<PAGE> 1
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DISTRICT OF COLUMBIA 52-089-1669
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
2201 COOPERATIVE WAY
HERNDON, VIRGINIA 22071
(703) 709-6700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JOHN JAY LIST, GENERAL COUNSEL
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
2201 COOPERATIVE WAY
HERNDON, VIRGINIA 22071
(703) 709-6700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
MARK L. WEISSLER THOMAS R. BROME
MILBANK, TWEED, HADLEY & MCCLOY CRAVATH, SWAINE & MOORE
1 CHASE MANHATTAN PLAZA 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10005 NEW YORK, NEW YORK 10019
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to
time after the effective date of this registration statement as determined by
market conditions.
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING
BOX. / /
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR INTEREST
REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING BOX. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
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PROPOSED PROPOSED
TITLE OF EACH MAXIMUM MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Collateral Trust Bonds......................... $500,000,000 100% $500,000,000 $172,415.00
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</TABLE>
(1) Expressed as the principal amount of Collateral Trust Bonds.
(2) Estimated solely for purposes of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS
CONTAINED IN THIS REGISTRATION STATEMENT ALSO RELATES TO THE REGISTRATION
STATEMENT ON FORM S-3 (REGISTRATION NO. 33-35261) PREVIOUSLY FILED BY THE
REGISTRANT.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY, SUBJECT TO COMPLETION, OCTOBER 18, 1994
PROSPECTUS
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
COLLATERAL TRUST BONDS
------------------------
National Rural Utilities Cooperative Finance Corporation ("CFC" or the
"Company") intends to issue in one or more series from time to time debt
securities (the "Bonds"). The Bonds of each series will be offered to the public
on terms determined by market conditions at the time of sale. The Company may
sell Bonds for proceeds up to $650,000,000 (or the equivalent thereof if any of
the Bonds are denominated in a foreign currency or a currency unit) (i) directly
to purchasers, (ii) through agents designated from time to time or (iii) through
underwriters or a group of underwriters which may include Lehman Brothers Inc.
The Bonds may be issued in registered form without coupons, in a form
registered as to principal only with or without coupons, in bearer form with or
without coupons or any combination thereof. In addition, all or a portion of the
Bonds may be issued in temporary or definitive global form. Bonds in bearer form
are offered only to non-United States persons and to offices located outside the
United States of certain United States financial institutions. See "Limitations
on Issuance of Bearer Bonds".
The Bonds may be sold for U.S. dollars, foreign currencies or foreign
currency units, and the principal (including any premium) and any interest on
the Bonds may be payable in U.S. dollars, foreign currencies or foreign currency
units. The Bonds may be issued in one or more series with the same or various
maturities at or above par or with an original issue discount. The specific
designation, aggregate principal amount, currency, currencies or currency unit
or units in which the principal, premium, if any, or interest, if any, is
payable, authorized denominations, purchase price, maturity, rate (or method of
calculation) and time of payment of any interest, any redemption terms, any
listing on a securities exchange, or other specific terms of the Bonds in
respect of which this Prospectus is being delivered ("Offered Bonds") are set
forth in the accompanying Prospectus Supplement or in a supplement thereto
relating to the specific Offered Bonds (together, the "Prospectus Supplement"),
together with the terms of offering of the Offered Bonds.
For a discussion of certain United States federal income tax consequences,
see "United States Taxation".
A discussion of certain other United States federal tax matters applicable
to the Offered Bonds may be set forth in the Prospectus Supplement relating to
the Offered Bonds.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF BONDS UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
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THE DATE OF THIS PROSPECTUS IS OCTOBER , 1994
<PAGE> 3
IN CONNECTION WITH AN OFFERING, THE UNDERWRITERS FOR SUCH OFFERING, IF ANY,
MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET
PRICE OF THE OFFERED BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected at the office of the Commission, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, DC 20549, as well as at the Regional Offices of the Commission
at Seven World Trade Center, Suite 1300, New York, NY 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. Copies can also be
obtained by mail from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549 at the prescribed
rates. In addition, certain of the Company's securities are listed on, and
reports and other information concerning the Company can also be inspected at,
the New York Stock Exchange, Inc., 20 Broad Street, New York, NY 10005.
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DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended May 31,
1994, Quarterly Report on Form 10-Q for the quarter ended August 31, 1994,
Current Report on Form 8-K dated September 9, 1994 and Current Report on Form
8-K dated September 16, 1994, as filed with the Commission pursuant to the
Exchange Act, are hereby incorporated by reference in this Prospectus.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the offering
of the Bonds, shall be deemed to be incorporated in this Prospectus by reference
and to be a part hereof from the respective date of filing of each such
document. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will furnish without charge upon written or oral request by any
person, including any beneficial owner, to whom this Prospectus is delivered a
copy of any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference, other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates. Requests for such copies
should be directed to Steven L. Lilly, Senior Vice President and Chief Financial
Officer, National Rural Utilities Cooperative Finance Corporation, Woodland
Park, 2201 Cooperative Way, Herndon, VA 22071. Telephone requests may be
directed to (703) 709-6700.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROSPECTUS OR THE PROSPECTUS
SUPPLEMENT IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND THE
PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS AND THE
PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF, OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SINCE ITS DATE.
2
<PAGE> 4
THE COMPANY
National Rural Utilities Cooperative Finance Corporation ("CFC" or the
"Company") was incorporated as a private, not-for-profit cooperative association
under the laws of the District of Columbia in 1969. The principal purpose of CFC
is to provide its members with a source of financing to supplement the loan
program of the Rural Electrification Administration ("REA") of the United States
Department of Agriculture. CFC makes loans primarily to its rural utility system
members ("Utility Members") to enable them to acquire, construct and operate
electric distribution, generation, transmission and related facilities. CFC also
makes loans to service organization members ("Service Members") to finance
office buildings, equipment, related facilities and services provided by them to
the rural utility systems. CFC has also provided guarantees for tax-exempt
financing of pollution control facilities and other properties constructed or
acquired by its members, and in addition has provided loans or guarantees
through National Cooperative Services Corporation ("NCSC") in connection with
certain lease transactions of its members. Also, through Rural Telephone Finance
Cooperative ("RTFC"), a controlled affiliate of CFC established in 1987, CFC
provides financing to rural telephone and telecommunications companies and their
affiliates. In addition, through Guaranty Funding Cooperative, ("GFC"), a
controlled affiliate of CFC established in 1991, CFC provides financing for
certain members to refinance their debt to the Federal Financing Bank of the
United States Treasury ("FFB"). CFC's offices are located at Woodland Park, 2201
Cooperative Way, Herndon, VA 22071 and its telephone number is (703) 709-6700.
CFC's 1,039 members as of May 31, 1994, included 899 rural electric Utility
Members, virtually all of which are consumer-owned cooperatives, 71 service
members and 69 associate members. The Utility Members included 833 distribution
systems and 66 generation and transmission ("Power Supply") systems operating in
46 states and U.S. territories. At December 31, 1993, CFC's member systems
served approximately 12.4 million consumers, representing service to an
estimated 32.5 million ultimate users of electricity, and owned approximately
$62.6 billion (before depreciation of $17.9 billion) in total utility plant.
CFC's long-term loans to Utility Members generally have 35-year maturities.
They are made primarily in conjunction with concurrent REA loans and are
generally secured ratably with REA's loans by a common mortgage on substantially
all the Utility Member's property (including revenues). Interest rates on these
loans are either fixed or variable. Fixed rates are set weekly based on CFC's
overall cost of long-term capital and may be obtained for any period from one to
30 years. Variable rates are adjusted monthly in line with changes in CFC's cost
of short-term funds.
CFC makes short-term unsecured line-of-credit loans and secured
intermediate-term loans with up to five-year maturities. Rates on these loans
may be adjusted semi-monthly in line with changes in CFC's short-term cost of
funds. The intermediate-term loans are generally made to Power Supply systems in
connection with the planning and construction of new generating plants and
transmission facilities.
CFC also makes loans to telecommunication systems through RTFC. Such loans
are long-term fixed or variable rate loans with maturities not exceeding 15
years and short-term loans.
CFC's guarantees are senior obligations ranking on a par with its other
senior debt. Even if the system defaults in payment of the guaranteed
obligations, the debt cannot be accelerated as long as CFC pays the debt service
under its guarantee as due. The system is generally obligated to reimburse CFC
on demand for amounts paid on the guarantee, and this obligation is usually
secured by a mortgage (often joint with REA) on the system's property or, in the
case of a lease transaction, on the leased property. Holders of $1,214.6 million
of the guaranteed pollution control debt (at May 31, 1994) have the right at
certain times to tender their bonds for remarketing, and, if they cannot
otherwise be remarketed, CFC has committed to purchase bonds so tendered.
By policy, CFC maintains an allowance for loan and guarantee losses at a
level believed to be adequate in relation to the quality and size of its loans
and guarantees outstanding. At May 31, 1994, the allowance was $188.2 million.
At May 31, 1994, CFC's ten largest borrowers, which were all Power Supply
members, had outstanding loans totaling $461.6 million (excluding $394.1 million
of loans guaranteed by REA), which represented approximately 7.5% of CFC's total
loans outstanding. As of May 31, 1994, outstanding CFC guarantees for these same
ten largest borrowers totaled $2,117.7 million, which represented 79.2% of CFC's
total guarantees outstanding, including guarantees of the maximum amounts of
lease obligations at such date. On that
3
<PAGE> 5
date, no member had loans and guarantees outstanding in excess of 10% of the
aggregate amount of CFC's outstanding loans and guarantees; however, one of the
ten largest borrowers, Deseret Generation & Transmission Co-operative
("Deseret"), was in financial difficulty (See "THE RURAL ELECTRIC SYSTEMS--Power
Supply Systems"). At May 31, 1994, loans outstanding to Deseret accounted for
1.8% of total loans outstanding (excluding loans guaranteed by REA) and
guarantees outstanding to Deseret accounted for 12.6% of total guarantees
outstanding. Total loans and guarantees outstanding to Deseret equaled 26.8% of
total Members' Equity, Members' Subordinated Certificates and the allowance for
loan and guarantee losses.
4
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Set forth below is a table showing loans outstanding to borrowers as of the
dates shown, loans committed but unadvanced to borrowers at May 31, 1994, and
the weighted average interest rates thereon.
<TABLE>
<CAPTION>
LOANS COMMITTED
BUT UNADVANCED AT
LOANS OUTSTANDING AND WEIGHTED AVERAGE INTEREST MAY 31, 1994
RATES THEREON AT MAY 31, (A)(B)
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1994 1993 1992
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(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term fixed rate secured loans:
Distribution Systems(C)............ $ 1,502,454 7.69% $ 1,604,275 8.14% $ 2,148,974 8.93% $ 12,089
Power Supply Systems(C)............ 273,186 7.56% 179,384 7.80% 135,778 8.29% 9,705
Service Organizations(C)(D)........ 94,104 9.53% 90,090 9.85% 94,183 9.79% 11,461
Associate Members.................. 1,606 10.25% 1,628 10.25% 1,648 10.25% --
Telecommunication Organizations.... 119,600 9.16% 130,552 9.33% 104,350 9.84% --
----------- ----------- ----------- -----------------
Total long-term fixed rate
secured loans.............. 1,990,950 7.85% 2,005,929 8.27% 2,484,933 8.97% 33,255
----------- ----------- ----------- -----------------
Long-term variable rate secured
loans(E):
Distribution Systems............... 2,172,799 4.65% 1,975,784 4.63% 1,320,823 5.28% 807,848
Power Supply Systems............... 170,683 4.65% 178,095 4.63% 221,552 5.25% 436,147
Service Organizations(D)........... 39,487 4.65% 43,014 4.63% 6,931 5.25% 64,828
Associate Members.................. 29,089 4.45% 26,098 4.38% 27,734 5.00% 47,412
Telecommunication Organizations.... 499,506 4.92% 288,234 4.75% 282,082 5.38% 366,269
----------- ----------- ----------- -----------------
Total long-term variable rate
secured loans.............. 2,911,564 4.69% 2,511,225 4.64% 1,859,122 5.28% 1,722,504
----------- ----------- ----------- -----------------
Refinancing variable rate loans
guaranteed by REA:
Power Supply Systems............... 533,545 4.87% 297,724 3.94% 287,324 5.21% --
----------- ----------- ----------- -----------------
Intermediate-term secured loans:
Distribution Systems............... 4,112 4.90% 320 4.75% 412 5.38% 2,000
Power Supply Systems............... 21,316 4.90% 28,496 4.75% 152,871 5.38% 234,391
Service Organizations.............. 2,099 4.90% 496 4.75% 1,501 5.38% 5,541
Telecommunication Organizations.... -- -- -- -- -- -- --
----------- ----------- ----------- -----------------
Total intermediate-term
secured loans.............. 27,527 4.90% 29,312 4.75% 154,784 5.38% 241,932
----------- ----------- ----------- -----------------
Intermediate-term unsecured loans:
Distribution Systems............... 13,046 4.90% 10,873 4.75% 31,443 5.38% 10,695
Power Supply Systems............... 84,515 4.90% -- -- 2,740 5.38% 22,376
Service Organizations.............. -- -- 11 4.75% 27 5.38% 70
Telecommunication Organizations.... 1,265 5.05% -- -- -- -- 1,303
----------- ----------- ----------- -----------------
Total intermediate-term
unsecured loans............ 98,826 4.90% 10,884 4.75% 34,210 5.38% 34,444
----------- ----------- ----------- -----------------
Short-term loans(F):
Distribution Systems............... 276,373 4.90% 151,941 4.75% 130,891 5.43% 1,943,335
Power Supply Systems............... 14,048 4.90% 14,157 4.75% 3,438 5.38% 962,224
Service Organizations.............. 11,812 4.90% 11,873 4.75% 14,335 5.38% 66,463
Associate Members.................. 3,084 4.90% 1,856 4.75% 2,952 5.38% 16,201
Telecommunication Organizations.... 31,176 5.65% 21,370 5.50% 26,032 6.13% 114,172
----------- ----------- ----------- -----------------
Total short-term loans....... 336,493 4.97% 201,197 4.83% 177,648 5.52% 3,102,395
----------- ----------- ----------- -----------------
Nonperforming loans(G):
Distribution Systems............... 1,933 8.27% 11,164 10.20% 11,797 9.76% --
Power Supply Systems............... 27,948 4.75% 29,584 4.75% 5,225 5.38% --
Associate Members.................. 12,961 9.00% 12,963 9.00% -- -- --
Telecommunication Organizations.... 2,098 6.13% 2,117 9.00% -- -- --
----------- ----------- ----------- -----------------
Total nonperforming loans.... 44,940 6.19% 55,828 6.99% 17,022 8.42% --
----------- ----------- ----------- -----------------
Restructured loans(H):
Distribution Systems............... 2,667 18.37% -- -- -- -- 3,000
Power Supply Systems............... 160,873 8.32% 149,685 7.86% 130,541 7.58% 50,000
Service Organizations.............. 1,833 4.62% 2,000 4.63% -- -- --
Associate Members.................. -- -- 2,666 4.46% 12,963 5.00% --
Telecommunication Organizations.... -- -- 18,592 4.77% 2,119 5.38% --
----------- ----------- ----------- -----------------
Total restructured loans..... 165,373 8.44% 172,943 7.43% 145,623 7.32% 53,000
----------- ----------- ----------- -----------------
Total loans.................. 6,109,218 5.87% 5,285,042 6.10% 5,160,666 7.13% 5,187,530
----------- ----------- ----------- -----------------
Less: Allowance for loan and
guarantee losses................... 188,196 172,571 157,571 --
----------- ----------- ----------- -----------------
Net loans.................... $ 5,921,022 $ 5,112,471 $ 5,003,095 $ 5,187,530
========== ========== ========== ===============
</TABLE>
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(A) The interest rates in effect at October 1, 1994, were 8.45% for long-term
loans with a seven-year fixed rate term, 5.60% on variable rate long-term
loans and 5.90% on intermediate-and short-term loans. The rates in effect at
October 1, 1994, on loans to associate members were 8.65% for long-term
loans with a seven-year fixed rate term, 5.35% on long-term variable rate
loans and 5.90% on short-term loans. The rates in effect at October 1, 1994,
on loans to telecommunication organizations were 9.30% for long-term loans
with a seven-year fixed rate term requiring a 10% equity investment, 9.15%
for long-term loans with
5
<PAGE> 7
a seven-year fixed rate term requiring a 5% equity investment, 5.80% on
long-term variable rate loans requiring a 10% equity investment, 5.65% on
long-term variable rate loans requiring a 5% equity investment, 6.05% on
intermediate-term loans and 6.65% on short-term loans.
(B) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed or for which loan contracts have been
executed, but funds have not been advanced.
(C) During calendar year 1995, $141.8 million of such outstanding fixed rate
loans, which currently have a weighted average interest rate of 7.99% per
annum, will become subject to rate adjustment. During the first quarter of
calendar year 1994, long-term fixed rate loans totaling $52.9 million had
their interest rates adjusted. These loans will be eligible to readjust
their interest rate again during the first quarter of calendar year 1995 to
the lowest long-term fixed rate offered during 1994 for the term selected.
At January 1 and May 31, 1994, the seven-year long-term fixed rate was 6.55%
and 8.00%, respectively.
(D) CFC had loans outstanding to NCSC in each of the periods shown. Long-term
fixed rate loans outstanding to NCSC as of May 31, 1994, 1993 and 1992, were
$47.8 million, $49.0 million and $50.2 million, respectively. In addition,
as of May 31, 1994, CFC had unadvanced long-term fixed rate and long-term
variable rate loan commitments to NCSC in the amounts of $5.0 million and
$9.7 million, respectively.
(E) Included in long-term variable rate secured loans are $3.5 million, $2.5
million and $2.6 million in unsecured loans to one borrower at May 31, 1994,
1993 and 1992.
(F) All short-term loans are unsecured, except for $18.2 million, $31.6 million
and $23.2 million in loans outstanding at May 31, 1994, 1993 and 1992 that
are secured.
(G) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily relate to
the interest recognized by CFC from such loans.
(H) The rates on restructured loans are the weighted average of the effective
rates (based on the present value of scheduled future cashflows) as of the
dates shown and do not necessarily relate to the interest recognized by CFC
on such loans.
Set forth below is a table showing CFC's guarantees as of the dates
indicated. Substantially all these guarantees have been given on behalf of
Power Supply members.
CFC MEMBER GUARANTEES
<TABLE>
<CAPTION>
MAY 31,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Long-term tax-exempt bonds.............................. $1,494,200* $1,576,230* $1,618,880*
Debt portions of leveraged lease transactions........... 646,472 700,841 739,303
Indemnifications of tax benefit transfers............... 414,512 436,860 404,680
Other guarantees........................................ 100,643 99,800 113,211
---------- ---------- ----------
Total.................................... $2,655,827 $2,813,731 $2,876,074
========== ========== ==========
</TABLE>
- ---------------
* Includes $1,214.6 million, $1,120.8 million and $1,068.0 million at May 31,
1994, 1993 and 1992, respectively, of adjustable rate pollution control bonds
which can be tendered for purchase at specified times at the option of the
holders (in the case of $382.9 million, $358.6 million and $361.4 million of
such bonds outstanding at May 31, 1994, 1993 and 1992, respectively, at any
time on seven days' notice, in the case of $289.5 million, $233.2 million and
$236.3 million outstanding at May 31, 1994, 1993 and 1992, respectively, at
any time on a minimum of one day's notice and in the case of the remainder on
a five-week or semiannual basis). CFC has agreed to purchase any such bonds
that cannot be remarketed. Since the inception of the program CFC has not been
required to purchase any such bonds.
6
<PAGE> 8
Set forth below are the weighted average interest rates earned by CFC
(recognized in the case of non-performing and restructured loans) on all loans
outstanding during the fiscal year ended May 31 of the year indicated.
INTEREST RATES EARNED ON LOANS
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Long-term fixed rate......................... 8.63% 9.15% 9.16%
Long-term variable rate...................... 4.08% 4.99% 6.09%
Telecommunication organizations.............. 5.58% 6.32% 7.26%
Refinancing loans guaranteed by REA.......... 4.01% 4.09% 5.97%
Intermediate-term............................ 4.41% 4.93% 6.03%
Short-term................................... 4.38% 5.08% 6.18%
Associate members............................ 4.21% 4.74% 6.09%
Non-performing............................... 1.19% 1.26% 7.96%
Restructured................................. 2.33% 1.92% 3.52%
All loans..................... 5.66% 6.54% 7.86%
</TABLE>
Borrowed funds for CFC's programs are derived primarily from the sale to
its members of its Subordinated Certificates, the sale of Collateral Trust Bonds
and Medium-Term Notes and the sale of its commercial paper and bank bid notes.
Set forth below is a table showing CFC's outstanding borrowings and the interest
rates thereon as of the dates shown.
CFC BORROWINGS
<TABLE>
<CAPTION>
AMOUNTS OUTSTANDING AT MAY 31,
-------------------------------------------------------------------------------------
1994 1993 1992
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Long-and intermediate-term debt:(A)
9 1/4% Series P Bonds, Due
1992(B)......................... $ -- $ -- $ 99,700
10 1/2% Series N Bonds, Due
1995(B)......................... -- -- 100,000
9 3/8% Series Q Bonds, Due
1995(B)......................... -- 149,800 149,800
9 5/8% Series R Bonds, Due
1996(B)......................... -- 99,600 99,600
9.85% Series S Bonds, Due
1996(B)......................... -- 99,700 99,700
9 1/2% Series T Bonds, Due 1997... 150,000 149,800 149,800
8 1/2% Series U Bonds, Due 1998... 149,800 149,800 149,800
7.40% Series A Bonds, Due 2007.... 2,819 6,319 8,619
9 3/4% Series F Bonds, Due
2009(B)......................... -- -- 76,769
Floating Rate Series E-2 Bonds,
Due 2010........................ 2,253 2,279 2,315
9% Series O Bonds, Due 2016....... 87,400 91,600 95,800
9% Series V Bonds, Due 2021....... 150,000 149,800 149,800
Medium-Term Notes and weighted
average interest rates.......... 472,208 (6.99%) 456,538 (7.29%) 537,365 (7.90%)
---------- ---------- ----------
Total long-and
intermediate-term
debt and weighted average
interest rates(C)........... 1,014,480(D) (8.06%) 1,355,236 (8.56%) 1,719,068 (8.90%)
Members' Subordinated
Certificates,
including advance payments and
weighted average interest
rates(E)........................ 1,086,529 (4.46%) 1,066,755 (4.58%) 1,056,928 (4.17%)
---------- ---------- ----------
Total long-and
intermediate-term
debt and Members'
Subordinated
Certificates and weighted
average interest rates...... $2,101,009 (6.20%) $2,421,991 (6.81%) $2,775,996 (7.10%)
========== ========== ==========
Short-term debt(F) and weighted
average interest rates(G)......... $3,637,975 (4.23%) $2,533,624 (3.14%) $2,143,815 (3.85%)
========== ========== ==========
Total debt and weighted average
interest rates at May 31.......... $5,738,984 (4.95%) $4,955,615 (4.93%) $4,919,811 (5.68%)
========== ========== ==========
</TABLE>
- ---------------
(A) Net of $0.2 million, $1.5 million and $30.7 million principal amount of
bonds held in Treasury at May 31, 1994, 1993 and 1992, respectively, of
which $0.2 million, $1.5 million and $1.8 million, respectively, was
purchased in connection with CFC's deferred compensation program.
7
<PAGE> 9
(B) Series N Collateral Trust Bonds were called July 2, 1992. Series P
Collateral Trust Bonds matured November 1, 1992. Series F Collateral Trust
Bonds were called September 3, 1992, at a premium of 4.07%. Series Q
Collateral Trust Bonds were called on June 16, 1993, at par. Series R
Collateral Trust Bonds were called on February 2, 1994, at par. Series S
Collateral Trust Bonds were called on April 18, 1994, at par.
(C) Excludes $2,030.0 million, $2,030.0 million and $1,750.0 million of
Commercial Paper classified as long-term debt as of May 31, 1994, 1993 and
1992, respectively.
(D) Total long-and intermediate-term debt includes $200.8 million which will be
due or is expected to be redeemed, during fiscal year 1995.
(E) Excluding $107.1 million, $116.5 million and $128.0 million of Debt Service
Reserve Certificates, and $29.3 million, $32.4 million and $36.2 million of
subscribed but unissued Subordinated Certificates as of May 31, 1994, 1993
and 1992, respectively, since such funds are not generally available for
investing in earning assets.
(F) Net of discount; includes $2,030.0 million, $2,030.0 million and $1,750.0
million of Commercial Paper classified as long-term debt as of May 31, 1994,
1993 and 1992, respectively. Includes $209.0 million, $335.0 million and
$100.0 million of Bank Bid Notes at May 31, 1994, 1993 and 1992,
respectively.
(G) Average interest rates are weighted on the basis of amounts of outstanding
borrowings without adjustment for bank credit compensation arrangements for
short-term borrowings.
Set forth below are the weighted average interest costs incurred by CFC on
its commercial paper and bank bid notes (giving effect to bank credit
compensation arrangements) and long-term borrowings (including discount and
issuance expenses on Collateral Trust Bonds) during the periods shown.
INTEREST COSTS ON CFC BORROWINGS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------
1994 1993 1992
------ ------ -------
<S> <C> <C> <C>
Short-term borrowings............................. 3.67% 3.61% 5.23%
Long-term borrowings.............................. 8.63% 8.92% 9.40%
All borrowings............................... 5.14% 5.80% 7.18%
</TABLE>
Due to its non-profit character, CFC does not seek to maximize its
operating margins, but rather to achieve margins only to the extent considered
by CFC to be consistent with sound financial practice. CFC is exempt from the
payment of Federal income taxes.
USE OF PROCEEDS
Except as may be otherwise provided in a Prospectus Supplement, the net
proceeds from the sale of the Bonds will be added to the general funds of the
Company and will be available for making loans to members, the repayment of
short-term borrowings, the refinancing of existing long-term debt and for other
corporate purposes. The Company expects to incur additional indebtedness from
time to time, the amount and terms of which will depend upon the volume of its
business, general market conditions and other factors.
8
<PAGE> 10
SUMMARY FINANCIAL INFORMATION
The following is a summary of selected financial data for each of the five
years ended May 31, 1994.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
For the year ended May 31:
Operating income................. $ 324,682 $ 336,387 $ 402,255 $ 428,974 $ 423,989
========== ========== ========== ========== ==========
Operating margin................. $ 29,159 $ 38,352 $ 42,809 $ 28,564 $ 36,542
Nonoperating income.............. 4,029 3,296 2,744 3,883 2,731
Gain on sale of building......... -- -- -- 15,858 --
Extraordinary loss(A)............ -- (3,161) (1,398) (2,800) --
---------- ---------- ---------- ---------- ----------
Net margins...................... $ 33,188 $ 38,487 $ 44,155 $ 45,505 $ 39,273
========== ========== ========== ========== ==========
Fixed charge coverage ratio(A)... 1.13 1.16 1.14 1.14 1.11
========== ========== ========== ========== ==========
As of May 31:
Assets........................... $6,224,296 $5,464,144 $5,401,473 $5,139,624 $4,963,966
========== ========== ========== ========== ==========
Long-term debt(B)(C)............. $2,841,220 $3,095,488 $2,971,074 $3,204,357 $3,113,006
========== ========== ========== ========== ==========
Members' subordinated
certificates................... $1,222,858 $1,215,547 $1,221,095 $1,181,010 $1,189,993
========== ========== ========== ========== ==========
Members' equity.................. $ 260,968 $ 258,299 $ 246,320 $ 243,491 $ 227,201
========== ========== ========== ========== ==========
Leverage ratio(D)................ 4.63 4.41 4.44 4.43 4.29
========== ========== ========== ========== ==========
</TABLE>
- ---------------
(A) During the years ended May 31, 1993, 1992 and 1991, CFC paid premiums
totaling $3.2 million, $1.4 million, and $2.8 million respectively, in
connection with the prepayment of Collateral Trust Bonds. Margins used to
compute the fixed charge coverage ratio represent net margins before
extraordinary loss plus fixed charges. The fixed charges used in the
computation of the fixed charge coverage ratio consist of interest and
amortization of bond discount and bond issuance expenses.
(B) Includes commercial paper reclassified as long-term debt and excludes
portion of long-term debt due within one year.
(C) Excludes $200.8 million, $286.8 million, $494.5 million, $109.6 million and
$65.1 million in long-term debt that comes due, matures and/or will be
redeemed early during fiscal years 1995, 1994, 1993, 1992 and 1991,
respectively.
(D) In accordance with CFC's revolving credit agreements, the leverage ratio is
calculated by dividing debt and guarantees outstanding, excluding debt used
to fund loans guaranteed by the U.S. Government, by the total of Members'
Subordinated Certificates and Members' Equity.
CFC has had outstanding guarantees for its members' indebtedness in each of
the fiscal years shown above. Members' interest expense on such indebtedness was
approximately $124.3 million for the year ended May 31, 1994.
The Company does not have outstanding any common stock and does not pay
dividends. CFC expects to retire half of each year's Patronage Capital
Certificates, which represent allocations of CFC's net margins for such year,
during the next fiscal year, and expects to retire the remaining half of the
year's Patronage Capital Certificates after 15 years with due regard for CFC's
financial condition.
9
<PAGE> 11
CAPITALIZATION
The following table shows the capitalization of the Company as of August
31, 1994.
<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
<S> <C>
SENIOR DEBT:
Short-term Indebtedness(A).................................... $1,877,690
Long-term Debt(A)............................................. 3,102,208
----------
Total Senior Debt(B).................................. 4,979,898
----------
SUBORDINATED DEBT AND MEMBERS' EQUITY:
Members' Subordinated Certificates(C)......................... 1,236,473
Members' Equity(D)............................................ 241,759
----------
Total Capitalization.................................. $6,458,130
==========
</TABLE>
- ------------
(A) Short-term indebtedness is used to fund the Company's short-, intermediate-
and long-term variable rate loans, as well as its long-term fixed rate loans
on a temporary basis. It generally consists of commercial paper with
maturities of up to nine months. To support its own commercial paper and its
obligations with respect to tax-exempt debt issued on behalf of members, the
Company had at August 31, 1994, bank lines of credit providing for
borrowings aggregating $610,000,000 and bank revolving credit agreements
providing for borrowings aggregating up to $2,900,000,000. The lines of
credit are subject to termination at the banks' option, and the Company's
ability to borrow under the revolving credit agreements is subject to
continued satisfaction of certain conditions, including the maintenance of
Members' Equity and Members' Subordinated Certificates of at least
$1,334,400,000 increased each fiscal year after 1994 by 90% of net margins
not distributed to Members and an average fixed charge coverage ratio over
the six most recent fiscal quarters of at least 1.025. The revolving credit
agreements also require a fixed charge coverage ratio of 1.05 for the
preceding fiscal year as a condition to the retirement of patronage capital
and prohibit the Company from pledging collateral in excess of 150% of the
principal amount of collateral trust bonds outstanding. Commercial paper in
the amount of $2,030,000,000, which is supported by a three-year revolving
credit agreement, is shown as long-term debt. Long-term debt also includes
the Company's outstanding collateral trust bonds and Medium-Term Notes. The
outstanding collateral trust bonds have been issued under a separate
indenture and are secured by a separate pool of collateral.
(B) At August 31, 1994, the Company had outstanding guarantees of tax-exempt
securities issued on behalf of members in the aggregate amount of
$1,488,231,000. Guaranteed tax-exempt securities include $1,211,000,000 of
long-term adjustable or floating/fixed rate pollution control bonds which
are required to be remarketed at the option of the holders. The Company has
agreed to purchase any such bonds that cannot be remarketed, with the
exception of $107,400,000 of certain variable rate bonds. At August 31,
1994, the Company had guaranteed its members' obligations in connection
with certain lease transactions and other debt in the amount of
$1,137,176,000.
(C) Subordinated Certificates are subordinated obligations purchased by members
as a condition of membership and in connection with the Company's extension
of long-term credit to them. Those issued as a condition of membership
($640,520,000 at August 31, 1994) generally mature 100 years from issuance
and bear interest at 5% per annum. The others either mature 46 to 50 years
from issuance, or mature at the same time as, or amortize proportionately
with, the credit extended, and either are non-interest bearing or bear
interest at varying rates.
(D) The Company allocates its net margins among its members in proportion to
interest earned by the Company from such members within various loan pools.
The Company intends to return the amounts so allocated to its members 50% in
the following year and the remaining 50% after 15 years with due regard for
the Company's financial condition. The six years of unretired allocations
that are currently held by the Company will be retired over the next 15
years commencing with the retirement made in August 1994. The current policy
of RTFC is to retire 50% of current year's margins with 8 1/2 months of the
end of the fiscal year with the remainder to be retired at the discretion of
RTFC's Board of Directors. The current policy of Guaranty Funding
Cooperative, a controlled affiliate of the Company, is to retire 100% of
current year's margins shortly after the end of the fiscal year.
10
<PAGE> 12
THE RURAL ELECTRIC SYSTEMS
GENERAL
CFC's 899 rural electric Utility Members as of May 31, 1994, were drawn
from the approximately 930 rural electric utility systems (the "systems") which
were eligible for REA loans. A large proportion of the eligible systems are
members of CFC and information regarding these systems is available in the
Annual Statistical Reports of REA ("REA Reports"), therefore, commentary in this
section is based on information about the systems generally, rather than CFC
members alone (see Note on page 15). However, the Composite Financial Statements
on pages 16 to 18 relate only to CFC Utility Members. At December 31, 1993, and
for the year then ended, CFC's members accounted for approximately 98% of the
total utility plant, 93% of the total equity, 97% of the net margins and 93% of
the total number of systems covered by REA Reports, and CFC believes that its
members are representative of the systems as a whole.
Although generally stable retail rates have been the historical pattern of
REA borrowers, in the 1970's and early 1980's rising costs of fuel, material,
labor, capital and wholesale power required rate increases by most of the
distribution systems. Increases in costs have also resulted in rate increases by
the power supply systems. Virtually all power contracts between power supply
systems and their member distribution systems provide for rate increases to
cover increased costs of supplying power, although in certain cases such
increases must be approved by regulatory agencies. During the last five years
costs and rates have generally been stable.
THE REA PROGRAM
Since the enactment of the Rural Electrification Act of 1936, REA has
financed the construction and operation of electric generating plants,
transmission facilities and distribution systems in order to provide electricity
to persons in rural areas who were without central station service. Principally
through the organization of systems under the REA loan program in 46 states and
U.S. territories, the percentage of farms and residences in rural areas of the
United States receiving central station electric service increased from 11% in
1934 to almost 99% currently. Rural electric systems serve 11% of all consumers
of electricity in the United States. They account for approximately 8% of total
sales of electricity and about 6% of energy generation and generating capacity.
In 1949, the Act was amended to allow REA to lend for the purpose of
furnishing and improving rural telephone service. At December 31, 1993, 883 of
REA's 940 telephone borrowers provided service to 5.6 million subscribers
throughout the United States and its territories (reporting information was not
available for the remaining 57 borrowers).
The Rural Electrification Act provides for REA to make insured loans and to
provide other forms of financing assistance to borrowers. REA is authorized to
make direct loans at below-market rates to systems which are eligible to borrow
from it. REA is also authorized to guarantee loans which have been used mainly
to provide financing for construction of Bulk Power Supply Projects. Guaranteed
loans bear interest at a rate agreed upon by the borrower and the lender (which
generally has been the FFB). For telephone borrowers, REA also provides
financing through the Rural Telephone Bank ("RTB"). The RTB is a government
corporation providing financing at rates reflecting its cost of capital. REA
exercises a high degree of financial and technical supervision over borrowers'
operations. Its loans and guarantees are secured by a mortgage on substantially
all the system's property and revenues.
Legislation has been proposed which would provide funding of $675 million
for the REA insured loan program for electric borrowers for fiscal year 1995 and
$498 million for telephone borrowers through REA and the RTB. In addition, $300
million was proposed for the REA guaranteed loan program.
Legislation has been enacted which allows REA borrowers to prepay their
loans to REA at a discount based on the government's cost of funds at the time
of prepayment. If a borrower chooses to prepay its notes, it becomes ineligible
for future REA lending for a period of ten years, except in certain specified
instances. Regulations regarding the note buy-out, relating to computation of
discount and certain issues concerning potential taxes on gains, were adopted on
March 22, 1994. As of May 31, 1994, no borrowers have prepaid their REA loans
under these rules.
11
<PAGE> 13
DISTRIBUTION SYSTEMS
Distribution systems are local utilities distributing electric power,
generally purchased from wholesale sources, to consumers in their service areas.
Virtually all are locally-managed cooperative, non-profit associations, and most
have been in operation for at least 40 years. At December 31, 1993, the
approximate number of consumers served by REA borrowers was 12.4 million,
representing an estimated 32.5 million ultimate users. Aggregate operating
revenues of the distribution systems from sales of electric energy for the year
ended December 31, 1993, totaled $15.1 billion, of which 66% was derived from
the sales of electricity to residential consumers (farm and non-farm), 30% from
such sales to commercial and industrial consumers and the remainder from sales
to various other consumers.
The composite TIER of CFC member distribution systems increased to 2.54 in
1993 from 2.19 in 1992. The composite DSC ratio increased to 2.44 in 1993 from
2.07 in 1992. Composite equity as a percent of total assets for member
distribution systems increased from 39.44% at December 31, 1992 to 40.83% at
December 31, 1993.
The cost of purchased wholesale power in 1993 amounted to 65.95% of the
total revenues of the distribution systems. Information from REA concerning the
amount of energy generated and purchased by REA borrowers including distribution
systems during the 12 months ended December 31, 1992 (1993 data is not yet
available) indicates that 18.4% was purchased from power companies including
investor-owned utilities and industrial and manufacturing corporations, 55.5%
from rural electric power supply systems and other distribution systems having
generating facilities, 18.8% from Federal agencies and 7.3% from publicly-owned
power suppliers, such as municipal systems.
Wholesale power supply contracts ordinarily guarantee neither an
uninterrupted supply nor a constant cost of power. Contracts with REA-financed
power supply systems (which generally require the distribution system to
purchase all its power requirements from the power supply system) provide for
rate increases to pass along increases in sellers' costs (subject in certain
cases to regulatory approval). The wholesale power contracts permit the power
supply system, subject to REA approval, and, in certain circumstances,
regulatory agencies, to establish rates to its members so as to produce revenues
sufficient, with revenues from all other sources, to meet the costs of operation
and maintenance (including, without limitation, replacements, insurance, taxes
and administrative and general overhead expenses) of all generating,
transmission and related facilities, to pay the cost of any power and energy
purchased for resale, to pay the costs of generation and transmission, to make
all payments on account of all indebtedness and leases of the power supply
system and to provide for the establishment and maintenance of reasonable
reserves. The rates under the wholesale power contracts are required to be
reviewed by the Board of Directors of the power supply system at least annually.
Power contracts with investor-owned utilities, or power supply systems
which do not borrow from REA generally have rates subject to regulation by the
Federal Energy Regulatory Commission ("FERC"). Contracts with Federal agencies
generally permit rate changes by the selling agency (subject, in some cases, to
Federal regulatory approval). In the case of many distribution systems, only one
power supplier is within a feasible distance to provide wholesale electricity.
POWER SUPPLY SYSTEMS
Power supply systems are utilities which purchase or generate electric
power and provide it wholesale to distribution systems for delivery to the
ultimate retail consumer. Of the 62 operating power supply systems financed in
whole or in part by REA or CFC at December 31, 1993, 61 were cooperatives owned
directly or indirectly by groups of distribution systems and one was government
owned. Of this number, 39 had generating capacity of at least 100,000 kilowatts,
and eight had no generating capacity. Five of the eight systems with no
generating capacity operated transmission lines to supply certain distribution
systems, one has applied for REA financing for its first transmission facility
and two are currently building their first transmission facilities. Certain
other power supply systems had been formed but did not yet own generating or
transmission facilities. At December 31, 1993, the 55 power supply systems
reporting to REA owned 145 generating units with a total generating capacity of
approximately 29,597,000 kilowatts, or approximately 4.3% of the nation's
estimated electric generating capacity, and served 716 REA distribution system
borrowers (representing an average for the year of approximately 8.5 million
consumers). Certain of the power supply systems which own generating plants
lease these facilities to others and purchase their power requirements from the
lessee-operators.
12
<PAGE> 14
Of the power supply systems' total generating capacity in place as of
December 31, 1993, steam plants accounted for 94.2% (including nuclear capacity
representing approximately 10.2% of such total generating capacity), internal
combustion plants accounted for 5.5% and hydroelectric plants accounted for
0.3%. REA loans and loan guarantees as of December 31, 1993, have provided funds
for the installation of over 34,031,000 kilowatts, of which nuclear capacity is
approximately 3,806,000 kilowatts, or 11.2% of the total, of which 1,279,000
kilowatts have officially been cancelled, or 3.8% of the total.
The high level of growth in demand for electricity experienced in the
1970's was not expected to decline in the 1980's and the power supply systems
continued their construction programs in anticipation of continued growth in
demand. During the 1980's, however, slower growth in power requirements of the
systems reduced the need for additional generating capacity in most areas of the
country. Thus, many areas are now experiencing a surplus of generating capacity
and, as a result, some power supply systems have significant amounts of fixed
costs for power plant investment not fully supported by increased revenues.
While the level of funds needed for new generating units is expected to be
low over the next few years, the need for transmission and capital additions
will continue to generate substantial long-term capital requirements. The power
supply systems are expected to continue to seek to satisfy these requirements
primarily through the REA loan guarantee program.
Deseret Generation & Transmission Co-operative ("Deseret") and its major
creditors entered into an Agreement Restructuring Obligations ("ARO") that
restructured Deseret's debt obligations to REA, CFC and certain other creditors,
including certain lease payments due on the Bonanza Power Plant. The ARO, which
closed in January 1991, with an effective date of January 1, 1989, provides for
the reduction of Deseret's debt service and rental obligations on the Bonanza
Power Plant until 1996 when large sales of power were intended to commence.
Under the ARO assumptions, CFC expects to fund Deseret's cash flow
shortfalls until at least 1996 under CFC's various guarantees of debt
obligations. Deseret's ability to generate enough cash flow to service its
current debt and rental payments as well as to begin repayment of the shortfall
funded by CFC thereafter depends on whether it is able to make the large power
sales on which the ARO is premised. Due to changes in power demands of Deseret's
distribution system members and the resulting reduction in power available for
sale at higher prices to nonmembers, as well as an inability, so far, to
complete the intended power sales, Deseret's cash flow projections have
undergone revision since the closing of the ARO. As a result of these changes,
Deseret is expected to be unable to satisfy its payment obligations under the
ARO beginning within the next two years. Under the ARO, CFC expected to fund
Deseret's cash flow shortfalls totaling $117 million and expected a maximum
exposure of $439 million in 1996. At August 31, 1994, CFC had funded $108.0
million of the shortfall. CFC's current exposure of $455.9 million is greater
than the expected maximum from the ARO because it loaned Deseret funds for the
early redemption, at a premium, of two high interest rate bond issues.
On April 25, 1994, Deseret announced that it had entered into an agreement
with Tri-State G&T and PacifiCorp to study the possible acquisition of Deseret's
assets. This agreement has since been changed to reflect that Deseret is
undertaking a request for proposal from any party for the purchase of power,
assets or the entire Deseret system. These proposals are expected to be received
in early 1995.
CFC has placed all loans to Deseret on a nonaccrual basis with respect to
interest income recognition. CFC does not anticipate interest income recognition
on the outstanding loans until such time that Deseret's power sales produce cash
flows sufficient to service all debts.
As part of a separate agreement, in conjunction with the ARO, CFC may be
obligated to repay out of payments by Deseret $25.9 million (plus interest)
received from a party to the Bonanza lease transaction to cover shortfalls in
the July 1989, January 1990 and July 1990 lease payments which were funded by
that party. This amount would be repaid if the available annual cash flow were
to exceed the debt repayment requirements as defined in the ARO (i.e., CFC is no
longer required to fund a shortfall).
As of August 31, 1994, CFC had approximately $455.9 million in current
credit exposure to Deseret consisting of $125.6 million in secured loans and
$330.3 million in guarantees by CFC of various direct and indirect obligations
of Deseret. CFC's guarantees include $9.1 million in tax-benefit
indemnifications and $30.6 million relating to mining equipment for a coal
supplier of Deseret. The remainder of CFC's guarantee is for
13
<PAGE> 15
semiannual debt service payments on $290.6 million of bonds issued in a $655
million leverage lease financing of a generating station in 1985. Under the ARO,
CFC has also provided Deseret a $20.0 million five-year priority secured line of
credit. At August 31, 1994, there was no balance outstanding under this line of
credit.
CFC believes that, given the underlying collateral value and the terms of
the ARO, it has adequately reserved for any potential loss on its loans and
guarantees to Deseret.
Certain other CFC borrowers have defaulted on their obligations, and CFC is
participating in efforts to restructure the debt of such borrowers or is
pursuing collection in certain instances. CFC believes that adequate reserves
have been established for any loss contingencies associated with its loans and
guarantees. Further information concerning these matters can be found in the
financial statements incorporated by reference into this Prospectus.
REGULATION AND COMPETITION
The degree of regulation of rural electric systems by state authorities
varies from state to state. The retail rates of rural electric systems are
regulated in 17 states (in which there are approximately 289 systems).
Distribution systems in these states account for approximately 34% of the total
operating revenues and patronage capital of all distribution systems nationwide.
State agencies, principally public utility commissions, of 20 states regulate
those states' approximately 300 systems as to the issuance of long-term debt
securities. In six states (in which there are approximately 100 systems) state
agencies regulate, to varying degrees, the issuance of short-term debt
securities. Since 1967, the Federal Power Commission and its successor, FERC,
which regulates interstate sales of energy at wholesale, have taken the position
that it lacks jurisdiction to regulate cooperative rural electric systems which
are current borrowers from REA. However, rural electric cooperatives that pay
off their REA debt or never incur REA debt may be regulated by FERC with respect
to financing and/or rates. To date four power supply systems and one
distribution system are regulated by FERC.
Varying degrees of territorial protection against competing utility systems
are provided to distribution systems in 41 states (in which over 92% of the
distribution systems are located). Changes in administrative or legislative
policy in several states may result in more or in less territorial protection
for the distribution systems.
In addition to competition from other utility systems, some distribution
systems have expressed increasing concern about the loss of desirable suburban
service areas as a result of annexation by expanding municipal or franchised
investor-owned utility systems, regardless of the degree of territorial
protection otherwise provided by applicable law. The systems are also subject to
competition from alternate sources of energy such as bottled gas, natural gas,
fuel oil, diesel generation, wood stoves and self-generation.
The systems, in common with the electric power industry generally, may
incur substantial capital expenditures and increases in operating costs in order
to meet the requirements of both present and future Federal, state and local
standards relating to safety and environmental quality control. These include
possible requirements for burying distribution lines, and meeting air and water
pollution standards.
On November 15, 1990, amendments to the Clean Air Act of 1970 (the
"Amendments"), designed to cause utilities and others to reduce emissions,
became law. The Amendments contain a range of compliance options and a phase-in
period which will help mitigate the immediate costs of implementation. Many of
CFC's member systems already comply with the provisions of the Amendments. CFC
is currently monitoring the overall impact of the Amendments on individual
member systems, which must implement compliance plans and operating or equipment
modifications for Phase I of the Act (1995), and for those affected in Phase II
of the Act (2000). Compliance plans for member systems with units affected in
Phase I primarily involve fuel switching to low-sulfur coal. The trading of
emission allowances may also be an economical alternative in Phase II. Some
member systems originally believed to be affected by the Amendments have
developed strategies that minimize the Amendments' impact. At this time, it is
not anticipated that the Amendments will have a material adverse impact on the
quality of CFC's loan portfolio.
14
<PAGE> 16
FINANCIAL INFORMATION
The systems differ from investor-owned utilities in that the vast majority
are cooperative, non-profit organizations operating under policies which provide
that rates should be established so as to minimize rates over the long-term.
Revenues in excess of operating costs and expenses are referred to as "net
margins and patronage capital" and are treated as equity capital furnished by
the systems' consumers. This "capital" is transferred to a balance sheet account
designated as "patronage capital," and is usually allocated to consumers in
proportion to their patronage. Such capital is not refunded to them for a period
of years during which time it is available to the system to be used for proper
corporate purposes. Subject to their applicable contractual obligations, the
systems may refund such capital to their members when doing so will not impair
the systems' financial condition. In the terminology of the Uniform System of
Accounts prescribed by REA for its borrowers, "operating revenues and patronage
capital" refers to all utility operating income received during a given period.
Similar to the practice followed by investor-owned utilities pursuant to
FERC procedures and as prescribed by REA, the systems capitalize as a cost of
construction the interest charges on borrowed funds ("interest charged to
construction") and the estimated unearned interest attributable to
internally-generated funds ("allowance for funds used during construction") used
in the construction of generation, and to a lesser extent transmission and
distribution facilities. This accounting policy, which increases net margins by
the amounts of these actual and imputed interest charges, is based on the
premise that the cost of financing construction is an expenditure serving to
increase the productive capacity and value of the utility's assets and thus
should be included in the cost of the assets constructed and recovered over the
life of the asset. In the case of power supply systems, REA has included in its
direct loans and guarantees of loans amounts sufficient to meet the estimated
interest charges during construction. If the foregoing accounting policy were
not followed, utilities would presumably request regulatory permission, if
applicable, to increase their rates to cover such costs. The amounts of interest
charged to construction and allowance for funds used during construction
capitalized by distribution systems are relatively insignificant. Because power
supply systems generally expend substantial amounts on long-term construction
projects, the application of this accounting policy may result in substantially
lower interest expense and in substantially higher net margins for such systems
during construction than would be the case if such a policy were not followed.
On the following pages are tables providing composite statements of
revenues, expenses and patronage capital of the distribution systems which were
members of CFC and the power supply systems which were members of CFC during the
five years ended December 31, 1993, and their respective composite balance
sheets as at the end of each such year. This information has been derived from
the REA 1993 Statistical Report, Rural Electric Borrowers (Information
Publication 201-1).
- ---------------
NOTE: Statistical information in REA Reports has not been examined by CFC's
independent public accountants, and the number and geographical dispersion of
the systems have made impractical an independent investigation by CFC of the
statistical information available from REA. The REA Reports are based upon
financial statements submitted to REA, subject to year-end audit adjustments, by
reporting REA borrowers and do not, with minor exceptions, take into account
current data for certain systems, primarily those which are not active REA
borrowers. As of December 31, 1993, 163 REA borrowers had repaid their REA loans
in full and were accordingly not subject to REA reporting requirements.
15
<PAGE> 17
COMPOSITE SUMMARY FINANCIAL INFORMATION AS REPORTED BY
CFC MEMBER DISTRIBUTION SYSTEMS
THE FOLLOWING ARE UNAUDITED FIGURES WHICH ARE BASED UPON FINANCIAL STATEMENTS
SUBMITTED TO REA OR TO CFC BY CFC MEMBER DISTRIBUTION SYSTEMS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenue and patronage
capital................................ $15,072,400 $13,921,515 $13,446,544 $12,819,204 $12,303,951
----------- ----------- ----------- ----------- -----------
Operating deductions..................... 13,566,716 12,628,989 12,194,103 11,570,307 11,185,808
----------- ----------- ----------- ----------- -----------
Utility operating margins................ 1,505,684 1,292,526 1,252,441 1,248,897 1,118,143
Non-operating margins and capital
credits(1)............................. 384,862 377,550 377,701 365,378 337,577
Interest on long-term debt and other
deductions(2).......................... (766,722) (777,435) (782,023) (764,072) (712,134)
----------- ----------- ----------- ----------- -----------
Net margins and patronage capital........ $ 1,123,824 $ 892,641 $ 848,119 $ 850,203 $ 743,586
============ ============ ============ ============ ============
TIER(3).................................. 2.64 2.19 2.11 2.15 2.07
DSC(4)................................... 2.44 2.07 2.13 2.16 2.09
MDSC(5).................................. 2.21 1.99 2.06 2.05 2.03
Number of systems included............... 825 821 819 820 822
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets and other debits:
Net utility plant.................... $21,877,902 $20,721,332 $19,649,754 $18,662,477 $17,525,582
Other assets......................... 7,410,799 6,980,758 6,695,615 6,440,000 5,997,422
----------- ----------- ----------- ----------- -----------
Total assets and other debits... $29,288,701 $27,702,090 $26,345,369 $25,102,477 $23,523,004
============ ============ ============ ============ ============
Liabilities and other credits:
Total net worth...................... $11,959,962 $10,925,009 $10,059,342 $ 9,367,448 $ 8,549,697
Other liabilities and credits........ 17,328,739 16,777,081 16,286,027 15,735,029 14,973,307
----------- ----------- ----------- ----------- -----------
Total liabilities and other
credits....................... $29,288,701 $27,702,090 $26,345,369 $25,102,477 $23,523,004
============ ============ ============ ============ ============
Number of systems included............... 825 821 819 820 822
</TABLE>
- ---------------
(1) Represents net margins of power supply systems and other associated
organizations allocated to their member distribution systems and added in
determining net margins and patronage capital of distribution systems under
REA accounting practices. Cash distributions of this credit have rarely been
made by the power supply systems and such other organizations to their
members.
(2) Interest on long-term debt is net of interest charged to construction, which
is stated separately as a credit in REA Reports. For a description of the
reasons for, and the effect on net margins and patronage capital of, the
accounting policies governing interest charged to construction and allowance
for funds used during construction. See "--Financial Information". CFC
believes that amounts incurred by distribution systems for interest charged
to construction and allowance for funds used during construction are
immaterial relative to their total interest on long-term debt and net
margins and patronage capital.
(3) Determined by adding interest on long-term debt (in each year including all
interest charged to construction) and net margins and patronage capital and
dividing the total by interest on long-term debt (in each year including all
interest charged to construction). This is the basis for computing TIER used
by CFC for purposes of determining loan eligibility.
(4) The ratio of (x) net margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations.
(5) The new DSC (also called the "Modified DSC" or "MDSC") calculation is the
ratio of (x) operating margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization expense plus non-operating margins-interest
plus cash received in respect of generation and transmission and other
capital credits to (y) long-term debt service obligations.
16
<PAGE> 18
COMPOSITE SUMMARY FINANCIAL INFORMATION AS REPORTED BY
CFC MEMBER POWER SUPPLY SYSTEMS
THE FOLLOWING ARE UNAUDITED FIGURES WHICH ARE BASED UPON FINANCIAL STATEMENTS
SUBMITTED TO REA OR TO CFC BY CFC MEMBER POWER SUPPLY SYSTEMS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenue and patronage
capital................................ $ 9,976,560 $ 9,111,434 $ 8,615,165 $ 8,553,618 $ 8,589,575
----------- ----------- ----------- ----------- -----------
Operating deductions..................... 8,191,101 7,375,988 6,986,912 6,824,168 6,796,491
----------- ----------- ----------- ----------- -----------
Utility operating margins................ 1,785,458 1,735,446 1,628,253 1,729,450 1,793,084
Non-operating margins and
capital credits(1)..................... 376,796 311,581 357,824 340,801 324,326
Interest on long-term debt and
other deductions(2).................... (2,199,696) (2,213,283) (2,041,969) (2,172,079) (2,170,511)
----------- ----------- ----------- ----------- -----------
Net margins and patronage capital........ $ (37,442) $ (166,256) $ (55,892) $ (101,828) $ (53,101)
============ ============ ============ ============ ============
TIER(3).................................. .98 .92 .97 .95 .97
DSC(4)................................... 1.03 1.05 1.06 1.05 1.08
Number of systems included(5)............ 50 50 49 50 51
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets and other debits:
Net utility plant.................... $23,774,280 $23,715,910 $22,558,712 $23,084,888 $24,391,780
Other assets......................... 11,256,222 8,539,061 7,929,750 8,432,676 8,485,903
----------- ----------- ----------- ----------- -----------
Total assets and other debits... $35,030,502 $32,254,971 $30,488,462 $31,517,564 $32,877,683
============ ============ ============ ============ ============
Liabilities and other credits:
Total net worth...................... $ 432,095 $ 316,039 $ 593,749 $ 545,122 $ 690,729
Other liabilities and credits........ 34,598,407 31,938,932 29,894,713 30,972,442 32,186,954
----------- ----------- ----------- ----------- -----------
Total liabilities and other
credits....................... $35,030,502 $32,254,971 $30,488,462 $31,517,564 $32,877,683
============ ============ ============ ============ ============
Number of systems included(5)............ 50 49 50 51
</TABLE>
- ---------------
(1) Certain power supply systems purchase wholesale power from other power
supply systems of which they are members. Power supply capital credits
represent net margins of power supply systems allocated to member power
supply systems on the books of the selling power supply systems. This item
has been added in determining net margins and patronage capital of the
purchasing power supply systems under REA accounting practices. Cash
distributions of this credit have rarely been made by the selling power
supply systems to their members. Includes also net margins of associated
organizations allocated to CFC power supply members and added in determining
net margins and patronage capital of the CFC member systems under REA
accounting practices.
(2) Interest on long-term debt is net of interest charged to construction.
Allowance for funds used during construction has been included in
non-operating margins. For a description of the reasons for, and the effect
on net margins and patronage capital of, the accounting policies governing
interest charged to construction and allowance for funds used during
construction. See "--Financial Information". According to unpub-
17
<PAGE> 19
lished information furnished by REA, interest charged to construction and
allowance for funds used during construction for CFC power supply members in
the years 1989-1993 were as follows:
<TABLE>
<CAPTION>
ALLOWANCE FOR
INTEREST CHARGED FUNDS USED
TO CONSTRUCTION DURING CONSTRUCTION TOTAL
---------------- ------------------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
1993 $ 49,237 $ 8,621 $ 57,858
1992 $ 54,093 $ 4,396 $ 58,489
1991 $ 49,495 $ 5,241 $ 54,736
1990 $ 55,670 $ 6,615 $ 62,285
1989 $100,380 $ 6,761 $107,141
</TABLE>
(3) Determined by adding interest on long-term debt (in each year including all
interest charged to construction) and net margins and patronage capital and
dividing the total by interest on long-term debt (in each year including all
interest charged to construction). This is the basis for computing TIER used
by CFC for purposes of determining loan eligibility. The TIER calculation
includes the operating results of six systems which currently fail to make
debt service payments or are operating under a debt restructure agreement,
without which the composite TIER would have been 1.20, 1.15, 1.15, 1.08 and
1.10 for the years ended December 31, 1993, 1992, 1991, 1990 and 1989,
respectively.
(4) The ratio of (x) net margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations. The
DSC calculation includes the operating results of six systems which
currently fail to make debt service payments or are operating under a debt
restructure agreement. Without these systems, the composite DSC would have
been 1.21, 1.22, 1.26, 1.21 and 1.21 for the years ended December 31, 1993,
1992, 1991, 1990 and 1989, respectively.
(5) Thirteen CFC power supply system members are not required to report to REA
since they are not currently borrowers from REA. These systems are either in
developmental stages or act as coordinating agents for their members. Their
inclusion would not have a material effect on these data. In addition, REA
has determined not to include data for Wabash Valley Power Association
("WVPA") and Colorado-Ute in their composite statements due to WVPA's
ongoing bankruptcy and the liquidation of Colorado-Ute. WVPA is discussed
further in the combined financial statements incorporated by reference in
this Prospectus.
DESCRIPTION OF BONDS
The Bonds are to be issued under an indenture dated as of February 15, 1994
(said Indenture, as supplemented from time to time, being herein called the
"Indenture"), between CFC and First Bank National Association, as Trustee (the
"Trustee"), which Indenture is an exhibit to the Registration Statement of which
this Prospectus is a part. The following summaries of certain provisions of the
Indenture do not purport to be complete, and, where particular provisions of the
Indenture are referred to, such provisions, including definitions of certain
terms, are incorporated by reference as a part of such summaries, which are
qualified in their entirety by such reference. Section references in this
Description of Bonds are to Sections of the Indenture.
CFC may maintain banking relationships in the ordinary course of business
with First Bank National Association, including the making of investments
through, and borrowings from, said bank.
The Indenture provides that additional debt securities may be issued
thereunder without limitation as to aggregate principal amount except as
described below under "Security," as authorized from time to time by CFC's Board
of Directors. (Sections 2.01, 2.02 and 2.03) Bonds issued at any time under the
Indenture are referred to herein collectively as "Collateral Trust Bonds." The
terms of Bonds of any series will be set forth in or pursuant to a Board
resolution or supplemental indenture adopted or entered into prior to the time
of the issuance thereof. (Section 2.03 and 13.01) The Bonds will rank and be
secured equally and ratably with each other.
18
<PAGE> 20
GENERAL
Reference is made to the Prospectus Supplement for the following terms of
the Bonds with respect to which this Prospectus is delivered: (i) the title of
such Bonds; (ii) any limit upon the aggregate principal amount of such Bonds;
(iii) the persons to whom interest on such Bonds shall be payable, if other than
the persons in whose names such Bonds are registered; (iv) the date or dates on
which the principal of such Bonds is payable or the method by which such date or
dates shall be determined; (v) the rate or rates, if any, at which such Bonds
shall bear interest or any method by which such rate or rates shall be
determined; (vi) the date or dates from which such interest, if any, shall
accrue and the date or dates on which such interest, if any, shall be payable;
(vii) the place or places at which the principal of and premium, if any, and
interest, if any, on such Bonds shall be payable and registration of transfer or
exchanges of such Bonds may be effected, and the registrar for such Bonds;
(viii) the terms and conditions upon which such Bonds may be redeemed, including
any sinking fund or other mandatory redemption provisions; (ix) the
denominations in which such Bonds shall be issuable if other than denominations
of $1,000 and any integral multiple thereof; (x) the coin or currency in which
payment of the principal of and premium, if any, and interest, if any, on such
Bonds shall be payable (if other than the coin or currency in which such Bonds
are denominated), and, if the principal of or premium, if any, or interest, if
any, on such Bonds are to be payable, at the election of the Company or a holder
thereof, in a coin or currency other than that in which such Bonds are
denominated, the period or periods within which, and the terms and conditions
upon which, such election may be made, and if denominated or payable in any coin
or currency, including composite currencies, other then U.S. dollars, the method
by which such Bonds shall be valued; (xi) if the principal of or premium, if
any, or interest, if any, on such Bonds are to be payable in securities or other
property at the election of the Company or a holder thereof, the type and amount
of such securities or other property, or the method by which such amount shall
be determined, and the periods within which, and the terms and conditions upon
which, any such election may be made; (xii) if the amount payable in respect of
principal of or premium, if any, or interest, if any, on such Bonds may be
determined with reference to an index, the manner in which such amounts shall be
determined; (xiii) if other than the principal amount thereof, the portion of
the principal amount of such Bonds, or any tranche thereof, which shall be
payable upon declaration of the acceleration of the maturity thereof; (xiv) the
terms, if any, pursuant to which such Bonds may be converted into or exchanged
for shares of capital stock or other securities of the Company or any other
person; (xv) if such Bonds are to be issued in global form, the depositary with
respect to such global bond or bonds and any limitations on the rights of the
holder or holders of such bonds to transfer or exchange the same or to obtain
the registration of transfer thereof or to obtain certificates therefor in
definitive form in lieu of temporary form; (xvi) if such Bonds are to be
issuable as bearer securities, any and all matters incidental thereto; (xvii)
the right, if any, of the Company to limit or discharge the indenture as to such
Bonds; (xviii) whether and under what circumstances the Company will pay
additional amounts on such Bonds held by a Person who is not a U.S. person in
respect of any tax, assessment or governmental charge withheld or deducted and,
if so, whether and on what terms the Company will have the option to redeem such
Bonds rather than pay such additional amounts; and (xix) any other terms of such
Bonds not inconsistent with the Indenture. (Section 2.03)
SECURITY
The Bonds will be secured, equally with outstanding Collateral Trust Bonds,
by the pledge with the Trustee of Eligible Collateral having an Allowable Amount
of at least 100% of the principal amount of Collateral Trust Bonds outstanding.
The Indenture provides that Eligible Collateral shall consist of cash, Eligible
Mortgage Notes of Distribution System Members and Permitted Investments. The
"Allowable Amount" of cash is 100% thereof, the "Allowable Amount" of Eligible
Mortgage Notes is the amount advanced thereon and not repaid and the "Allowable
Amount" of Permitted Investments is their cost to CFC (exclusive of accrued
interest and brokerage commissions), except that the "Allowable Amount" of
Permitted Investments traded on a national securities exchange or in any
over-the-counter market is their fair market value as determined by CFC. For
purposes of the Indenture and as used in describing the Bonds herein, a "Member"
is any person which is a member or patron of CFC; and a "Distribution System
Member" is a Member 50% or more of whose gross operating revenues are derived
from sales of electricity to ultimate consumers. (Sections 1.01 and 3.01)
19
<PAGE> 21
As a condition to the authentication and delivery of Bonds (or, for certain
series of Bonds, prior only to the first issuance thereof and if such
certification has not been made as of a date 90 days prior to the authentication
and delivery of such Bonds) or to the withdrawal of Collateral, and in any event
at least once a year, CFC must certify to the Trustee that:
(1) the Allowable Amount of Eligible Collateral pledged under the
Indenture is at least equal to 100% of the aggregate principal amount of
Collateral Trust Bonds to be outstanding;
(2) each Eligible Mortgage Note included in the Eligible Collateral so
certified is an Eligible Mortgage Note of a Distribution System Member
having an Equity Ratio of at least 20% and an Average Coverage Ratio of at
least 1.35; and
(3) the aggregate Allowable Amount of all Eligible Mortgage Notes of
any one Distribution System Member so certified does not exceed 10% of the
aggregate Allowable Amount of all Eligible Collateral so certified.
(Sections 3.01, 6.01 and 7.13)
CFC is also entitled to the authentication and delivery of Collateral Trust
Bonds on the basis of the retirement of outstanding Collateral Trust Bonds at
their final maturity or by redemption at the option of CFC. (Sections 3.02 and
3.03)
The Indenture provides that Collateral Trust Bonds of one or more other
series may be issued thereunder without limitation as to aggregate principal
amount, subject to the restriction described under "Restriction on
Indebtedness", so long as the Allowable Amount of Eligible Collateral pledged
under the Indenture is at least equal to the aggregate principal amount of
Collateral Trust Bonds to be outstanding and meets the other requirements set
forth herein. (Sections 2.03 and 13.01) "Eligible Mortgage Note" means a note or
bond of a Distribution System Member which is secured by a Mortgage under which
no default exists with respect to the covenants required by the Indenture to be
contained in a Mortgage (as described below), unless consented to by the
mortgagees to the extent permitted in the Mortgage and the Indenture, and under
which no "event of default" as defined in the Mortgage shall have occurred and
shall have resulted in the exercise of remedies. (Section 1.01)
"Equity Ratio" is determined by dividing the sum of the Member's equities
and margins at the end of the particular year by the Member's total assets and
other debts at such date; and "Coverage Ratio" is determined by dividing the sum
of the Member's patronage capital and operating margins, non-operating
margins-interest, cash received in respect of power supply systems and other
capital credits, depreciation and amortization expense and interest expense with
respect to long-term debt by the Member's long-term debt service obligations in
respect of such year (but in the event any portion of such Member's long-term
debt is refinanced during such year the long-term debt service obligations
during such year in respect thereof will be based upon the larger of (x) an
annualization of such obligations with respect to the refinancing debt during
the portion of the year such refinancing debt is outstanding and (y) the
long-term debt service obligations during the following year on such refinancing
debt). These terms are determined in accordance with the system of accounting
used for REA reporting or if such Member is not required to maintain its
accounts in accordance with such system, then in accordance with generally
accepted accounting principles, except that the Indenture requires that interest
expense and long-term debt service obligations include 33 1/3% of the amount by
which (x) rental payments by such Member with regard to certain property having
an initial cost greater than $250,000 exceed (y) 2% of such Member's equities
and margins, each in respect of such year. For REA reporting purposes and for
purposes of CFC's calculation of borrowers' ratios, obligations under
take-or-pay power contracts, guaranties and other contingent obligations are not
considered debt of a Member. "Average Coverage Ratios" are computed by averaging
the best two of the three calendar years preceding the date of determination.
(Section 1.01) The effect of these provisions is to exclude from the computation
of the Coverage Ratio capital credits except to the extent received by the
Member in the form of cash.
The Indenture requires that each Mortgage securing an Eligible Mortgage
Note be a first mortgage on the property then owned or thereafter acquired by
the Member issuing the Note (or, in the case of certain public agency borrowers,
on such Member's revenues), subject to usual exceptions in mortgages of utility
companies, and that, if the Mortgage is a common mortgage with REA or any other
lender, the mortgagees be secured equally
20
<PAGE> 22
and ratably. (Section 1.01 and Schedule I) There are no requirements in the
Indenture as to the value of the property subject to the lien of a Mortgage.
The Indenture provides that, unless an Event of Default under the Indenture
exists, and other than certain limited duties specified in the Indenture, the
Trustee shall have no duties or responsibilities with regard to any Mortgage and
no responsibilities with regard to the value of any property subject thereto.
(Section 4.03)
"Permitted Investments" are defined to include certain obligations of or
guaranteed by the United States and of states and municipalities and agencies
thereof which are rated AA (or equivalent) or better by at least two nationally
recognized statistical rating agencies and which mature not more than two years
after purchase, certificates of deposit or time deposits of a bank or trust
company having at least $500,000,000 of capital and surplus and maturing not
more than two years after purchase and commercial paper of bank holding
companies or other corporate issuers (other than CFC) generally rated in the
highest category by at least two nationally recognized statistical rating
agencies and maturing not more than one year after purchase. (Section 5.03)
EXERCISE OF RIGHTS
Until the occurrence of an Event of Default under the Indenture, CFC
retains the right to control the exercise of rights and powers under Eligible
Mortgage Notes and Mortgages pledged under the Indenture. (Section 15.01)
Mortgages which also secure notes issued to REA provide that REA will have the
exclusive right for an initial 30-day period to initiate and control enforcement
proceedings on behalf of the holders of all the notes secured by the particular
Mortgage, including those held by the Trustee.
RESTRICTION ON INDEBTEDNESS
CFC may not incur any Superior Indebtedness or make any optional prepayment
on any Capital Term Certificate if, as a result, the principal amount of
Superior Indebtedness outstanding thereafter or on any future date, less the
principal amount of a Government or Government Insured Obligations held by CFC
on the determination date, would exceed 20 times the sum of the Members' equity
in CFC at the time of determination plus the principal amount of Capital Term
Certificates outstanding at the time of determination or at such given future
date, as the case may be. The principal amounts of Superior Indebtedness and
Capital Term Certificates to be outstanding on any future given date will be
computed after giving effect to maturities and sinking fund requirements.
(Section 7.11) "Superior Indebtedness" means all indebtedness of CFC (including
all guarantees by CFC of indebtedness of others) except Capital Term
Certificates. (Section 1.01). A "Capital Term Certificate" is defined for the
purposes of the Indenture as a note of CFC substantially in the form of the
capital term certificates of CFC outstanding on the date of the Indenture and
any other indebtedness having substantially similar provisions as to
subordination. (Section 1.01). "Government or Government Insured Obligations"
means obligations held by CFC which relate to the REA or successor programs and
which are obligations of the United States or any agency thereof or which are
guaranteed or insured by the United States government or any agency thereof.
(Section 7.11) As of August 31, 1994, CFC had $7,194,552,000 outstanding of
Superior Indebtedness and within the restrictions of the Indenture was permitted
to have outstanding an additional $22,370,086,000 of Superior Indebtedness.
Unless an Event of Default shall occur, CFC will be entitled to receive and
retain all payments on account of principal, premium and interest on the
Eligible Mortgage Notes and Permitted Investments on deposit with the Trustee.
(Section 4.02)
MODIFICATIONS
Modifications of the provisions of the Indenture may be made with the
consent of the holders of not less than a majority in aggregate principal amount
of the then outstanding Collateral Trust Bonds, but, without the consent of the
holder of each Collateral Trust Bond affected thereby, no such modification
shall (i) effect a reduction, or an extension of the stated time of payment, of
the principal of or interest on any Collateral Trust Bond or of any premium
payable on redemption, (ii) permit the creation of any prior or equal lien on
the securities or other property pledged under the Indenture (except as
expressly permitted) or deprive the holder of any Collateral Trust Bond (except
as expressly permitted) of the lien created by the Indenture or (iii) reduce the
21
<PAGE> 23
above-stated percentage of holders of Collateral Trust Bonds whose consent is
required to modify the Indenture or the percentage of holders of Collateral
Trust Bonds whose consent is required for any waiver under the Indenture.
(Section 13.02)
The Indenture provides that the Company and the Trustee may, without the
consent of any holders of Collateral Trust Bonds, enter into supplemental
indentures for the purposes, among other things, of adding to the Company's
covenants, establishing the form or terms of Bonds of any series, changing or
eliminating any restriction on the manner or place of payment of principal of or
interest on Bearer Bonds or, provided such action shall not adversely affect the
interests of the holders of any series of Bonds in any material respect, curing
ambiguities or inconsistencies in the Indenture or making other provisions with
respect to matters arising under the Indenture. (Section 13.01)
WAIVER OF CERTAIN COVENANTS
The Indenture provides that the Company may omit to comply with certain
restrictive covenants (including that described above under "Restriction on
Indebtedness") if the holders of not less than a majority in principal amount of
all series of Collateral Trust Bonds at the time outstanding affected thereby
(acting as one class) waive compliance with such restrictive covenants. (Section
7.16)
EVENTS OF DEFAULT
The Indenture provides that the following constitute "Events of Default"
thereunder: (i) default in the payment of interest on any Bonds continuing for
30 days; (ii) default in the payment of the principal of (or, premium, if any,
on) any Bonds at their maturity or upon redemption; (iii) default in the making
of any sinking fund payment on any Bonds which provide for mandatory sinking
fund payments; (iv) default in the performance of specified covenants in the
Indenture for 60 days after such default is known to any officer of CFC,
including the restriction on indebtedness and the covenant to maintain Eligible
Collateral outlined above; (v) failure to perform any other covenant in the
Indenture for 60 days after notice from the Trustee to the Company or from
holders of at least 25% in principal amount of Bonds outstanding to the Trustee
and (vi) specified events of bankruptcy, reorganization or insolvency. (Section
9.01)
CFC is required to file with the Trustee annually a written statement as to
CFC's compliance with the conditions and covenants under the Indenture. (Section
7.15) In case an Event of Default should occur and be continuing, the Trustee or
the holders of at least 25% in principal amount of the Bonds then outstanding
may declare the principal of the Bonds to be due and payable. Each declaration
may, under certain circumstances, be rescinded by the holders of a majority in
principal amount of the Bonds at the time outstanding. (Section 9.02)
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
shall be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Bonds, unless
such holders shall have offered to the Trustee reasonable security or indemnity.
Subject to such provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in principal amount of the Bonds at
the time outstanding shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. The Trustee is not
required to expend or risk its own funds or incur financial liability if it has
reasonable ground for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
(Sections 9.08, 10.01 and 10.03)
The Indenture provides that upon receipt by the Trustee of notice of an
Event of Default, declaring an acceleration or directing the time, method or
place of conducting a proceeding at law if an Event of Default has occurred and
is continuing, the Trustee shall, with respect to any series of Bonds
represented by a global bond or bonds, and may, with respect to any other series
of Bonds, establish a record dated for the purpose of determining holders of
outstanding Bonds of such series entitled to join in such notice. (Section 9.01)
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SATISFACTION AND DISCHARGE; DEFEASANCE
At the request of the Company, the Indenture will cease to be in effect as
to the Company (except for certain obligations to register the transfer or
exchange of Bonds and hold moneys for payment in trust) with respect to the
Bonds when (i) the principal of and interest on Bonds and coupons, if any, have
been paid and/or the Company has deposited with the Trustee, in trust, money and
U.S. Government Obligations (as defined in the Indenture), which through the
payment of interest thereon and principal thereof in accordance with their terms
will provide money in an amount sufficient to pay all the principal of, and
interest on, the Bonds in accordance with the terms of the Bonds, or (ii) such
Bonds or coupons are deemed paid and discharged in the manner described in the
next paragraph. (Section 14.01)
Unless the Prospectus Supplement relating to the Offered Bonds provides
otherwise, the Company at its option (a) will be Discharged (as such term is
defined in the Indenture) from any and all obligations in respect of the Offered
Bonds (except for certain obligations to register the transfer or exchange of
Bonds, replace stolen, lost or mutilated Bonds and coupons, maintain paying
agencies and hold moneys for payment in trust) or (b) need not comply with
certain restrictive covenants of the Indenture (including those described above
under "Restriction on Indebtedness"), in each case after the Company deposits
with the Trustee, in trust, money, and, in the case of Bonds and coupons
denominated in a foreign currency, Foreign Government Securities, as defined in
the Indenture, which through the payment of interest thereon and principal
thereof in accordance with their terms will provide money in an amount
sufficient to pay in the currency, currencies or currency unit or units in which
the Offered Bonds are payable all the principal of, and interest on, the Offered
Bonds on the dates such payments are due in accordance with the terms of the
Offered Bonds. Among the conditions to the Company's exercising any such option,
the Company is required to deliver to the Trustee an opinion of counsel to the
effect that the deposit and related defeasance would not cause the holders of
the Offered Bonds to recognize income, gain or loss for United States federal
income tax purposes and that the holders will be subject to United States
federal income tax in the same amounts, in the same manner and at the same times
as would have been the case if such deposit and related defeasance has not
occurred. (Section 14.02)
At the request of the Company, the Trustee will deliver or pay to the
Company any U.S. Government Obligations, Foreign Government Securities or money
deposited, for the purposes described in the preceding two paragraphs, with the
Trustee by the Company and which, in the opinion of a nationally-recognized firm
of independent public accountants, are in excess of the amount thereof which
would then have been required to be deposited for such purposes. In addition,
the Trustee, in exchange for, simultaneously, other U.S. Government Obligations,
Foreign Government Securities or money, will deliver or pay to the Company, at
the Company's request, U.S Government Obligations, Foreign Government Securities
or money deposited with the Trustee for the purposes described in the preceding
two paragraphs, provided that, in the opinion of a nationally-recognized firm of
independent public accountants, immediately after such exchange the obligations,
securities or money then held by the Trustee will be in such amount as would
then have been required to be deposited with the Trustee for such purposes.
(Section 14.02)
LIMITATIONS ON ISSUANCE OF BEARER BONDS
Under U.S. federal tax laws, certain limitations on offers, sales and
delivery apply to Bearer Bonds. These limitations, as well as additional
information regarding the U.S. federal income tax consequences in respect of a
Bearer Bond, will be set forth in any Prospectus Supplement providing for the
issuance of Bearer Bonds.
UNITED STATES TAXATION
The following is a summary of the principal U.S. federal income tax
consequences of the acquisition, ownership and disposition of Registered Bonds.
The summary reflects present law, which is subject to prospective and
retroactive changes. It is not intended as tax advice, and it does not describe
all of the tax considerations that may be relevant to a prospective purchaser.
The summary addresses only original purchasers of the Bonds that hold the Bonds
as capital assets. It does not address U.S. federal income tax issues relevant
to purchasers subject to special rules, such as banks, securities dealers, life
insurance companies, controlled foreign corporations, persons
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holding Bonds in connection with a hedge or persons having a functional currency
other than the U.S. dollar. The summary does not consider the tax consequences
of Bonds with terms other than those described in this Prospectus. PROSPECTIVE
PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISERS ABOUT THE TAX CONSEQUENCES OF
AN INVESTMENT IN THE BONDS UNDER THE LAWS OF THE UNITED STATES AND OTHER
JURISDICTIONS WHERE PURCHASERS ARE SUBJECT TO TAXATION.
For the purposes of this discussion, "U.S. Holder" means (i) a beneficial
owner of the Bonds that is a citizen or resident of the United States, a
corporation or partnership organized in or under the laws of the United States,
or an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source or (ii) any other beneficial owner as to which
income from the Bonds is effectively connected with the conduct of a trade or
business within the United States. The term "Non-U.S. Holder" refers to any
beneficial owner of the Bonds other than a U.S. Holder.
U.S. HOLDERS
PAYMENTS OF INTEREST
Interest on a Bond generally will be taxable to a U.S. Holder as ordinary
interest income at the time of receipt or accrual in accordance with the U.S.
Holder's method of accounting for U.S. federal income tax purposes. Special
rules for the interest on Bonds with original issue discount are described
below.
ORIGINAL ISSUE DISCOUNT
The following discussion of original issue discount relies in significant
part on the interpretations found in final U.S. Treasury regulations issued in
1994 (the "Final Regulations") and in certain proposed U.S. Treasury regulations
issued in 1986 and modified in 1991 dealing with debt instruments that have
contingent payments (the "Proposed Regulations"). The Proposed Regulations
currently are under review, and their application to the Bonds is subject to
change. The Proposed Regulations are not binding authority, and different
proposed, temporary or final Treasury regulations may apply to the Bonds
retroactively.
General. A U.S. Holder of a Bond issued at a discount with a maturity of
more than one year after the date of issue must include original issue discount
in income over the term of the Bond. The U.S. Holder generally must include in
gross income for the taxable year the sum of the daily portions of original
issue discount that accrue on the Bond for each day during the year on which
such holder held the Bond. Accordingly, a U.S. Holder will be required to
include amounts attributable to original issue discount in income before
receiving cash attributable to that income.
A Bond has original issue discount for U.S. federal income tax purposes to
the extent that the Bond's stated redemption price at maturity exceeds its issue
price. The issue price of a Bond is the initial offering price at which a
substantial amount of the Bonds is sold to the public (excluding bond houses,
brokers or similar persons). The stated redemption price of a Bond is the total
of all payments due on the Bond other than payments of "qualified stated
interest." A Bond is not treated as issued at a discount, however, if the
discount is less than 1/4 of 1 percent of the Bond's stated redemption price at
maturity multiplied by the number of complete years to maturity ("de minimis
original issue discount"). A Bond that bears interest for any accrual period at
a rate below the rate for the remaining term of the Bond (e.g., a Bond with a
"teaser rate") also will not be treated as issued at a discount solely on
account of that feature if the greater of (a) the foregone interest and (b) the
excess, if any, of the Bond's stated principal amount over its issue price, is
less than 1/4 of 1 percent of the Bond's adjusted stated redemption price
multiplied by the number of complete years to maturity.
Qualified stated interest is interest that is payable unconditionally in
cash or in property (other than debt of the issuer) at least annually at either
(a) a single fixed rate that appropriately takes into account the length of the
interval between payments or (b) the current values of (i) a single "qualified
floating rate" or (ii) a single "objective rate" (each a "Single Variable
Rate"). A qualified floating rate is any floating rate the variations in which
reasonably can be expected to measure contemporaneous variations in the cost of
newly-borrowed funds in the currency in which the Bond is denominated (e.g.,
LIBOR). For this purpose, a rate equal to (a) the product
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of a qualified floating rate and a fixed multiple that is greater than zero but
not more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than zero but not more than 1.35, increased or
decreased by a fixed rate is treated as a single qualified floating rate. The
Final Regulations further provide that (a) interest that is stated at a fixed
rate for an initial period of less than one year followed by a qualified
floating rate for a subsequent period, and the value of the qualified floating
rate on the issue date is intended to approximate the fixed rate, the fixed rate
and the qualified floating rate together constitute a single qualified floating
rate and (b) two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the Bond
will constitute a single qualified floating rate. The qualified floating rate
will be conclusively presumed for this purpose to approximate the fixed rate or
the predecessor floating rate if the value of the qualified floating rate on the
issue date does not differ from the value of the fixed rate or predecessor
floating rate by more than .25 of 1 percent (25 basis points). In addition, if a
floating rate has minimum or maximum restrictions or similar restrictions, the
Internal Revenue Service could assert that the floating rate does not constitute
a qualified floating rate. However, the Final Regulations provide that a
floating rate will not fail to be treated as a qualified floating rate if it is
subject to the following restrictions: (a) a cap, floor or periodic adjustment
restriction (a "governor") that is fixed throughout the term of the Bond, (b) a
cap or similar restriction that is not reasonably expected as of the issue date
to cause the yield on the Bond to be significantly less than the expected yield
determined without the cap, (c) a floor or similar restriction that is not
reasonably expected as of the issue date to cause the yield on the Bond to be
significantly more than the expected yield determined without the floor, or (d)
a governor or similar restriction that is not reasonably expected as of the
issue date to cause the yield on the Bond to be significantly more or less than
the expected yield determined without the governor. Floating rate interest
payments subject to caps, floors, or governors that do not meet the above
requirements could be treated as contingent payments. Under the Proposed
Regulations, contingent interest payments generally would be includible in
income on the date when the contingent interest amount becomes fixed. Because
the Proposed Regulations are being reviewed by the U.S. Treasury, U.S. Holders
are urged to consult their tax advisers regarding the tax treatment of
contingent payments. An objective rate is a rate, other than a qualified
floating rate, determined by a single formula that is fixed throughout the term
of the Bond and is based on (i) one or more qualified floating rates (e.g., a
multiple of a qualified floating rate or the inverse of a qualified floating
rate), (ii) one or more rates where each rate would be a qualified floating rate
for a Bond denominated in a currency other than the currency in which the Bond
is denominated, (iii) the yield or the changes in the price of one or more items
of personal property (other than stock or debt of the Company or a related
party), provided each item of property is actively traded, (iv) a combination of
rates described in (i), (ii) or (iii) described above or (v) other rates
designated from time to time by the Internal Revenue Service. The Final
Regulations provide that each rate described in (i) through (iv) above will not
be considered an objective rate, however, if it is reasonably expected that the
average value of the rate during the first half of the Bond's term will be
either significantly less than or greater than the average value of the rate
during the final half of the Bond's term. In addition, the Final Regulations
provide that interest that is stated at a fixed rate for an initial period of
less than one year followed by an objective rate for a subsequent period, and
the value of the objective rate on the issue date is intended to approximate the
fixed rate, the fixed rate and the objective rate together constitute a single
objective rate with a conclusively favorable presumption if the value of the
objective rate on the issue date does not differ from the value of the fixed
rate by more than .25 of 1 percent (25 basis points).
To determine the daily portions of original issue discount, original issue
discount accruing during an accrual period is divided by the number of days in
the period. Except as described below under "Variable Rate Bonds", the amount of
original discount accruing during an accrual period is determined by using a
constant yield to maturity method, and the accrued amount for any period is the
excess of (i) the product of the Bond's adjusted issue price at the beginning of
the accrual period and its yield to maturity (determined on the basis of
compounding at the close of each accrual period and appropriately adjusted for
the length of the accrual period) over (ii) the amount of any qualified stated
interest payments allocable to the accrual period. The adjusted issue price of a
Bond at the beginning of any accrual period generally equals the issue price of
the Bond increased by the aggregate amount of original issue discount that
accrued on that Bond in all prior accrual periods and reduced by the amount of
payments in prior accrual periods other than payments of qualified stated
interest.
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A U.S. Holder of a Bond issued at a discount that purchases the Bond for
more than the Bond's adjusted issue price but less than the Bond's stated
redemption price at maturity may reduce the daily portions of original issue
discount includible in gross income by daily portions of the acquisition premium
paid for the Bond.
Variable Rate Bonds. Special rules apply to the U.S. Holder of a Bond that
bears interest at a "variable rate" (a "Variable Rate Bond"). A "variable rate"
of interest is interest that is payable unconditionally in cash or in property
(other than debt of the Company) at least annually at (a) a Single Variable
Rate, (b) more than one qualified floating rate, (c) a single fixed rate and one
or more qualified floating rates or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." Under the Final
Regulations, a qualified inverse floating rate is an objective rate that (a) is
equal to a fixed rate minus a qualified floating rate and (b) the variations of
which can reasonably be expected to inversely reflect contemporaneous variations
in the cost of newly borrowed funds.
In general, to compute the accrual of original issue discount on a Variable
Rate Bond, the Final Regulations convert a Variable Rate Bond into a fixed rate
debt instrument and then apply the general original issue discount rules
discussed above to that deemed fixed rate debt instrument. If a Variable Rate
Bond provides for stated interest at a Single Variable Rate, (a) all stated
interest with respect to the Variable Rate Bond is qualified stated interest and
(b) the amount of original issue discount, if any, is determined under the
original issue discount rules applicable to fixed rate debt instruments
discussed above by assuming that the Single Variable Rate is a fixed rate equal
to (i) in the case of a qualified floating rate or qualified inverse floating
rate, the value, as of the issue date of the Variable Rate Bonds, of the
qualified floating rate or qualified inverse floating rate or (ii) in the case
of an objective rate (other than a qualified inverse floating rate), a fixed
rate that reflects the yield that is reasonably expected for the Variable Rate
Bond.
If a Variable Rate Bond provides for stated interest other than at a Single
Variable Rate, special rules apply to determine the amounts of interest and
original issue discount accruals. The fixed rate substitute (a) for each
qualified floating rate provided for in the Variable Rate Bond is the value of
each rate as of the issue date of the Variable Rate Bonds (with appropriate
adjustment for any differences in intervals between interest adjustment dates),
(b) for a qualified inverse floating rate is the value of the qualified inverse
floating rate as of the issue date of the Variable Rate Bonds and (c) for an
objective rate (other than a qualified inverse floating rate) is a fixed rate
that reflects the yield that is reasonably expected for the Variable Rate Bond.
The equivalent fixed rate debt instrument has terms that are identical to those
provided under the Variable Rate Bond, except that the equivalent fixed rate
debt instrument provides for the fixed rate substitutes in lieu of the qualified
floating rates or objective rate provided under the Variable Rate Bond. The
amounts of qualified stated interest and original issue discount, if any, are
determined for the equivalent fixed rate debt instrument under the rules
applicable to fixed rate debt instruments as described above and are taken into
account as if the U.S. Holder held the equivalent fixed rate debt instrument.
Qualified stated interest or original issue discount allocable to an accrual
period is increased (or decreased) if the interest actually accrued or paid
during an accrual period exceeds (or is less than) the interest assumed to be
accrued or paid during the accrual period under the equivalent fixed rate debt
instrument. This increase or decrease is an adjustment to qualified stated
interest for the accrual period if the equivalent fixed rate debt instrument
provides for qualified stated interest and the increase or decrease is reflected
in the amount actually paid during the accrual period. Otherwise, this increase
or decrease is an adjustment to original issue discount for the accrual period.
Optional Redemption. For purposes of determining the yield and maturity of
a Bond, the Company will be presumed to exercise any right to redeem a Bond
before its stated maturity or to extend the maturity of a Bond if exercise would
reduce the yield on the Bond. Likewise, the U.S. Holder will be presumed to
exercise any right to require the redemption of a Bond or to extend the maturity
of the Bond if exercise would increase the yield on the Bond. If both the
Company and the U.S. Holder have such options, the rules of this paragraph are
applied to the options in the order that they may be exercised. Accordingly, the
deemed exercise of one option may eliminate other options that are later in
time. If the Bond is not actually redeemed on the date when the option was
presumed to have been exercised, the Bond will be treated only for purposes of
determining the accrual of original issue discount as having been reissued at a
price equal to that Bond's adjusted issue price on that date.
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Anti-Abuse Rule. Under proposed and temporary Treasury regulations, if a
principal purpose in structuring a Bond or applying the Treasury regulations
described above is to achieve a result that is unreasonable in light of the
purposes of the applicable statutes (which generally are intended to achieve the
clear reflection of income for both borrowers and lenders), then the Internal
Revenue Service can apply or depart from the Final Regulations as necessary or
appropriate to achieve a reasonable result.
Short-Term Bonds. U.S. Holders that do not use the accrual method of
accounting for tax purposes generally will not be required to recognize original
issue discount on Bonds maturing within one year of original issuance until they
receive payments on the Bonds. U.S. Holders on the accrual method, regulated
investment companies, common trust funds, and certain others, however, must
accrue original issue discount on such short-term Bonds on a straight-line basis
unless they elect to accrue the discount on a constant yield basis with daily
compounding. The original issue discount on a short-term Bond is the amount by
which the total principal and interest payments on the Bond exceed its issue
price. U.S. Holders may elect to include discount on such short-term Bonds into
income based on acquisition discount rather than original issue discount.
Acquisition discount is the excess of a Bond's stated redemption price at
maturity over the U.S. Holder's basis in the Bond.
Gain recognized on the sale or exchange of a short-term Bond by a U.S.
Holder that has not accrued discount on the Bond will be ordinary income to the
extent attributable to accrued interest and original issue discount. Such a
holder also must defer deductions for net interest expense on any borrowing
attributable to the short-term Bond to the extent that the expense does not
exceed accrued but unrecognized interest and original issue discount (or
acquisition discount) on the Bond.
MARKET DISCOUNT
A U.S. Holder that purchases a Bond at a market discount generally will be
required to treat payments other than qualified stated interest payments as
ordinary income to the extent of the accrued market discount and to treat gain
on the sale of the Bond as ordinary income to the extent of the accrued market
discount not previously included in income. See "Sale or Exchange of Bonds"
below. Market discount is the amount by which the stated redemption price at
maturity (or, in the case of a Bond with original issue discount, the revised
issue price) exceeds the purchaser's basis in the Bond immediately after
acquisition. A Bond is not treated as purchased at a market discount, however,
if the discount is less than 1/4 of 1 percent of the stated redemption price at
maturity (or the revised issue price) multiplied by the number of complete years
remaining to maturity ("de minimis market discount"). (The revised issue price
of a Bond is its initial issue price increased by the amount of original issue
discount includible in the gross income of previous holders.) Market discount on
a Bond will accrue, at the election of the holder, either ratably or at a
constant yield to maturity. The U.S. Holder may elect to take market discount
into income as it accrues. Under certain circumstances, the U.S. Holder may be
required to defer deductions for interest expense attributable to debt incurred
or continued to purchase a Bond with market discount.
PREMIUM
A U.S. Holder that purchases a Bond for more than its stated redemption
price at maturity may elect to amortize the bond premium. If a U.S. Holder makes
such an election, the amount of interest on the Bond otherwise to be included in
the U.S. Holder's income will be reduced each year by the amount of amortizable
bond premium allocable to such year on a constant yield to maturity basis
(except to the extent regulations may provide otherwise). Amortized bond premium
will reduce the U.S. Holder's basis in the Bond. An election to amortize bond
premium will apply to certain other debt instruments that the U.S. Holder
acquired at a premium, and the election may have different tax consequences
depending on when the debt instruments were issued or acquired. It also is not
entirely clear how amortizable bond premium would be computed for obligations
with contingent interest payments. A U.S. Holder should consult its tax adviser
before making an election to amortize bond premium.
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INTEREST ELECTION
Under the Final Regulations, U.S. Holders on the accrual method or the cash
method of accounting generally may elect to include all accrued interest on a
Bond in gross income using the constant yield to maturity method. The election
applies to stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount and
unstated interest, as adjusted by any amortizable bond premium or acquisition
premium. A U.S. Holder should consult its tax adviser before making this
election.
SALE OR EXCHANGE OF BONDS
Except to the extent that gain or loss is attributable to accrued but
unpaid interest or accrued market discount, a U.S. Holder generally will
recognize capital gain or loss upon a sale, exchange or complete retirement of a
Bond equal to the difference between the amount realized and the U.S. Holder's
adjusted basis in the Bond. The gain or loss will be long-term if the Bond has
been held for more than one year. The adjusted basis of a Bond generally will
equal its initial cost increased by any original issue discount, market discount
or acquisition discount with respect to the Bond previously included in the U.S.
Holder's gross income and reduced by the payments previously received on the
Bond, other than payments of qualified stated interest, and by any amortized
premium.
The tax consequences of the partial redemption of a Bond will depend upon
the price at which the U.S. Holder purchased the Bond. A U.S. Holder that
purchased a Bond at a de minimis market discount or purchased a Bond for more
than its revised issue price, but less than its principal amount, will recognize
capital gain equal to the difference between the principal prepayment and the
U.S. Holder's adjusted basis in the prepaid portion of the Bond. If a U.S.
Holder purchased a Bond at a market discount, (i) the principal prepayment will
be included in ordinary income to the extent of the accrued market discount
allocable to the prepaid portion of the Bond (and it is possible that amounts
allocable to unaccrued market discount allocable to the prepaid portion of the
Bond will be recognized as capital gain) and (ii) any principal prepayment
exceeding the revised issue price allocable to the prepaid portion of the Bond
will be capital gain. If a U.S. Holder purchased a Bond for more than its stated
principal amount and has not elected to amortize bond premium, the U.S. Holder
will recognize a capital loss equal to any amount by which the U.S. Holder's
adjusted basis in the prepaid portion of the Bond exceeds the amount of the
principal prepayment. If the U.S. Holder has elected to amortize bond premium,
all or part of such excess might be deductible as amortizable bond premium
rather than as capital loss. Any capital gain or loss will be long-term if the
Bond has been held for more than one year.
FOREIGN CURRENCY BONDS
The tax treatment of Bonds the interest or principal on which may be
determined by reference to one or more foreign currencies will depend on the
application of special rules to the particular terms of the Bonds. The tax
considerations relevant to such Bonds will be described in an applicable
Prospectus Supplement, and each prospective purchaser should consult its tax
adviser about such matters.
NON-U.S. HOLDERS
Interest received by a Non-U.S. Holder is exempt from U.S. federal income
tax unless the holder actually or constructively owns at least 10% of the total
combined voting power of the Company's stock or the holder is for U.S. federal
income tax purposes a controlled foreign corporation related to the Company
through stock ownership. To qualify for that exemption, a Non-U.S. Holder must
provide a statement signed under penalties of perjury certifying that the holder
is not a U.S. person for U.S. tax purposes and providing the holder's name and
address. Gain from the sale or other disposition of a Bond by a Non-U.S. Holder
is not subject to U.S. federal income tax unless the Non-U.S. Holder is an
individual who is present in the United States for at least 183 days during the
taxable year of the disposition and certain other conditions are met.
Bonds held by a Non-U.S. Holder will not be subject to the U.S. federal
estate tax unless the holder actually or constructively owns at least 10% of the
total combined voting power of the Company's stock.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
A 31% backup withholding of federal income tax and certain information
reporting requirements may apply to certain payments made on the Bonds and to
the proceeds from the disposition of a Bond if the holder is not a corporation,
a financial institution or otherwise entitled to an exemption. U.S. Holders that
provide a correct taxpayer identification number and Non-U.S. Holders that
provide the statement described above to establish an exemption from withholding
tax generally are exempt from backup withholding. Amounts withheld under the
backup withholding rules can be claimed as a refund or taken as a credit against
the holder's U.S. federal income tax liability on a properly filed annual income
tax return.
PLAN OF DISTRIBUTION
Bonds of any series may be purchased to be reoffered to the public through
underwriting syndicates led by Lehman Brothers Inc. or other underwriters (the
"Underwriters"). The Underwriters with respect to an underwritten offering of
Bonds are named in the Prospectus Supplement relating to such offering. Unless
otherwise set forth in the Prospectus Supplement, the obligations of the
Underwriters to purchase Bonds will be subject to certain conditions precedent
and each of the Underwriters with respect to a sale of Bonds will be obligated
to purchase all of its Bonds if any are purchased. The initial public offering
price and any discounts or concessions allowed or reallowed or paid to dealers
set forth in the Prospectus Supplement may be changed from time to time.
The place and time of delivery for the Offered Bonds in respect of which
this Prospectus is delivered are set forth in the Prospectus Supplement.
CFC has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
Each Underwriter, dealer and agent participating in the distribution of any
Offered Bonds which are issuable in bearer form will agree that it will not
offer, sell or deliver, directly or indirectly, Offered Bonds in bearer form in
the United States or its possessions or to United States persons (other than
qualifying financial institutions) in connection with the original issuance of
the Offered Bonds. See "LIMITATIONS ON ISSUANCE OF BEARER BONDS".
The Offered Bonds may not be offered or sold directly or indirectly in
Great Britain other than to persons whose ordinary business it is to buy or sell
shares or debentures (except in circumstances which do not constitute an offer
to the public within the meaning of the Companies Act of 1985), and this
Prospectus and any Prospectus Supplement or any other offering material relating
to the Offered Bonds may not be distributed in or from Great Britain other than
to persons whose business involves the acquisition and disposal, or the holding,
of securities whether as principal or as agent.
Certain of the Underwriters or agents and their associates may engage in
transactions with and perform services for the Company in the ordinary course of
business.
LEGAL OPINIONS
The validity of the Bonds offered hereby will be passed upon for the
Company by Milbank, Tweed, Hadley & McCloy, 1 Chase Manhattan Plaza, New York,
New York, and for the agents or Underwriters, if any, by Cravath, Swaine &
Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York.
EXPERTS
The audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended May 31, 1994, incorporated by reference in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
incorporated herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
29
<PAGE> 31
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities covered hereby, other than underwriting commissions, are, subject to
further contingencies, estimated as follows:
<TABLE>
<S> <C>
Registration Statement Filing Fee................................. $172,415
Printing.......................................................... 100,000
Legal Fees and Expenses........................................... 100,000
Blue Sky Fees and Expenses........................................ 15,000
Accounting Fees................................................... 15,000
Fees of Trustee................................................... 15,000
Fees of Rating Agencies........................................... 100,000
Miscellaneous..................................................... 15,000
--------
Total................................................... $532,415
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 29-1104(9) of the District of Columbia Cooperative Association Act
provides that an association such as the Registrant shall have the capacity "to
exercise . . . any power granted to ordinary business corporations, save those
powers inconsistent with this chapter." Section 29-304(16) of the District of
Columbia Business Corporation Act permits any corporation:
To indemnify any and all of its directors or officers or former directors
or officers or any person who may have served at its request as a director or
officer of another corporation in which it owns shares of capital stock or of
which it is a creditor against expenses actually and necessarily incurred by
them in connection with the defense of any action, suit, or proceeding in which
they, or any of them, are made parties, or a party, by reason of being or having
been directors or officers or a director or officer of the corporation, or of
such other corporation, except in relation to matters as to which any such
director or officer or former director or officer or person shall be adjusted in
such action, suit, or proceeding to be liable for negligence or misconduct in
the performance of duty. Such indemnification shall not be deemed exclusive of
any rights to which those indemnified may be entitled, under any bylaw,
agreement, vote of stockholders, or otherwise.
The Board of Directors of CFC has resolved to indemnify all CFC directors,
officers and employees in accordance with the terms of the first sentence of
Section 29-304(16). Pursuant to a resolution of the Board of Directors, CFC has
also obtained liability insurance covering officers, directors and key staff
personnel. The insurance terms provide, with certain exceptions and exclusions,
for protection of the insured personnel against unindemnified losses from claims
and expenses resulting from any negligent act, any error, any omission or any
breach of duty while acting in their respective capacities.
ITEM 16. LIST OF EXHIBITS
<TABLE>
<S> <C>
1 -- Form of Underwriting Agreement to be used in connection with Bonds.
4.1 -- Indenture, dated as of February 15, 1994, between the Company and First Bank
National Association, as Trustee. Incorporated by reference to Exhibit 4 to
Post-Effective Amendment No. 1 to Registration Statement on Form S-3 filed by
the Company on February 15, 1994 (Registration No. 33-35261).
4.2 -- First Supplemental Indenture, dated as of September 16, 1994, between the
Company and First Bank National Association, as Trustee. Incorporated by
reference to Exhibit 4 to the current report on Form 8-K filed by the Company
on September 16, 1994.
5 -- Opinion and consent of Milbank, Tweed, Hadley & McCloy.
</TABLE>
II-1
<PAGE> 32
<TABLE>
<S> <C>
8 -- Opinion of Milbank, Tweed, Hadley & McCloy. Included as part of Exhibit 5.
12 -- Schedule of computation of ratio of margins to fixed charges. Incorporated by
reference to Exhibit 12 to the Company's annual report on Form 10-K for the
year ended May 30, 1994.
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Milbank, Tweed, Hadley & McCloy. Included as part of Exhibit 5.
24 -- Power of Attorney (included on signature pages).
25 -- Form T-1 Statement of Eligibility and Qualification under the Trust Indenture
Act of 1939 of First Bank National Association, as Trustee.
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement (other than
as provided in the proviso and instructions to Item 512(a) of Regulation
S-K):
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-2
<PAGE> 33
THE REGISTRANT AND EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY
AUTHORIZES EACH OF CHARLES B. GILL, STEVEN L. LILLY AND JOHN JAY LIST (THE
"AGENTS") TO FILE ONE OR MORE AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS)
TO THE REGISTRATION STATEMENT WHICH AMENDMENTS MAY MAKE SUCH CHANGES IN THE
REGISTRATION STATEMENT AS SUCH AGENT DEEMS APPROPRIATE AND THE REGISTRANT AND
EACH SUCH PERSON HEREBY APPOINTS EACH SUCH AGENT AS ATTORNEY-IN-FACT TO EXECUTE
IN THE NAME AND ON BEHALF OF THE REGISTRANT AND EACH SUCH PERSON, INDIVIDUALLY
AND IN EACH CAPACITY STATED BELOW, ANY SUCH AMENDMENTS TO THE REGISTRATION
STATEMENT.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT OR AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE COUNTY OF FAIRFAX, COMMONWEALTH OF VIRGINIA, ON
THE 13TH DAY OF OCTOBER, 1994.
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
By: /s/ CHARLES B. GILL
------------------------------------
CHARLES B. GILL
Governor and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ---------------------------- ----------------------
<S> <C> <C>
/s/ CHARLES B. GILL Governor and Chief )
- ---------------------------------------- Executive Officer )
CHARLES B. GILL )
)
/s/ STEVEN L. LILLY Senior Vice President and )
- ---------------------------------------- Chief Financial Officer )
STEVEN L. LILLY )
)
/s/ ANGELO M. SALERA Controller (Principal )
- ---------------------------------------- Accounting Officer) )
ANGELO M. SALERA )
)
/s/ BILL MCGINNIS President and Director )
- ---------------------------------------- )
BILL MCGINNIS )
)
/s/ J. CHRIS CARIKER Vice President and Director )
- ---------------------------------------- )
J. CHRIS CARIKER )
) October 13, 1994
/s/ GARRY BYE Secretary-Treasurer and )
- ---------------------------------------- Director )
GARRY BYE )
)
/s/ JOHN C. ANDERSON Director )
- ---------------------------------------- )
JOHN C. ANDERSON )
)
/s/ JOHNNIE R. AUSTIN Director )
- ---------------------------------------- )
JOHNNIE R. AUSTIN )
)
/s/ ROBERT J. BAUMAN Director )
- ---------------------------------------- )
ROBERT J. BAUMAN )
)
/s/ BILL BERTRAM Director )
- ---------------------------------------- )
BILL BERTRAM )
</TABLE>
II-3
<PAGE> 34
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ---------------------------- ----------------------
<S> <C> <C>
/s/ HAROLD I. DYCUS Director )
- ---------------------------------------- )
HAROLD I. DYCUS )
)
Director )
- ---------------------------------------- )
GLENN ENGLISH )
)
/s/ JOHN B. FLOYD, JR. Director )
- ---------------------------------------- )
JOHN B. FLOYD, JR. )
)
/s/ NADINE GRIFFIN Director )
- ---------------------------------------- )
NADINE GRIFFIN )
)
/s/ RALPH HARMEYER Director )
- ---------------------------------------- )
RALPH HARMEYER )
)
/s/ GORDON J. HUDSON Director )
- ---------------------------------------- )
GORDON J. HUDSON )
)
/s/ GEORGE W. KLINE Director )
- ---------------------------------------- )
GEORGE W. KLINE )
)
/s/ PAUL J. LIESS Director )
- ---------------------------------------- ) October 13, 1994
PAUL J. LIESS )
)
/s/ RALPH L. LOVELESS Director )
- ---------------------------------------- )
RALPH L. LOVELESS )
)
/s/ GERALD PAOLUCCI Director )
- ---------------------------------------- )
GERALD PAOLUCCI )
)
/s/ DAVID E. PIPER Director )
- ---------------------------------------- )
DAVID E. PIPER )
)
/s/ TERRY PITCHFORD Director )
- ---------------------------------------- )
TERRY PITCHFORD )
)
Director )
- ---------------------------------------- )
J. C. ROBERTS )
)
/s/ TOM SLOAN Director )
- ---------------------------------------- )
TOM SLOAN )
)
/s/ ROBERT O. WILLIAMS Director )
- ---------------------------------------- )
ROBERT O. WILLIAMS )
</TABLE>
II-4
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ---- --------------------------------------------------------------------------- -------------
<C> <S> <C>
1 -- Form of Underwriting Agreement to be used in connection with Bonds.
4.1 -- Indenture, dated as of February 15, 1994, between the Company and First
Bank National Association, as Trustee. Incorporated by reference to
Exhibit 4 to Post-Effective Amendment No. 1 to Registration Statement on
Form S-3 filed by the Company on February 15, 1994 (Registration No.
33-35261).
4.2 -- First Supplemental Indenture, dated as of September 16, 1994, between
the Company and First Bank National Association, as Trustee.
Incorporated by reference to Exhibit 4 to the current report on Form 8-K
filed by the Company on September 16, 1994.
5 -- Opinion and consent of Milbank, Tweed, Hadley & McCloy.
8 -- Opinion of Milbank, Tweed, Hadley & McCloy. Included as part of Exhibit
5.
12 -- Schedule of computation of ratio of margins to fixed charges.
Incorporated by reference to Exhibit 12 to the Company's annual report
on Form 10-K for the year ended May 30, 1994.
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Milbank, Tweed, Hadley & McCloy. Included as part of Exhibit
5.
24 -- Power of Attorney (included on signature pages).
25 -- Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of First Bank National Association, as Trustee.
</TABLE>
<PAGE> 1
$
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
Collateral Trust Bonds,
Series , Due
Underwriting Agreement
, 199
--
- --------------------
- --------------------
- --------------------
As Representatives of the several Underwriters
In care of
[Address] --------------
[City, State]
Dear Sirs:
National Rural Utilities Cooperative Finance Corporation, a
District of Columbia cooperative association (the "Company"), proposes to issue
$ principal amount of its Collateral Trust Bonds, Series
, Due (the "Bonds"), to be issued under and secured by an Indenture
dated as of February 15, 1994, between the Company and First Bank National
Association (the "Trustee"), as amended by the [First Supplemental Indenture
dated as of September 16, 1994]. Such Indenture, as amended by the [First
Supplemental Indenture and] by any supplemental indenture, is hereinafter
called the "Indenture." The Bonds are more fully described in the Registration
Statement and in the Prospectus hereinafter mentioned. The Bonds will be
issued in fully registered form only, in denominations of $1,000 and any
integral multiple thereof.
You have advised us (i) that you and other firms and
corporations named in Schedule I attached hereto (you and such firms and
corporations being hereinafter called the Underwriters, which term shall also
include any underwriter substituted as provided in Section 11 hereof), acting
<PAGE> 2
2
severally and not jointly, are willing to purchase, on the terms and conditions
hereinafter set forth, the respective principal amounts of the Bonds,
aggregating $ principal amount thereof, specified in such Schedule I,
and (ii) that you are authorized, on behalf of yourselves and the other
Underwriters, to enter into this Agreement.
1. Certain Representations and Warranties by the Company.
The Company represents and warrants to each Underwriter as follows:
(a) Registration Statement and Prospectus. The Company
has filed with the Securities and Exchange Commission (the "Commission")
Registration Statement No. 33- , for the registration under the Securities
Act of 1933, as amended (the "Securities Act"), of the Bonds (including a
prospectus relating thereto) and may have filed one or more amendments thereto
(including one or more amended or supplemental prospectuses) and such
registration statement and any such amendment has become effective. A
prospectus supplement relating to the Bonds, including a prospectus (together,
the "Prospectus"), has been prepared and will be filed pursuant to Rule 424
under the Securities Act. The Company will not file any other amendment of
such registration statement or such prospectus or any supplement to such
prospectus on or after the date of this Agreement and prior to the date and
time of delivery of and payment for the Bonds referred to in Section 3 hereof
(the "Closing Date"), except with your approval. Such registration statement,
including financial statements and exhibits, at the time it became effective,
is hereinafter called the Registration Statement. Any reference in this
Agreement to the Prospectus as amended or supplemented shall include, without
limitation, any prospectus filed with the Commission pursuant to Rule 424 of
the Commission under the Securities Act which amends or supplements the
Prospectus. Any reference herein to the Registration Statement or the
Prospectus shall be deemed to refer to and include the documents incorporated
by reference therein pursuant to Item 12 of Form S-3 which were filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), on or before
the effective date of the Registration Statement or the date of such
Prospectus, as the case may be; and any reference herein to the terms "amend",
"amendment" or "supplement" with respect to the Registration Statement or the
Prospectus shall be deemed to refer to and include the filing of any document
under the Exchange Act after the effective date of the Registration Statement,
or the date of
<PAGE> 3
3
any Prospectus, as the case may be, and deemed to be incorporated therein by
reference.
(b) Accuracy of Registration Statement. At all times
subsequent to the date of this Agreement up to and including the Closing Date,
and when any post-effective amendment thereof shall become effective, the
Registration Statement (and the Registration Statement as amended if any
post-effective amendment thereof shall have become effective) will comply in
all material respects with the provisions of the Securities Act and the
Exchange Act and the rules and regulations of the Commission thereunder and
will not contain an untrue statement of a material fact and will not omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and, at all times subsequent to the date of
this Agreement up to and including the Closing Date, the Prospectus (and the
Prospectus as amended or supplemented, if the Company shall have filed with the
Commission any amendment thereof or supplement thereto) will fully comply with
the provisions of the Securities Act and the Exchange Act and the rules and
regulations of the Commission thereunder and will not contain an untrue
statement of a material fact and will not omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
paragraph (b) shall apply to (i) that part of the Registration Statement which
shall constitute the Statement of Eligibility and Qualification (Form T-1)
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"),
of the Trustee or (ii) statements in, or omissions from, the Registration
Statement or the Prospectus or any amendment thereof or supplement thereto made
in reliance upon and in conformity with information furnished as herein stated
or otherwise furnished in writing to the Company by or on behalf of any
Underwriter through you for use in connection with the preparation of the
Registration Statement or the Prospectus or any such amendment or supplement.
(c) Accountants. The accountants who have certified or shall
certify the financial statements filed and to be filed with the Commission as
parts of the Registration Statement and the Prospectus are independent with
respect to the Company as required by the Securities Act and rules and
regulations of the Commission thereunder.
<PAGE> 4
4
(d) Due Incorporation. The Company has been duly
incorporated and is now, and on the Closing Date will be, a validly existing
cooperative association in good standing under the laws of the District of
Columbia, duly qualified and in good standing in each jurisdiction in which the
ownership or leasing of properties or the conduct of its business requires it
to be qualified (or the failure to be so qualified will not have a material
adverse effect upon the business or condition of the Company), and the Company
has the corporate power and holds all valid permits and other required
authorizations from governmental authorities necessary to carry on its business
as now conducted and as to be conducted on the Closing Date and as contemplated
by the Prospectus.
(e) Material Changes. Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, and
except as set forth therein, there has not been any material adverse change in
the condition, financial or other, or the results of operations of the Company,
whether or not arising from transactions in the ordinary course of business.
(f) Litigation. On the date hereof, except as set forth in
the Prospectus, the Company does not have any litigation pending of a character
which in the opinion of counsel for the Company referred to in Section 10(c)
hereof could result in a judgment or decree having a material adverse effect on
the condition, financial or other, or the results of operations of the Company.
(g) Legality. On the Closing Date, the Bonds will be duly
and validly authorized, and no further authorization, consent or approval of
the members and no further authorization or approval of the Board of Directors
of the Company or any committee thereof will be required for the issuance and
sale of the Bonds as contemplated herein; and neither such issuance or sale of
the Bonds nor the consummation of any other of the transactions herein
contemplated will result in a breach by the Company of any terms of, or
constitute a default under, any other agreement or undertaking of the Company.
(h) No Stop Order. The Commission has not issued and, to the
best knowledge of the Company, is not threatening to issue any order preventing
or suspending the use of the Prospectus (as amended or supplemented, if the
<PAGE> 5
5
Company shall have filed with the Commission any amendment thereof or
supplement thereto).
(i) Regulation. The Company is not required to be registered
as an investment company under the Investment Company Act of 1940 and is not
subject to regulation under the Public Utility Holding Company Act of 1935.
2. Agreement to Purchase. Subject to the terms and
conditions and upon the representations and warranties herein set forth, the
Company agrees to sell to you and the other Underwriters, severally and not
jointly, and you and such other Underwriters, severally and not jointly, agree
to purchase from the Company, at % of the principal amount thereof, plus
interest accrued thereon, if any, from , to the Closing
Date, the respective principal amounts of the Bonds set forth opposite the
names of the respective Underwriters in Schedule I hereto, aggregating
$ principal amount thereof.
3. Closing. Delivery of and payment for the Bonds shall be
made at the office of , , at A.M., New York City time,
on , or such later date (not later than ) as you, as
Representatives of the Underwriters, shall designate, which date and time may
be postponed by agreement between you, as such Representatives, and the
Company or as provided in Section 11 hereof. Delivery of the Bonds shall be
made to you, for the respective accounts of the several Underwriters, against
payment by the several Underwriters through you of the purchase price thereof,
to or upon the order of the Company by certified or official bank check or
checks payable in immediately available funds. The Bonds shall be delivered
in definitive global form through the facilities of Depository Trust Company.
4. Prospectuses. The Company has caused to be delivered to
you, as Representatives of the Underwriters, copies of the Prospectus and has
consented to the use of such copies for the purposes permitted by the
Securities Act. The Company agrees to deliver to you, as Representatives of
the Underwriters, without charge, from time to time during such period as in
the opinion of Cravath, Swaine & Moore, counsel for the Underwriters, the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or dealer, as many copies of the Prospectus (and, in the event of
any amendment of or supplement to the Prospectus, of such amended or
<PAGE> 6
6
supplemented Prospectus) as you, as Representatives of the Underwriters, may
reasonably request. If, at any time during the period in which the Company is
required to deliver copies of the Prospectus, as provided in this Section 4,
any event known to the Company relating to or affecting the Company shall occur
which should be set forth in an amendment of or supplement to the Prospectus in
order to make the statements in the Prospectus not misleading in the light of
the circumstances at the time it is delivered to the purchaser, or it shall be
necessary to amend or supplement the Prospectus to comply with law or with the
rules and regulations of the Commission, the Company, at its expense, will
forthwith prepare and furnish to you for distribution to the Underwriters and
dealers a reasonable number of copies of an amendment or amendments of or a
supplement or supplements to the Prospectus which will so amend or supplement
the Prospectus that, as amended or supplemented, it will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements in the Prospectus
not misleading in the light of the circumstances when it is delivered to a
purchaser, and will comply with law and with such rules and regulations. The
Company authorizes the Underwriters and all dealers effecting sales of the
Bonds to use the Prospectus, as from time to time amended or supplemented, in
connection with the sale of the Bonds in accordance with applicable provisions
of the Securities Act and the applicable rules and regulations thereunder for
the period during which the Company is required to deliver copies of the
Prospectus as provided in this Section 4.
5. Commission Proceedings as to Registration Statement. The
Company agrees to advise you promptly, as Representatives of the Underwriters,
and to confirm such advice in writing, (a) when any post-effective amendment of
the Registration Statement shall have become effective and when any further
amendment of or supplement to the Prospectus shall be filed with the
Commission, (b) of any request by the Commission for any amendment of the
Registration Statement or the Prospectus or for additional information and (c)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the initiation of any
proceedings for that purpose. The Company will use every reasonable effort to
prevent the issuance of such a stop order and, if any such order shall at any
time be issued, to obtain the withdrawal thereof at the earliest possible
moment.
<PAGE> 7
7
6. Blue Sky. The Company will diligently endeavor, when and
as requested by you, to qualify the Bonds, or such portion thereof as you may
request, for offering and sale under the securities or blue sky laws of any
jurisdictions which you shall designate.
7. Earnings Statement. The Company agrees to make generally
available to its security holders, in accordance with Section 11(a) of the
Securities Act and Rule 158 thereunder, an earnings statement of the Company
(which need not be audited) in reasonable detail and covering a period of at
least twelve months beginning after the effective date of the Registration
Statement.
8. Expenses. The Company agrees to pay all fees and expenses
in connection with (a) the preparation, printing and filing of the Registration
Statement (including all exhibits to the Registration Statement), the
Prospectus and any amendments thereof and supplements thereto, and the
furnishing of copies of each thereof to the Underwriters (including costs of
mailing and shipment), (b) the issuance of the Bonds, (c) the rating of the
Bonds by rating agencies, (d) the delivery of the Bonds to you in New York City
for the respective accounts of the several Underwriters and (e) the qualifying
of the Bonds as provided in Section 6 hereof and the determination of the
eligibility of the Bonds for investment under the laws of such jurisdictions as
you may designate (including fees of not more than $10,000 and disbursements of
counsel for the Underwriters in connection therewith).
9. Indemnities.
(a) By the Company. The Company agrees to indemnify and hold
harmless each Underwriter and each person who controls any Underwriter within
the meaning of Section 15 of the Securities Act against any and all losses,
claims, damages or liabilities, joint or several, to which they or any of them
may become subject under the Securities Act, the Exchange Act or any other
statute or common law, and to reimburse the Underwriters and such controlling
persons for any legal or other expenses incurred by them in connection with
investigating any claims and defending any actions, insofar as such losses,
claims, damages, liabilities or actions arise out of or are based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof, or the
omission or alleged
<PAGE> 8
8
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or supplemented, if the Company shall have filed with
the Commission any amendment thereof or supplement thereto), if used within the
period during which the Underwriters are authorized to use the Prospectus as
provided in Section 4 hereof, or the omission or alleged omission to state
therein (if so used) a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
indemnity agreement contained in this Section 9(a) shall not apply to any such
losses, claims, damages, liabilities or actions arising out of, or based upon,
any such untrue statement or alleged untrue statement, or any such omission or
alleged omission, if such statement or omission was made in reliance upon and
in conformity with information furnished as herein stated in Section 12 or
otherwise furnished in writing to the Company by or on behalf of any
Underwriter through you for use in connection with the preparation of the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, or was contained in that part of the Registration Statement
constituting the Statement of Eligibility and Qualification (Form T-1) under
the Trust Indenture Act of the Trustee; provided, further, that, with respect
to any untrue statement or alleged untrue statement made in, or omission or
alleged omission from, the Prospectus, the indemnity agreement contained in
this Section 9(a) with respect to the Prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any such losses, claims,
damages or liabilities purchased the Bonds which are the subject thereof (or
the benefit of any person controlling such Underwriter), if the Prospectus (or
the Prospectus as amended or supplemented if the Company shall have made any
amendments thereof or supplements thereto which shall have been furnished to
you, as Representatives of the Underwriters, or to such Underwriter prior to
the time of the below-written confirmation) does not contain such statement,
alleged statement, omission or alleged omission, and a copy of such Prospectus,
excluding the documents incorporated therein by reference, shall not have been
sent or given to such person at or prior to the written confirmation of the
sale of such Bonds to such person.
<PAGE> 9
9
(b) By the Underwriters. Each Underwriter agrees, in the
manner and to the same extent as set forth in Section 9(a) hereof, to indemnify
and hold harmless the Company, each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act, the directors of the
Company and those officers of the Company who shall have signed the
Registration Statement, with respect to any statement in or omission from the
Registration Statement or any post-effective amendment thereof or the
Prospectus (as amended or supplemented, if so amended or supplemented), if such
statement or omission was made in reliance upon and in conformity with
information furnished as herein stated in Section 12 or otherwise furnished in
writing to the Company through you on behalf of such Underwriter for use in
connection with the preparation of the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto.
(c) General. Each indemnified party will, within ten days
after the receipt of notice of the commencement of any action against such
indemnified party in respect of which indemnity may be sought from an
indemnifying party on account of an indemnity agreement contained in this
Section 9, notify the indemnifying party in writing of the commencement
thereof. The omission of any indemnified party so to notify an indemnifying
party of any such action shall not relieve the indemnifying party from any
liability which it may have to such indemnified party on account of the
indemnity agreement contained in this Section 9 or otherwise. Except as
provided in the next succeeding sentence, in case any such action shall be
brought against any indemnified party and it shall notify an indemnifying party
of the commencement thereof, such indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice in writing
from such indemnifying party to such indemnified party of its election so to
assume the defense thereof, such indemnifying party will not be liable to such
indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. Such indemnified party
shall have the right to employ its own counsel in any such action, but the fees
and expenses of such counsel shall be at the expense of such indemnified party
unless (i) the employment of such counsel has been authorized in writing by
<PAGE> 10
10
the indemnifying party in connection with the defense of such action, (ii) such
indemnified party shall have been advised by such counsel that there are
material legal defenses available to it which are different from or additional
to those available to the indemnifying party (in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf
of such indemnified party) or (iii) the indemnifying party shall not have
assumed the defense of such action and employed counsel therefor satisfactory
to such indemnified party within a reasonable time after notice of commencement
of such action, in any of which events such fees and expenses shall be borne by
the indemnifying party.
(d) Contribution. If the indemnification provided for in
this Section 9 shall for any reason be unavailable to an indemnified party
under Section 9(a) or 9(b) hereof in respect of any loss, claim, damage or
liability or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Bonds or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and the Underwriters on
the other with respect to the statements or omissions which resulted in such
loss, claim, damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other with respect to such
offering shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Bonds (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by
the Underwriters with respect to such offering, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault of the
Company on the one hand and the Underwriters on the other shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by
<PAGE> 11
11
the Company or the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this Section 9(d) were
to be determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the loss, claim,
damage or liability, or action in respect thereof, referred to above in this
Section 9(d) shall be deemed to include, for purposes of this Section 9(d), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9(d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Bonds underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise paid or become liable to pay by reason of any untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 9(d) are several in proportion to their
respective underwriting obligations and not joint.
(e) Survival of Indemnities. The respective indemnity and
contribution agreements of the Company and the Underwriters contained in this
Section 9, and the representations and warranties of the Company set forth in
Section 1 hereof, shall remain operative and in full force and effect,
regardless of any termination or cancelation of this Agreement or any
investigation made by or on behalf of any Underwriter or any such controlling
person or the Company or any such controlling person, director or officer, and
shall survive the delivery of the Bonds, and any successor of any Underwriter
or of any such controlling person or of the Company, and any legal
representative of any such controlling person, director or officer, as the case
may be, shall be entitled to the benefit of the respective indemnity and
contribution agreements.
<PAGE> 12
12
10. Conditions to Underwriters' Obligations. The several
obligations of the Underwriters hereunder are subject to the accuracy of and
compliance with the representations and warranties of the Company contained in
Section 1 hereof, as of the date hereof and as of the Closing Date, and to the
following further conditions:
(a) Effectiveness of Registration Statement. No stop order
suspending the effectiveness of the Registration Statement or
qualification of the Indenture shall be in effect on the Closing Date,
and no proceedings for the issuance of such an order shall be pending
or, to the knowledge of the Company or you, threatened by the
Commission on the Closing Date.
(b) Opinion of Counsel for the Underwriters. The form and
validity of the Indenture, the form and validity of the Bonds, the
legality and sufficiency of the authorization of the issuance and sale
of the Bonds hereunder, and all corporate proceedings and other legal
matters incident to the foregoing, and the form of the Registration
Statement and of the Prospectus (other than financial statements and
other financial data), shall have been approved as of the Closing Date
by Cravath, Swaine & Moore, counsel for the Underwriters.
(c) Opinion of Counsel for the Company. The Company shall
have furnished to you, as Representatives of the Underwriters, on the
Closing Date, the opinion, addressed to the Underwriters and dated the
Closing Date, of Milbank, Tweed, Hadley & McCloy, counsel for the
Company, which opinion shall be satisfactory in form and scope to
counsel for the Underwriters, to the following effect:
(i) the Company has been duly incorporated and is
validly existing as a cooperative association in good standing
under the laws of the District of Columbia with corporate
power to conduct its business as described in the Registration
Statement;
(ii) the issuance and sale of the Bonds by the
Company pursuant to this Agreement have been duly and validly
authorized by all necessary corporate action; and no
authorization, consent, order or approval of, or filing or
registration with, or
<PAGE> 13
13
exemption by, any government or public body or authority
(including, without limitation, the Rural Electrification
Administration) of the United States or of the State of New
York or any department or subdivision thereof or to the best
of such counsel's knowledge any court, other than such as may
be required under State securities or blue sky laws and other
than registration of the Bonds under the Securities Act and
qualification of the Indenture under the Trust Indenture Act,
is required for the validity of the Bonds or for the issuance,
sale and delivery of the Bonds by the Company pursuant to
this Agreement or for the execution and delivery of this
Agreement by the Company;
(iii) the Indenture has been duly authorized by the
Company, has been duly qualified under the Trust Indenture
Act, constitutes an instrument valid and binding on the
Company and enforceable in accordance with its terms and the
Indenture Trustee has a valid first perfected security
interest in the Mortgage Notes in its possession in New York
and, subject to the requirements of Section 9-306 of the New
York Uniform Commercial Code, in the proceeds thereof, subject
only to the exceptions permitted by the Indenture, pledged
pursuant to the Indenture (except that no opinion need be
expressed as to the lien on the Mortgages, as defined in the
Indenture, so pledged);
(iv) the Bonds are in the forms provided for in the
Indenture, and, assuming due execution of the Bonds on behalf
of the Company and authentication thereof by the Trustee, the
Bonds constitute valid and binding obligations of the Company
enforceable in accordance with their terms and are entitled to
the benefits of the Indenture;
(v) this Agreement has been duly authorized, executed
and delivered by the Company and the performance of this
Agreement and the consummation of the transactions herein
contemplated will not result in a breach of any terms or
provisions of, or constitute a default under, the Articles of
Incorporation or By-laws of the Company or any indenture, deed
of trust, note, note agreement or other agreement or
instrument known to such
<PAGE> 14
14
counsel, after due inquiry, to which the Company is a
party or by which the Company or any of its properties is
bound or affected;
(vi) the Bonds and the Indenture conform in all
material respects to the descriptions thereof contained in the
Registration Statement;
(vii) the Registration Statement (and any
post-effective amendment thereof) has become and is effective
under the Securities Act and the Bonds have become registered
under the Securities Act, and, to the best of the knowledge of
such counsel, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or
contemplated, and the Registration Statement (and any
post-effective amendment thereof), the Prospectus and each
amendment thereof or supplement thereof (except for the
financial statements and other financial data included therein
as to which such counsel need express no opinion) when they
became effective or were filed with the Securities and
Exchange Commission complied as to form in all material
respects with the requirements of the Securities Act, the
Exchange Act, the Trust Indenture Act and the rules and
regulations issued thereunder;
(viii) based upon such counsel's participation in the
preparation of the Registration Statement, the Prospectus and
documents incorporated by reference therein, such counsel's
discussions with certain officers and employees of the
Company, such counsel's conferences with representatives of
the Company's independent Certified Public Accountants and
such counsel's representation of the Company, and while such
counsel does not pass on or assume any responsibility for the
accuracy, completeness or fairness thereof, nothing has come
to such counsel's attention that causes it to believe that
either the Registration Statement (or any post-effective
amendment thereof) as of the date it became effective, or the
Prospectus and each supplement thereto as of the Closing Date
(except in each case for the financial or statistical data
included therein, as to which
<PAGE> 15
15
such counsel expresses no view) contains an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading and such counsel does not
know of any litigation or any governmental proceeding
instituted or threatened against the Company required to be
disclosed in the Registration Statement or Prospectus and
which is not disclosed therein;
(ix) the Company is not required to be registered as
an investment company under the Investment Company Act of
1940;
(x) the Company is not subject to regulation under
the Public Utility Holding Company Act of 1935; and
(xi) the Company is not a public utility as defined
in the Federal Power Act and is not a natural gas company as
defined in the Natural Gas Act.
If the certification referred to in clause (ix) of subsection
10(e) below indicates that the Pledged Property includes collateral
other than Mortgage Notes, the opinion referred to in clause (iii)
above shall also address the security interest of the Indenture
Trustee in the Pledged Property (and in the proceeds thereof), in form
reasonably satisfactory to you.
The foregoing opinion may contain qualifications to the effect
that any sale or transfer by the Trustee under the Indenture of any
Pledged Property (other than a transfer into the name of the Trustee
or a nominee thereof) may be subject to the provisions of the
Securities Act and other applicable securities laws and regulations
promulgated thereunder, and, insofar as such opinion relates to the
enforceability of the Bonds and the Indenture, the enforceability
thereof may be limited by bankruptcy, reorganization, insolvency,
moratorium or other laws of general application relating to or
affecting the enforcement of creditors' rights and by general
principals of equity (regardless of whether considered in a proceeding
in equity or at law), including without limitation (a) the possible
unavailability of specific performance, injunctive
<PAGE> 16
16
relief or any other equitable remedy and (b) concepts of materiality,
reasonableness, good faith and fair dealing. In addition, the
Company's obligations and the rights and remedies of the Trustee and
the Bondholders may be subject to possible limitations on the exercise
of remedial or procedural provisions contained in the Indenture
(provided that such limitations do not, in the opinion of such
counsel, make inadequate the remedies afforded thereby for the
practical realization of the substantive benefits provided for in the
Bonds and the Indenture).
In rendering the foregoing opinion, Milbank, Tweed, Hadley &
McCloy may rely as to matters of the law of the District of Columbia
upon the opinion of John Jay List, Esq., General Counsel of the
Company, addressed to the Underwriters and dated the Closing Date,
satisfactory in form and scope to counsel for the Underwriters. If
Milbank, Tweed, Hadley & McCloy shall so rely upon the opinion of John
Jay List, Esq., (i) copies of the opinion so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to
counsel for the Underwriters and (ii) the opinion required by this
Section 10(c) shall also state that Milbank, Tweed, Hadley & McCloy
has made an independent investigation of the matters in its opinion
covered by the opinion so relied upon and that the Underwriters are
justified in relying upon such opinion.
(d) Accountants' Letter. Arthur Andersen & Co. shall have
furnished to you, as Representatives of the Underwriters, at or prior
to the Closing Date, a letter, addressed to the Underwriters and dated
the Closing Date, confirming that they are independent public
accountants with respect to the Company within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission; and stating, as of the date of such
letter (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five days prior
to the date of such letter), the conclusions and findings of such firm
with respect to the financial information and other matters covered by
its letter delivered to you, as Representatives of the
<PAGE> 17
17
Underwriters, concurrently with the execution of this Agreement and
confirming in all material respects the conclusions and findings set
forth in such prior letter or, if no such letter shall have been
delivered to you, the conclusions and findings of such firm, in form
and substance satisfactory to you, as Representatives of the
Underwriters, with respect to such financial information and other
matters as you, as Representatives of the Underwriters, shall
reasonably request.
(e) Officer's Certificate. You shall have received, on the
Closing Date, a certificate of the Company dated the Closing Date,
signed on its behalf by the President, the Governor or a Vice
President of the Company, to the effect that the signer of such
certificate has examined the Registration Statement and the Prospectus
and that (i) in his opinion, as of the effective date of the
Registration Statement, the Registration Statement did not contain an
untrue statement of a material fact and did not omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus did not contain
an untrue statement of a material fact and did not omit to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, (ii)
since the effective date of the Registration Statement no event has
occurred which should have been set forth in an amendment or
supplement to the Prospectus but which has not been so set forth,
(iii) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
material adverse change in the condition, financial or other, or
earnings of the Company, whether or not arising from transactions in
the ordinary course of business, other than changes which the
Registration Statement and the Prospectus indicate might occur after
the effective date of the Registration Statement, (iv) the Company has
no material contingent obligations which are required to be disclosed
in the Registration Statement and the Prospectus and are not disclosed
therein, (v) no stop order suspending the effectiveness of the
Registration Statement is in effect on the Closing Date and no
proceedings for the issuance of such an order have been taken or to
the knowledge of the Company are contemplated by the Commission at or
<PAGE> 18
18
prior to the Closing Date, (vi) there are no material legal
proceedings to which the Company is a party or of which property of
the Company is the subject which are required to be disclosed and
which are not disclosed in the Registration Statement and the
Prospectus, (vii) there are no material contracts to which the Company
is a party which are required to be disclosed and which are not
disclosed in the Registration Statement or the Prospectus, (viii) the
representations and warranties of the Company herein are true and
correct as of the Closing Date and (ix) the Pledged Property consists
solely of Mortgage Notes, or if such is not the case, a description of
the other collateral included in the Pledged Property.
(f) (i) The Company shall not have sustained since the date
of the latest audited financial statements included or incorporated by
reference in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated
in the Prospectus or (ii) since such date there shall not have been
any change in the members' equity or long-term debt of the Company or
any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, member's equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case
described in clause (i) or (ii), is, in your judgment, so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Bonds on the terms and in the
manner contemplated in the Prospectus.
(g) On or after the date hereof: (i) no downgrading shall
have occurred in the rating accorded the Company's debt securities by
any "nationally recognized statistical rating organization", as that
term is defined by the Commission for purposes of Rule 436(g)(2) of
the Rules and Regulations and (ii) no such organization shall have
publicly announced that it has under surveillance or review, with
possible negative implications, its rating of any of the Company's
debt securities.
<PAGE> 19
19
(h) On or after the date hereof, there shall not have
occurred any of the following: (i) a suspension or material
limitation in trading in securities generally on the New York Stock
Exchange, (ii) a banking moratorium on commercial banking activities
in New York declared by Federal or state authorities, (iii) the United
States shall have become engaged in hostilities, there shall have been
an escalation in hostilities involving the United States or there
shall have been a declaration of a national emergency or war by the
United States or (iv) such a material adverse change in general
economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States
shall be such) the effect of which, in any such case described in
clause (iii) or (iv), is, in your reasonable judgment, to make it
impracticable or inadvisable to proceed with the public offering or
delivery of the Bonds on the terms and in the manner contemplated in
the Prospectus.
(i) Miscellaneous. The Company shall have taken, on or prior
to the Closing Date, all other action, if any, which it is stated in
the Registration Statement (or any post-effective amendment thereof)
or the Prospectus (as amended or supplemented, if so amended or
supplemented) that the Company will take prior to or concurrently with
the issuance and delivery of the Bonds, and all agreements herein
contained to be performed on the part of the Company on or prior to
the Closing Date shall have been so performed.
(j) Other Documents. The Company shall have furnished to you
and to Cravath, Swaine & Moore, counsel for the Underwriters, such
further certificates and documents as you or they may have reasonably
requested prior to the Closing Date.
If any of the conditions specified in this Section 10 shall not have been
fulfilled when and as required by this Agreement to be fulfilled, this
Agreement and all obligations of the Underwriters hereunder may be canceled on,
or at any time prior to, the Closing Date by you, as Representatives of the
Underwriters. Notice of such cancelation shall be given to the Company in
writing, or by telegraph, telephone or telex confirmed in writing.
<PAGE> 20
20
11. Substitution of Underwriters. If any one or more of the
Underwriters shall fail or refuse on the Closing Date to purchase and pay for
the Bonds which it or they have agreed to purchase hereunder, then (a) if the
aggregate principal amount of the Bonds which the defaulting Underwriter or
Underwriters so agreed to purchase shall not exceed $ , the
nondefaulting Underwriters of shall be obligated to purchase the Bonds from the
Company, in proportion to their respective obligations hereunder and upon the
terms herein set forth, or (b) if the aggregate principal amount of the Bonds
which the defaulting Underwriter or Underwriters so agreed to purchase shall
exceed $ , either you, as Representatives of the Underwriters, or the
Company shall have the right at any time prior to 9:30 A.M., New York City
time, on the next business day after the Closing Date to procure one or more of
the other Underwriters, or any others, to purchase such Bonds from the Company,
in such amounts as may be agreed upon and upon the terms herein set forth. If
within such specified time neither you, as such representative, nor the Company
shall have procured such other Underwriters or any others to purchase the Bonds
agreed to be purchased by the defaulting Underwriter or Underwriters, this
Agreement shall terminate without liability on the part of any nondefaulting
Underwriter or of the Company. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 11, the Closing Date may be
postponed for such period, not exceeding seven days, as you, as such
representative, shall determine in order that any required changes in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken or termination of this
Agreement under this Section 11 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
12. Information Furnished by Underwriters. The statement set
forth in the last paragraph on the cover of, in the last paragraph on page 2
of, and under the heading "Underwriting" in, the prospectus supplement portion
of the Prospectus, and under the heading "Plan of Distribution" in the
Prospectus, constitute information furnished in writing by you, on behalf of
the Underwriters, for inclusion therein, and you, as Representatives of the
Underwriters, confirm that such statements are correct.
13. Termination. This Agreement shall be subject to
termination by you, by notice given to the Company prior
<PAGE> 21
21
to delivery of and payment for the Bonds, if prior to such time any of the
events described in Sections 10(f), 10(g) or 10(h) occurs.
14. Miscellaneous.
(a) Except as otherwise expressly provided in this Agreement,
(i) whenever notice is required by all the provisions of this Agreement to be
given to the Company, such notice shall be in writing addressed to the Company
at its office, 2201 Cooperative Way, Herndon, Virginia 22071-3025, attention of
the Governor, and (ii) whenever notice is required by the provisions of this
Agreement to be given to you, as Representatives of the Underwriters or of any
of them, such notice shall be in writing addressed to you at your office, Three
World Financial Center, New York, New York 10285.
(b) The Company agrees to furnish to you and to Cravath,
Swaine & Moore, without charge, a signed copy of the Registration Statement and
each amendment thereof, including all financial statements and all exhibits
thereto (except such financial statements and exhibits as are incorporated
therein by reference and which shall have been previously furnished to you),
and to furnish to each of the other Underwriters, without charge, a copy of the
Registration Statement and each amendment thereof, including all financial
statements (except such financial statements as are incorporated therein by
reference) but without exhibits.
(c) This Agreement is made solely for the benefit of the
several Underwriters and the Company and their respective successors and
assigns, and, to the extent provided in Section 9 hereof, any controlling
person referred to in such Section 9 and the directors of the Company and those
officers of the Company who shall have signed the Registration Statement, and
their respective legal representatives, successors and assigns, and no other
person shall acquire or have any right under or by virtue of this Agreement.
The term "successor" or the term "successors and assigns" as used in this
Agreement shall not include any purchaser, as such purchaser, from any of the
Underwriters of the Bonds.
(d) If this Agreement shall be canceled or terminated by the
Underwriters on any of the grounds referred to or specified in Section 10
hereof or because of
<PAGE> 22
22
any failure or refusal on the part of the Company to comply with any of the
terms or to fulfill any of the conditions of this Agreement, the Company will
reimburse the Underwriters severally for all their out-of-pocket expenses
(including the fees and disbursements of their counsel) reasonably incurred by
them in connection with the subject matter of this Agreement.
(e) The term "business day" as used in this Agreement shall
mean any day on which the New York Stock Exchange, Inc., is open for trading.
(f) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
(g) Section headings have been inserted in this Agreement as
a matter of convenience of reference only and it is agreed that such section
headings are not a part of this Agreement and will not be used in the
interpretation of any provision of this Agreement.
Please confirm that you are acting on behalf of yourself and
the other several Underwriters and that the foregoing correctly sets forth the
agreement between the Company and the several Underwriters.
Very truly yours,
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE
CORPORATION,
By
------------------
Name:
Title:
<PAGE> 23
23
Acting on behalf of ourselves and
the other several Underwriters named
in Schedule I attached to the
foregoing letter, we hereby confirm
as of the date thereof that such letter
correctly sets forth the agreement between
the Company and the several Underwriters.
,
By
------------------
Name:
Title:
<PAGE> 24
SCHEDULE I
Underwriting Agreement dated [ ]
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
<TABLE>
<CAPTION>
Principal Amount of
Underwriter Bonds to be Purchased
- ----------- ---------------------
<S> <C>
$
Total . . . . . . . . . . . . . . . . . . . . . $
===================
</TABLE>
<PAGE> 1
(MILBANK, TWEED, HADLEY, & MCCLOY LETTERHEAD)
October 18, 1994
National Rural Utilities Cooperative
Finance Corporation
2201 Cooperative Way
Herndon, Virginia 22071
Dear Sirs:
We have acted as counsel for National Rural Utilities
Cooperative Finance Corporation (the "Company") in connection with the proposed
issuance in one or more Series from time to time, directly to purchasers or
through agents or underwriters to be designated from time to time, of
Collateral Trust Bonds (the "Bonds"), such Bonds to be issued under an
Indenture dated as of February 15, 1994 (the "Indenture"), between the Company
and First Bank National Allocation, as Trustee, as contemplated in the
Company's Registration Statement filed on Form S-3 on the date hereof pursuant
to Rule 415 under the Securities Act of 1933 (the "Registration Statement").
We submit this opinion for use as Exhibits 5 and 8 to the Registration
Statement and hereby consent to the use of this opinion in the Registration
Statement and to the use of our name under the caption "Legal Opinions" in the
Prospectus.
We have investigated the corporate status of the Company and
have examined the corporate proceedings authorizing the creation and issuance
of the Bonds.
Based upon the foregoing, and having regard to legal
considerations that we deem relevant, we are of the opinion that the Bonds,
when duly authorized and executed by the Company and authenticated by or on
behalf of the Trustee pursuant to the terms of the Indenture, and issued for
value in accordance with the terms of the Indenture and applicable resolutions
of the Board of Directors of the Company, will be the validly issued, binding
obligations of the Company.
<PAGE> 2
2
In our opinion, the discussion under the caption "United
States Taxation" in the Prospectus included as part of the Registration
Statement is correct in all material respects.
Very truly yours,
Milbank, Tweed, Hadley, & McCloy
MLW/RSR/BK
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated July 18, 1994
included in the National Rural Utilities Cooperative Finance Corporation's Form
10-K for the year ended May 31, 1994 and to all references to our Firm included
in or made a part of this registration statement.
/S/ Arthur Andersen LLP
-------------------------
Arthur Andersen LLP
Washington, D.C.
October 14, 1994
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM T-1
Statement of Eligibility and Qualification Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
FIRST BANK NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0256895
(State of Incorporation) (I.R.S. Employer
Identification No.)
First Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
District of Columbia 52-089-1669
(State of Incorporation) (I.R.S. Employer
Identification No.)
2201 Cooperative Way
Herndon, Virginia 22071
(Address of Principal Executive Offices) (Zip Code)
COLLATERAL TRUST BONDS
(Exact name of registrant as specified in its charter)
<PAGE> 2
GENERAL
1. General Information Furnish the following information as
to the Trustee.
(a) Name and address of each examining or supervising
authority to which it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust
powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or
any underwriter for the obligor is an affiliate of the
Trustee, describe each such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the
Trustee's knowledge the obligor is not in default under any
Indenture for which the Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of
this statement of eligibility and qualification. Each of the
exhibits listed below is incorporated by reference from a
previous registration.
1. Copy of Articles of Association.
2. Copy of Certificate of Authority to Commence Business.
3. Authorization of the Trustee to exercise corporate
trust powers (included in Exhibits 1 and 2; no
separate instrument).
4. Copy of existing By-Laws.
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section
321(b) of the act.
7. Copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its
supervising or examining authority.
<PAGE> 3
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors or affiliates, are based
upon information furnished to the Trustee by the obligors, While the Trustee
has no reason to doubt the accuracy of any such information, it cannot accept
any responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Bank National Association, an Association organized and existing
under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested,
all in the City of Saint Paul and State of Minnesota on the 4th day of
February, 1994.
FIRST BANK NATIONAL ASSOCIATION
[SEAL]
/s/ Frank P. Leslie III
----------------------------------
Frank P. Leslie III
Assistant Vice President
/s/ Christina M. Hatfield
- ----------------------------------
Christina M. Hatfield
Assistant Secretary
<PAGE> 4
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned, FIRST BANK NATIONAL ASSOCIATION hereby consents that reports
of examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: February 4, 1994
FIRST BANK NATIONAL ASSOCIATION
/s/ Frank P. Leslie III
----------------------------------
Frank P. Leslie III
Assistant Vice President
