<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
File No. 33-64231
THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE INFORMATION CONTAINED HEREIN
ARE SUBJECT TO COMPLETION OR AMENDMENT AND PROSPECTIVE PURCHASERS ARE
REFERRED TO THE RELATED FINAL PROSPECTUS SUPPLEMENT FOR DEFINITIVE
INFORMATION ON ANY MATTER CONTAINED HEREIN. THIS PRELIMINARY PROSPECTUS
SUPPLEMENT 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
JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH JURISDICTION.
PRELIMINARY, SUBJECT TO COMPLETION, DATED OCTOBER 17, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 17, 1996)
$125,000,000
National Rural Utilities
Cooperative Finance Corporation
QUICS(SM)
% Quarterly Income Capital Securities
(Subordinated Deferrable Interest Debentures Due 2045)
------------------------
The % Quarterly Income Capital Securities (Subordinated Deferrable
Interest Debentures Due 2045) (the "Capital Securities") will mature on
, 2045. Interest on the Capital Securities is payable quarterly in
arrears, on March 31, June 30, September 30 and December 31 of each year,
commencing on December 31, 1996. The Capital Securities will be redeemable at
the option of National Rural Utilities Cooperative Finance Corporation ("CFC"),
in whole or in part, on or after , 2001 at 100% of the principal amount
to be redeemed together with accrued interest to the redemption date. The
Capital Securities will be available for purchase in denominations of $25.00 and
any integral multiple thereof. Each $25.00 principal amount of Capital
Securities is referred to herein as a "Capital Security." The Capital Securities
will be represented by a Global Security registered in the name of Cede & Co.,
as nominee for The Depository Trust Company ("DTC") which has agreed to act as
securities depositary for the Capital Securities. Except under the limited
circumstances described herein, beneficial interests in Capital Securities will
be shown only on records maintained by, transfers of Capital Securities will be
effected only through, and payments of principal of and interest on Capital
Securities will be made only through, DTC or a successor depositary. See
"Description of the Capital Securities" and, in the accompanying Prospectus,
"Description of Debt Securities."
The obligations of CFC under the Capital Securities are subordinate and
junior in right of payment to Senior Indebtedness (as defined in the
accompanying Prospectus) of CFC. As of August 31, 1996, outstanding Senior
Indebtedness of CFC aggregated approximately $8.6 billion (of which $2.2 billion
is contingent guarantees).
The Capital Securities have been accepted for listing on the New York Stock
Exchange. Trading of the Capital Securities on the New York Stock Exchange is
expected to commence within a 30-day period after the initial delivery of the
Capital Securities. See "Underwriting."
------------------------
SEE "INVESTMENT CONSIDERATIONS" ON PAGE S-3 FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE CAPITAL SECURITIES, INCLUDING THE PERIODS AND
CIRCUMSTANCES DURING AND UNDER WHICH PAYMENT OF INTEREST ON THE CAPITAL
SECURITIES MAY BE DEFERRED AND THE RELATED U.S. FEDERAL INCOME TAX CONSEQUENCES.
------------------------
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 SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2)(3) COMPANY(3)(4)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Capital Security....................... $ $ $
- ----------------------------------------------------------------------------------------------------------------
Total...................................... $ $ $
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from the date of original issuance.
(2) CFC has agreed to indemnify the several Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(3) The Underwriting Discount will be $ for each Capital Security sold
to certain institutions. Therefore, to the extent that the Capital
Securities are sold to such institutions, the actual Underwriting Discount
will be less than, and the proceeds to CFC will be greater than, the amounts
shown.
(4) Before deducting expenses payable by CFC estimated at $ .
------------------------
The Capital Securities offered by this Prospectus Supplement are offered by
the Underwriters, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain other conditions. It is anticipated that delivery of
the Capital Securities will be made in New York, New York, on or about October
, 1996 (the "Closing Date").
------------------------
LEHMAN BROTHERS
DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
October , 1996
(SM)QUICS is a service mark of Lehman Brothers Inc.
<PAGE> 2
SELECTED INFORMATION
The following material, which is presented herein solely to furnish limited
introductory information, is qualified in its entirety by, and should be
considered in conjunction with, the information appearing in this Prospectus
Supplement and in the accompanying Prospectus, including documents incorporated
therein by reference.
THE COMPANY
National Rural Utilities Cooperative Finance Corporation (the "Company" or
"CFC") is a private, not-for-profit District of Columbia cooperative
association. The principal purpose of CFC is to provide its members with a
source of financing to supplement the loan programs of the Rural Utilities
Service ("RUS") of the United States Department of Agriculture. CFC makes loans
primarily to its rural utility system members to enable them to acquire,
construct and operate electric distribution, generation, transmission and
related facilities. CFC also makes loans to service organization 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, provides guarantees of
taxable debt in connection with certain lease and other transactions of its
members.
CFC's 1,051 members as of August 31, 1996, included 903 rural electric
utility members, virtually all of which are consumer-owned cooperatives, 74
service members and 74 associate members. The utility members included 839
distribution systems and 64 generation and transmission systems operating in 46
states and U.S. territories. At December 31, 1994, CFC's member systems served
approximately 12.2 million consumers, representing service to an estimated 32.0
million ultimate users of electricity, and owned approximately $66.5 billion
(before depreciation of $19.4 billion) in total utility plant. For additional
information concerning CFC and its business, refer to "The Company" and "The
Rural Electric and Telephone Systems" in the accompanying Prospectus.
The following is a summary of selected financial data for each of the five
years ended May 31, 1996.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
For the year ended May 31:
Operating income...................... $ 505,073 $ 440,109 $ 324,682 $ 336,387 $ 402,255
========== ========== ========== ========== ==========
Operating margin...................... $ 46,857 $ 41,803 $ 29,159 $ 38,352 $ 42,809
Nonoperating income................... 3,764 3,409 4,029 3,296 2,744
Extraordinary loss(A)................. (1,580) -- -- (3,161) (1,398)
---------- ---------- ---------- ---------- ----------
Net margins........................... $ 49,041 $ 45,212 $ 33,188 $ 38,487 $ 44,155
========== ========== ========== ========== ==========
Fixed charge coverage ratio(A)........ 1.12 1.13 1.13 1.16 1.14
==== ==== ==== ==== ====
As of May 31:
Assets................................ $8,054,089 $7,080,789 $6,224,296 $5,464,144 $5,401,473
Long-term debt(B)..................... $3,682,421 $3,423,031 $2,841,220 $3,095,488 $2,971,074
Members' subordinated certificates.... $1,207,684 $1,234,715 $1,222,858 $1,215,547 $1,221,095
Members' equity....................... $ 269,641 $ 270,221 $ 260,968 $ 258,299 $ 246,320
Leverage ratio(C)..................... 5.69 5.13 4.63 4.41 4.44
</TABLE>
- ------------
(A) During the years ended May 31, 1996, 1993 and 1992, CFC paid premiums
totaling $1.6 million, $3.2 million and $1.4 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 $351.5
million, $262.7 million, $200.8 million, $286.8 million and $494.5 million
in long-term debt that comes due, matures and/or will be redeemed early
during fiscal years 1997, 1996, 1995, 1994 and 1993, respectively.
(C) 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.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF CFC'S CAPITAL
SECURITIES AT LEVELS ABOVE THOSE 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.
S-2
<PAGE> 3
INVESTMENT CONSIDERATIONS
Prospective purchasers of Capital Securities should carefully review the
information contained elsewhere in this Prospectus Supplement and in the
accompanying Prospectus and should particularly consider the following matters:
SUBORDINATION OF CAPITAL SECURITIES
The obligations of CFC under the Capital Securities are subordinate and
junior in right of payment to Senior Indebtedness of CFC. As of August 31, 1996,
outstanding Senior Indebtedness of CFC aggregated approximately $8.6 billion,
including contingent guarantees of $2.2 billion. There are no terms in the
Capital Securities that limit CFC's ability to incur additional indebtedness,
including indebtedness that ranks senior to the Capital Securities. See
"Description of Debt Securities--Subordination" in the accompanying Prospectus.
The Capital Securities will be senior to CFC's Members' Subordinated
Certificates.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
CFC will have the right at any time and from time to time during the term
of the Capital Securities to extend the interest payment period to a period not
exceeding 20 consecutive quarters (an "Extension Period"). At the end of an
Extension Period, CFC must pay all interest then accrued and unpaid (together
with interest thereon at the same rate as specified for the Capital Securities
to the extent permitted by applicable law). During any Extension Period, CFC may
not declare or pay any dividend or interest on, or principal of, or redeem,
purchase, acquire or make a liquidation payment with respect to, any of its
Members' Subordinated Certificates, Members' Equity or patronage capital.
Therefore, CFC believes that the extension of an interest payment period on the
Capital Securities is unlikely. Prior to the termination of any Extension
Period, CFC may further extend the interest payment period, provided that
Extension Period, together with all previous and further extensions thereof, may
not exceed 20 consecutive quarters or extend beyond the maturity of the Capital
Securities. Upon the termination of an Extension Period and the payment of all
amounts then due, CFC may select a new Extension Period, subject to the above
requirements. See "Description of the Capital Securities--Option to Extend
Interest Payment Period."
Should an Extension Period occur, a holder of the Capital Securities will
be required to accrue income (as original issue discount) for U.S. federal
income tax purposes even though interest is not being paid on a current basis.
As a result, such a holder must include such interest in gross income for U.S.
federal income tax purposes in advance of the receipt of cash, and will not
receive the cash from CFC related to such income if such holder disposes of his
or her Capital Securities prior to the record date for payment of interest. See
"U.S. Taxation-- United States Holders."
Should CFC declare or pay any dividend or interest on, or principal of, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
its Members' Subordinated Certificates, Members' Equity or patronage capital
during an Extension Period, such action would constitute an immediate event of
default under the terms of the Capital Securities. See "Description of the
Capital Securities--Additional Event of Default." However, because of the terms
of the subordination provisions in CFC's Members' Subordinated Certificates,
CFC's failure to pay interest on, or principal of, such Certificates during an
Extension Period will not be a default thereunder.
CERTAIN TRADING CHARACTERISTICS OF THE CAPITAL SECURITIES
The Capital Securities are expected to trade as other securities on the
equity floor of the New York Stock Exchange. Consequently, purchasers will not
pay and sellers will not receive any accrued and unpaid interest on the Capital
Securities that is not included in the trading price. For certain tax
consequences with respect to such Capital Securities, see "U.S. Taxation."
Trading prices of the Capital Securities are expected to be quoted in dollars
per $25.00 unit of Capital Securities rather than in percentages of their
principal amount.
S-3
<PAGE> 4
USE OF PROCEEDS
The net proceeds from the sale of the Capital Securities offered hereby are
estimated to be $ . The proceeds will be used by CFC to repay short-term
indebtedness, primarily commercial paper issued through dealers at varying rates
incurred to make loan advances to its Members, and for general corporate
purposes.
CAPITALIZATION
The following table shows the capitalization of CFC as of August 31, 1996,
and as adjusted to reflect the issuance of the Capital Securities and the
application of the proceeds thereof.
<TABLE>
<CAPTION>
AS
OUTSTANDING ADJUSTED
----------- -----------
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
SENIOR DEBT:
Short-term Debt(A)............................................. $ 2,708,684 $
Long-term Debt(A).............................................. 4,049,122 4,049,122
----------- -----------
Total Senior Debt(B)...................................... 6,757,806
SUBORDINATED DEBT AND MEMBERS' EQUITY:
Subordinated Deferrable Interest Debentures.................... $ -- $
Members' Subordinated Certificates(C).......................... 1,216,547 1,216,547
Members' Equity(D)............................................. 233,260 233,260
----------- -----------
Total Capitalization...................................... $ 8,207,613 $
=========== ===========
</TABLE>
- ------------
(A) Short-term indebtedness is used to fund CFC'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, CFC
had at August 31, 1996, bank revolving credit agreements providing for
borrowings aggregating up to $5,050,000,000. CFC'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 $1,346,300,000 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 CFC from
pledging collateral in excess of 150% of the principal amount of Collateral
Trust Bonds outstanding. Commercial paper in the amount of $2,730,000,000,
which is supported by a five-year revolving credit agreement, is shown as
long-term debt. Long-term debt also includes CFC's outstanding Collateral
Trust Bonds and Medium-Term Notes. CFC issued $100,000,000 of 6.75%
Collateral Trust Bonds, Due 2001 on September 5, 1996 and issued
$100,000,000 of 7.30% Collateral Trust Bonds, Due 2006 on September 26,
1996.
(B) At August 31, 1996, CFC had outstanding guarantees of tax-exempt securities
issued on behalf of members in the aggregate amount of $1,311,970,000.
Guaranteed tax-exempt securities include $1,164,700,000 of long-term
adjustable or floating/fixed-rate pollution control bonds which are required
to be remarketed at the option of the holders. CFC has agreed to purchase
any such bonds that cannot be remarketed with the exception of $91,000,000
of certain variable rate bonds. At August 31, 1996, CFC had guaranteed its
members' obligations in connection with certain lease transactions and other
debt in the amount of $911,193,000.
(C) Subordinated Certificates are subordinated obligations purchased by members
as a condition of membership and in connection with CFC's extension of
long-term credit to them. Those issued as a condition of membership
($638,440,000 at August 31, 1996) generally mature 100 years from issuance
and bear interest
S-4
<PAGE> 5
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) CFC allocates its net margins among its members in proportion to interest
earned by CFC from such members within various loan pools. CFC intends to
return the amounts so allocated to its members 70% in the following year and
the remaining 30% after 15 years with due regard for CFC'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 Rural Telephone
Finance Cooperative ("RTFC"), a controlled affiliate of CFC, is to retire
70% of current year's margins within 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 CFC, is to retire 100% of current year's margins shortly after
the end of the fiscal year.
SELECTED FINANCIAL INFORMATION
The following table summarizes CFC's results of operations and fixed charge
coverage for the years ended May 31, 1996 and May 31, 1995 and for the three
months ended August 31, 1996 and August 31, 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------ YEAR ENDED MAY 31,
AUGUST 31, AUGUST 31, ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN
THOUSANDS) THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating income..................... $134,267 $122,048 $ 505,073 $ 440,109
======== ======= ========= =========
Operating margin..................... 12,105 11,569 46,857 41,803
Nonoperating income.................. 661 819 3,764 3,409
Extraordinary loss................... -- -- (1,580) --
-------- ------- --------- ---------
Net margins.......................... $ 12,766 $ 12,388 $ 49,041 $ 45,212
======== ======= ========= =========
Fixed charge coverage ratio(1)....... 1.12 1.12 1.12 1.13
======== ======= ========= =========
</TABLE>
- ------------
(1) 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.
DESCRIPTION OF THE CAPITAL SECURITIES
The following description of specific terms of the Capital Securities
should be read in conjunction with the description of the general terms and
provisions of the Debt Securities set forth in the accompanying Prospectus under
the caption "Description of Debt Securities." The following summary does not
purport to be complete and is subject in all respects to the provisions of, and
is qualified in its entirety by reference to, the description in the
accompanying Prospectus and the Indenture, dated as of ,
1996, from CFC to Mellon Bank, N.A., as Trustee, as supplemented by resolutions
of the Board of Directors of CFC (the "Board") passed by the Board on September
28, 1995 and resolutions of the Bond Pricing Committee of the Board passed by
the Bond Pricing Committee on April 30, 1996. The Indenture, as so supplemented,
is hereinafter referred to in this Prospectus Supplement as the "Indenture."
PRINCIPAL AMOUNT, INTEREST AND MATURITY
The Capital Securities will be issued as a series of Debt Securities under
the Indenture. The Capital Securities will be limited in aggregate principal
amount to $125 million. There is no limit on the amount of additional securities
similar to the Capital Securities that may be issued under the Indenture.
The Capital Securities will mature on , 2045 and will bear
interest at the rate per annum shown on the cover hereof from the date on which
the Capital Securities are issued until the principal amount thereof
S-5
<PAGE> 6
becomes due and payable. Interest will be payable quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, commencing December 31,
1996. Interest will be payable to the person in whose names the Capital
Securities are registered at the close of business on the relevant record dates,
which will be the Business Day (as hereinafter defined) immediately preceding
the relevant payment dates. The amount of interest payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which interest is payable on the Capital Securities is not a
Business Day, then payment of the interest payable on such date will be made on
the next succeeding day which is a Business Day (and without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, such payment will be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date. A "Business Day" is any day other than a day on which
banking institutions in New York City are authorized or obligated by law to
close.
GLOBAL SECURITIES
The Capital Securities will be represented by a Global Security that will
be deposited with, or on behalf of, DTC, and will be available for purchase in
denominations of $25.00 and any integral multiple thereof.
DTC has advised CFC and the Underwriters that DTC is (i) a limited purpose
trust company organized under the New York Banking Law, (ii) a "banking
organization" within the meaning of the New York Banking Law, (iii) a member of
the Federal Reserve System, (iv) a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and (v) a "clearing agency" registered
pursuant to the provisions of Section 17A of the Securities Exchange Act of
1934, as amended. DTC was created to hold securities of its participating
organizations ("participants") and to facilitate the clearance and settlement of
securities transactions, such as transfers and pledges, among its participants
in such securities through electronic computerized book-entry changes in
accounts of participants, thereby eliminating the need for physical movement of
securities certificates. Participants include securities brokers and dealers
(including Underwriters), banks, trust companies, clearing corporations and
certain other organizations, some of whom (and/or their representatives) own
DTC. Access to DTC's book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Persons who are not participants may beneficially own securities held by DTC
only through participants.
A further description of DTC's procedures with respect to the Capital
Securities is set forth under "Description of Debt Securities--Global
Securities" in the accompanying Prospectus.
REDEMPTION
The Capital Securities will be redeemable at the option of CFC, in whole or
in part, at any time on or after , 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' notice, at 100% of the
principal amount to be redeemed together with accrued interest to the redemption
date. If a partial redemption would result in a delisting of the Capital
Securities from any national securities exchange on which the Capital Securities
are then listed, CFC may redeem such Capital Securities only in whole.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
CFC will have the right at any time and from time to time during the term
of the Capital Securities to extend the interest payment period to a period not
exceeding 20 consecutive quarters (an "Extension Period"). At the end of an
Extension Period, CFC must pay all interest then accrued and unpaid (together
with interest thereon at the same rate as specified for the Capital Securities
to the extent permitted by applicable law), provided that during any Extension
Period CFC may not declare or pay any dividend or interest on, or principal of,
or redeem, purchase, acquire or make a liquidation payment with respect to, any
of its Members' Subordinated Certificates, Members' Equity or patronage capital.
Prior to the termination of any Extension Period, CFC may further extend the
interest payment period, provided that such Extension Period, together with all
previous and further extensions thereof, may not exceed 20 consecutive quarters
or extend beyond the maturity of the Capital Securities. Upon the termination of
an Extension Period and the payment of all amounts then due, CFC may select a
new Extension Period, subject to the above requirements. No interest during an
Extension Period, except
S-6
<PAGE> 7
at the end thereof, shall be due and payable. CFC shall give the holders of the
Capital Securities notice of its selection of an Extension Period ten Business
Days prior to the earlier of (i) the next interest payment due date and (ii) the
date CFC is required to give notice to holders of the Capital Securities (or, if
applicable, to the New York Stock Exchange or other applicable self-regulatory
organization) of the record or payment date for such interest payment, but in
any event not less than two Business Days prior to such record date.
ADDITIONAL EVENT OF DEFAULT
In addition to the events of default described in the accompanying
Prospectus under the caption "Description of Debt Securities--Events of
Default," the following will constitute an Event of Default under the Indenture
with respect to the Capital Securities: CFC shall pay any dividend or interest
on, or principal of, or redeem, purchase, acquire or make a liquidation payment
with respect to, any Members' Subordinated Certificates, Members' Equity or
patronage capital, if such payment is made during an Extension Period, and
either (i) such Extension Period has not expired or been terminated or (ii) CFC
has not made all payments due on the Capital Securities as a result of such
expiration or termination. However, because of the terms of the subordination
provisions in CFC's Members' Subordinated Certificates, CFC's failure to pay
interest on, or principal of, such Certificates during an Extension Period will
not be a default thereunder.
DEFEASANCE
The provisions described in the accompanying Prospectus under the caption
"Description of Debt Securities--Defeasance" are applicable to the Capital
Securities.
As is set forth in such description, under the provisions of the Indenture,
subject to certain conditions specified in the Indenture, the Capital Securities
will be deemed to have been paid for purposes of the Indenture and the entire
indebtedness of CFC in respect thereof will be deemed to have been satisfied and
discharged, if there has been irrevocably deposited with the Trustee or any
Paying Agent in trust sufficient cash or certain government securities, or a
combination thereof, to fully satisfy all principal of and interest on the
Capital Securities.
PAYING AGENT AND REGISTRAR
Initially, Mellon Bank, N.A. will act as Paying Agent and Registrar for the
Capital Securities.
U.S. TAXATION
GENERAL
This section is a summary of certain United States federal income tax
considerations that may be relevant to prospective purchasers of Capital
Securities and represents the opinion of Milbank, Tweed, Hadley & McCloy,
special tax counsel to CFC, insofar as it relates to matters of law and legal
conclusions. This section is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change. Subsequent changes may cause tax consequences to vary
substantially from the consequences described below.
No attempt has been made in the following discussion to comment on all
United States federal income tax matters affecting purchasers of Capital
Securities. Moreover, the discussion focuses on holders of Capital Securities
who are individual citizens or residents of the United States who are initial
purchasers and who hold Capital Securities as a capital asset and has only
limited application to corporations, estates, trusts or non-resident aliens.
Accordingly, each prospective purchaser of Capital Securities should consult,
and should depend on, his or her own tax advisor in analyzing the federal,
state, local and foreign tax consequences of the purchase, ownership or
disposition of Capital Securities.
S-7
<PAGE> 8
UNITED STATES HOLDERS
For purposes of this discussion, a "United States Holder" is a beneficial
owner who or that is (i) a citizen or resident of the United States, (ii) a
domestic corporation or (iii) otherwise subject to United States federal income
taxation on a net income basis in respect of Capital Securities.
Under income tax regulations that recently became effective, based on
certain factual assumptions concerning the Capital Securities, CFC believes that
the Capital Securities will not be treated as issued with original issue
discount or OID. It should be noted that these regulations have not yet been
addressed in any rulings or other interpretations by the Internal Revenue
Service (the "IRS"), and counsel is not providing any opinion on this question.
Accordingly, it is possible that the IRS could take a position contrary to the
interpretation described herein.
CFC has the right to defer payments of interest on the Capital Securities
for Extension Periods of up to 20 consecutive calendar quarters and to pay as a
lump sum at the end of such period all of the interest that has accrued during
such period. Should CFC exercise this option to extend the interest payment
periods, the Capital Securities would at that time be treated as issued with OID
and all the stated interest payments on the Capital Securities would thereafter
be treated as OID as long as they remained outstanding. As a result, United
States Holders would, in effect, be required to accrue interest income even if
the holders are on the cash method of tax accounting. Consequently, in the event
that the interest payment period is extended, a United States Holder would be
required to include OID in income on an economic accrual basis notwithstanding
that CFC will not make any interest payments during such period on the Capital
Securities. The tax basis of a Capital Security will be increased by the amount
of any OID that is included in income, and will be decreased when and if
distributions are subsequently received from CFC by such Holders.
A United States Holder will generally recognize gain or loss on the sale or
retirement of a Capital Security equal to the difference between the amount
realized from the sale or retirement of such Capital Security and the tax basis
of the Capital Security. Such gain or loss will be capital gain or loss, except
to the extent attributable to accrued but unpaid interest not previously
included in such United States Holder's income, and will be long-term capital
gain or loss if the Capital Security has been held for more than one year. The
tax basis of a Capital Security will generally equal the amount paid for it,
increased by the amount of any accrued and unpaid interest previously included
in the United States Holder's income.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
holder who or that is (i) a nonresident alien individual or (ii) a foreign
corporation, partnership or estate or trust, in either case not subject to
United States federal income tax on a net income basis in respect of Capital
Securities.
Under current United States federal income tax law, subject to the
discussion below with respect to backup withholding: (i) payments by CFC or any
of its paying agents to any holder of Capital Securities who or that is a United
States Alien Holder will not be subject to United States federal withholding tax
provided that (a) the beneficial owner of Capital Securities does not actually
or constructively own 10% or more of the total combined voting power of all
classes of capital stock of CFC entitled to vote, (b) the beneficial owner of
Capital Securities is not a controlled foreign corporation that is related to
CFC through stock ownership and (c) either (x) the beneficial owner of Capital
Securities certifies to CFC or its agent, under penalties of perjury, that it is
a United States Alien Holder and provides its name and address or (y) the holder
of Capital Securities is a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "financial institution"), and such holder certifies to
CFC or its agent under penalties of perjury that such statement has been
received from the beneficial owner by it or by a financial institution between
it and the beneficial owner and furnishes CFC or its agent with a copy thereof,
and (ii) a United States Alien Holder of Capital Securities will generally not
be subject to United States federal income or withholding taxes on any gain
realized on the sale or exchange of Capital Securities if (a) such gain is not
effectively connected with a U.S. trade or business of the United States Alien
Holder and (b) in the case of an individual, such United States Alien Holder (x)
is not present in the United States for 183 days or more in the taxable year of
the sale or exchange or (y) does not have a tax home (as defined in Section
911(d)(3) of the Code) in the United States in
S-8
<PAGE> 9
the taxable year of the sale or exchange and the gain is not attributable to an
office or other fixed place of business maintained by such individual in the
United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to payments of
principal and interest on Capital Securities, and the proceeds of the sale of
Capital Securities prior to maturity within the United States, with respect to
non-corporate United States Holders, and "backup withholding" at a rate of 31%
will apply to such payments if the United States Holder fails to provide an
accurate taxpayer identification number or underreports its tax liability
required to be shown on its federal income tax returns.
Information reporting and backup withholding will not apply to payments of
principal and interest made by CFC or a paying agent to a United States Alien
Holder on Capital Securities if the certification described in clause (i)(c)
under "United States Alien Holders" above is received, or if the United States
Alien Holder otherwise establishes an exemption, provided that the payor does
not have actual knowledge that the holder is a United States Holder.
Payments of the proceeds from the sale by a United States Alien Holder of
Capital Securities made to or through a foreign office of a broker will not be
subject to information reporting or backup withholding, except that if the
broker is a United States person, a controlled foreign corporation for United
States tax purposes or a foreign person 50% or more of whose gross income from
all sources for the three-year period ending with the close of its taxable year
preceding the payment is effectively connected with a United States trade or
business information reporting may apply to such payments. Payments of proceeds
from the sale of Capital Securities to or through the United States office of a
broker is subject to information reporting and backup withholding unless the
United States Alien Holder or beneficial owner certifies as to its non-United
States status or otherwise establishes an exemption from information reporting
and backup withholding.
UNDERWRITING
The Underwriters (the "Underwriters") named below, acting through their
Representatives, Lehman Brothers Inc., Dean Witter Reynolds Inc., A.G. Edwards &
Sons, Inc., Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, PaineWebber Incorporated and Prudential Securities Incorporated,
have severally agreed to purchase, and CFC has agreed to sell to them, the
respective principal amounts of Capital Securities set forth opposite their
names:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
-------------------------------------------------------------- ------------
<S> <C>
Lehman Brothers Inc........................................... $
Dean Witter Reynolds Inc. ....................................
A.G. Edwards & Sons, Inc. ....................................
Goldman, Sachs & Co. .........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated ...........
PaineWebber Incorporated......................................
Prudential Securities Incorporated............................
------------
Total............................................... $125,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions as therein set forth. The
Underwriters will be obligated to purchase all the Capital Securities if any of
the Capital Securities are purchased.
CFC has been advised by the Underwriters that the Underwriters propose to
offer the Capital Securities to the public initially at the offering price set
forth on the cover of this Prospectus Supplement and to certain dealers at such
price less a selling concession not in excess of $ per Capital Security.
The Underwriters may allow and each such dealer may reallow to other dealers a
concession not exceeding $ per Capital Security. After the initial public
offering, such public offering price and such concessions and reallowances may
be changed.
S-9
<PAGE> 10
The Capital Securities are a new issue of securities with no established
trading market. The Capital Securities have been approved for listing, subject
to official notice of issuance, on the New York Stock Exchange (the "Exchange").
In order to meet one of the requirements for listing the Capital Securities on
the Exchange, the Underwriters will undertake to sell 1,000,000 or more Capital
Securities to a minimum of 400 beneficial holders. Trading of the Capital
Securities on the Exchange is expected to commence within a thirty-day period
after the initial delivery of the Capital Securities. CFC has been advised by
the Underwriters that they intend to make a market in the Capital Securities but
are not obligated to do so and may discontinue any market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Capital Securities.
CFC has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Plan of Distribution" in the accompanying Prospectus for further
information regarding the distribution of the Capital Securities.
LEGAL MATTERS
Statements as to U.S. taxation in this Prospectus Supplement under the
caption "U.S. Taxation" have been passed upon for CFC by Milbank, Tweed, Hadley
& McCloy, special tax counsel to CFC, and are stated herein on their authority
as experts.
S-10
<PAGE> 11
PROSPECTUS
$250,000,000
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
DEBT SECURITIES
------------------------
National Rural Utilities Cooperative Finance Corporation ("CFC" or the
"Company") intends to issue in one or more series from time to time up to
$250,000,000 aggregate principal amount of debt securities (the "Debt
Securities"). The Debt Securities of each series will be offered to the public
on terms determined by market conditions at the time of sale. The Company may
sell Debt Securities (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 specific designation, aggregate principal amount, authorized
denominations, purchase price, maturity, premium, if any, 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 Debt Securities
in respect of which this Prospectus is being delivered ("Offered Debt
Securities") are set forth in the accompanying Prospectus Supplement or in a
supplement thereto relating to the specific Offered Debt Securities (together,
the "Prospectus Supplement"), together with the terms of offering of the Offered
Debt Securities.
The Prospectus Supplement relating to the Offered Debt Securities will also
contain information concerning certain U.S. federal income tax considerations,
if applicable to the Offered Debt Securities.
------------------------
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 Debt Securities
unless accompanied by a Prospectus Supplement.
------------------------
The date of this Prospectus is October 17, 1996
<PAGE> 12
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 DEBT SECURITIES 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.
------------------------
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 public reference facilities of the Commission, Judiciary Plaza,
450 Fifth Street, N.W., Room 1024, Washington, DC 20549, as well as at the
Regional Offices of the Commission at 7 World Trade Center, Suite 1300, New
York, NY 10048 and Northwestern Atrium 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, 20 Broad
Street, 7th Floor, New York, NY 10005.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus.
1. The Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1996.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
August 31, 1996.
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 Debt Securities, 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 20171. Telephone requests may be
directed to (703) 709-6700.
------------------------
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> 13
THE COMPANY
National Rural Utilities Cooperative Finance Corporation (the "Company" or
"CFC") was incorporated as a private, not-for-profit cooperative association
under the laws of the District of Columbia in April 1969. The principal purpose
of CFC is to provide its members with a source of financing to supplement the
loan programs of the Rural Utilities Service ("RUS") 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. 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. 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. 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 20171 and its telephone number is (703) 709-6700.
CFC's 1,051 members as of May 31, 1996, included 903 rural electric utility
members, virtually all of which are consumer-owned cooperatives, 74 service
members and 74 associate members. The utility members included 838 distribution
systems and 65 generation and transmission ("power supply") systems operating in
46 states and U.S. territories. At December 31, 1994, CFC's member rural
electric systems provided service to about 70% of the contiguous continental
land territory of the United States, serving approximately 12.2 million
consumers, representing an estimated 32.0 million ultimate users of electricity,
and owned approximately $66.5 billion (before depreciation of $19.4 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 RUS loans and are
generally secured ratably with RUS'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. As of May 31, 1996, RTFC had 388 members.
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 RUS) on the system's property or, in the
case of a lease transaction, on the leased property. Holders of $1.2 billion of
the guaranteed
3
<PAGE> 14
pollution control debt (at May 31, 1996) 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, 1996, the allowance was $218.0 million.
At May 31, 1996, CFC's ten largest borrowers, which were all power supply
members, had outstanding loans totaling $763.1 million (excluding $368.0 million
of loans guaranteed by RUS), which represented approximately 9.6% of CFC's total
loans outstanding. As of May 31, 1996, outstanding CFC guarantees for these same
ten largest borrowers totaled $1,528.3 million, which represented 67.5% of CFC's
total guarantees outstanding, including guarantees of the maximum amounts of
lease obligations at such date. On that 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, 1996, loans
outstanding to Deseret accounted for 2.0% of total loans outstanding (excluding
loans guaranteed by RUS) and guarantees outstanding to Deseret accounted for
13.4% of total guarantees outstanding. Total loans and guarantees outstanding to
Deseret equaled 27.2% of total Members' Equity, Members' Subordinated
Certificates and the allowance for loan and guarantee losses.
4
<PAGE> 15
Set forth below is a table showing loans outstanding to borrowers as of May
31, 1996, 1995 and 1994, and the weighted average interest rates thereon and
loans committed but unadvanced to borrowers at May 31, 1995.
<TABLE>
<CAPTION>
LOANS OUTSTANDING AND WEIGHTED AVERAGE INTEREST LOANS COMMITTED
RATES THEREON AT MAY 31, BUT UNADVANCED AT
-------------------------------------------------------------------- MAY 31, 1996
1996 1995 1994 (A)(B)
---------- ---------- ---------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term fixed rate secured
loans(C):
Distribution Systems(D)...... $2,380,587 7.29% $1,645,551 7.68% $1,502,454 7.69% $ 36,117
Power Supply Systems(D)...... 247,556 7.71% 253,208 7.68% 273,186 7.56% 1,214
Telecommunication
Organizations.............. 134,497 8.66% 141,144 8.98% 119,600 9.16% --
Service Organizations
(D)(E)..................... 77,205 8.03% 81,521 9.27% 94,104 9.53% 3,140
Associate Members............ 1,542 10.25% 1,569 10.25% 1,606 10.25% --
---------- ---------- ---------- ---------
Total long-term fixed
rate secured loans..... 2,841,387 7.41% 2,122,993 7.83% 1,990,950 7.85% 40,471
---------- ---------- ---------- ---------
Long-term variable rate secured
loans(F):
Distribution Systems......... 2,717,494 6.45% 2,553,590 6.50% 2,172,799 4.65% 839,861
Power Supply Systems......... 202,249 6.45% 191,967 6.50% 170,683 4.65% 626,926
Telecommunication
Organizations.............. 764,911 6.55% 704,427 6.64% 499,506 4.92% 202,971
Service Organizations(E)..... 46,376 6.45% 53,332 6.50% 39,487 4.65% 71,400
Associate Members............ 47,541 6.19% 42,561 6.20% 29,089 4.45% 38,979
---------- ---------- ---------- ---------
Total long-term variable
rate secured loans..... 3,778,571 6.47% 3,545,877 6.52% 2,911,564 4.69% 1,780,137
---------- ---------- ---------- ---------
Refinancing variable rate loans
guaranteed by RUS:
Power Supply Systems......... 416,637 6.47% 429,129 7.27% 533,545 4.87% --
---------- ---------- ---------- ---------
Intermediate-term secured loans:
Distribution Systems......... 4,831 6.60% 4,176 6.85% 4,112 4.90% 2,300
Power Supply Systems......... 53,614 6.60% 40,237 6.85% 21,316 4.90% 168,123
Service Organizations........ 27,652 6.60% 11,429 6.85% 2,099 4.90% 9,384
---------- ---------- ---------- ---------
Total intermediate-term
secured loans.......... 86,097 6.60% 55,842 6.85% 27,527 4.90% 179,807
---------- ---------- ---------- ---------
Intermediate-term unsecured
loans:
Distribution Systems......... 16,019 6.45% 11,392 6.50% 13,046 4.90% 41,572
Power Supply Systems......... 28,957 6.45% 47,443 6.50% 84,515 4.90% 67,190
Telecommunication
Organizations.............. 12,048 6.80% 3,255 7.54% 1,265 5.05% 8,501
---------- ---------- ---------- ---------
Total intermediate-term
unsecured loans........ 57,024 6.52% 62,090 6.56% 98,826 4.90% 117,263
---------- ---------- ---------- ---------
Short-term unsecured loans(G):
Distribution Systems......... 409,664 6.60% 445,962 6.85% 276,373 4.90% 2,191,156
Power Supply Systems......... 25,763 6.60% 10,267 6.85% 14,048 4.90% 930,710
Telecommunication
Organizations.............. 63,813 7.15% 34,637 7.60% 31,176 5.65% 278,811
Service Organizations........ 23,467 6.60% 25,653 6.85% 11,812 4.90% 77,499
Associate Members............ 9,240 6.60% 7,651 6.85% 3,084 4.90% 15,685
---------- ---------- ---------- ---------
Total short-term loans... 531,947 6.67% 524,170 6.90% 336,493 4.97% 3,493,861
---------- ---------- ---------- ---------
Nonperforming loans(H):
Distribution Systems......... 1,739 7.20% 1,830 7.21% 1,933 8.27% --
Power Supply Systems......... 23,555 6.48% 25,811 6.57% 27,948 4.75% --
Telecommunication
Organizations.............. -- -- -- -- 2,098 6.13% --
Associate Members............ -- -- -- -- 12,961 9.00% --
---------- ---------- ---------- ---------
Total nonperforming
loans.................. 25,294 6.53% 27,641 6.61% 44,940 6.19% --
---------- ---------- ---------- ---------
</TABLE>
5
<PAGE> 16
<TABLE>
<CAPTION>
LOANS COMMITTED
BUT UNADVANCED AT
LOANS OUTSTANDING AND WEIGHTED AVERAGE INTEREST MAY 31, 1996
RATES THEREON AT MAY 31, (A)(B)
----------------------------------------------------------------------- -----------------
1996 1995 1994
--------------------- --------------------- ---------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Restructured loans(I):
Distribution Systems......... $ 2,576 18.37% $ 2,654 18.37% $ 2,667 18.37% $ --
Power Supply Systems......... 205,074 9.13% 180,521 9.01% 160,873 8.32% --
Service Organizations........ 1,711 6.45% 1,803 6.50% 1,833 4.62% --
---------- ---------- ---------- ---------
Total restructured
loans.................. 209,361 9.22% 184,978 9.12% 165,373 8.44% --
---------- ---------- ---------- ---------
Total loans.............. 7,946,318 6.85% 6,952,720 7.01% 6,109,218 5.87% 5,611,539
---------- ---------- ---------- ---------
Less: Allowance for loan and
guarantee losses............... 218,047 205,596 188,196 --
---------- ---------- ---------- ---------
Net loans.................... $7,728,271 $6,747,124 $5,921,022 $ 5,611,539
========== ========== ========== =========
</TABLE>
- ----------
<TABLE>
<S> <C>
(A) The interest rates in effect at August 1, 1996, for loans to electric members were
7.60% for long-term loans with a seven-year fixed rate term, 6.20% on variable rate
long-term loans and 6.35% on intermediate- and short-term loans. The rates in effect at
August 1, 1996, on loans to associate members were 8.15% for long- term loans with a
seven-year fixed rate term loans, 6.20% on long-term variable rate loans and 6.35% on
short-term loans. The rates in effect at August 1, 1996, on loans to telecommunication
organizations were 8.25% for long-term loans with a seven-year fixed rate term, 6.30%
on long-term variable rate loans, 6.55% on intermediate-term loans and 6.90% 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. Long-term unadvanced loan commitments that do not have an interest rate
associated with the commitment have been listed under the variable rate. Rates, fixed
or variable, will be set at the time of advance, on the amount of the advance.
(C) Includes $198.3 million and $30.4 million of unsecured loans at May 31, 1996 and 1995.
(D) During calendar year 1997, $131.5 million of such outstanding fixed rate loans, which
currently have a weighted average interest rate of 9.07% per annum, will become subject
to rate adjustment. During the first quarter of calendar year 1996, long-term fixed
rate loans totaling $46.6 million had their interest rates adjusted. These loans will
be eligible to readjust their interest rate again during the first quarter of calendar
year 1997 to the lowest long-term fixed rate offered during 1996 for the term selected.
At January 1 and May 31, 1996, the seven-year long-term fixed rate was 6.65% and 7.65%,
respectively.
(E) CFC had loans outstanding to NCSC in each of the periods shown. Long-term fixed rate
loans outstanding to NCSC as of May 31, 1996, 1995 and 1994, were $31.8 million, $48.5
million and $47.8 million, respectively. In addition, as of May 31, 1996, 1995 and
1994, CFC had unadvanced long-term fixed rate and long-term variable rate loan
commitments to NCSC in the amounts of $15.4 million, $12.3 million and $14.7 million,
respectively.
(F) Includes $84.6 million, $41.4 million and $3.5 million of unsecured loans at May 31,
1996, 1995 and 1994.
(G) Includes $92.7 million, $30.9 million and $18.2 million of secured loans at May 31,
1996, 1995 and 1994.
(H) 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.
(I) 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.
</TABLE>
6
<PAGE> 17
Set forth below is a table showing CFC's guarantees as of the dates
indicated. Substantially all guarantees have been provided on behalf of Power
Supply members.
CFC MEMBER GUARANTEES
<TABLE>
<CAPTION>
MAY 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Long-term tax exempt bonds............................. $1,317,655* $1,496,930* $1,494,200*
Debt portions of leveraged lease transactions.......... 432,516 568,662 646,472
Indemnifications of tax benefit transfers.............. 363,702 389,755 414,512
Other guarantees....................................... 135,567 119,575 100,643
---------- ---------- ----------
Total................................... $2,249,440 $2,574,922 $2,655,827
========== ========== ==========
</TABLE>
- ----------
* Includes $1,168.9 million, $1,200.1 million and $1,214.6 million at May 31,
1996, 1995 and 1994, 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 $370.1 million, $376.7 million and $382.9 million of
such bonds outstanding at May 31, 1996, 1995 and 1994, respectively, at any
time on seven days' notice, in the case of $248.8 million, $254.5 million and
$289.5 million outstanding at May 31, 1996, 1995 and 1994, 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.
Set forth below are the weighted average interest rates earned by CFC
(recognized in the case of nonperforming and restructured loans) on all loans
outstanding during the fiscal years ended May 31.
INTEREST RATES EARNED ON LOANS
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Long-term fixed rate............................... 7.92% 8.63% 8.63%
Long-term variable rate............................ 6.30% 5.90% 4.08%
Telecommunication Organizations.................... 6.86% 6.70% 5.58%
Refinancing loans guaranteed by RUS................ 6.75% 6.07% 4.01%
Intermediate-term.................................. 6.57% 6.19% 4.41%
Short-term......................................... 6.49% 6.29% 4.38%
Associate Members.................................. 6.46% 5.40% 4.21%
Nonperforming...................................... 0.25% 1.56% 1.19%
Restructured....................................... 1.49% 1.92% 2.33%
All loans..................................... 6.77% 6.72% 5.66%
</TABLE>
7
<PAGE> 18
Set forth below is a table showing CFC's outstanding borrowings and the
weighted average interest rates thereon as of the dates shown:
CFC BORROWINGS
<TABLE>
<CAPTION>
AMOUNTS OUTSTANDING AT MAY 31,
--------------------------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Long- and intermediate-term debt:(A)
9.50% Series T Collateral Trust Bonds,
Due 1997(B)(1)............................. $ 150,000 $ 150,000 $ 150,000
8.50% Series U Collateral Trust Bonds,
Due 1998(1)................................ 149,800 149,800 149,800
7.40% Series A Collateral Trust Bonds,
Due 2007(C)(1)............................. -- -- 2,819
Floating Rate Series E-2 Collateral Trust
Bonds,
Due 2010(1)................................ 2,178 2,189 2,253
9.00% Series O Collateral Trust Bonds,
Due 2016(C)(1)............................. -- 82,289 87,400
9.00% Series V Collateral Trust Bonds,
Due 2021(1)................................ 150,000 150,000 150,000
Floating Rate Series 1994A Collateral Trust
Bonds, Due 1996(B)(2)...................... 150,000 150,000 --
6.45% Collateral Trust Bonds, Due 2001(2).... 100,000 -- --
6.50% Collateral Trust Bonds, Due 2002(2).... 100,000 -- --
5.95% Collateral Trust Bonds, Due 2003(2).... 100,000 -- --
6.65% Collateral Trust Bonds, Due 2005(2).... 50,000 -- --
7.20% Collateral Trust Bonds, Due 2015(2).... 50,000 -- --
Medium-Term Notes and weighted average
interest rates............................. 604,252 (6.68%) 573,637 (7.23%) 472,208 (6.99%)
---------- ---------- ----------
Total long- and intermediate-term debt and
weighted average interest rates(D)(E).... 1,606,230 (7.20%) 1,257,915 (7.90%) 1,014,480 (8.06%)
Members' Subordinated Certificates, including
advance payments and weighted average
interest rates(F)............................ 1,073,924 (4.29%) 1,096,466 (4.36%) 1,086,529 (4.46%)
---------- ---------- ----------
Total long- and intermediate-term debt and
Members' Subordinated Certificates and
weighted average interest rates.......... $2,680,154 (6.03%) $2,354,381 (6.25%) $2,101,009 (6.20%)
---------- ---------- ----------
Short-term debt(G) and weighted average
interest rates(H)............................ $4,901,570 (5.41%) $4,242,570 (6.11%) $3,637,975 (4.23%)
---------- ---------- ----------
Total debt and weighted average interest
rates at May 31.......................... $7,581,724 (5.63%) $6,596,951 (6.16%) $5,738,984 (4.95%)
========== ========== ==========
</TABLE>
- ----------
<TABLE>
<S> <C>
(1) Collateral Trust Bonds issued under the 1972 Indenture.
(2) Collateral Trust Bonds issued under the 1994 Indenture.
(A) Net of $0.2 million, $1.1 million and $0.2 million principal amount of bonds held in treasury at
May 31, 1996, 1995 and 1994, respectively, all of which was purchased in connection with CFC's
deferred compensation program.
(B) Collateral Trust Bonds maturing during fiscal year 1997 have been reclassified to short-term debt
in the balance sheet.
(C) The Series O Collateral Trust Bonds were called on March 16, 1996. The Series A Collateral Trust
Bonds were called on December 1, 1994, at par.
(D) Excludes $2,730.0 million, $2,430.0 million, and $2,030.0 million of Commercial Paper classified
as long-term debt as of May 31, 1996, 1995 and 1994, respectively.
(E) Total long- and intermediate-term debt includes $639.0 million which will be due or is expected
to be redeemed during fiscal year 1997.
(F) Excluding $102.5 million, $114.1 million and $107.1 million of Debt Service Reserve Certificates
and $31.4 million, $24.3 million and $29.3 million of subscribed but unissued Subordinated
Certificates as of May 31, 1996, 1995 and 1994, respectively, since such funds are not generally
available for investing in earning assets.
(G) Net of discount; includes $2,730.0 million $2,430.0 million and $2,030.0 million of Commercial
Paper classified as long-term debt as of May 31, 1996, 1995 and 1994, respectively. Includes
$183.5 million, $350.0 million, and $209.0 million of Bank Bid Notes at May 31, 1996, 1995 and
1994, respectively.
</TABLE>
8
<PAGE> 19
Set forth below are the weighted average costs incurred by CFC on its
short-term borrowings (Commercial Paper and Bank Bid Notes) and on its long-term
borrowings (Collateral Trust Bonds, Medium-Term Notes and interest rate swaps)
for the period shown.
INTEREST COSTS ON CFC BORROWINGS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Short-term borrowings.................................. 5.83% 5.59% 3.67%
Long-term borrowings................................... 7.99% 8.15% 8.63%
Total short- and long-term borrowings............. 6.33% 6.15% 5.14%
</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 Debt Securities 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.
SUMMARY FINANCIAL INFORMATION
The following is a summary of selected financial data for each of the five
years ended May 31, 1996.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
For the year ended May 31:
Operating income.................... $ 505,073 $ 440,109 $ 324,682 $ 336,387 $ 402,255
========== ========== ========== ========== ==========
Operating margin.................... $ 46,857 $ 41,803 $ 29,159 $ 38,352 $ 42,809
Nonoperating income................. 3,764 3,409 4,029 3,296 2,744
Extraordinary loss(A)............... (1,580) -- -- (3,161) (1,398)
---------- ---------- ---------- ---------- ----------
Net margins......................... $ 49,041 $ 45,212 $ 33,188 $ 38,487 $ 44,155
========== ========== ========== ========== ==========
Fixed charge coverage ratio(A)...... 1.12 1.13 1.13 1.16 1.14
---- ---- ---- ---- ----
---- ---- ---- ---- ----
As of May 31:
Assets.............................. $8,054,089 $7,080,789 $6,224,296 $5,464,144 $5,401,473
========== ========== ========== ========== ==========
Long-term debt(B)................... $3,682,421 $3,423,031 $2,841,220 $3,095,488 $2,971,074
========== ========== ========== ========== ==========
Members' subordinated
certificates...................... $1,207,684 $1,234,715 $1,222,858 $1,215,547 $1,221,095
========== ========== ========== ========== ==========
Members' equity..................... $ 269,641 $ 270,221 $ 260,968 $ 258,299 $ 246,320
========== ========== ========== ========== ==========
Leverage ratio(C)................... 5.69 5.13 4.63 4.41 4.44
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
- ----------
(A) During the years ended May 31, 1996, 1993 and 1992, CFC paid premiums
totaling $1.6 million, $3.2 million and $1.4 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.
9
<PAGE> 20
(B) Includes commercial paper reclassified as long-term debt and excludes $351.5
million, $262.7 million, $200.8 million, $286.8 million and $494.5 million
in long-term debt that comes due, matures and/or will be redeemed early
during fiscal years 1997, 1996, 1995, 1994 and 1993, respectively.
(C) 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 $121.3 million for the year ended May 31, 1996.
The Company does not have outstanding any common stock and does not pay
dividends. Under current policies, CFC retires Patronage Capital Certificates,
which represent allocations of CFC's net margins, 70% during the next fiscal
year and expects to retire the remaining 30% after 15 years, if permitted by
CFC's contractual obligations and to the extent that the Board of Directors in
its discretion may determine from time to time that the financial condition of
CFC will not be impaired.
CAPITALIZATION
The following table shows the capitalization of the Company as of May 31,
1996.
<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
----------
<S> <C>
SENIOR DEBT:
Short-term Indebtedness(A)................................................. $2,471,552
Long-term Debt(A).......................................................... 4,033,881
----------
Total Senior Debt(B).................................................. 6,505,433
SUBORDINATED DEBT AND MEMBERS' EQUITY:
Members' Subordinated Certificates(C)...................................... 1,207,684
Members' Equity(D)......................................................... 269,641
----------
Total Capitalization.................................................. $7,982,758
</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 May 31, 1996 bank revolving credit agreements providing for
borrowings aggregating up to $5,050,000,000. 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 $1,346,300,000 increased each
fiscal year after 1994 by 90% of net margins not distributed to Members, an
average fixed charge coverage ratio over the six most recent fiscal quarters
of at least 1.025 and that the Company has no material contingent or other
liability or material litigation that was not disclosed by or reserved
against in its most recent annual financial statements (other than loan and
guaranty commitments issued in the ordinary course of business). 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. Notes payable in the amount of $2,730,000,000, which are
supported by a three-year revolving credit agreement, are 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 May 31, 1996, the Company had outstanding guarantees of tax-exempt
securities issued on behalf of members in the aggregate amount of
$1,317,655,000. Guaranteed tax-exempt securities include
10
<PAGE> 21
$1,168,900,000 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. At May 31, 1996, the Company had guaranteed its members'
obligations in connection with certain lease transactions and other debt in
the amount of $931,785,000.
(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
($638,440,000 at May 31, 1996) 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 70% of the amounts so allocated to its members
in the next fiscal year and the remaining 30% after 15 years with due regard
for the Company's financial condition. The current policy of RTFC is to
retire 70% of current year's margins within 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.
THE RURAL ELECTRIC AND TELEPHONE SYSTEMS
GENERAL
CFC's 903 rural electric Utility Members as of May 31, 1996, were drawn
from the approximately 915 (at December 31, 1994) rural electric utility systems
(the "systems") which were eligible for RUS 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 RUS ("RUS Reports"), therefore,
commentary in this section is based on information about the systems generally,
rather than CFC members alone (see Note on page 17). However, the Composite
Financial Statements on pages 18 to 20 relate only to CFC Utility Members. At
December 31, 1994, and for the year then ended, CFC's members accounted for
approximately 98% of the total utility plant, 94% of the total equity, 97% of
the net margins and 93% of the total number of systems covered by RUS 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
RUS 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 RUS PROGRAM
Since the enactment of the Rural Electrification Act of 1936 ("the Act"),
RUS has financed the construction 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 RUS 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 and its territories. They account for
approximately 8% of total sales of electricity and about 7% of energy generation
and generating capacity.
In 1949, the Act was amended to allow RUS to lend for the purpose of
furnishing and improving rural telephone service. At December 31, 1994, 695 of
RUS's 919 telephone borrowers provided service to 4.4 million
11
<PAGE> 22
subscribers throughout the United States and its territories (reporting
information was not available for the remaining 224 borrowers).
The Act provides for RUS to make insured loans and to provide other forms
of financial assistance to borrowers. RUS is authorized to make direct loans at
below-market rates to systems which are eligible to borrow from it. RUS 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, RUS also provides financing through the Rural
Telephone Bank ("RTB"). The RTB is a government corporation providing financing
at rates reflecting its cost of capital. RUS 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.
For fiscal year 1997, Congress has approved RUS electric insured loan
levels of $650 million, of which $125 million would be at the 5% rate, and $525
million would be at municipal bond equivalent rates. An additional $300 million
would be available in loan guarantees.
Legislation enacted in 1994 allows RUS electric borrowers to prepay their
loans to RUS 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 RUS lending for a period of ten years, but remains eligible for RUS
loan guarantees. As of July 31, 1996, 77 borrowers had either fully prepaid or
partially prepaid their RUS notes, under these provisions, in the total amount
of $1,177.9 million. A total of 59 of these borrowers have selected CFC to
refinance a total of $1,005.8 million of this amount.
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, 1994, the
approximate number of consumers served by RUS electric borrowers was 12.2
million, representing an estimated 32.0 million ultimate users. Aggregate
operating revenues of the distribution systems from sales of electric energy for
the year ended December 31, 1994, totaled $16.5 billion, of which 64% 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 from 2.54
in 1993 to 3.16 in 1994. The composite DSC ratio decreased from 2.44 in 1993 to
2.26 in 1994. The composite MDSC ratio decreased from 2.21 in 1993 to 2.09 in
1994. Composite equity as a percent of total assets for member distribution
systems increased from 40.83% at December 31, 1993 to 41.53% at December 31,
1994.
Wholesale power supply contracts ordinarily guarantee neither an
uninterrupted supply nor a constant cost of power. Contracts with RUS-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. The wholesale power
contracts permit the power supply system, subject to RUS 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
12
<PAGE> 23
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 and power supply systems
which do not borrow from RUS 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 63 operating power supply systems financed in
whole or in part by RUS or CFC at December 31, 1995, 62 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 megawatts, and
nine had no generating capacity. Seven of the nine systems with no generating
capacity operated transmission lines to supply certain distribution systems and
one is currently building its first transmission facility. Certain other power
supply systems had been formed but did not yet own generating or transmission
facilities. At December 31, 1995, the 55 power supply systems reporting to RUS
owned 145 generating plants representing generating capacity of approximately
29,597 megawatts, or approximately 4.3% of the nation's estimated electric
generating capacity, and served 716 RUS 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. Of the power supply systems' total generating capacity in place as of
December 31, 1995, steam plants accounted for 94.2% (including nuclear capacity
representing approximately 10.1% of such total generating capacity), internal
combustion plants accounted for 5.5% and hydroelectric plants accounted for
0.3%. RUS loans and loan guarantees as of December 31, 1995, have provided funds
for the installation of over 34,031 megawatts (including nuclear capacity of
approximately 3,806 megawatts, or 11.2% of the total), of which 1,279 megawatts
or 3.8% of the total have officially been canceled.
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 RUS 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 RUS, 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, provided 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.
Deseret failed to make the payments required under the ARO during 1995.
Deseret's creditors agreed to extend the provisions of the ARO first until
January 31, 1996, and then until February 29, 1996. These extensions were
intended to allow the creditors to develop final terms for a long-term
restructuring of the ARO. The creditors were unable to agree on the terms of a
negotiated settlement and thus the ARO was terminated as of February 29, 1996.
CFC filed a foreclosure action against the owner of the Bonanza Plant in State
court in Utah on March 21, 1996. In this action, CFC has not terminated the
lease or sought removal of Deseret as the plant operator. One of the defendants
in the action has asserted counterclaims against CFC alleging that the remedies
13
<PAGE> 24
which CFC seeks are not available to it and that CFC seeks such remedies in an
improper manner. As of October 1996, the counterclaims were very general in
nature, making it difficult to determine any potential impact on CFC. Another
party, not named in the action, has successfully intervened and joined the
action. The foreclosure trial is expected to begin in early 1997.
From January 1, 1989, through August 31, 1996, CFC funded $160.8 million in
cashflow shortfalls related to Deseret's debt service and rental obligations.
All cashflow shortfalls funded by CFC represent an increase to the restructured
loan to Deseret. They also serve to reduce CFC's guarantee exposure to Deseret.
As of August 31, 1996, CFC had approximately $472.2 million in current credit
exposure to Deseret. This exposure consists of $178.5 million in secured loans
and $293.7 million of guarantees by CFC of various direct and indirect
obligations of Deseret. The guarantees include $5.9 million in tax-benefit
indemnifications, $23.9 million related to mine equipment leases and $263.9
million related to the leveraged lease financing of the Bonanza generating
station. In addition, CFC had a $5.3 million loan to Deseret which is fully
guaranteed by the U.S. Government.
CFC believes that given the underlying collateral value and its secured
position against the mortgage of the Bonanza plant, it is adequately reserved
for any potential loss on its loans and guarantees to Deseret.
On October 16, 1996, CFC purchased the RUS claims against Deseret for
$238.5 million. Deseret's members purchased loan participations from CFC
totaling $55 million. As part of this transaction, Deseret's members were also
required to repay their RUS debt totaling approximately $50 million. CFC also
agreed to provide Deseret with a $20 million secured line of credit.
CFC will fund $105 million of long-term secured loans to Deseret's members
for the purpose of purchasing the loan participations and repaying their RUS
debt. These loans are secured against the assets and future revenues of the
members and not by the assets of Deseret.
On September 13, 1996, CFC advanced $235 million to Soyland for the purpose
of repaying its RUS debt at a significant discount. CFC advanced the amount to
Soyland through two senior secured amortizing five-year term notes for $117.5
million, both maturing on July 1, 2001. One of the notes is fully guaranteed by
the distribution members of Soyland. Due to the amount of the RUS discount, CFC
expects Soyland to be able to make all payments related to this debt and has
classified these notes as performing loans. Interest income on these notes will
be recognized on an accrual basis. As part of the buyout from RUS, Soyland will
no longer be responsible for the semi-annual debt service on the grantor trust
certificates, the notes of which are guaranteed by RUS. RUS will now be
responsible for all debt service payments related to the $274.0 million, in
addition to the outstanding fixed-rate grantor trust certificates held by public
investors.
As of September 30, 1996, CFC has classified all new loans to Soyland as
performing, with interest recognition on an accrual basis. The revolving credit
loan and capital additions loan remain classified as performing, with interest
recognized on an accrual basis. The restructured loan will remain classified as
restructured, due to changes made in a prior agreement, and it will be returned
to accrual status with respect to the recognition of interest income.
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.
TELEPHONE SYSTEMS
As of December 31, 1994 (complete data at December 31, 1995 is not yet
available), there were 919 telephone systems that were RUS borrowers, and RUS
had collected financial data on 695. The 695 telephone systems included 199
cooperative not-for-profit organizations and 496 commercial for-profit
organizations. These organizations provided telephone service to approximately
4.4 million consumers and owned approximately 725,430 miles of telephone lines.
Total assets at December 31, 1994 were $10.8 billion, with a composite TIER of
4.49 and composite equity ratio of 46.8%. The telephone systems operate in all
fifty states and seven U.S. territories.
14
<PAGE> 25
The RTB was created by a 1971 amendment to the Act to serve as a source of
supplemental financing for rural telephone systems. To initially capitalize the
RTB, between 1971 and 1991 the United States Government purchased $592 million
in Class A stock of the RTB. RTB borrowers, who are required to purchase Class B
stock in an amount equal to five percent of the amount of each loan, have, as of
June 30, 1995, invested $524 million. In addition, borrowers and other eligible
entities have purchased $112 million in Class C stock of the RTB.
The Act provides that the RTB is to redeem and retire the government's
Class A stock as soon as practicable after September 30, 1995, but not to the
extent that the bank's board determines that such retirement would impair the
operation of the RTB. The minimum amount of Class A stock to be retired each
year after September 30, 1995 is the amount of the Class B stock that is issued
during that year. Language in the United States Government Fiscal Year 1996
House Agriculture Appropriation limits the amount of Class A stock that can be
redeemed in fiscal year 1996 to five percent of the amount of Class A stock
outstanding. Similar language is expected to be included in the fiscal year 1997
Appropriations Bill.
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 16 states (in which there are approximately 250 systems).
Distribution systems in these states account for 35% of the total operating
revenues and patronage capital of all distribution systems nationwide. State
agencies, principally public utility commissions, of 19 states regulate those
states' 289 systems as to the issuance of long-term debt securities. In five
states (in which there are 52 systems) state agencies regulate, to varying
degrees, the issuance of short-term debt securities. Since 1967, the Federal
Power Commission and its successor, the Federal Energy Regulatory Commission
("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 RUS. However, rural electric
cooperatives that pay off their RUS debt or never incur RUS debt may be
regulated by FERC with respect to financing and/or rates.
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 or federal regulation 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
quality standards.
The 1990 amendments to the Clean Air Act of 1970 (the "Amendments")
required utilities and others to reduce emissions. 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 II of the
Act (2000). Compliance plans for member systems with units affected in Phase I
primarily involved 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 designed to 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.
In March 1995, the FERC published a Notice of Proposed Rulemaking ("NOPR")
to solicit comments regarding pending policy changes aimed at opening wholesale
power sales to competition. This NOPR would
15
<PAGE> 26
require jurisdictional public utilities (including investor-owned electric
utilities and cooperatives that are not RUS borrowers) that own, control, or
operate transmission facilities to file non-discriminatory open access
transmission tariffs that provide others with the same transmission services
they provide themselves.
On April 24, 1996, the FERC issued orders 888 and 889 incorporating its
findings during the rulemaking process. Order 888 provides for competitive
wholesale power sales by requiring jurisdictional public utilities that own,
control, or operate transmission facilities to file non-discriminatory open
access transmission tariffs that provide others with transmission service
comparable to the service they provide themselves. The reciprocity provision
associated with Order 888 also provides comparable access to transmission
facilities of non-jurisdictional utilities (including RUS borrowers and
municipal and other publicly-owned electric utilities) that use jurisdictional
utilities' transmission systems. The order further provides for the recovery of
stranded costs from departing wholesale customers with agreements dated prior to
July 11, 1994. After that date, stranded costs must be agreed upon in the
service agreement. Order 889 provides for a real-time electronic information
system referred to as the Open Access Same-Time Information System ("OASIS"). It
also addresses standards of conduct to ensure that transmission owners and their
affiliates do not have an unfair competitive advantage by using transmission to
sell power. Presently, many of the issues surrounding the implementation of
Orders 888 and 889 remain unresolved. These issues are anticipated to be
resolved in part by litigation on a case-by-case basis before the FERC and
through the appellate process. Due to the uncertainty of this litigation, CFC is
unable to estimate the ultimate impact of these orders on its member systems.
However, open access transmission as a national policy has long been sought by
electric cooperatives so that investor-owned utilities cannot use their
ownership of transmission to the disadvantage of the cooperatives.
Section 211 of the Federal Power Act, as amended by the Energy Policy Act
of 1992, classifies any cooperative with significant transmission assets as a
"transmitting utility" for the purposes of this section. Under the provisions of
this Act, FERC has the authority to order such cooperatives to provide open
access for unaffiliated entities. This provision also authorizes FERC to require
investor-owned and other utilities to provide the same open access transmission
for the benefit of cooperatives. Electric cooperatives have strongly supported
section 211 for this reason. Under sections 205 and 206 of the Federal Power
Act, cooperatives that pay off their RUS debt are treated as "jurisdictional
public utilities". FERC is proceeding under the legal theory that, under these
sections, it can order "jurisdictional public utilities" to provide open access.
All telephone systems are regulated by the Federal Communications
Commission with respect to long distance access rates. Most states also regulate
local rates.
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 RUS 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 RUS, 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, RUS has included
16
<PAGE> 27
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, 1994, and their respective composite balance
sheets as at the end of each such year. Complete RUS data for the year ended
December 31, 1995 is not available.
- ----------
NOTE: Statistical information in RUS 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 RUS. The RUS Reports are based upon
financial statements submitted to RUS, subject to year-end audit adjustments, by
reporting RUS borrowers and do not, with minor exceptions, take into account
current data for certain systems, primarily those which are not active RUS
borrowers.
17
<PAGE> 28
COMPOSITE SUMMARY FINANCIAL INFORMATION AS REPORTED BY
CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Distribution Systems
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues and patronage
capital............................... $16,163,578 $15,072,400 $13,921,515 $13,446,544 $12,819,204
Operating deductions.................... 14,126,839 13,566,718 12,628,989 12,194,103 11,570,307
----------- ----------- ----------- ----------- -----------
Utility operating margins............... 2,036,739 1,505,682 1,292,526 1,252,441 1,248,897
Non-operating margins and capital
credits(1)............................ 395,682 384,862 377,550 377,701 365,378
Interest on long-term debt and other
deductions(2)......................... (805,323) (766,722) (777,435) (782,023) (764,072)
----------- ----------- ----------- ----------- -----------
Net margins and patronage capital....... $ 1,627,098 $ 1,123,822 $ 892,641 $ 848,119 $ 850,203
============ ============ ============ ============ ============
TIER(3)................................. 3.16 2.54 2.19 2.11 2.15
DSC(4).................................. 2.26 2.44 2.07 2.13 2.16
MDSC(5)................................. 2.09 2.21 1.99 2.06 2.05
Number of systems included.............. 828 825 821 819 820
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets and other debits:
Net utility plant................... $23,329,493 $21,877,902 $20,721,332 $19,649,754 $18,662,477
Other assets........................ 7,770,998 7,410,799 6,980,758 6,695,615 6,440,000
----------- ----------- ----------- ----------- -----------
Total assets and other
debits....................... $31,100,491 $29,288,701 $27,702,090 $26,345,369 $25,102,477
============ ============ ============ ============ ============
Liabilities and other credits:
Total net worth..................... $12,918,484 $11,959,962 $10,925,009 $10,059,342 $ 9,367,448
Other liabilities and credits....... 18,182,007 17,328,739 16,777,081 16,286,027 15,735,029
----------- ----------- ----------- ----------- -----------
Total liabilities and other
credits...................... $31,100,491 $29,288,701 $27,702,090 $26,345,369 $25,102,477
============ ============ ============ ============ ============
Equity percentage....................... 41.5% 40.8% 39.4% 38.2% 37.3%
Number of systems included.............. 828 825 821 819 820
</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
RUS 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 RUS 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) Modified DSC ("MDSC") 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.
18
<PAGE> 29
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 RUS or to
CFC by CFC Member Power Supply Systems
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenue and patronage
capital............................... $ 9,972,873 $ 9,976,560 $ 9,111,434 $ 8,615,165 $ 8,553,618
Operating deductions.................... 8,393,817 8,191,101 7,375,988 6,986,912 6,824,168
----------- ----------- ----------- ----------- -----------
Utility operating margins............... 1,579,056 1,785,459 1,735,446 1,628,253 1,729,450
Non-operating margins and capital
credits(1)............................ 253,534 376,796 311,581 357,824 340,801
Interest on long-term debt and other
deductions(2)......................... (1,987,438) (2,199,696) (2,213,283) (2,041,969) (2,172,079)
----------- ----------- ----------- ----------- -----------
Net margins and patronage capital....... $ (154,848) $ (37,441) $ (166,256) $ (55,892) $ (101,828)
============ ============ ============ ============ ============
TIER(3)................................. .93 .98 .92 .97 .95
DSC(4).................................. 1.01 1.03 1.05 1.06 1.05
Number of systems included(5)........... 53 50 50 49 50
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets and other debits:
Net utility plant................... $23,781,496 $23,774,280 $23,715,910 $22,558,712 $23,084,888
Other assets........................ 11,095,752 11,256,222 8,539,061 7,929,750 8,432,676
----------- ----------- ----------- ----------- -----------
Total assets and other
debits....................... $34,877,248 $35,030,502 $32,254,971 $30,488,462 $31,517,564
============ ============ ============ ============ ============
Liabilities and other credits:
Total net worth..................... $ 246,584 $ 432,347 $ 316,039 $ 593,749 $ 545,122
Other liabilities and credits....... 34,630,664 34,598,155 31,938,932 29,894,713 30,972,442
----------- ----------- ----------- ----------- -----------
Total liabilities and other
credits...................... $34,877,248 $35,030,502 $32,254,971 $30,488,462 $31,517,564
============ ============ ============ ============ ============
Number of systems included(5)........... 53 50 50 49 50
</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 RUS accounting practices. Cash
distributions of this credit have rarely been made by the selling power
supply systems to their members. This item also includes 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 RUS 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 unpublished
19
<PAGE> 30
information furnished by RUS, 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
FUNDS USED
DURING
INTEREST CHARGED CONSTRUCTION
TO CONSTRUCTION ------------------ TOTAL
---------------- (DOLLAR AMOUNTS IN -------
THOUSANDS)
<S> <C> <C> <C>
1994 $ 46,773 $8,913 $ 55,686
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
</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). 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 1.31, 1.20, 1.15, 1.15 and 1.08 for the
years ended December 31, 1994, 1993, 1992, 1991 and 1990, 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
(including all interest charged to construction). 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 1.24, 1.21, 1.22,
1.26 and 1.21 for the years ended December 31, 1994, 1993, 1992, 1991 and
1990, respectively.
(5) Thirteen CFC power supply system members are not required to report to RUS
since they are not currently borrowers from RUS. These systems with the
exception of Old Dominion Electric Cooperative are either in developmental
stages or act as coordinating agents for their members. Their inclusion
would not have a material effect on these data.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities may be issued in one or more new series under an
Indenture or Indentures (the "Indenture") between CFC and Mellon Bank, N.A., or
other trustee to be named, as Trustee (each, a "Trustee"). The statements herein
concerning (i) the Indenture, (ii) one or more supplemental indentures, board
resolutions or officer's certificates establishing the Debt Securities and (iii)
the Debt Securities (the forms of each of which are filed, or will be filed, as
exhibits to the Registration Statement of which this Prospectus forms a part, or
as an exhibit to a Current Report on Form 8-K to be incorporated by reference in
this Prospectus) are merely an outline and do not purport to be complete. Such
statements make use of the terms defined in the Indenture and are qualified in
their entirety by express reference to the sections of the Indenture cited
herein. The Debt Securities will be unsecured and subordinated obligations of
CFC.
Reference is made to the Prospectus Supplement relating to any particular
issue of Offered Debt Securities for the following terms: (1) the title of such
Debt Securities; (2) any limit on the aggregate principal amount of such Debt
Securities or the series of which they are a part; (3) the date or dates on
which the principal of any of such Debt Securities will be payable; (4) the rate
or rates (which may be fixed or variable) and/or the method of determination of
such rate or rates at which any of such Debt Securities will bear interest, if
any, the date or dates from which any such interest will accrue, the Interest
Payment Dates on which any such interest will be payable and the Regular Record
Date for any such interest payable on any Interest Payment Date; (5) the place
or places where (i) the principal of, premium, if any, and interest on any of
such Debt Securities will be payable,
20
<PAGE> 31
(ii) registration of transfer of such Debt Securities may be effected, (iii)
exchanges of such Debt Securities may be effected and (iv) notices and demands
to or upon CFC in respect of such Debt Securities may be served; the Security
Registrar for such Debt Securities and, if such is the case, that the principal
of such Debt Securities shall be payable without presentment or surrender
thereof; (6) the period or periods within which, or the date or dates on which,
the price or prices at which and the terms and conditions upon which any of such
Debt Securities may be redeemed, in whole or in part, at the option of CFC; (7)
the obligation or obligations, if any, of CFC to redeem or purchase any of such
Debt Securities pursuant to any sinking fund or other mandatory redemption
provisions or at the option of the Holder thereof, and the period or periods
within which, or the date or dates on which, the price or prices at which and
the terms and conditions upon which any of such Debt Securities shall be
redeemed or purchased, in whole or in part, pursuant to such obligation, and
applicable exceptions to the requirements of a notice of redemption in the case
of mandatory redemption or redemption at the option of the Holder; (8) the
denominations in which any of such Debt Securities will be issuable, if other
than denominations of $1,000 and any integral multiple thereof; (9) if the
amount payable in respect of principal of or any premium or interest on any of
such Debt Securities may be determined with reference to an index or other fact
or event ascertainable outside the Indenture, the manner in which such amounts
will be determined; (10) if other than the currency of the United States, the
currency or currencies, including composite currencies in which the principal of
or any premium or interest on any of such Debt Securities will be payable; (11)
if the principal of or any premium or interest on any of such Debt Securities is
to be payable, at the election of CFC or the Holder thereof, in a coin or
currency other than in which such Debt Securities are stated to be payable, the
period or periods within which and the terms and conditions upon which, such
election is to be made; (12) if other than the principal amount thereof, the
portion of the principal amount of any of such Debt Securities which shall be
payable upon declaration of acceleration of the Maturity thereof; (13) if the
principal of or premium or interest on such Debt Securities are to be payable,
or are to be payable at the election of CFC or a Holder thereof, in securities
or other property, the type and amount of such securities or other property, or
the formulary or other method or other means by which such amount shall be
determined, and the period or periods within which, and the terms and conditions
upon which, any such election may be made; (14) the terms, if any, pursuant to
which such Debt Securities may be converted into or exchanged for securities of
CFC or any other Person; (15) the obligations or instruments, if any, which
shall be considered to be Eligible Obligations in respect of such Debt
Securities denominated in a currency other than Dollars or in a composite
currency, and any additional or alternative provisions for the reinstatement of
CFC's indebtedness in respect of such Debt Securities after the satisfaction and
discharge thereof; (16) if such Debt Securities are to be issued in global form,
(i) any limitations on the rights of the Holder or Holders of such Debt
Securities to transfer or exchange the same or to obtain the registration of
transfer thereof, (ii) any limitations on the rights of the Holder or Holders
thereof to obtain certificates therefor in definitive form in lieu of temporary
form and (iii) any and all other matters incidental to such Debt Securities;
(17) if such Debt Securities are to be issuable as bearer securities; (18) any
limitations on the rights of the Holders of such Debt Securities to transfer or
exchange such Debt Securities or to obtain the registration of transfer thereof,
and if a service charge will be made for the registration of transfer or
exchange of such Debt Securities, the amount or terms thereof; (19) any
exceptions to the provisions governing payments due on legal holidays or any
variations in the definition of Business Day with respect to such Debt
Securities; (20) any addition to the Events of Default applicable to any of such
Debt Securities and any addition to the covenants of CFC for the benefit of the
Holders of such Debt Securities; and (21) any other terms of such Debt
Securities of such series, or any Tranche thereof, not inconsistent with the
provisions of the Indenture. (Section 301)
Debt Securities may be sold at a substantial discount below their principal
amount. Certain special United States federal income tax considerations (if any)
applicable to Debt Securities sold at an original issue discount may be
described in the applicable Prospectus Supplement. In addition, certain special
United States federal income tax or other considerations (if any) applicable to
any Debt Securities which are denominated in a currency or currency unit other
than Dollars may be described in the applicable Prospectus Supplement.
Except as may otherwise be described in the Prospectus Supplement, the
covenants contained in the Indenture would not afford Holders of Debt Securities
protection in the event of a highly-leveraged transaction involving CFC.
21
<PAGE> 32
SUBORDINATION
The Debt Securities will be subordinate and junior in right of payment to
all Senior Indebtedness of CFC.
No payment of principal of (including redemption and sinking fund
payments), premium, if any, or interest on, the Debt Securities may be made if
any Senior Indebtedness is not paid when due, or a default (other than a payment
default) has occurred with respect to the Senior Indebtedness permitting the
holders to accelerate the maturity thereof and such default has not been cured
or waived and has not ceased to exist. Upon (i) any acceleration of the
principal amount due on the Debt Securities or (ii) any distribution of assets
of CFC to creditors upon any dissolution, winding-up, liquidation or
reorganization, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all principal of, and premium, if any, and
interest due or to become due on, all Senior Indebtedness must be paid in full
before the Holders of the Debt Securities are entitled to receive or retain any
payment. (Article 15) The rights of the Holders of the Debt Securities will be
subrogated to the rights of the Holders of Senior Indebtedness to receive
payments or distributions applicable to Senior Indebtedness until all amounts
owing on the Debt Securities are paid in full. (Article 15)
The term "Senior Indebtedness" is defined in the Indenture to mean (a) all
indebtedness heretofore or hereafter incurred by CFC for money borrowed unless
by its terms it is provided that such indebtedness is not Senior Indebtedness,
(b) all other indebtedness hereafter incurred by the CFC which by its terms
provides that such indebtedness is Senior Indebtedness, (c) all guarantees,
endorsements and other contingent obligations in respect of, or obligations to
purchase or otherwise acquire or service, indebtedness or obligations of others,
and (d) any amendments, modifications, deferrals, renewals or extensions of any
such Senior Indebtedness heretofore or hereafter issued in evidence of or
exchange of such Senior Indebtedness.
The Indenture does not limit the aggregate amount of Senior Indebtedness
that CFC may issue. As of August 31, 1996, outstanding Senior Indebtedness of
CFC aggregated approximately $8.6 billion, including contingent guarantees of
$2.2 billion.
FORM, EXCHANGE AND TRANSFER
Unless otherwise specified in the applicable Prospectus Supplement, the
Debt Securities of each series will be issuable only in fully registered form
without coupons and in denominations of $1,000 and any integral multiple
thereof. (Sections 201 and 302)
At the option of the Holder, subject to the terms of the Indenture and the
limitations applicable to global securities, Debt Securities of any series will
be exchangeable for other Debt Securities of the same series, of any authorized
denomination and of like tenor and aggregate principal amount. (Section 305)
Subject to the terms of the Indenture and the limitations applicable to
global securities, Debt Securities may be presented for exchange as provided
above or for registration of transfer (duly endorsed or accompanied by a duly
executed instrument of transfer) at the office of the Security Registrar or at
the office of any transfer agent designated by CFC for such purpose. CFC may
designate itself the Security Registrar. No service charge will be made for any
registration of transfer or exchange of Debt Securities, but CFC may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Such transfer or exchange will be effected upon
the Security Registrar or such transfer agent, as the case may be, being
satisfied with the documents of title and identity or the person making the
request. (Section 305) Any transfer agent (in addition to the Security
Registrar) initially designated by CFC for any Debt Securities will be named in
the applicable Prospectus Supplement. CFC may at any time designate additional
transfer agents or rescind the designation of any transfer agent or approve a
change in the office through which any transfer agent acts, except that CFC will
be required to maintain a transfer agent in each Place of Payment for the Debt
Securities of each series. (Section 602)
CFC will not be required to (i) issue, register the transfer of, or
exchange any Debt Security or any Tranche thereof during a period beginning at
the opening of business 15 days before the day of mailing of a notice of
redemption of any such Debt Security called for redemption and ending at the
close of business on the day of such mailing or (ii) register the transfer of or
exchange any Debt Security so selected for redemption, in whole or in part,
except the unredeemed portion of any such Debt Security being redeemed in part.
(Section 305)
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PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable Prospectus Supplement, payment
of interest on a Debt Security on any Interest Payment Date will be made to the
person in whose name such Debt Security (or one or more Predecessor Securities)
is registered at the close of business on the Regular Record Date for such
interest. (Section 307)
Unless otherwise indicated in the applicable Prospectus Supplement,
principal of and any premium and interest on the Debt Securities of a particular
series will be payable at the office of such Paying Agent or Paying Agents as
CFC may designate for such purpose from time to time. Unless otherwise indicated
in the applicable Prospectus Supplement, the corporate trust office of the
Trustee in New York City will be designated as CFC's sole Paying Agent for
payments with respect to Debt Securities of each series. Any other Paying Agents
initially designated by CFC for the Debt Securities of a particular series will
be named in the applicable Prospectus Supplement. CFC may at any time designate
additional Paying Agents or rescind the designation of any Paying Agent or
approve a change in the office through which any Paying Agent acts, except that
CFC will be required to maintain a Paying Agent in each Place of Payment for the
Debt Securities of a particular series. (Section 602)
All moneys paid by CFC to a Paying Agent for the payment of the principal
of or any premium or interest on any Debt Security which remain unclaimed at the
end of two years after such principal, premium or interest has become due and
payable will be repaid to CFC, and the Holder of such Debt Security thereafter
may look only to CFC for payment thereof. (Section 603)
REDEMPTION
Any terms for the optional or mandatory redemption of Debt Securities will
be set forth in the applicable Prospectus Supplement or a supplement thereto.
Except as shall otherwise be provided in the applicable Prospectus Supplement
with respect to Debt Securities that are redeemable at the option of the Holder,
Debt Securities will be redeemable only upon notice by mail not less than 30 nor
more than 60 days prior to the date fixed for redemption, and, if less than all
the Debt Securities of a series, or any Tranche thereof, are to be redeemed, the
particular Debt Securities to be redeemed will be selected by such method as
shall be provided for any particular series, or in the absence of any such
provision, by such method of random selection as the Security Registrar deems
fair and appropriate. (Section 403 and 404)
Any notice of redemption at the option of CFC may state that such
redemption will be conditional upon receipt by the Paying Agent or Agents, on or
prior to the dated fixed for such redemption, of money sufficient to pay the
principal of and premium, if any, and interest, if any, on such Debt Securities
and that if such money has not been so received, such notice will be of no force
and effect and CFC will not be required to redeem such Debt Securities. (Section
404)
CONSOLIDATION, MERGER, AND SALE OF ASSETS
CFC may not consolidate with or merge into any other person or convey,
transfer or lease its properties and assets substantially as an entirety to any
Person, unless (i) the corporation formed by such consolidation or into which
CFC is merged or the Person which acquires by conveyance or transfer, or which
leases, the property and assets of CFC substantially as an entirety shall be a
Person organized and validly existing under the laws of any domestic
jurisdiction and such Person expressly assumes CFC's obligations on the Debt
Securities and under the Indenture, (ii) immediately after giving effect to the
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing, and (iii) CFC will have delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel as provided in the Indenture. (Section
1101)
EVENTS OF DEFAULT
Each of the following will constitute an Event of Default under the
Indenture with respect to Debt Securities of any series: (a) failure to pay any
interest on any Debt Securities of such series within 60 days after the same
becomes due and payable; (b) failure to pay principal or premium, if any, on any
Debt Security of such
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series within three Business Days after the same becomes due and payable; (c)
failure to perform or breach of any other covenant or warranty of CFC in the
Indenture (other than a covenant or warranty of CFC in the indenture solely for
the benefit of one or more series of Debt Securities other than such series) for
60 days after written notice to CFC by the Trustee, or to CFC and the Trustee by
the Holders of at least 33% in principal amount of the Debt Securities of such
series outstanding under the Indenture as provided in the Indenture; (d) certain
events of bankruptcy, insolvency or reorganization; and (e) any other Event of
Default specified in the applicable Prospectus Supplement with respect to Debt
Securities of particular series. (Section 801)
No Event of Default with respect to the Debt Securities necessarily
constitutes an Event of Default with respect to the Debt Securities of any other
series issued under the Indenture.
If an Event of Default with respect to any series of Debt Securities occurs
and is continuing, then either the Trustee or the Holders of not less than 33%
in principal amount of the Outstanding Debt Securities of such series may
declare the principal amount (or if the Debt Securities of such series are
discount notes or similar Debt Securities, such portion of the principal amount
may be specified in the applicable Prospectus Supplement) of all of the Debt
Securities of such series to be due and payable immediately; provided, however,
that if an Event of Default occurs and is continuing with respect to more than
one series of Debt Securities, the Trustee or the Holders of not less than 33%
in aggregate principal amount of the Outstanding Debt Securities of all such
series, considered as one class, may make such declaration of acceleration and
not the Holders of the Debt Securities of any one of such series.
At any time after the declaration of acceleration with respect to the Debt
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained, the Event or Events of Default
giving rise to such declaration of acceleration will, without further act, be
deemed to have been waived, and such declaration and its consequences will,
without further act, be deemed to have been rescinded and annulled, if
(a) CFC has paid or deposited with the Trustee a sum sufficient to pay
(1) all overdue interest on all Debt Securities of such series;
(2) the principal of and premium, if any, on any Debt Securities of
such series which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate or rates prescribed
therefor in such Debt Securities;
(3) interest upon overdue interest at the rate or rates prescribed
therefor in such Debt Securities, to the extent that payment of such
interest is lawful; and
(4) all amounts due to the Trustee under the Indenture;
(b) any other Event or Events of Default with respect to the Debt
Securities of such series, other than the nonpayment of the principal of
the Debt Securities of such series which has become due solely by such
declaration of acceleration, have been cured or waived as provided in the
Indenture. (Section 802)
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
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
shall have offered to the Trustee reasonable indemnity. (Section 903) Subject to
such provisions for the indemnification of the Trustee, the Holders of a
majority in principal amount of the Outstanding Debt Securities of any series
will 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, with respect to the Debt Securities of that
series. (Section 812)
No Holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the Indenture, or for the appointment of a
receiver or a trustee, or for any other remedy thereunder, unless (i) such
Holder has previously given to the Trustee written notice of a continuing Event
of Default with respect to the Debt Securities of such series, (ii) the Holders
of not less than 33 1/3% in aggregate principal amount of the Outstanding Debt
Securities of such series have made written request to the Trustee, and such
Holder or Holders
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have offered reasonable indemnity to the Trustee to institute such proceeding as
trustee and (iii) the Trustee has failed to institute such proceeding, and has
not received from the Holders of a majority in aggregate principal amount of the
Outstanding Debt Securities of that series a direction inconsistent with such
request, within 60 days after such notice, request and offer. (Section 807)
However, such limitations do not apply to a suit instituted by a Holder of a
Debt Security for the enforcement of payment of the principal of or any premium
or interest on such Debt Security on or after the applicable due date specified
in such Debt Security. (Section 808)
CFC will be required to furnish to the Trustee annually a statement by an
appropriate officer as to such officer's knowledge of CFC's compliance with all
conditions and covenants under the Indenture, such compliance to be determined
without regard to any period of grace or requirement of notice under the
Indenture. (Section 605)
MODIFICATION AND WAIVER
Without the consent of any Holder of Debt Securities, CFC and the Trustee
may enter into one or more supplemental indentures for any of the following
purposes: (a) to evidence the assumption by any permitted successor to CFC of
the covenants of CFC in the Indenture and the Debt Securities; or (b) to add one
or more covenants of CFC or other provisions for the benefit of the Holders of
all or any series of Outstanding Debt Securities or to surrender any right or
power conferred upon CFC by the Indenture; or (c) to add any additional Events
of Default with respect to all or any series of Outstanding Debt Securities; or
(d) to change or eliminate any provision of the Indenture or to add any new
provision to the Indenture, provided that if such change, elimination or
addition will adversely affect the interests of the Holders of Debt Securities
of any series in any material respect, such change, elimination or addition will
become effective with respect to such series only when there is no Debt Security
of such series remaining Outstanding under the Indenture; or (e) to provide
collateral security for the Debt Securities; or (f) to establish the form or
terms of Debt Securities of any series as permitted by the Indenture; or (g) to
evidence and provide for the acceptance of appointment of a successor Trustee
under the Indenture with respect to the Debt Securities of one or more series
and to add to or change any of the provisions of the Indenture as shall be
necessary to provide for or to facilitate the administration of the trusts under
the Indenture by more than one trustee; or (h) to provide for the procedures
required to permit the utilization of a noncertificated system of registration
for any series of Debt Securities; or (i) to change any place where (1) the
principal of and premium, if any, and interest, if any, on any Debt Securities
shall be payable, (2) any Debt Securities may be surrendered for registration of
transfer or exchange and (3) notices and demands to or upon CFC in respect of
Debt Securities and the Indenture may be served; or (j) to cure any ambiguity or
inconsistency or to make or change any other provisions with respect to matters
and questions arising under the Indenture, provided such changes or additions
shall not adversely affect the interests of the Holders of Debt Securities of
any series in any material respect. (Section 1201)
The Holders of not less than a majority in aggregate principal amount of
the Outstanding Debt Securities of any series may waive compliance by CFC with
certain restrictive provisions of the Indenture. (Section 606) The Holders of a
majority in principal amount of the Outstanding Debt Securities of any series
may waive any past default under the Indenture, except a default in the payment
of principal, premium or interest and certain covenants and provisions of the
Indenture that cannot be modified or be amended without the consent of the
Holder of each Outstanding Debt Security of such series affected. (Section 813)
Without limiting the generality of the foregoing, if the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"), is amended after the date
of the Indenture in such a way as to require changes to the Indenture or the
incorporation therein of additional provisions or so as to permit changes to, or
the elimination of, provisions which, at the date of the Indenture or at any
time thereafter, were required by the Trust Indenture Act to be contained in the
Indenture, the Indenture will be deemed to have been amended so as to conform to
such amendment or to effect such changes or elimination, and CFC and the Trustee
may, without the consent of any Holders, enter into one or more supplemental
indentures to evidence or effect such amendment. (Section 1201)
Except as provided above, the consent of the Holders of not less than a
majority in aggregate principal amount of the Debt Securities of all series then
Outstanding, considered as one class, is required for the purpose of adding any
provisions to, or changing in any manner, or eliminating any of the provisions
of, the Indenture
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pursuant to one or more supplemental indentures; provided, however, that if less
than all of the series of Debt Securities Outstanding are directly affected by a
proposed supplemental indenture, then the consent only of the Holders of a
majority in aggregate principal amount of Outstanding Debt Securities of all
series so directly affected, considered as one class, will be required; and
provided, further, that if the Debt Securities of any series have been issued in
more than one Tranche and if the proposed supplemental indenture directly
affects the rights of the Holders of one or more, but less than all, such
Tranches, then the consent only of the Holders of a majority in aggregate
principal amount of the Outstanding Debt Securities of all Tranches so directly
affected, considered as one class, will be required; and provided further, that
no such amendment or modification may (a) change the Stated Maturity of the
principal of, or any installment of principal of or interest on, any Debt
Security, or reduce the principal amount thereof or the rate of interest thereon
(or the amount of any installment of interest thereon) or change the method of
calculating such rate or reduce any premium payable upon the redemption thereof,
or reduce the amount of the principal of any Discount Security that would be due
and payable upon a declaration of acceleration of Maturity or change the coin or
currency (or other property) in which any Debt Security or any premium or the
interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity of any Debt
Security (or, in the case of redemption, on or after the redemption date)
without, in any such case, the consent of the Holder of such Debt Security, (b)
reduce the percentage in principal amount of the Outstanding Debt Securities of
any series, or any Tranche thereof, the consent of the Holders of which is
required for any such supplemental indenture, or the consent of the Holders of
which is required for any waiver of compliance with any provision of the
Indenture or any default thereunder and its consequences, or reduce the
requirements for quorum or voting, without, in any such case, the consent of the
Holder of each Outstanding Debt Security of such series or Tranche, or (c)
modify certain of the provisions of the Indenture relating to supplemental
indentures, waivers of certain covenants and waivers of past defaults with
respect to the Debt Securities of any series, or any Tranche thereof, without
the consent of the Holder of each Outstanding Debt Security affected thereby. A
supplemental indenture which changes or eliminates any covenant or other
provision of the Indenture which has expressly been included solely for the
benefit of one or more particular series of Debt Securities or one or more
Tranches thereof, or modifies the rights of the Holders of Debt Securities of
such series or Tranches with respect to such covenant or other provision, will
be deemed not to affect the rights under the Indenture of the Holders of the
Debt Securities of any other series or Tranche. (See Section 1202)
The Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding Debt Securities have given or
taken any direction, notice, consent, waiver or other action under the Indenture
as of any date, (i) Debt Securities owned by CFC or any other obligor upon the
securities or any Affiliate of CFC or of such other obligor (unless CFC, such
Affiliate or such obligor owns all Securities Outstanding under the Indenture,
or all Outstanding Securities of each such series and each such Tranche, as the
case may be, determined without regard to this clause (i)) shall be disregarded
and deemed not to be Outstanding; (ii) the principal amount of a Discount
Security that shall be deemed to be Outstanding for such purposes shall be the
amount of the principal thereof that would be due and payable as of the date of
such determination upon a declaration of acceleration of the Maturity thereof as
provided in the Indenture; and (iii) the principal amount of a Debt Security
denominated in one or more foreign currencies or a composite currency that will
be deemed to be Outstanding will be the Dollar equivalent, determined as of such
date in the manner prescribed for such Debt Security, of the principal amount of
such Debt Security (or, in the case of a Debt Security described in clause (ii)
above, of the amount described in such clause). (Section 101)
If CFC shall solicit from Holders any request, demand, authorization,
direction, notice, consent, election, waiver or other Act, CFC may, at its
option, by Board Resolution, fix in advance a record date for the determination
of Holders entitled to give such request, demand, authorization, direction,
notice, consent, election, waiver or other Act, but CFC shall have no obligation
to do so. If such a record date is fixed, such request, demand, authorization,
direction, notice, consent, election, waiver or other Act may be given before or
after such record date, but only the Holders of record at the close of business
on the record date shall be deemed to be Holders for the purposes of determining
whether Holders of the requisite proportion of the Outstanding Securities have
authorized or agreed or consented to such request, demand, authorization,
direction, notice, consent, waiver or other Act, and for that purpose the
Outstanding Securities shall be computed as of the record date. Any request,
demand, authorization, direction, notice, consent, election, waiver or other Act
of a Holder shall bind
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every future Holder of the same Security and the Holder of every Security issued
upon the registration of transfer thereof or in exchange therefor or in lieu
thereof in respect of anything done, omitted or suffered to be done by the
Trustee or the Company in reliance thereon, whether or not notation of such
action is made upon such Security. (Section 104)
DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, any
Debt Security, or any portion of the principal amount thereof, will be deemed to
have been paid for purposes of the Indenture, and, at CFC's election, the entire
indebtedness of CFC in respect thereof will be deemed to have been satisfied and
discharged, if there has been irrevocably deposited with the Trustee or any
Paying Agent (other than CFC), in trust: (a) money in an amount which will be
sufficient, or (b) Eligible Obligations (as described below), which do not
contain provisions permitting the redemption or other prepayment thereof at the
option of the issuer thereof, the principal of and the interest on which when
due, without any regard to reinvestment thereof, will provide monies which,
together with money, if any, deposited with or held by the Trustee or such
Paying Agent, will be sufficient, or (c) a combination of (a) and (b) which will
be sufficient, to pay when due the principal of and premium, if any, and
interest, if any, due and to become due on such Debt Security or Securities or
portions thereof. (Section 701) For this purpose, unless otherwise indicated in
the applicable Prospectus Supplement, Eligible Obligations include direct
obligations of, or obligations unconditionally guaranteed by, the United States,
entitled to the benefit of the full faith and credit thereof, and certificates,
depositary receipts or other instruments which evidence a direct ownership
interest in such obligations or in any specific interest or principal payments
due in respect thereof. Among the conditions to CFC's making the election to
have its entire indebtedness deemed satisfied and discharged, CFC 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 Debt Securities 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.
RESIGNATION OF TRUSTEE
The Trustee may resign at any time by giving written notice thereof to CFC
or may be removed at any time by Act of the Holders of a majority in principal
amount of Debt Securities then Outstanding delivered to the Trustee and CFC. No
resignation or removal of the Trustee and no appointment of a successor trustee
will become effective until the acceptance of appointment by a successor trustee
in accordance with the requirements of the Indenture. So long as no Event of
Default or event which, after notice or lapse of time, or both, would become an
Event of Default has occurred and is continuing and except with respect to a
Trustee appointed by Act of the Holders, if CFC has delivered to the Trustee a
resolution of its Board of Directors appointing a successor trustee and such
successor has accepted such appointment in accordance with the terms of the
Indenture, the Trustee will be deemed to have resigned and the successor will be
deemed to have been appointed as trustee in accordance with the Indenture.
(Section 910)
NOTICES
Notices to Holders of Debt Securities will be given by mail to the
addresses of such Holders as they may appear in the Security Register. (Section
106)
TITLE
CFC, the Trustee and any agent of CFC or the Trustee may treat the Person
in whose name a Debt Security is registered as the absolute owner thereof
(whether or not such Debt Security may be overdue) for the purpose of making
payment and for all other purposes. (Section 308)
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the law of the State of New York. (Section 112)
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REGARDING THE TRUSTEE
The Trustee under the Indenture is Mellon Bank, N.A.
GLOBAL SECURITIES
The Depository Trust Company ("DTC") may act as securities depository for
some or all of the Debt Securities of any series. These Debt Securities will be
issued in fully-registered form in the name of Cede & Co. (DTC's partnership
nominee). One or more fully-registered certificates will be issued as Global
Securities for the Debt Securities in the aggregate principal amount of the Debt
Securities, and will be deposited with, or held for the benefit of, DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934. DTC holds securities that its participants ("Direct Participants")
deposit with DTC. DTC also facilitates the settlement among Direct Participants
of securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in Direct
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations. DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks, and
trust companies that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly ("Indirect Participants" and
together with Direct Participants, "Participants"). The Rules applicable to DTC
and its Participants are on file with the Securities and Exchange Commission.
Purchases of the Debt Securities under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Debt Securities
on DTC's records. The ownership interest of each actual purchaser of the Debt
Securities ("Beneficial Owner") is in turn to be recorded on the Participants'
records. Beneficial Owners will not receive written confirmation from DTC of
their purchases, but Beneficial Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Participant through which the Beneficial
Owner entered into the transaction. Transfers of ownership interests in the Debt
Securities are to be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in the Debt Securities,
except in the event that use of the book-entry system for the Debt Securities is
discontinued.
To facilitate subsequent transfers, all the Debt Securities deposited by
Direct Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of the Debt Securities with DTC and their
registration in the name of Cede & Co. effect no change in beneficial ownership.
DTC has no knowledge of the actual Beneficial Owners of the Debt Securities;
DTC's records reflect only the identity of the Direct Participants to whose
accounts such Debt Securities are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the Debt
Securities. Under its usual procedures, DTC would mail an Omnibus Proxy to CFC
as soon as possible after the record date. The Omnibus Proxy assigns Cede &
Co.'s consenting or voting rights to those Direct Participants to whose accounts
the Debt Securities are credited on the record date (identified in a listing
attached to the Omnibus Proxy).
Principal and interest payments on the Debt Securities will be made to DTC.
DTC's practice is to credit Direct Participants' accounts on the payable date in
accordance with their respective holdings shown on DTC's
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records unless DTC has reason to believe that it will not receive payment on the
payable date. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name", and will be the responsibility of such Participant and not of DTC, CFC or
the Trustee, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal and interest to DTC is the
responsibility of CFC or the Trustee, disbursement of such payments to Direct
Participants shall be the responsibility of DTC, and disbursements of such
payments to the Beneficial Owners shall be the responsibility of Participants.
DTC may discontinue providing its services as securities depository with
respect to the Debt Securities at any time by giving reasonable notice to CFC or
the Trustee. Under such circumstances, in the event that a successor securities
depository is not obtained, the Debt Securities certificates are required to be
printed and delivered.
CFC may decide to discontinue use of the system of book-entry transfers
through DTC (or a successor securities depository). In that event, the Debt
Securities certificates will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that CFC believes to be reliable (including DTC),
but CFC takes no responsibility for the accuracy thereof.
Neither CFC, the Trustee nor any Underwriter (as defined herein) will have
any responsibility or obligation to Participants, or the persons for whom they
act as nominees, with respect to the accuracy of the records of DTC, its nominee
or any Participant with respect to any ownership interest in the Debt
Securities, or payments to, or the providing of notice for, Participants or
Beneficial Owners.
PLAN OF DISTRIBUTION
Debt Securities 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 Debt Securities will be named in the Prospectus
Supplement relating to such offering. Unless otherwise set forth in the
Prospectus Supplement, the obligations of the Underwriters to purchase Debt
Securities will be subject to certain conditions precedent and each of the
Underwriters with respect to a sale of Debt Securities will be obligated to
purchase all of its Debt Securities 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 Debt Securities in respect
of which this Prospectus is delivered will be set forth in the Prospectus
Supplement.
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 Debt Securities 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, 1995, 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> 40
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY AGENT OR UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR
THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT
Investment Considerations............. S-3
Use of Proceeds....................... S-4
Capitalization........................ S-4
Selected Financial Information........ S-5
Description of the Capital
Securities.......................... S-5
U.S. Taxation......................... S-7
Underwriting.......................... S-9
Legal Matters......................... S-10
PROSPECTUS
Available Information................. 2
Documents Incorporated by Reference... 2
The Company........................... 3
Use of Proceeds....................... 9
Summary Financial Information......... 9
Capitalization........................ 10
The Rural Electric and Telephone
Systems............................. 11
Description of Debt Securities........ 20
Plan of Distribution.................. 29
Legal Opinions........................ 29
Experts............................... 29
</TABLE>
$125,000,000
[CFC LOGO]
NATIONAL RURAL
UTILITIES COOPERATIVE
FINANCE CORPORATION
QUICS(SM)
% Quarterly Income Capital Securities
(Subordinated Deferrable
Interest Debentures Due 2045)
---------------------------
PROSPECTUS SUPPLEMENT
, 1996
---------------------------
LEHMAN BROTHERS
DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
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