $10,000 per security or
a Make-Whole Amount per security. A "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 PARIBAS on a consolidated basis for purposes of the
application of French banking regulations. A "Tax Event" means the receipt by
the Company of an opinion of a nationally recognised law firm that 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 Securities
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" consists 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 noncumulative dividend payments from the
Regulatory Event Redemption Date to December 5, 2007.
NOTE 6-- RELATED PARTY TRANSACTIONS
The Company entered into a Services Agreement with the Branch on December 5,
1997 pursuant to which the Branch manages the securities portfolio of the
Company and performs other administrative functions. Expenses incurred under
such Agreement were $938,513 and $961,063 for the periods ended December 31,
2004 and 2003, respectively. Under a specific allocation methodology, the costs
of personnel servicing the Company is based on actual man-hours devoted to the
activities of the Company and remains at arms length.
The counterparty to all cross currency and interest rate swaps is BNP Paribas.
The fair value of these swap transactions is disclosed in Note 7.
The Branch also serves as the dividend paying agent, registrar and transfer
agent with respect to the Series A Preferred Securities. The fee is $4,000 per
annum for these services.
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
Paribas or their affiliates.
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of securities at December 31, 2004 and December 31, 2003 were
obtained from independent market sources and are summarized in Note 4. The
carrying values of securities, as shown in Note 4, approximates their fair
value. The fair value of the receivable arising from payment for securities,
pursuant to the application of SFAS 125, as replaced by SFAS 140, was
$20,845,013 and $30,893,778 at December 31, 2004 and December 31, 2003,
respectively.
The carrying value of cash and cash equivalents, accounts receivable, accrued
interest receivable, accrued expenses, and accounts payable approximates fair
value due to their short-term maturity of less than nine months.
The fair value of the cross currency and interest rate swaps was $(75,415,299)
and $(94,597,757) at December 31, 2004 and December 31, 2003, respectively, and
are reflected in "Other liabilities".
NOTE 8--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company maintains an overall risk management strategy that incorporates the
use of derivative instruments to hedge the interest rate risk and foreign
currency risk of fixed-income securities. As a result of interest rate or
exchange rate fluctuations, hedged fixed-rate assets will appreciate or
depreciate in market value. The effect of this unrealized appreciation or
depreciation is expected to substantially offset the Company's gains or losses
on the derivative instruments that are linked to these hedged assets and
liabilities. The Company considers its use of derivatives to be a prudent method
of managing interest rate and foreign currency rate sensitivity, as it prevents
earnings from being exposed to undue risk posed by changes in interest and
exchange rates in compliance with the Company's policies.
Derivative instruments that are used as part of the Company's interest rate risk
management strategy include interest rate and cross currency swap contracts that
have indices related to the pricing of specific balance sheet assets and
liabilities. As a matter of policy, the Company does not use highly leveraged
derivative instruments for interest rate risk management. Interest rate swaps
generally involve the exchange of fixed and variable rate interest payments
between two parties, based on a common notional principal amount and maturity
date.
By using derivative instruments, the Company exposes itself to credit and market
risk. If a counterparty fails to fulfill its performance obligations under a
derivative contract, the Company's credit risk will equal the fair value gain in
a derivative. Generally, when the fair value of a derivative contract is
positive, this indicates that the counterparty owes the Company, thus creating a
repayment risk for the Company. When the fair value of a derivative contract is
negative, the Company owes the counterparty and, therefore, assumes no repayment
risk. The Company minimizes the credit (or repayment) risk in derivative
instruments by entering into transactions with BNP PARIBAS S.A. Consequently,
the Company does not require that collateral be provided by the counterparty.
Market risk is the adverse effect that a change in interest rates, currency, or
implied volatility rates might have on the value of a financial instrument. The
Company does not expose itself to market risk by using derivatives but rather
reduces market risk since it uses derivatives only for fair value hedges that
effectively offset fluctuations in the fair value of the hedged items.
The Company formally documents all relationships between derivatives and hedged
items, as well as its risk management objectives and strategies for undertaking
various hedge transactions. This process includes linking all derivatives that
are designated as fair value or cash flow hedges to (1) assets and liabilities
on the balance sheet, (2) firm commitments or (3) forecasted transactions.
Fair Value Hedges
The Company mainly enters into interest rate swaps and cross currency interest
rate swaps to convert fixed rate Agency Debentures, Agency DUSs and Fixed-Rate
REMICs into variable rate securities.
The fair value of the hedging instruments was $(73,672,428) and $(94,253,884) at
December 31, 2004 and December 31, 2003, respectively, and has been recorded in
"Other liabilities". It has been offset, except for the ineffective portion of
the hedge, by the revaluation of the respective hedged investment securities.
The fair value of the hedging instruments does not include accrued interest
receivable and payable, which are shown separately on the balance sheet. For the
twelve months ended December 31, 2004, the Company recognized a gain of $462,428
in earnings related to the ineffective portion of fair value hedges. The Company
also recognized a loss of $(1,398,998) in current year's earnings related to a
cross currency swap that no longer qualified as a fair value hedging instrument.
Cash Flow Hedges
For the years ended December 31, 2004 and December 31, 2003, the Company did not
enter into cash flow hedge transactions and it is not the intention of the
Company to use interest rate swaps to convert floating rate financial
instruments to fixed rate financial instruments as part of a cash flow hedge
strategy.
At December 31, 2004 and December 31, 2003, the Company had outstanding interest
rate and cross currency swap agreements with a notional principal amount of
$668,663,803 and $739,305,189, respectively.
BNP U.S. FUNDING L.L.C.
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
(in thousands, except per share data)
2004 for Quarter Ended 03/31/04 06/30/04 09/30/04 12/31/04 Total
- ---------------------- ----------- ----------- ----------- ----------- -----------
INTEREST INCOME: $ 6,006 $ 5,992 $ 6,150 $ 7,943 $ 26,091
---------- ---------- ---------- ---------- ----------
NONINTEREST INCOME (EXPENSE) (770) (75) (149) (1,732) (2,726)
---------- ---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO PREFERRED AND REDEEMABLE
COMMON SECURITIES $ 5,236 $ 5,917 $ 6,001 $ 6,211 $ 23,365
========= ========= ========= ========= =========
NET INCOME (LOSS) PER REDEEMABLE COMMON SECURITY $ 98.77 $ (253.31) $ 113.20 $ (247.76) $ (289.09)
========= ========= ========= ========= =========
2003 for Quarter Ended 03/31/03 06/30/03 09/30/03 12/31/03 Total
- ---------------------- ----------- ----------- ---------- ----------- ----------
INTEREST INCOME $ 6,887 $ 6,344 $ 7,164 $ 5,824 $ 26,219
---------- ---------- ---------- ----------- ----------
NONINTEREST EXPENSE (INCOME) 636 (521) 1,938 1,407 3,460
---------- ---------- ---------- ----------- ----------
NET INCOME APPLICABLE TO PREFERRED AND REDEEMABLE
COMMON SECURITIES $ 6,251 $ 6,865 $ 5,226 $ 4,417 $ 22,759
========= ========= ======== ========= ========
NET INCOME (LOSS) PER REDEEMABLE COMMON SECURITY $ 117.92 $ (235.42) $ 98.58 $ (281.60) $ (300.52)
========= ========= ======== ========= ========
Item 9: Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2004, the Company carried out an evaluation under the
supervision and with the participation of the Company's management, including
the President and Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon and as of the date of the
Company's evaluation, the President and Chief Financial Officer concluded that
the disclosure controls and procedures are effective in all material respects to
provide reasonable assurance that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required. There have been no
significant changes in the Company's internal control over financial reporting
that occurred during the fourth fiscal quarter that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
Item 9B: Other Information
None
Item 10: Directors and Executive Officers of the Company
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. On August 12, 2002, the Board of Directors of the Company elected John
Powers as Secretary, Thomas Clyne as Chief Financial Officer and Diana Mitchell
as Assistant Secretary. Donald J. Puglisi, the independent director, was
reappointed by the Board of Directors and the Branch, as holder of the Common
Securities of the Company, and his current term of office commenced as of
December 5, 2002. On November 29, 2002, Olivier Meisel became President and
Director. On March 24, 2003, Thomas Clyne was appointed a Director. On August
22, 2003, Michel Eydoux replaced Georges Chodron de Courcel as Chairman and
Director. On December 5, 2003, Martine Billeaud and Sady Karet were reappointed
as Directors.
Name and Age Position and Offices Held
------------ -------------------------
Michel Eydoux (54) Chairman and Director
Martine Billeaud (55) Director
Olivier Meisel (41) President and Director
John D. Powers (53) Secretary
Donald J. Puglisi (59) Independent Director
Sady Karet (50) Treasurer and Director
Thomas Clyne (48) Chief Financial Officer and Director
Diana E. Mitchell (49) Assistant Secretary
The following is a summary of the experience of the executive officers and
directors of the Company:
Michel Eydoux is currently Head of Treasury for Asset and Liability Management
of BNP PARIBAS, and a member of the Executive Committee for Corporate and
Investment Banking. Born in 1950, he graduated in 1973 from Ecole des Hautes
Etudes Commerciales de Paris. He started his career with Banque Paribas, where
he handled several assignments. In 1989, he was appointed Deputy General Manager
for Paribas in Spain and in 1991, Head of ALM Treasury for Paribas. He was
appointed to his current position in 1999.
Martine Billeaud is in charge of the Bank's medium and long term funding
activities related to Asset and Liability Management. She was previously
responsible for domestic treasury business. Ms. Billeaud was born in
Choisy-le-Roi, France in 1945.
Olivier Meisel is in charge of the ALM Treasury activities for BNP Paribas in
North America. He began his career as a derivative trader in the Paris and
London offices of Banque Paribas before joining the ALM Treasury Metier in 1997.
His previous position was as Head of ALM Treasury in Japan. Mr. Meisel was born
in Suresnes, France in 1963.
John D. Powers became General Counsel for the corporate and investment banking
businesses of BNP Paribas in North America after the merger of BNP and Paribas
in 2000. Before assuming his duties as General Counsel, Mr. Powers was the lead
counsel for Paribas' capital market businesses in North America from the time he
joined Paribas in 1992. Prior to this time, Mr. Powers was Assistant General
Counsel for Barclays Bank PLC, which he joined in 1983 after working as an
associate at Cravath, Swaine & Moore starting in 1980.
Donald J. Puglisi, the Independent Director, is the MBNA America Professor of
Business Emeritus at the University of Delaware where he has been on the faculty
since 1971. In addition, he is the Managing Director of Puglisi and 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.
Sady Karet is Vice President in charge of Asset and Liability analysis of the
Bank's US branches. He was previously posted in Hong Kong where he was in charge
of Market Risks for North Asia (excluding Japan). Mr. Karet was born in Paris,
France in 1954.
Thomas Clyne is a Managing Director in Finance responsible for U.S. Non-Banking
subsidiaries of BNP Paribas in North America. Mr. Clyne has been with BNP
Paribas since 1998. He has worked in the investment banking and financial
services industry for twenty-eight years. Prior to joining the Bank, he worked
for Credit Lyonnais as Managing Director and Chief Financial Officer of Credit
Lyonnais Securities (USA) Inc. Mr. Clyne was born in Brooklyn, New York in 1956.
Diana E. Mitchell is a Vice President and Assistant General Counsel for BNP
Paribas in North America. In her current position, she assists the General
Counsel for the corporate and investment banking businesses of BNP Paribas in
North America on matters with broad relevance to the U.S. operations of BNP
Paribas, focusing, in particular, on regulatory and compliance related issues.
Ms. Mitchell joined the corporate banking legal department for Paribas in 1994.
Prior to this time, Ms. Mitchell worked as an associate at Brown Raysman &
Millstein starting in 1991 and Lord Day & Lord, Barrett Smith starting in 1989.
Audit Committee Financial Expert
The Board of Directors serves as the Audit Committee of the Company. The Board
of Directors has sole and direct authority to engage, appoint, evaluate and
replace the independent auditor. The Board of Directors has determined that
Donald J. Puglisi is an Audit Committee Financial Expert as defined under the
Exchange Act and is independent as defined in the listing standard of the New
York Stock Exchange.
Code of Ethics
The Company has adopted a Code of Ethics that applies to the President, Chief
Financial Officer, and other persons performing similar functions. A copy of the
Code of Ethics is filed as an exhibit to this Annual Report on Form 10-K.
Item 11: 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 also officers or employees of the Branch or the Bank or their
affiliates and do not receive compensation from the Company or additional
compensation from the Branch or the Bank or any affiliate for services rendered
to the Company.
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
None.
Item 13: Certain Relationships and Related Transactions
Reference is hereby made to Item 1. Business and Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations for a discussion
of the Company's various relationships with the Bank, including the Branch, the
sole holder of all its outstanding Common Securities.
Item 14: Principal Accountant Fees and Services
Set forth below are the services rendered and related fees billed by
PricewaterhouseCoopers LLP for 2004 and 2003:
Audit Fees 2004 2003
---------- ---- ----
Financial Statement Audit $51,400 $48,500
Audit-Related Fees --- ---
Tax Fees
--------
Tax preparation-Partnership K-1s 54,000 54,000
Other Fees
----------
--- ---
-------- --------
Total fees $105,400 $102,500
======== ========
Engagement of the Independent Auditor
The Board of Directors is responsible for approving every engagement audit or
non-audit service before any service is provided.
Auditor Selection for 2005
PricewaterhouseCoopers LLP has been selected to serve as the Company's
independent auditor for the year ended December 31, 2005.
Item 15: Exhibits and Financial Statement Schedules
EXHIBITS
A) Exhibits:
11) Computation of net loss per common security
12) (a) Computation of ratio of earnings to fixed charges
(b) Computation of ratio of earnings to fixed charges and
preferred security dividends
14) Code of Ethics
31.1) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2) Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32) Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BNP U.S. FUNDING L.L.C.
-----------------------
Registrant
Date: March 30, 2005 By /s/ Oliver Meisel
---------------------------
Olivier Meisel
President and Director
Date: March 30, 2005 By /s/ Thomas Clyne
------------------------
Thomas Clyne
Chief Financial Officer and Director