<PAGE> 1
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 17, 1996)
$75,000,000
National Rural Utilities
Cooperative Finance Corporation
QUICS(SM)
7.65% Quarterly Income Capital Securities
(Subordinated Deferrable Interest Debentures Due 2046)
------------------------
The 7.65% Quarterly Income Capital Securities (Subordinated Deferrable
Interest Debentures Due 2046) (the "Capital Securities") will mature on
September 15, 2046. Interest on the Capital Securities is payable quarterly in
arrears, on March 15, June 15, September 15 and December 15 of each year,
commencing on December 15, 1997. 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 September 15, 2002 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 May 31, 1997, outstanding Senior
Indebtedness of CFC aggregated approximately $9.5 billion (of which $2.1 billion
is contingent guarantees).
CFC has applied to have the Capital Securities listed 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....................... $25.00 $0.7875 $24.2125
- ----------------------------------------------------------------------------------------------------------------
Total...................................... $75,000,000 $2,362,500 $72,637,500
================================================================================================================
</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 $0.50 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 $350,000.
------------------------
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 September
18, 1997 (the "Closing Date").
------------------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
September 12, 1997
(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 1,052 members as of May 31, 1997, included 907 rural electric utility
members, virtually all of which are consumer-owned cooperatives, 74 service
members and 71 associate members. The utility members included 841 distribution
systems and 66 generation and transmission systems operating in 46 states and
U.S. territories. At December 31, 1995, CFC's member systems served
approximately 11.5 million consumers, representing service to an estimated 27.8
million ultimate users of electricity, and owned approximately $69.1 billion
(before depreciation of $20.8 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, 1997.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
For the year ended May 31:
Operating income...................... $ 564,439 $ 505,073 $ 440,109 $ 324,682 $ 336,387
========== ========== ========== ========== ==========
Operating margin...................... $ 51,530 $ 46,857 $ 41,803 $ 29,159 $ 38,352
Nonoperating income................... 3,206 3,764 3,409 4,029 3,296
Extraordinary loss(A)................. -- (1,580) -- -- (3,161)
---------- ---------- ---------- ---------- ----------
Net margins........................... $ 54,736 $ 49,041 $ 45,212 $ 33,188 $ 38,487
========== ========== ========== ========== ==========
Fixed charge coverage ratio(A)........ 1.12 1.12 1.13 1.13 1.16
==== ==== ==== ==== ====
As of May 31:
Assets................................ $9,057,495 $8,054,089 $7,080,789 $6,224,296 $5,464,144
Long-term debt(B)..................... $3,596,231 $3,682,421 $3,423,031 $2,841,220 $3,095,488
Members' subordinated certificates.... $1,212,486 $1,207,684 $1,234,715 $1,222,858 $1,215,547
Members' equity....................... $ 271,594 $ 269,641 $ 270,221 $ 260,968 $ 258,299
Leverage ratio(C)..................... 5.84 5.69 5.13 4.63 4.41
Debt to equity ratio(D)............... 3.97 3.63 3.01 2.52 2.24
</TABLE>
- ------------
(A) During the years ended May 31, 1996 and 1993, CFC paid premiums totaling
$1.6 million and $3.2 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 $268.7
million, $351.5 million, $262.7 million, $200.8 million and $286.8 million
in long-term debt that comes due, matures and/or will be redeemed early
during fiscal years 1998, 1997, 1996, 1995 and 1994, respectively.
(C) In accordance with CFC's revolving credit agreements, the leverage ratio is
calculated by dividing debt and guarantees outstanding, excluding Quarterly
Income Capital Securities and debt used to fund loans guaranteed by the U.S.
Government, by the total of Quarterly Income Capital Securities, Members'
Subordinated Certificates and Members' Equity.
(D) The debt to equity ratio is calculated by dividing debt outstanding,
excluding Quarterly Income Capital Securities and debt used to fund loans
guaranteed by RUS, by the total of Quarterly Income Capital Securities,
Members' Subordinated Certificates, Members' Equity and the loan and
guarantee loss allowance.
------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CAPITAL
SECURITIES, INCLUDING PURCHASES OF CAPITAL SECURITIES TO COVER SOME OR ALL OF A
SHORT POSITION IN THE CAPITAL SECURITIES MAINTAINED BY THE UNDERWRITERS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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 May 31, 1997,
outstanding Senior Indebtedness of CFC aggregated approximately $9.5 billion,
including contingent guarantees of $2.1 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 $72,287,500. 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 May 31, 1997, 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)............................................. $ 3,507,074 $ 3,434,786
Long-term Debt(A).............................................. 3,864,887 3,864,887
----------- -----------
Total Senior Debt(B)...................................... 7,371,961 7,299,673
SUBORDINATED DEBT AND MEMBERS' EQUITY:
Subordinated Deferrable Interest Debentures.................... $ 125,000 $ 200,000
Members' Subordinated Certificates(C).......................... 1,212,486 1,212,486
Members' Equity(D)............................................. 271,594 271,594
----------- -----------
Total Capitalization...................................... $ 8,981,041 $ 8,983,753
=========== ===========
</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 May 31, 1997, bank revolving credit agreements providing for
borrowings aggregating up to $5,000,000,000. 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 $1,349,900,000 increased each
fiscal year 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 $2,250,000,000, 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 6.70% Collateral Trust
Bonds, Due 2002 on June 12, 1997.
(B) At May 31, 1997, CFC had outstanding guarantees of tax-exempt securities
issued on behalf of members in the aggregate amount of $1,190,925,000.
Guaranteed tax-exempt securities include $1,043,200,000 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 $90,300,000
of certain variable rate bonds. At May 31, 1997, CFC had guaranteed its
members' obligations in connection with certain lease transactions and other
debt in the amount of $889,746,000.
(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
($645,449,000 at May 31, 1997) 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
S-4
<PAGE> 5
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, 1997 and May 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1997 1996
-------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Operating income............................................. $564,439 $505,073
======== =======
Operating margin............................................. 51,530 46,857
Nonoperating income.......................................... 3,206 3,764
Extraordinary loss........................................... -- (1,580)
-------- -------
Net margins.................................................. $ 54,736 $ 49,041
======== =======
Fixed charge coverage ratio(1)............................... 1.12 1.12
======== =======
</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 October 15, 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 $75 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 September 15, 2046 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 becomes due
and payable. Interest will be payable quarterly in arrears on March 15, June 15,
September 15 and December 15 of each year, commencing December 15, 1997.
Interest will be payable to the person in whose
S-5
<PAGE> 6
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 September 15, 2002 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 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
S-6
<PAGE> 7
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.
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.
S-7
<PAGE> 8
Under applicable income tax regulations, 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 stated interest in income on an economic accrual basis
during an Extension Period 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 stated interest 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 (excluding any
portion thereof attributable to accrued interest, which is taxable as such) and
the tax basis of the Capital Security. Such gain or loss will be capital gain or
loss, and will be long-term capital gain or loss if the Capital Security has
been held for more than one year, although the preferential 20% rate for
individuals would apply only if the Capital Security is held for more than 18
months. 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 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.
S-8
<PAGE> 9
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., 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............................................ $15,625,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ..................................... 15,625,000
PaineWebber Incorporated....................................... 15,625,000
Prudential Securities Incorporated............................. 15,625,000
Bear, Stearns & Co. Inc. ...................................... 1,250,000
J.C. Bradford & Co. ........................................... 1,250,000
A.G. Edwards & Sons, Inc. ..................................... 1,250,000
Everen Securities, Inc. ....................................... 1,250,000
Interstate/Johnson Lane Corporation............................ 1,250,000
Legg Mason Wood Walker, Incorporated........................... 1,250,000
Morgan Keegan & Company, Inc. ................................. 1,250,000
Piper Jaffray Inc. ............................................ 1,250,000
The Robinson-Humphrey Company, Inc. ........................... 1,250,000
Wheat, First Securities, Inc. ................................. 1,250,000
-----------
Total................................................ $75,000,000
===========
</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.
S-9
<PAGE> 10
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 $0.50 per Capital Security. The
Underwriters may allow and each such dealer may reallow to other dealers a
concession not exceeding $0.35 per Capital Security. After the initial public
offering, such public offering price and such concessions and reallowances may
be changed.
The Capital Securities are a new issue of securities with no established
trading market. CFC has applied to have the Capital Securities listed 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.
In connection with the Offering, Lehman Brothers Inc., on behalf of the
Underwriters, may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Capital Securities. Such transactions may include
stabilization transactions effected in accordance with Rule 104 of Regulation M
under the Exchange Act, pursuant to which the Underwriters may bid for, or
purchase, Capital Securities for the purpose of stabilizing the market price.
The Underwriters also may create a short position for their respective accounts
by selling more Capital Securities in connection with the Offering than they are
committed to purchase from the Company, and in such case may purchase Capital
Securities in the open market following completion of the Offering to cover all
or a portion of such short position. In addition, Lehman Brothers Inc., on
behalf of the Underwriters, may impose "penalty bids" under the contractual
arrangements between the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of the Underwriters,
the selling concession with respect to Capital Securities that are distributed
in the Offering, but subsequently purchased for the account of the Underwriters
in the open market. Any of the transactions described in this paragraph may
result in the maintenance of the price of the Capital Securities at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
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
================================================================================
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
Selected Information.................. S-2
The Company........................... S-2
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>
$75,000,000
[CFC LOGO]
NATIONAL RURAL
UTILITIES COOPERATIVE
FINANCE CORPORATION
QUICS(SM)
7.65% Quarterly Income Capital Securities
(Subordinated Deferrable
Interest Debentures Due 2046)
---------------------------
PROSPECTUS SUPPLEMENT
September 12, 1997
---------------------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
================================================================================
