<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-47683
PROSPECTUS SUPPLEMENT
(To Prospectus dated March 10, 1998)
$200,000,000
[CFC LOGO]
National Rural Utilities
Cooperative Finance Corporation
5.00% Collateral Trust Bonds, Due 2002
- --------------------------------------------------------------------------------
This is a public offering by National Rural Utilities Cooperative Finance
Corporation of $200,000,000 of 5.00% Collateral Trust Bonds due October 1, 2002.
Interest is payable on April 1 and October 1 of each year, beginning April 1,
1999.
The Collateral Trust Bonds are not redeemable prior to maturity.
The Collateral Trust Bonds should be delivered on or about October 7, 1998
through the book-entry facilities of the Depository Trust Company.
<TABLE>
<CAPTION>
PER COLLATERAL TRUST BOND TOTAL
------------------------- ------------
<S> <C> <C>
Public Offering Price.................... 100.00% $200,000,000
Underwriting Discount.................... 0.45% $ 900,000
Proceeds to National Rural Utilities
Cooperative Finance Corporation........ 99.55% $199,100,000
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if the
Prospectus Supplement or the attached Prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
October 2, 1998
<PAGE> 2
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT OR THE ATTACHED PROSPECTUS. NO ONE HAS BEEN
AUTHORIZED TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT
THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE ATTACHED
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF
THE DOCUMENT. WE ARE NOT MAKING AN OFFER OF THESE COLLATERAL TRUST BONDS IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Use of Proceeds............................................. S-3
Capitalization.............................................. S-3
Selected Financial Information.............................. S-4
Description of the Bonds.................................... S-4
Underwriting................................................ S-6
PROSPECTUS
Available Information....................................... 2
Documents Incorporated by Reference......................... 2
The Company................................................. 3
Use of Proceeds............................................. 8
Summary Financial Information............................... 9
Capitalization.............................................. 10
The Rural Electric and Telephone Systems.................... 11
Description of Bonds........................................ 19
Limitations on Issuance of Bearer Bonds..................... 24
United States Taxation...................................... 24
Plan of Distribution........................................ 30
Legal Opinions.............................................. 31
Experts..................................................... 31
</TABLE>
S-2
<PAGE> 3
USE OF PROCEEDS
The net proceeds from the sale of the Collateral Trust Bonds offered hereby
are estimated to be $198,900,000 ($199,100,000 proceeds to the Company less
estimated issuance costs of $200,000). The proceeds will be used by National
Rural Utilities Cooperative Finance Corporation ("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, 1998, and
as adjusted to reflect the issuance of the Bonds and the application of the
proceeds thereof.
<TABLE>
<CAPTION>
OUTSTANDING AS ADJUSTED
----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
SENIOR DEBT:
Short-term Indebtedness(A)....................... $ 3,848,229 $ 3,649,329
Long-term Debt(A)................................ 5,024,621 5,224,621
----------- -----------
Total Senior Debt(B)..................... 8,872,850 8,873,950
SUBORDINATED DEBT AND MEMBERS' EQUITY:
Deferrable Subordinated Debt(C).................. 200,000 200,000
Members' Subordinated Certificates(D)............ 1,229,166 1,229,166
Members' Equity(E)............................... 279,278 279,278
----------- -----------
Total Capitalization..................... $10,581,294 $10,582,394
=========== ===========
</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, 1998,
bank revolving credit agreements providing for borrowings aggregating up to
$5,217,500,000. 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 $1,356,700,000 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
$2,345,000,000, 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.
(B) At May 31, 1998, CFC had outstanding guarantees of tax-exempt
securities issued on behalf of members in the aggregate amount of
$1,148,500,000. Guaranteed tax-exempt securities include $1,017,800,000 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. At May 31, 1998, CFC had
guaranteed its members' obligations in connection with certain lease
transactions and other debt in the amount of $885,994,000.
(C) As of May 31, 1998, CFC had issued a total of $200,000,000 of
Deferrable Subordinated Debt in the form of Quarterly Income Capital Securities
("QUICS"). QUICS are subordinate and junior in right of payment to senior
indebtedness. CFC has the right at any time and from time to time during the
term of the QUICS to defer the payment of interest for up to 20 consecutive
quarters.
(D) 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
($644,817,000 at May 31, 1998) 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.
(E) CFC allocates its net margins among its members in proportion to
interest earned by CFC. 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 unretired allocations for fiscal years
1988-1993 are being retired over the 15-year period from 1994 through 2008. 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.
S-3
<PAGE> 4
SELECTED FINANCIAL INFORMATION
The following table summarizes CFC's results of operations and fixed charge
coverage for the years ended May 31, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------
1998 1997
---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Operating income...................................... $637,573 $564,439
======== ========
Operating margin...................................... 54,411 51,530
Nonoperating income................................... 2,611 3,206
Gain on sale of land.................................. 5,194 --
-------- --------
Net margins........................................... $ 62,216 $ 54,736
======== ========
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 BONDS
The Bonds are to be issued under an indenture dated as of February 15, 1994
(the "Indenture"), between CFC and U.S. Bank National Association, as Trustee
(the "Trustee").
Except as otherwise defined herein, capitalized terms used herein shall
have their meanings as set forth in the Prospectus.
GENERAL
The Bonds will be direct obligations of CFC secured by the pledge of
Mortgage Notes of Members, cash and certain Permitted Investments. The Bonds are
to mature October 1, 2002, and are to bear interest from the date of original
issuance at the rate stated on the cover page of this Prospectus Supplement.
Interest will be payable semiannually on April 1 and October 1 to the persons in
whose names the Bonds are registered at the close of business on the preceding
March 15 and September 15, respectively, commencing April 1, 1999.
REDEMPTION
The Bonds may not be redeemed prior to maturity.
SECURITY
The Bonds will be secured under the Indenture, equally with Collateral
Trust Bonds heretofore issued and which may be subsequently issued under the
Indenture, by the pledge with the Trustee of Eligible Mortgage Notes. See
"Description of Bonds -- Security" in the Prospectus. On October 7, 1998, there
will be pledged with the Trustee approximately $2,264 million of Eligible
Mortgage Notes, against which $2,050 million of bonds (including the Bonds) will
have been issued.
BOOK-ENTRY SYSTEM
The Depository Trust Company ("DTC") will act as securities depository for
the Bonds. The Bonds 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 Bonds in the aggregate principal
amount of the Bonds, and will be deposited with DTC.
S-4
<PAGE> 5
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.
Purchasers of Bonds under the DTC system must be made by or through Direct
Participants, which will receive a credit for the Bonds on DTC's records. The
ownership interest of each actual purchaser of Bonds ("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 Bonds 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 Bonds, except in the event that use of the book-entry system
for the Bonds is discontinued.
To facilitate subsequent transfers, all Bonds deposited by Direct
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of Bonds 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 Bonds; DTC's records reflect only the identity
of the Direct Participants to whose accounts such Bonds 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 Bonds.
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
Bonds are credited on the record date (identified in a listing attached to the
Omnibus Proxy).
Principal and interest payments on the Bonds 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 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 Bonds 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, Bond certificates are required to be printed and
delivered.
S-5
<PAGE> 6
CFC may decide to discontinue use of the system of book-entry transfers
through DTC (or a successor securities depository). In that event, Bond
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 the Underwriters 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 Bonds, or payments to,
or the providing of notice for, Participants or Beneficial Owners.
UNDERWRITING
The Underwriters named below have severally agreed to purchase, and CFC has
agreed to sell to them, severally, the principal amounts of Bonds indicated
below. The Underwriting Agreement provides that the several obligations of the
Underwriters are subject to certain conditions as therein set forth. The
Underwriters will be obligated to purchase all the Bonds if any of the Bonds are
purchased.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF BONDS
----------- ------------
<S> <C>
Lehman Brothers Inc. ....................................... $140,000,000
Goldman, Sachs & Co. ....................................... 30,000,000
NationsBanc Montgomery Securities LLC ...................... 30,000,000
------------
$200,000,000
============
</TABLE>
CFC has been advised by the Underwriters that the Underwriters propose to
offer the Bonds 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 of 0.30% of the principal amount thereof. The Underwriters
may allow and each such dealer may reallow to other dealers a concession not
exceeding 0.25% of the principal amount thereof. After the initial public
offering, such public offering price and such concessions and reallowances may
be changed.
In connection with the offering made hereby, the Underwriters may purchase
and sell the Bonds in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Bonds, and short
positions created by the Underwriters involve the sale by the Underwriters of a
greater aggregate principal amount of Bonds than they are required to purchase
from CFC. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the Bonds sold in the
offering may be reclaimed by the Underwriters if such Bonds are repurchased by
the Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Bonds, which may
be higher than the price that might otherwise prevail in the open market; and
these activities, if commenced, may be discontinued at any time. These
transactions may be effected in the over-the-counter market or otherwise.
The Bonds are a new issue of securities with no established trading market.
CFC has been advised by the Underwriters that they intend to make a market in
the Bonds 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 Bonds. The Bonds will not be listed on any securities
exchange.
CFC has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933.
In the ordinary course of their respective businesses, the Underwriters and
their affiliates have engaged, and may in the future engage, in commercial
banking and/or investment banking transactions with the Company and its
affiliates.
See "Plan of Distribution" in the Prospectus for further information
regarding the distribution of the Bonds.
S-6
<PAGE> 7
PROSPECTUS
National Rural Utilities
Cooperative Finance Corporation
Collateral Trust Bonds
------------------------
National Rural Utilities Cooperative Finance Corporation ("CFC" or the
"Company") intends to issue in one or more series from time to time debt
securities (the "Bonds"). The Bonds of each series will be offered to the public
on terms determined by market conditions at the time of sale. The Company may
sell Bonds for proceeds up to $500,000,000 (or the equivalent thereof if any of
the Bonds are denominated in a foreign currency or a currency unit) (i) directly
to purchasers, (ii) through agents designated from time to time or (iii) through
underwriters or a group of underwriters which may include Lehman Brothers Inc.
The Bonds may be issued in registered form without coupons, in a form
registered as to principal only with or without coupons, in bearer form with or
without coupons or any combination thereof. In addition, all or a portion of the
Bonds may be issued in temporary or definitive global form. Bonds in bearer form
are offered only to non-United States persons and to offices located outside the
United States of certain United States financial institutions. See "Limitations
on Issuance of Bearer Bonds".
The Bonds may be sold for U.S. dollars, foreign currencies or foreign
currency units, and the principal (including any premium) and any interest on
the Bonds may be payable in U.S. dollars, foreign currencies or foreign currency
units. The Bonds may be issued in one or more series with the same or various
maturities at or above par or with an original issue discount. The specific
designation, aggregate principal amount, currency, currencies or currency unit
or units in which the principal, premium, if any, or interest, if any, is
payable, authorized denominations, purchase price, maturity, rate (or method of
calculation) and time of payment of any interest, any redemption terms, any
listing on a securities exchange, or other specific terms of the Bonds in
respect of which this Prospectus is being delivered ("Offered Bonds") are set
forth in the accompanying Prospectus Supplement or in a supplement thereto
relating to the specific Offered Bonds (together, the "Prospectus Supplement"),
together with the terms of offering of the Offered Bonds.
For a discussion of certain United States federal income tax consequences,
see "United States Taxation".
A discussion of certain other United States federal tax matters applicable
to the Offered Bonds may be set forth in the Prospectus Supplement relating to
the Offered Bonds.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF BONDS UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
------------------------
THE DATE OF THIS PROSPECTUS IS MARCH 10, 1998
<PAGE> 8
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE BONDS, INCLUDING
PURCHASES OF BONDS OR OTHER COLLATERAL TRUST BONDS OF THE COMPANY TO COVER SOME
OR ALL OF A SHORT POSITION IN SUCH BONDS MAINTAINED BY THE UNDERWRITERS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION".
---------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected at the office of the Commission, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, DC 20549, as well as at the Regional Offices of the Commission
at 7 World Trade Center, Suite 1300, New York, NY 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, IL 60661-2511. Copies can also be
obtained by mail from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549 at the prescribed
rates or through the Commission's web site (http://www.sec.gov). 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, 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, 1997.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
August 31, 1997 and November 30, 1997.
3. The Company's Current Reports on Form 8-K dated June 11, 1997, September
17, 1997, October 7, 1997, December 4, 1997, January 15, 1998 and
February 9, 1998.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the offering
of the Bonds, shall be deemed to be incorporated in this Prospectus by reference
and to be a part hereof from the respective date of filing of each such
document. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will furnish without charge upon written or oral request by any
person, including any beneficial owner, to whom this Prospectus is delivered a
copy of any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference, other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates. Requests for such copies
should be directed to Steven L. Lilly, Senior Vice President and Chief Financial
Officer, National Rural Utilities Cooperative Finance Corporation, Woodland
Park, 2201 Cooperative Way, Herndon, VA 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> 9
THE COMPANY
National Rural Utilities Cooperative Finance Corporation ("CFC" or the
"Company") was incorporated as a private, not-for-profit cooperative association
under the laws of the District of Columbia in 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") (formerly the Rural
Electrification Administration) of the United States Department of Agriculture.
CFC makes loans primarily to its rural utility system members ("Utility
Members") to enable them to acquire, construct and operate electric
distribution, generation, transmission and related facilities. CFC also makes
loans to service organization members ("Service Members") to finance office
buildings, equipment, related facilities and services provided by them to the
rural utility systems. CFC has also provided guarantees for tax-exempt financing
of pollution control facilities and other properties constructed or acquired by
its members, and in addition has provided loans or guarantees through National
Cooperative Services Corporation ("NCSC") in connection with certain lease
transactions of its members. Also, through Rural Telephone Finance Cooperative
("RTFC"), a controlled affiliate of CFC established in 1987, CFC provides
financing to rural telephone and telecommunications companies and their
affiliates. In addition, through Guaranty Funding Cooperative ("GFC"), a
controlled affiliate of CFC established in 1991, CFC provides financing for
certain members to refinance their debt to the Federal Financing Bank of the
United States Treasury ("FFB"). CFC's offices are located at Woodland Park, 2201
Cooperative Way, Herndon, VA 20171 and its telephone number is (703) 709-6700.
CFC's 1,052 members as of May 31, 1997 included 907 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 ("power supply") systems operating in 46 states
and U.S. territories. At December 31, 1996, CFC's member systems served
approximately 13.2 million consumers, representing service to an estimated 31.9
million ultimate users of electricity, and owned approximately $69.2 billion
(before depreciation of $21.7 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 offered 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 line-of-credit loans and intermediate-term loans with
up to five-year maturities. Short-term line-of-credit and intermediate-term
loans are made on either a secured or an unsecured basis. Rates on these loans
may be adjusted semi-monthly in line with changes in CFC's short-term cost of
funds. The intermediate-term loans are generally made to Power Supply systems in
connection with the planning and construction of new generating plants and
transmission facilities.
CFC also makes loans to telecommunication systems through RTFC. Such loans
are long-term fixed or variable rate loans with maturities not exceeding 15
years and short-term loans.
CFC's guarantees are senior obligations ranking on a par with its other
senior debt. Even if the system defaults in payment of the guaranteed
obligations, the debt cannot be accelerated as long as CFC pays the debt service
under its guarantee as due. The system is generally obligated to reimburse CFC
on demand for amounts paid on the guarantee, and this obligation is usually
secured by a mortgage (often joint with RUS) on the system's property or, in the
case of a lease transaction, on the leased property. Holders of $1,043.2 million
of the guaranteed pollution control debt (at May 31, 1997) had 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, 1997, the allowance was $233.2 million.
At May 31, 1997, CFC's ten largest borrowers, which were primarily power supply
members, had outstanding loans totaling $1,198.7 million (excluding $2.8 million
of loans guaranteed by RUS), which represented approximately 13.5% of CFC's
total loans outstanding. As of May 31, 1997, outstanding guarantees
3
<PAGE> 10
for these same ten largest borrowers totaled $1,261.7 million, which represented
59.3% 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 operating under
a restructuring agreement (See "THE RURAL ELECTRIC SYSTEMS--Power Supply
Systems"). At May 31, 1997, loans outstanding to Deseret (excluding loans
guaranteed by RUS) accounted for 4.1% of total loans outstanding. Guarantees
outstanding for Deseret accounted for 13.7% of total guarantees outstanding.
Total loans and guarantees outstanding to and for Deseret equalled 38.1% of
total Members' Equity, Members' Subordinated Certificates and the allowance for
loan and guarantee losses.
4
<PAGE> 11
Set forth below is a table showing loans outstanding to borrowers as of the
dates shown, and the weighted average interest rates thereon and loans committed
but unadvanced to borrowers at May 31, 1997.
<TABLE>
<CAPTION>
LOANS COMMITTED
BUT UNADVANCED AT
LOANS OUTSTANDING AND WEIGHTED AVERAGE INTEREST MAY 31, 1997
RATES THEREON AT MAY 31, (A) (B)
----------------------------------------------------------------------- -----------------
1997 1996 1995
---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term fixed rate secured
loans(C):
Distribution Systems(D)........... $2,503,890 7.20% $2,380,587 7.29% $1,645,551 7.68% $ 46,657
Power Supply Systems(D)........... 239,381 7.54% 247,556 7.71% 253,208 7.68% 1,214
Telecommunication Organizations... 148,566 8.53% 134,497 8.66% 141,144 8.98% --
Service Organizations(D)(E)....... 82,634 8.62% 77,205 8.03% 81,521 9.27% 3,170
Associate Members................. 1,512 10.25% 1,542 10.25% 1,569 10.25% --
---------- ---------- ---------- ----------
Total long-term fixed rate
secured loans............. 2,975,983 7.33% 2,841,387 7.41% 2,122,993 7.83% 51,041
---------- ---------- ---------- ----------
Long-term variable rate secured
loans(F):
Distribution Systems.............. 3,209,472 6.55% 2,717,494 6.45% 2,553,590 6.50% 1,185,303
Power Supply Systems.............. 281,368 6.55% 202,249 6.45% 191,967 6.50% 798,984
Telecommunication Organizations... 875,135 6.65% 764,911 6.55% 704,427 6.64% 237,170
Service Organizations(E).......... 54,802 6.55% 46,376 6.45% 53,332 6.50% 86,229
Associate Members................. 48,186 6.29% 47,541 6.19% 42,561 6.20% 13,666
---------- ---------- ---------- ----------
Total long-term variable
rate secured loans........ 4,468,963 6.57% 3,778,571 6.47% 3,545,877 6.52% 2,321,352
---------- ---------- ---------- ----------
Refinancing variable rate loans
guaranteed by RUS:
Power Supply Systems.............. 137,984 6.49% 416,637 6.47% 429,129 7.27% --
---------- ---------- ---------- ----------
Intermediate-term secured loans:
Distribution Systems.............. 12,530 6.70% 4,831 6.60% 4,176 6.85% 2,609
Power Supply Systems.............. 198,985 6.70% 53,614 6.60% 40,237 6.85% 196,385
Service Organizations............. 14,592 6.70% 27,652 6.60% 11,429 6.85% 2,884
---------- ---------- ---------- ----------
Total intermediate-term
secured loans............. 226,107 6.70% 86,097 6.60% 55,842 6.85% 201,878
---------- ---------- ---------- ----------
Intermediate-term unsecured loans:
Distribution Systems.............. 72,860 6.70% 16,019 6.45% 11,392 6.50% 37,687
Power Supply Systems.............. 43,129 6.70% 28,957 6.45% 47,443 6.50% 124,405
Telecommunication Organizations... 13,683 7.25% 12,048 6.80% 3,255 7.54% 9,387
---------- ---------- ---------- ----------
Total intermediate-term
unsecured loans........... 129,672 6.76% 57,024 6.52% 62,090 6.56% 171,479
---------- ---------- ---------- ----------
Short-term loans(G):
Distribution Systems.............. 473,639 6.70% 409,664 6.60% 445,962 6.85% 2,436,785
Power Supply Systems.............. 25,051 6.70% 25,763 6.60% 10,267 6.85% 913,371
Telecommunication Organizations... 61,779 6.25% 63,813 7.15% 34,637 7.60% 478,807
Service Organizations............. 27,420 6.70% 23,467 6.60% 25,653 6.85% 93,346
Associate Members................. 13,417 6.70% 9,240 6.60% 7,651 6.85% 19,308
---------- ---------- ---------- ----------
Total short-term loans...... 601,306 6.76% 531,947 6.67% 524,170 6.90% 3,941,617
---------- ---------- ---------- ----------
Nonperforming loans(H):
Distribution Systems.............. 1,705 7.21% 1,739 7.20% 1,830 7.21% --
Power Supply Systems.............. 7,723 6.64% 23,555 6.48% 25,811 6.57% --
---------- ---------- ---------- ----------
Total nonperforming loans... 9,428 6.75% 25,294 6.53% 27,641 6.61% --
---------- ---------- ---------- ----------
Restructured loans(I):
Distribution Systems.............. -- -- 2,576 18.37% 2,654 18.37% --
Power Supply Systems.............. 361,961 8.32% 205,074 9.13% 180,521 9.01% --
Service Organizations............. -- -- 1,711 6.45% 1,803 6.50% --
---------- ---------- ---------- ----------
Total restructured loans.... 361,961 8.32% 209,361 9.22% 184,978 9.12% --
---------- ---------- ---------- ----------
Total loans................. 8,911,404 6.81% 7,946,318 6.85% 6,952,720 7.01% 6,687,367
---------- ---------- ---------- ----------
Less: Allowance for loan and
guarantee losses.................. 233,208 218,047 205,596 --
---------- ---------- ---------- ----------
Net loans................... $8,678,196 $7,728,271 $6,747,124 $6,687,367
========== ========== ========== ==========
</TABLE>
- ---------------
(A) The interest rates in effect at March 2, 1998, for loans to electric members
were 6.90% for long-term loans with a seven-year fixed rate term, 6.55% on
variable rate long-term loans and 6.70% on intermediate- and short-term
loans. The rates in effect at March 2, 1998, on loans to telecommunication
organizations were 7.35% for long-term loans with a seven-year fixed rate,
6.65% on long-term variable rate loans, 6.90% on intermediate-term loans and
7.25% on short-term loans. The rates in effect at March 2, 1998, on loans to
associate members were 7.30% for long-term loans with a seven-year fixed
rate term, 6.55% on long-term variable rate loans and 6.70% 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. Since commitments may expire
without being fully drawn upon, the total amounts reported as commitments do
not necessarily represent future cash requirements. Collateral and
5
<PAGE> 12
security requirements for commitments are identical to those for advanced
loans. 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 $38.4 million, $198.3 million and $30.4 million of unsecured loans
at May 31, 1997, 1996 and 1995.
(D) During calendar year 1998, $172.1 million of such outstanding fixed rate
loans, which currently have a weighted average interest rate of 8.17% per
annum, will become subject to rate adjustment. During the first quarter of
calendar year 1997, long-term fixed rate loans totaling $41.3 million had
their interest rates adjusted. These loans will be eligible to readjust
their interest rate again during the first quarter of calendar year 1998 to
the lowest long-term fixed rate offered during 1997 for the term selected.
During calendar year 1997, the lowest seven-year long-term fixed rate was
6.95%.
(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, 1997, 1996 and 1995,
were $29.2 million, $31.8 million and $48.5 million, respectively. In
addition, as of May 31, 1997, 1996 and 1995, CFC had unadvanced long-term
loan commitments to NCSC in the amounts of $15.4 million, $15.4 million and
$12.3 million, respectively.
(F) Includes $112.4 million, $84.6 million and $41.4 million of unsecured loans
at May 31, 1997, 1996 and 1995.
(G) Includes $99.1 million, $92.7 million and $30.9 million of secured loans at
May 31, 1997, 1996 and 1995.
(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.
Set forth below is a table showing CFC's guarantees as of the dates
indicated. Substantially all these guarantees have been given on behalf of
Power Supply members.
CFC MEMBER GUARANTEES
<TABLE>
<CAPTION>
MAY 31,
------------------------------------
1997 1996 1995
---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Long-term tax-exempt bonds.............................. $1,190,925* $1,317,655* $1,496,930*
Debt portions of leveraged lease transactions........... 418,916 432,516 568,662
Indemnifications of tax benefit transfers............... 338,264 363,702 389,755
Other guarantees........................................ 132,566 135,567 119,575
---------- ---------- ----------
Total.................................... $2,080,671 $2,249,440 $2,574,922
========== ========== ==========
</TABLE>
- ---------------
* Includes $1,043.2 million, $1,168.9 million and $1,200.1 million at May 31,
1997, 1996 and 1995, 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 $260.7 million, $370.1 million and $376.7 million of
such bonds outstanding at May 31, 1997, 1996 and 1995, respectively, at any
time on seven days' notice, in the case of $242.3 million, $248.8 million and
$254.5 million outstanding at May 31, 1997, 1996 and 1995, respectively, at
any time on a minimum of one day's notice and in the case of the remainder on
a five-week or semiannual basis). CFC has agreed to purchase any such bonds
that cannot be remarketed. Since the inception of the program CFC has not been
required to purchase any such bonds.
6
<PAGE> 13
Set forth below are the weighted average interest rates earned by CFC
(recognized in the case of non-performing and restructured loans) on all loans
outstanding for the fiscal year ended May 31 of the year indicated.
INTEREST RATES EARNED ON LOANS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Long-term fixed rate......................... 7.65% 7.92% 8.63%
Long-term variable rate...................... 6.25% 6.30% 5.90%
Telecommunication organizations.............. 6.73% 6.86% 6.70%
Refinancing loans guaranteed by RUS.......... 6.36% 6.75% 6.07%
Intermediate-term............................ 7.08% 6.57% 6.19%
Short-term................................... 6.40% 6.49% 6.29%
Associate members............................ 6.42% 6.46% 5.40%
Non-performing............................... 0.00% 0.25% 1.56%
Restructured................................. 0.56% 1.49% 1.92%
All loans..................... 6.58% 6.77% 6.72%
</TABLE>
Borrowed funds for CFC's programs are derived primarily from the sale to
its members of its Subordinated Certificates, the sale of Collateral Trust Bonds
and Medium-Term Notes and the sale of its commercial paper and bank bid notes.
Prior to 1994, CFC issued collateral trust bonds under a prior indenture. Set
forth below is a table showing CFC's outstanding borrowings and the interest
rates thereon as of the dates shown.
CFC BORROWINGS
<TABLE>
<CAPTION>
AMOUNTS OUTSTANDING AT MAY 31,
---------------------------------------------------------------------
1997 1996 1995
---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Long- and intermediate-term debt:(A)
Floating Rate Series 1994A, Due 1996(2)...... $ -- $ 150,000 $ 150,000
9 1/2% Series T Bonds, Due 1997(1)........... -- 150,000 150,000
8 1/2% Series U Bonds, Due 1998(B)(1)........ 149,800 149,800 149,800
Variable Rate Collateral Trust Bonds, Due
1999(2).................................... 150,000 -- --
6.45% Collateral Trust Bonds, Due 2001(2).... 100,000 100,000 --
6.75% Collateral Trust Bonds, Due 2001(2).... 100,000 -- --
6.50% Collateral Trust Bonds, Due 2002(2).... 100,000 100,000 --
5.95% Collateral Trust Bonds, Due 2003(2).... 100,000 100,000 --
6.65% Collateral Trust Bonds, Due 2005(2).... 50,000 50,000 --
7.30% Collateral Trust Bonds, Due 2006(2).... 100,000 -- --
7.20% Collateral Trust Bonds, Due 2015(2).... 50,000 50,000 --
Floating Rate Series E-2 Bonds, Due
2010(1).................................... 2,142 2,178 2,189
9% Series O Bonds, Due 2016(C)(1)............ -- -- 82,289
9% Series V Bonds, Due 2021(1)............... 150,000 150,000 150,000
7.35% Collateral Trust Bonds, Due 2026(2).... 100,000 -- --
Medium-Term Notes and weighted
average interest rates..................... 615,396 (6.30%) 604,252 (6.68%) 573,637 (7.23%)
---------- ---------- ----------
Total long- and intermediate-term
debt and weighted average interest
rates(D)(E)............................ 1,767,338 (6.82%) 1,606,230 (7.20%) 1,257,915 (7.90%)
Quarterly Income Capital Securities.......... 125,000 (8.00%) -- --
Members' Subordinated Certificates,
including advance payments and
weighted average interest rates(F)......... 1,069,158 (4.29%) 1,073,924 (4.29%) 1,096,466 (4.36%)
---------- ---------- ----------
Total long- and intermediate-term
debt and Members' Subordinated
Certificates and weighted average
interest rates......................... $2,961,496 (5.96%) $2,680,154 (6.03%) $2,354,381 (6.25%)
========== ========== ==========
Short-term debt(G) and weighted
average interest rates(H).................... $5,607,372 (5.64%) $4,901,570 (5.41)% $4,242,570 (6.11%)
========== ========== ==========
Total debt and weighted average
interest rates at May 31..................... $8,568,868 (5.75%) $7,581,724 (5.63%) $6,596,951 (6.16%)
========== ========== ==========
</TABLE>
- ---------------
(1) Collateral Trust Bonds issued under the 1972 Indenture.
(2) Collateral Trust Bonds issued under the 1994 Indenture.
7
<PAGE> 14
(A) Net of $0.2 million, $0.2 million and $1.1 million principal amount of bonds
held in Treasury at May 31, 1997, 1996 and 1995, respectively, all of which
were purchased in connection with CFC's deferred compensation program.
(B) Collateral Trust Bonds maturing during fiscal year 1998 have been
reclassified to short-term debt in the balance sheet.
(C) The Series O Collateral Trust Bonds were called on March 16, 1996.
(D) Excludes $2,250.0 million, $2,730.0 million and $2,430.0 million of
Commercial Paper classified as long-term debt as of May 31, 1997, 1996 and
1995, respectively.
(E) Total long- and intermediate-term debt at May 31, 1997, includes $368.7
million which will be due or is expected to be redeemed during fiscal year
1998.
(F) Excluding $103.5 million, $102.5 million and $114.1 million of Debt Service
Reserve Certificates, and $39.8 million, $31.4 million and $24.3 million of
subscribed but unissued Subordinated Certificates, as of May 31, 1997, 1996
and 1995, respectively, since such funds are not generally available for
investing in earning assets.
(G) Net of discount; includes $2,250.0 million, $2,730.0 million and $2,430.0
million of Commercial Paper classified as long-term debt as of May 31, 1997,
1996 and 1995, respectively. Includes $115.0 million, $183.5 million and
$350.0 million of Bank Bid Notes at May 31, 1997, 1996 and 1995,
respectively.
(H) Average interest rates are weighted on the basis of amounts of outstanding
borrowings without adjustment for bank credit compensation arrangements for
short-term borrowings and without adjustment for Collateral Trust Bonds due
within one year and reclassified as notes payable.
Set forth below are the weighted average interest costs incurred by CFC on
its short-term borrowings (Commercial Paper and Bank Bid Notes) and long-term
borrowings (Collateral Trust Bonds, medium-term notes and interest rate swaps)
for the periods shown.
INTEREST COSTS ON CFC BORROWINGS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Short-term borrowings............................... 5.54% 5.83% 5.59%
Long-term borrowings................................ 7.36% 7.99% 8.15%
All borrowings................................. 5.99% 6.33% 6.15%
</TABLE>
Due to its non-profit character, CFC does not seek to maximize its
operating margins, but rather to achieve margins only to the extent considered
by CFC to be consistent with sound financial practice. CFC is exempt from the
payment of Federal income taxes.
USE OF PROCEEDS
Except as may be otherwise provided in a Prospectus Supplement, the net
proceeds from the sale of the Bonds will be added to the general funds of the
Company and will be available for making loans to members, the repayment of
short-term borrowings, the refinancing of existing long-term debt and for other
corporate purposes. The Company expects to incur additional indebtedness from
time to time, the amount and terms of which will depend upon the volume of its
business, general market conditions and other factors.
8
<PAGE> 15
SUMMARY FINANCIAL INFORMATION
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
========== ========== ========== ========== ==========
Quarterly Income Capital
Securities..................... $ 125,000 $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
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) Extraordinary loss for the years ended May 31, 1996 and 1993, represents
premiums 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 debt used
to fund loans guaranteed by the U.S. Government, by the total of 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.
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 $90.8 million for the year ended May 31, 1997.
The Company does not have outstanding any common stock and does not pay
dividends. Under current policies, CFC retires Patronage Capital Certificates,
which represent annual allocations of CFC's net margins, 70% during the next
fiscal year, and expects to retire the remaining 30% after 15 years with due
regard for CFC's financial condition.
9
<PAGE> 16
CAPITALIZATION
The following table shows the capitalization of the Company as of November
30, 1997.
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
SENIOR DEBT:
Short-term Debt(A)........................................ $3,687,742
Long-term Debt(A)......................................... 4,339,498
----------
Total Senior Debt(B).............................. 8,027,240
----------
SUBORDINATED DEBT AND MEMBERS' EQUITY:
Deferrable Subordinated Debt(C)........................... 200,000
Members' Subordinated Certificates(D)..................... 1,219,653
Members' Equity(E)........................................ 249,920
----------
Total Capitalization.............................. $9,696,813
==========
</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 November 30, 1997, bank revolving credit agreements providing
for borrowings aggregating up to $5,197.5 million. 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 $1,349.9 million
increased each fiscal year after 1994 by 90% of net margins not distributed
to members and an average fixed charge coverage ratio over the six most
recent fiscal quarters of at least 1.025. The revolving credit agreements
also require a fixed charge coverage ratio of 1.05 for the preceding fiscal
year as a condition to the retirement of patronage capital and prohibit the
Company from pledging collateral in excess of 150% of the principal amount
of collateral trust bonds outstanding. Commercial Paper in the amount of
$2,345.0 million, which is supported by a five-year revolving credit
agreement, is shown as long-term debt. Long-term debt also includes the
Company's outstanding Collateral Trust Bonds and Medium-Term Notes.
(B) At November 30, 1997, the Company had outstanding guarantees of tax-exempt
securities issued on be- half of members in the aggregate amount of
$1,169.5 million. Guaranteed tax-exempt securities include $1,030.7 million
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
November 30, 1997, the Company had guaranteed its members' obligations in
connection with certain lease transactions and other debt in the amount of
$909.5 million.
(C) As of November 30, 1997, CFC had issued a total of $200.0 million of
Deferrable Subordinated Debt in the form of Quarterly Income Capital
Securities ("QUICS"). QUICS are subordinate and junior in right of payment
to senior indebtedness. CFC has the right at any time and from time to time
during the term of the QUICS to defer the payment of interest for up to 20
consecutive quarters.
(D) 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
($644.8 million at November 30, 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 amortize
proportionately with, the credit extended, and either are non-interest
bearing or bear interest at varying rates.
(E) The Company allocates its net margins among its members in proportion to
interest earned by the Company from such members. The Company 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 the Company's financial
condition. The unretired allocations for fiscal years 1988-1993 are being
retired over the 15-year period from 1994 through 2008. The current policy
of RTFC is to retire 70% of current year's margins with 8 1/2 months of the
end of the fiscal year with the remainder to be retired at the discretion of
RTFC's Board of Directors. The current policy of GFC is to retire 100% of
current year's margins shortly after the end of the fiscal year.
10
<PAGE> 17
THE RURAL ELECTRIC AND TELEPHONE SYSTEMS
GENERAL
The majority of the systems reporting to RUS at December 31, 1996, 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 16). However, the Composite Financial Statements
on pages 17 to 19 relate only to CFC Utility Members.
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, 1995, 844 of
RUS's 897 telephone borrowers provided service to 5.1 million subscribers
throughout the United States and its territories (reporting information was not
available for the remaining 53 borrowers).
For fiscal year 1997, both the House and Senate Agriculture Appropriation
Committees have approved RUS electric insured loan levels of $524 million, of
which $69 million would be at the 5% rate and $455 million would be at municipal
rates. An additional $300 million would be available in loan guarantees.
Proposed electric funding levels for fiscal year 1998 are $525 million for loans
and $300 million for guarantees. These levels must be approved by both Congress
and the President. The loan levels may be further adjusted based on the loan
subsidies appropriated and the gap between the rate on these loans and the
government cost of money on October 1, 1997.
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 generally secured by a mortgage on substantially all the system's
property and revenues.
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 loans for a period of ten years, but remains eligible for RUS
loan guarantees. As of June 30, 1997, 108 borrowers had either fully prepaid or
partially prepaid their RUS notes under these provisions, in the total amount of
$1,435.7 million. A total of 86 of these borrowers have selected CFC to
refinance a total of $1,261.4 million of this amount.
11
<PAGE> 18
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, 1996, the
approximate number of consumers served by RUS electric borrowers was 13.2
million, representing an estimated 31.9 million ultimate users. Aggregate
operating revenues of the distribution systems from sales of electric energy for
the year ended December 31, 1996 totaled $15.0 billion, of which 64% was derived
from the sales of electricity to residential consumers (farm and non-farm), 29%
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 2.42
in 1995 to 2.44 in 1996. The composite DSC ratio increased from 2.40 in 1995 to
2.42 in 1996. The composite MDSC ratio increased from 2.28 in 1995 to 2.30 in
1996. Composite equity as a percent of total assets for member distribution
systems increased from 41.7% at December 31, 1995 to 42.5% at December 31, 1996.
TIER, DSC and MDSC are defined in notes (3), (4) and (5) on page 17 hereof.
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 (subject in certain
cases to regulatory approval). The wholesale power contracts permit the power
supply system, subject to approval by RUS, and, in certain circumstances,
regulatory agencies, to establish rates to its members so as to produce revenues
sufficient, with revenues from all other sources, to meet the costs of operation
and maintenance (including, without limitation, replacements, insurance, taxes
and administrative and general overhead expenses) of all generating,
transmission and related facilities, to pay the cost of any power and energy
purchased for resale, to pay the costs of generation and transmission, to make
all payments on account of all indebtedness and leases of the power supply
system and to provide for the establishment and maintenance of reasonable
reserves. The rates under the wholesale power contracts are required to be
reviewed by the Board of Directors of the power supply system at least annually.
Power contracts with investor-owned utilities 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, 1996, 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 facilities. Certain other power
supply systems had been formed but did not yet own generating or transmission
facilities.
At December 31, 1996, the 53 power supply systems reporting to RUS owned
interests in 145 generating plants representing generating capacity of
approximately 29,034 megawatts, or approximately 4.3% of the nation's estimated
electric generating capacity, and served 689 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, 1996, steam plants accounted for 94.1% (including
nuclear capacity representing approximately 10.0% of such total generating
capacity), internal combustion plants accounted for 5.5% and hydroelectric
plants accounted for 0.4%. RUS loans and loan guarantees as of December 31,
1996, have provided funds for the installation of over 34,000 megawatts
12
<PAGE> 19
(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
cancelled.
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 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, in January 1991, with an effective date of January 1, 1989.
Deseret failed to make the payments required under the ARO during 1995. 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 foreclosure action has recently
filed amended counterclaims against CFC. These amended counterclaims allege
breaches of contract and fiduciary duties, fraudulent concealment, tortious
interference with contract and conspiracy. These amended counterclaims also seek
rescission or equitable subordination of CFC's interest in the Bonanza Plant.
On October 16, 1996, Deseret and CFC entered into an Obligations
Restructuring Agreement (the "ORA") for the purpose of restructuring Deseret's
debt with CFC. Pursuant to the terms of the ORA, Deseret is required to make
quarterly minimum payments to CFC through December 31, 2025. In addition to the
quarterly minimum payments, Deseret is required to pay to CFC certain
percentages of its excess cash flow and proceeds from the disposition of assets.
If Deseret performs all of its obligations under the ORA and no event of default
then exists thereunder, then on December 31, 2025, CFC has agreed to forgive any
amounts owed by Deseret to CFC.
In October 1996, CFC acquired all of Deseret's indebtedness in the
outstanding principal amount of $740 million from RUS for the sum of $238.5
million (the "RUS Debt"). As a result of the purchase, CFC holds a majority of
Deseret's outstanding secured debt. The member systems of Deseret purchased from
CFC, for $55 million, a participation interest in the RUS Debt. CFC provided
long-term financing to the members of Deseret as follows: (i) $32.5 million in
the aggregate to finance the buyout by the members of their respective RUS debt
(the "Note Buyout Loans"), and (ii) $55.0 million in the aggregate to finance
the members' purchase of participation interests in the RUS Debt acquired by CFC
(the "Participation Loans"). The Note Buyout Loans and the Participation Loans
are secured by the assets and revenues of the respective member systems. Under
the participation agreement the Deseret members will receive a share of the
minimum quarterly payments that Deseret makes to CFC which the members will use
to service their Participation Loans. Each member of Deseret has the option to
put its loan and its participation interest in the RUS Debt back to CFC at any
time after twelve years, provided that no event of default exists under the ORA
and under such member's Participation Loan.
From January 1, 1989 through November 30, 1997, CFC has funded $170.7
million in cashflow shortfalls related to Deseret's debt service and rental
obligations. As of November 30, 1997, CFC had approximately $658.6 million in
current credit exposure to Deseret consisting of $335.6 million in secured loans
and $323.0 million in guarantees by CFC of various direct and indirect
obligations of Deseret. The secured loans to Deseret are on nonaccrual status
with respect to interest income. All payments received from Deseret are applied
against principal outstanding. CFC's guarantees include $5.0 million in
tax-benefit indemnifications and $56.1 million relating to mining equipment
leased to a coal supplier of Deseret. The remainder of CFC's guarantee
13
<PAGE> 20
is for semi-annual debt service payments on $261.9 million of bonds issued in a
$655 million leveraged lease financing of the Bonanza Plant in 1985. RUS is
responsible for the repayment of $172.1 million of Deseret loans held by grantor
trusts and serviced by CFC. CFC holds $2.8 million of the grantor trust
certificates which currently bear interest at a variable rate.
CFC believes that, given its analysis of Deseret's cashflow projections, it
has adequately reserved for any potential loss on its loans and guarantees to
Deseret and its affiliates.
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, 1995, there were 897 telephone systems that were RUS
borrowers (RUS had collected financial data on 844). The 844 telephone systems
included 235 cooperative, not-for-profit organizations and 609 commercial,
for-profit organizations. These organizations provided telephone service to
approximately 5.1 million consumers and owned approximately 851,357 miles of
telephone lines. Total assets at December 31, 1995 were $13.6 billion, with a
composite TIER of 4.24 and composite equity ratio of 48.4%. The telephone
systems operate in all fifty states and seven U.S. territories.
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 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 December
31, 1997, invested $94.4 million and have received patronage capital in the form
of Class B stock totalling $554.5 million. In addition, borrowers and other
eligible entities have purchased $191.2 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.
Language in the United States Government Fiscal Year 1997 House Agriculture
Appropriations Bill limits the amount of Class A stock that can be redeemed in
fiscal year 1997 to five percent of the amount of Class A stock outstanding.
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 257 systems). Distribution systems in
these states account for 32% 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' 293 systems as
to the issuance of long-term debt securities. In five states (in which there are
53 systems) state agencies regulate, to varying degrees, the issuance of
short-term debt securities. Since 1967, the Federal Power Commission and its
successor, FERC, which regulates interstate sales of energy at wholesale, have
taken the position that it lacks jurisdiction to regulate cooperative rural
electric systems which are current borrowers from 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.
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.
14
<PAGE> 21
The systems, in common with the electric power industry generally, may
incur substantial capital expenditures and increases in operating costs in order
to meet the requirements of both present and future Federal, state and local
standards relating to safety and environmental quality control. These include
possible requirements for burying distribution lines, and meeting air and water
pollution standards.
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 that minimize the Amendments' impact. At this time, it is not
anticipated that the Amendments will have a material adverse impact on the
quality of CFC's loan portfolio.
On April 24, 1996, the FERC issued Orders 888 and 889. Order 888 provides
for competitive wholesale power sales by requiring 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
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. 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 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.
All telephone systems are regulated by the Federal Communications
Commission with respect to long distance access rates. Most states also regulate
local rates.
The Telecommunications Act of 1996 opened the local exchange market to
competition. The Telecommunications Act contains numerous provisions designed to
assure the continued viability of the rural telecommunications companies.
Currently, the large and small Local Exchange Carriers ("LEC") and their
potential competitors are arguing before the FCC and in the courts about how to
fairly translate the provisions of the Telecommunications Act into the rules and
regulations under which the new telecommunications industry will operate.
Due to the Telecommunications Act, competition will eventually come to the
rural areas. The cost of competing with an established LEC may limit the
majority of the competition to the larger local exchanges located adjacent to
suburban areas and to rural areas containing large customers. The majority of
CFC's telecommunications borrowers are well established in their service areas,
with no significant competition at present.
15
<PAGE> 22
The impact of the Telecommunications Act on CFC's telecommunications
borrowers can not yet be determined.
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 assets. In the case of power supply systems, RUS has included in its
direct loans and guarantees of loans amounts sufficient to meet the estimated
interest charges during construction. If the foregoing accounting policy were
not followed, utilities would presumably request regulatory permission, if
applicable, to increase their rates to cover such costs. The amounts of interest
charged to construction and allowance for funds used during construction
capitalized by distribution systems are relatively insignificant. Because Power
Supply systems generally expend substantial amounts on long-term construction
projects, the application of this accounting policy may result in substantially
lower interest expense and in substantially higher net margins for such systems
during construction than would be the case if such a policy were not followed.
On the following pages are tables providing composite statements of
revenues, expenses and patronage capital of the distribution systems which were
members of CFC and the power supply systems which were members of CFC during the
five years ended December 31, 1996, the most recent year for which composite
financial information is available, and their respective composite balance
sheets as at the end of each such year.
- ---------------
NOTE: Statistical information in the 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.
16
<PAGE> 23
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,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenue and patronage
capital................................ $17,028,087 $16,253,957 $15,603,853 $15,072,400 $13,921,515
----------- ----------- ----------- ----------- -----------
Operating deductions..................... 15,330,997 14,672,169 14,126,839 13,566,718 12,628,989
----------- ----------- ----------- ----------- -----------
Utility operating margins................ 1,697,090 1,581,788 1,477,014 1,505,682 1,292,526
Non-operating margins and capital
credits(1)............................. 463,111 426,959 395,166 384,862 377,550
Interest on long-term debt and other
deductions(2).......................... (912,787) (879,969) (805,323) (766,722) (777,435)
----------- ----------- ----------- ----------- -----------
Net margins and patronage capital........ $ 1,247,414 $ 1,128,776 $ 1,066,857 $ 1,123,822 $ 892,641
=========== =========== =========== =========== ===========
TIER(3).................................. 2.44 2.42 2.42 2.54 2.19
DSC(4)................................... 2.42 2.40 2.26 2.44 2.07
MDSC(5).................................. 2.30 2.28 2.09 2.21 1.99
Number of systems included............... 832 824 828 825 821
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets and other debits:
Net utility plant.................... $26,470,506 $24,777,794 $23,329,493 $21,877,902 $20,721,332
Other assets......................... 8,466,621 8,195,805 7,770,998 7,410,799 6,980,758
----------- ----------- ----------- ----------- -----------
Total assets and other debits... $34,937,127 $32,973,599 $31,100,491 $29,288,701 $27,702,090
=========== =========== =========== =========== ===========
Liabilities and other credits:
Total net worth...................... $14,836,929 $13,761,742 $12,918,484 $11,959,962 $10,925,009
Other liabilities and credits........ 20,100,198 19,211,857 18,182,007 17,328,739 16,777,081
----------- ----------- ----------- ----------- -----------
Total liabilities and other
credits....................... $34,937,127 $32,973,599 $31,100,491 $29,288,701 $27,702,090
=========== =========== =========== =========== ===========
Number of systems included............... 832 824 828 825 821
</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) The ratio of (x) interest on long-term debt (in each year including all
interest charged to construction) and net margins and patronage capital to
(y) interest on long-term debt (in each year including all interest charged
to construction).
(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.
17
<PAGE> 24
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,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenue and patronage
capital................................ $10,585,875 $10,182,928 $ 9,972,873 $ 9,976,560 $ 9,111,434
----------- ----------- ----------- ----------- -----------
Operating deductions..................... 9,121,759 8,703,236 8,393,817 8,191,101 7,375,988
----------- ----------- ----------- ----------- -----------
Utility operating margins................ 1,464,116 1,479,692 1,579,056 1,785,459 1,735,446
Non-operating margins and
capital credits(1)..................... 549,464 302,864 253,534 376,796 311,581
Interest on long-term debt and
other deductions(2).................... (3,038,119) (1,565,846) (1,987,438) (2,199,696) (2,213,283)
----------- ----------- ----------- ----------- -----------
Net margins and patronage capital........ $(1,024,539) $ 216,710 $ (154,848) $ (37,441) $ (166,256)
=========== =========== =========== =========== ===========
TIER(3).................................. .29 1.15 .93 .98 .92
DSC(4)................................... .69 1.02 1.01 1.03 1.05
Number of systems included(5)............ 54 53 53 50 50
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets and other debits:
Net utility plant.................... $21,048,036 $23,527,287 $23,781,497 $23,774,280 $23,715,910
Other assets......................... 10,800,356 11,308,776 11,095,752 11,256,222 8,539,061
----------- ----------- ----------- ----------- -----------
Total assets and other debits... $31,848,392 $34,836,063 34,877,249 $35,030,502 $32,254,971
=========== =========== =========== =========== ===========
Liabilities and other credits:
Total net worth...................... $ (645,857) $ 498,006 $ 246,584 $ 432,347 $ 316,039
Other liabilities and credits........ 32,494,249 34,338,057 34,630,665 34,598,155 31,938,932
----------- ----------- ----------- ----------- -----------
Total liabilities and other
credits....................... $31,848,392 $34,836,063 $34,877,249 $35,030,502 $32,254,971
=========== =========== =========== =========== ===========
Number of systems included(5)............ 54 53 53 50 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. Includes also net margins of associated
organizations allocated to CFC power supply members and added in determining
net margins and patronage capital of the CFC member systems under 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 unpub-
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<PAGE> 25
lished information furnished by RUS, interest charged to construction and
allowance for funds used during construction for CFC power supply members in
the years 1992-1996 were as follows:
<TABLE>
<CAPTION>
INTEREST ALLOWANCE FOR
CHARGED FUNDS USED
TO CONSTRUCTION DURING CONSTRUCTION TOTAL
--------------- ------------------- -----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
1996 $13,434 $11,620 $25,054
1995 68,400 11,018 79,418
1994 46,773 8,913 55,686
1993 49,237 8,621 57,858
1992 54,093 4,396 58,489
</TABLE>
(3) Determined by adding interest on long-term debt (in each year including all
interest charged to construction) and net margins and patronage capital and
dividing the total by interest on long-term debt (in each year including all
interest charged to construction). This is the basis for computing TIER used
by CFC for purposes of determining loan eligibility. The TIER calculation
includes the operating results of six systems which currently fail to make
debt service payments or are operating under a debt restructure agreement,
without which the composite TIER would have been 1.21, 1.23, 1.31, 1.20 and
1.15 for the years ended December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
(4) The ratio of (x) net margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations. The
DSC calculation includes the operating results of six systems which
currently fail to make debt service payments or are operating under a debt
restructure agreement. Without these systems, the composite DSC would have
been 1.20, 1.22, 1.24, 1.21 and 1.22 for the years ended December 31, 1996,
1995, 1994, 1993 and 1992, 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 BONDS
The Bonds are to be issued under an indenture dated as of February 15, 1994
(said Indenture, as supplemented from time to time, being herein called the
"Indenture"), between CFC and First Bank National Association, as Trustee (the
"Trustee"), which Indenture is an exhibit to the Registration Statement of which
this Prospectus is a part. The following summaries of certain provisions of the
Indenture do not purport to be complete, and, where particular provisions of the
Indenture are referred to, such provisions, including definitions of certain
terms, are incorporated by reference as a part of such summaries, which are
qualified in their entirety by such reference. Section references in this
Description of Bonds are to Sections of the Indenture.
CFC may maintain banking relationships in the ordinary course of business
with First Bank National Association, including the making of investments
through, and borrowings from, said bank.
The Indenture provides that additional debt securities may be issued
thereunder without limitation as to aggregate principal amount except as
described below under "Security," as authorized from time to time by CFC's Board
of Directors. (Sections 2.01, 2.02 and 2.03) Bonds issued at any time under the
Indenture are referred to herein collectively as "Collateral Trust Bonds," which
term does not include Series E-2 and Series V Collateral Trust Bonds, which
bonds were issued under a prior indenture. The terms of Bonds of any series will
be set forth in or pursuant to a Board resolution or supplemental indenture
adopted or entered into prior to the time of the issuance thereof. (Section 2.03
and 13.01) The Bonds will rank and be secured equally and ratably with each
other.
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<PAGE> 26
GENERAL
Reference is made to the Prospectus Supplement for the following terms of
the Bonds with respect to which this Prospectus is delivered: (i) the title of
such Bonds; (ii) any limit upon the aggregate principal amount of such Bonds;
(iii) the persons to whom interest on such Bonds shall be payable, if other than
the persons in whose names such Bonds are registered; (iv) the date or dates on
which the principal of such Bonds is payable or the method by which such date or
dates shall be determined; (v) the rate or rates, if any, at which such Bonds
shall bear interest or any method by which such rate or rates shall be
determined; (vi) the date or dates from which such interest, if any, shall
accrue and the date or dates on which such interest, if any, shall be payable;
(vii) the place or places at which the principal of and premium, if any, and
interest, if any, on such Bonds shall be payable and registration of transfer or
exchanges of such Bonds may be effected, and the registrar for such Bonds;
(viii) the terms and conditions upon which such Bonds may be redeemed, including
any sinking fund or other mandatory redemption provisions; (ix) the
denominations in which such Bonds shall be issuable if other than denominations
of $1,000 and any integral multiple thereof; (x) the coin or currency in which
payment of the principal of and premium, if any, and interest, if any, on such
Bonds shall be payable (if other than the coin or currency in which such Bonds
are denominated), and, if the principal of or premium, if any, or interest, if
any, on such Bonds are to be payable, at the election of the Company or a holder
thereof, in a coin or currency other than that in which such Bonds are
denominated, the period or periods within which, and the terms and conditions
upon which, such election may be made, and if denominated or payable in any coin
or currency, including composite currencies, other then U.S. dollars, the method
by which such Bonds shall be valued; (xi) if the principal of or premium, if
any, or interest, if any, on such Bonds are to be payable in securities or other
property at the election of the Company or a holder thereof, the type and amount
of such securities or other property, or the method by which such amount shall
be determined, and the periods within which, and the terms and conditions upon
which, any such election may be made; (xii) if the amount payable in respect of
principal of or premium, if any, or interest, if any, on such Bonds may be
determined with reference to an index, the manner in which such amounts shall be
determined; (xiii) if other than the principal amount thereof, the portion of
the principal amount of such Bonds, or any tranche thereof, which shall be
payable upon declaration of the acceleration of the maturity thereof; (xiv) the
terms, if any, pursuant to which such Bonds may be converted into or exchanged
for shares of capital stock or other securities of the Company or any other
person; (xv) if such Bonds are to be issued in global form, the depositary with
respect to such global bond or bonds and any limitations on the rights of the
holder or holders of such bonds to transfer or exchange the same or to obtain
the registration of transfer thereof or to obtain certificates therefor in
definitive form in lieu of temporary form; (xvi) if such Bonds are to be
issuable as bearer securities, any and all matters incidental thereto; (xvii)
the right, if any, of the Company to limit or discharge the indenture as to such
Bonds; (xviii) whether and under what circumstances the Company will pay
additional amounts on such Bonds held by a Person who is not a U.S. person in
respect of any tax, assessment or governmental charge withheld or deducted and,
if so, whether and on what terms the Company will have the option to redeem such
Bonds rather than pay such additional amounts; and (xix) any other terms of such
Bonds not inconsistent with the Indenture. (Section 2.03)
SECURITY
The Bonds will be secured, equally with outstanding Collateral Trust Bonds,
by the pledge with the Trustee of Eligible Collateral having an Allowable Amount
of at least 100% of the principal amount of Collateral Trust Bonds outstanding.
The Indenture provides that Eligible Collateral shall consist of cash, Eligible
Mortgage Notes of Distribution System Members and Permitted Investments. The
"Allowable Amount" of cash is 100% thereof, the "Allowable Amount" of Eligible
Mortgage Notes is the amount advanced thereon and not repaid and the "Allowable
Amount" of Permitted Investments is their cost to CFC (exclusive of accrued
interest and brokerage commissions), except that the "Allowable Amount" of
Permitted Investments traded on a national securities exchange or in any
over-the-counter market is their fair market value as determined by CFC. For
purposes of the Indenture and as used in describing the Bonds herein, a "Member"
is any person which is a member or patron of CFC; and a "Distribution System
Member" is a Member 50% or more of whose gross operating revenues are derived
from sales of electricity to ultimate consumers. (Sections 1.01 and 3.01)
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<PAGE> 27
As a condition to the authentication and delivery of Bonds (or, for certain
series of Bonds, prior only to the first issuance thereof and if such
certification has not been made as of a date 90 days prior to the authentication
and delivery of such Bonds) or to the withdrawal of Collateral, and in any event
at least once a year, CFC must certify to the Trustee that:
(1) the Allowable Amount of Eligible Collateral pledged under the
Indenture is at least equal to 100% of the aggregate principal amount of
Collateral Trust Bonds to be outstanding;
(2) each Eligible Mortgage Note included in the Eligible Collateral so
certified is an Eligible Mortgage Note of a Distribution System Member
having an Equity Ratio of at least 20% and an Average Coverage Ratio of at
least 1.35; and
(3) the aggregate Allowable Amount of all Eligible Mortgage Notes of
any one Distribution System Member so certified does not exceed 10% of the
aggregate Allowable Amount of all Eligible Collateral so certified.
(Sections 3.01, 6.01 and 7.13)
CFC is also entitled to the authentication and delivery of Collateral Trust
Bonds on the basis of the retirement of outstanding Collateral Trust Bonds at
their final maturity or by redemption at the option of CFC. (Sections 3.02 and
3.03)
The Indenture provides that Collateral Trust Bonds of one or more other
series may be issued thereunder without limitation as to aggregate principal
amount, subject to the restriction described under "Restriction on
Indebtedness", so long as the Allowable Amount of Eligible Collateral pledged
under the Indenture is at least equal to the aggregate principal amount of
Collateral Trust Bonds to be outstanding and meets the other requirements set
forth herein. (Sections 2.03 and 13.01) "Eligible Mortgage Note" means a note or
bond of a Distribution System Member which is secured by a Mortgage under which
no default exists with respect to the covenants required by the Indenture to be
contained in a Mortgage (as described below), unless consented to by the
mortgagees to the extent permitted in the Mortgage and the Indenture, and under
which no "event of default" as defined in the Mortgage shall have occurred and
shall have resulted in the exercise of remedies. (Section 1.01)
"Equity Ratio" is determined by dividing the sum of the Member's equities
and margins at the end of the particular year by the Member's total assets and
other debts at such date; and "Coverage Ratio" is determined by dividing the sum
of the Member's patronage capital and operating margins, non-operating
margins-interest, cash received in respect of power supply systems and other
capital credits, depreciation and amortization expense and interest expense with
respect to long-term debt by the Member's long-term debt service obligations in
respect of such year (but in the event any portion of such Member's long-term
debt is refinanced during such year the long-term debt service obligations
during such year in respect thereof will be based upon the larger of (x) an
annualization of such obligations with respect to the refinancing debt during
the portion of the year such refinancing debt is outstanding and (y) the
long-term debt service obligations during the following year on such refinancing
debt). These terms are determined in accordance with the system of accounting
used for REA reporting or if such Member is not required to maintain its
accounts in accordance with such system, then in accordance with generally
accepted accounting principles, except that the Indenture requires that interest
expense and long-term debt service obligations include 33 1/3% of the amount by
which (x) rental payments by such Member with regard to certain property having
an initial cost greater than $250,000 exceed (y) 2% of such Member's equities
and margins, each in respect of such year. For RUS reporting purposes and for
purposes of CFC's calculation of borrowers' ratios, obligations under
take-or-pay power contracts, guaranties and other contingent obligations are not
considered debt of a Member. "Average Coverage Ratios" are computed by averaging
the best two of the three calendar years preceding the date of determination.
(Section 1.01) The effect of these provisions is to exclude from the computation
of the Coverage Ratio capital credits except to the extent received by the
Member in the form of cash.
The Indenture requires that each Mortgage securing an Eligible Mortgage
Note be a first mortgage on the property then owned or thereafter acquired by
the Member issuing the Note (or, in the case of certain public agency borrowers,
on such Member's revenues), subject to usual exceptions in mortgages of utility
companies, and that, if the Mortgage is a common mortgage with RUS or any other
lender, the mortgagees be secured equally
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<PAGE> 28
and ratably. (Section 1.01 and Schedule I) There are no requirements in the
Indenture as to the value of the property subject to the lien of a Mortgage.
The Indenture provides that, unless an Event of Default under the Indenture
exists, and other than certain limited duties specified in the Indenture, the
Trustee shall have no duties or responsibilities with regard to any Mortgage and
no responsibilities with regard to the value of any property subject thereto.
(Section 4.03)
"Permitted Investments" are defined to include certain obligations of or
guaranteed by the United States and of states and municipalities and agencies
thereof which are rated AA (or equivalent) or better by at least two nationally
recognized statistical rating agencies and which mature not more than two years
after purchase, certificates of deposit or time deposits of a bank or trust
company having at least $500,000,000 of capital and surplus and maturing not
more than two years after purchase and commercial paper of bank holding
companies or other corporate issuers (other than CFC) generally rated in the
highest category by at least two nationally recognized statistical rating
agencies and maturing not more than one year after purchase. (Section 5.03)
EXERCISE OF RIGHTS
Until the occurrence of an Event of Default under the Indenture, CFC
retains the right to control the exercise of rights and powers under Eligible
Mortgage Notes and Mortgages pledged under the Indenture. (Section 15.01)
Mortgages which also secure notes issued to RUS provide that RUS will have the
exclusive right for an initial 30-day period to initiate and control enforcement
proceedings on behalf of the holders of all the notes secured by the particular
Mortgage, including those held by the Trustee.
RESTRICTION ON INDEBTEDNESS
CFC may not incur any Superior Indebtedness or make any optional prepayment
on any Capital Term Certificate if, as a result, the principal amount of
Superior Indebtedness outstanding thereafter or on any future date, less the
principal amount of a Government or Government Insured Obligations held by CFC
on the determination date, would exceed 20 times the sum of the Members' equity
in CFC at the time of determination plus the principal amount of Capital Term
Certificates outstanding at the time of determination or at such given future
date, as the case may be. The principal amounts of Superior Indebtedness and
Capital Term Certificates to be outstanding on any future given date will be
computed after giving effect to maturities and sinking fund requirements.
(Section 7.11) "Superior Indebtedness" means all indebtedness of CFC (including
all guarantees by CFC of indebtedness of others) except Capital Term
Certificates. (Section 1.01). A "Capital Term Certificate" is defined for the
purposes of the Indenture as a note of CFC substantially in the form of the
capital term certificates of CFC outstanding on the date of the Indenture and
any other indebtedness having substantially similar provisions as to
subordination. (Section 1.01). "Government or Government Insured Obligations"
means obligations held by CFC which relate to the RUS or successor programs and
which are obligations of the United States or any agency thereof or which are
guaranteed or insured by the United States government or any agency thereof.
(Section 7.11) As of November 30, 1997, CFC had $10,059.6 million outstanding of
Superior Indebtedness and within the restrictions of the Indenture was permitted
to have outstanding an additional $23,331.9 million of Superior Indebtedness.
Unless an Event of Default shall occur, CFC will be entitled to receive and
retain all payments on account of principal, premium and interest on the
Eligible Mortgage Notes and Permitted Investments on deposit with the Trustee.
(Section 4.02)
MODIFICATIONS
Modifications of the provisions of the Indenture may be made with the
consent of the holders of not less than a majority in aggregate principal amount
of the then outstanding Collateral Trust Bonds, but, without the consent of the
holder of each Collateral Trust Bond affected thereby, no such modification
shall (i) effect a reduction, or an extension of the stated time of payment, of
the principal of or interest on any Collateral Trust Bond or of any premium
payable on redemption, (ii) permit the creation of any prior or equal lien on
the securities or other property pledged under the Indenture (except as
expressly permitted) or deprive the holder of any Collateral Trust Bond (except
as expressly permitted) of the lien created by the Indenture or (iii) reduce the
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<PAGE> 29
above-stated percentage of holders of Collateral Trust Bonds whose consent is
required to modify the Indenture or the percentage of holders of Collateral
Trust Bonds whose consent is required for any waiver under the Indenture.
(Section 13.02)
The Indenture provides that the Company and the Trustee may, without the
consent of any holders of Collateral Trust Bonds, enter into supplemental
indentures for the purposes, among other things, of adding to the Company's
covenants, establishing the form or terms of Bonds of any series, changing or
eliminating any restriction on the manner or place of payment of principal of or
interest on Bearer Bonds or, provided such action shall not adversely affect the
interests of the holders of any series of Bonds in any material respect, curing
ambiguities or inconsistencies in the Indenture or making other provisions with
respect to matters arising under the Indenture. (Section 13.01)
WAIVER OF CERTAIN COVENANTS
The Indenture provides that the Company may omit to comply with certain
restrictive covenants (including that described above under "Restriction on
Indebtedness") if the holders of not less than a majority in principal amount of
all series of Collateral Trust Bonds at the time outstanding affected thereby
(acting as one class) waive compliance with such restrictive covenants. (Section
7.16)
EVENTS OF DEFAULT
The Indenture provides that the following constitute "Events of Default"
thereunder: (i) default in the payment of interest on any Bonds continuing for
30 days; (ii) default in the payment of the principal of (or, premium, if any,
on) any Bonds at their maturity or upon redemption; (iii) default in the making
of any sinking fund payment on any Bonds which provide for mandatory sinking
fund payments; (iv) default in the performance of specified covenants in the
Indenture for 60 days after such default is known to any officer of CFC,
including the restriction on indebtedness and the covenant to maintain Eligible
Collateral outlined above; (v) failure to perform any other covenant in the
Indenture for 60 days after notice from the Trustee to the Company or from
holders of at least 25% in principal amount of Bonds outstanding to the Trustee
and (vi) specified events of bankruptcy, reorganization or insolvency. (Section
9.01)
CFC is required to file with the Trustee annually a written statement as to
CFC's compliance with the conditions and covenants under the Indenture. (Section
7.15) In case an Event of Default should occur and be continuing, the Trustee or
the holders of at least 25% in principal amount of the Bonds then outstanding
may declare the principal of the Bonds to be due and payable. Each declaration
may, under certain circumstances, be rescinded by the holders of a majority in
principal amount of the Bonds at the time outstanding. (Section 9.02)
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
shall be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Bonds, unless
such holders shall have offered to the Trustee reasonable security or indemnity.
Subject to such provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in principal amount of the Bonds at
the time outstanding shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. The Trustee is not
required to expend or risk its own funds or incur financial liability if it has
reasonable ground for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
(Sections 9.08, 10.01 and 10.03)
The Indenture provides that upon receipt by the Trustee of notice of an
Event of Default, declaring an acceleration or directing the time, method or
place of conducting a proceeding at law if an Event of Default has occurred and
is continuing, the Trustee shall, with respect to any series of Bonds
represented by a global bond or bonds, and may, with respect to any other series
of Bonds, establish a record dated for the purpose of determining holders of
outstanding Bonds of such series entitled to join in such notice. (Section 9.01)
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<PAGE> 30
SATISFACTION AND DISCHARGE; DEFEASANCE
At the request of the Company, the Indenture will cease to be in effect as
to the Company (except for certain obligations to register the transfer or
exchange of Bonds and hold moneys for payment in trust) with respect to the
Bonds when (i) the principal of and interest on Bonds and coupons, if any, have
been paid and/or the Company has deposited with the Trustee, in trust, money and
U.S. Government Obligations (as defined in the Indenture), which through the
payment of interest thereon and principal thereof in accordance with their terms
will provide money in an amount sufficient to pay all the principal of, and
interest on, the Bonds in accordance with the terms of the Bonds, or (ii) such
Bonds or coupons are deemed paid and discharged in the manner described in the
next paragraph. (Section 14.01)
Unless the Prospectus Supplement relating to the Offered Bonds provides
otherwise, the Company at its option (a) will be Discharged (as such term is
defined in the Indenture) from any and all obligations in respect of the Offered
Bonds (except for certain obligations to register the transfer or exchange of
Bonds, replace stolen, lost or mutilated Bonds and coupons, maintain paying
agencies and hold moneys for payment in trust) or (b) need not comply with
certain restrictive covenants of the Indenture (including those described above
under "Restriction on Indebtedness"), in each case after the Company deposits
with the Trustee, in trust, money, and, in the case of Bonds and coupons
denominated in a foreign currency, Foreign Government Securities, as defined in
the Indenture, which through the payment of interest thereon and principal
thereof in accordance with their terms will provide money in an amount
sufficient to pay in the currency, currencies or currency unit or units in which
the Offered Bonds are payable all the principal of, and interest on, the Offered
Bonds on the dates such payments are due in accordance with the terms of the
Offered Bonds. Among the conditions to the Company's exercising any such option,
the Company is required to deliver to the Trustee an opinion of counsel to the
effect that the deposit and related defeasance would not cause the holders of
the Offered Bonds to recognize income, gain or loss for United States federal
income tax purposes and that the holders will be subject to United States
federal income tax in the same amounts, in the same manner and at the same times
as would have been the case if such deposit and related defeasance has not
occurred. (Section 14.02)
At the request of the Company, the Trustee will deliver or pay to the
Company any U.S. Government Obligations, Foreign Government Securities or money
deposited, for the purposes described in the preceding two paragraphs, with the
Trustee by the Company and which, in the opinion of a nationally-recognized firm
of independent public accountants, are in excess of the amount thereof which
would then have been required to be deposited for such purposes. In addition,
the Trustee, in exchange for, simultaneously, other U.S. Government Obligations,
Foreign Government Securities or money, will deliver or pay to the Company, at
the Company's request, U.S Government Obligations, Foreign Government Securities
or money deposited with the Trustee for the purposes described in the preceding
two paragraphs, provided that, in the opinion of a nationally-recognized firm of
independent public accountants, immediately after such exchange the obligations,
securities or money then held by the Trustee will be in such amount as would
then have been required to be deposited with the Trustee for such purposes.
(Section 14.02)
LIMITATIONS ON ISSUANCE OF BEARER BONDS
Under U.S. federal tax laws, certain limitations on offers, sales and
delivery apply to Bearer Bonds. These limitations, as well as additional
information regarding the U.S. federal income tax consequences in respect of a
Bearer Bond, will be set forth in any Prospectus Supplement providing for the
issuance of Bearer Bonds.
UNITED STATES TAXATION
The following is a summary of the principal U.S. federal income tax
consequences of the acquisition, ownership and disposition of Registered Bonds.
The summary reflects present law, which is subject to prospective and
retroactive changes. It is not intended as tax advice, and it does not describe
all of the tax considerations that may be relevant to a prospective purchaser.
The summary addresses only original purchasers of the Bonds that hold the Bonds
as capital assets. It does not address U.S. federal income tax issues relevant
to purchasers subject to special rules, such as banks, securities dealers, life
insurance companies, controlled foreign corporations, persons
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<PAGE> 31
holding Bonds in connection with a hedge or as a position in a "straddle" or
persons having a functional currency other than the U.S. dollar. The summary
does not consider the tax consequences of Bonds with terms other than those
described in this Prospectus. PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR
TAX ADVISERS ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT IN THE BONDS UNDER THE
LAWS OF THE UNITED STATES AND OTHER JURISDICTIONS WHERE PURCHASERS ARE SUBJECT
TO TAXATION.
For the purposes of this discussion, "U.S. Holder" means (i) a beneficial
owner of the Bonds that is a citizen or resident of the United States, a
corporation or partnership organized in or under the laws of the United States
or any political subdivision thereof, a trust subject to the control of a United
States person and the primary supervision of a United States court, or an estate
the income of which is subject to U.S. federal income taxation regardless of its
source or (ii) any other beneficial owner as to which income from the Bonds is
effectively connected with the conduct of a trade or business within the United
States. The term "Non-U.S. Holder" refers to any beneficial owner of the Bonds
other than a U.S. Holder.
U.S. HOLDERS
PAYMENTS OF INTEREST
Interest on a Bond generally will be taxable to a U.S. Holder as ordinary
interest income at the time of receipt or accrual in accordance with the U.S.
Holder's method of accounting for U.S. federal income tax purposes. Special
rules for the interest on Bonds with original issue discount are described
below.
ORIGINAL ISSUE DISCOUNT
The following is a summary of the U.S. federal income tax consequences to
U.S. Holders of the purchase, ownership and disposition of Bonds issued with
original issue discount ("OID"). The following summary is based on sections 1271
through 1273 and section 1275 of the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), and on certain final regulations of the U.S. Department of
Treasury issued in 1994 and 1996 (the "OID Regulations") interpreting these
provisions.
General. A U.S. Holder of a Bond issued at a discount with a maturity of
more than one year after the date of issue must include OID in income over the
term of the Bond. The U.S. Holder generally must include in gross income for the
taxable year the sum of the daily portions of OID that accrue on the Bond for
each day during the year in which such holder held the Bond. Accordingly, a U.S.
Holder will be required to include amounts attributable to OID in income before
receiving cash attributable to that income.
A Bond has OID for U.S. federal income tax purposes to the extent that the
Bond's stated redemption price at maturity exceeds its issue price. The issue
price of a Bond is the initial offering price at which a substantial amount of
the Bonds is sold to the public (excluding bond houses, brokers or similar
persons). The stated redemption price of a Bond is the total of all payments due
on the Bond other than payments of "qualified stated interest." A Bond is not
treated as issued at a discount, however, if the discount is less than 1/4 of 1
percent of the Bond's stated redemption price at maturity multiplied by the
number of complete years to maturity ("de minimis OID"). A Bond that bears
interest for any accrual period at a rate below the rate for the remaining term
of the Bond (e.g., a Bond with a "teaser rate") also will not be treated as
issued at a discount solely on account of that feature if the foregone interest
is less than 1/4 of 1 percent of the Bond's adjusted stated redemption price
multiplied by the number of complete years to maturity.
Qualified stated interest is interest that is payable unconditionally in
cash or in property (other than debt of the issuer) at least annually at either
(a) a single fixed rate that appropriately takes into account the length of the
interval between payments or (b) certain variable rates.
To determine the daily portions of OID, OID accruing during an accrual
period is divided by the number of days in the period. Except as described below
under "Variable Rate Bonds", the amount of OID accruing during an accrual period
is determined by using a constant yield to maturity method. The accrued amount
for any period is the excess of (i) the product of the Bond's adjusted issue
price at the beginning of the accrual period and its yield to maturity
(determined on the basis of compounding at the close of each accrual period and
appropriately
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adjusted for the length of the accrual period) over (ii) the amount of any
qualified stated interest payments allocable to the accrual period. The adjusted
issue price of a Bond at the beginning of any accrual period generally equals
the issue price of the Bond increased by the aggregate amount of OID that
accrued on that Bond in all prior accrual periods and reduced by the amount of
payments in prior accrual periods other than payments of qualified stated
interest.
A U.S. Holder of a Bond issued at a discount that purchases the Bond for
more than the Bond's adjusted issue price but less than or equal to the Bond's
stated redemption price at maturity may reduce the daily portions of OID
includible in gross income by daily portions of the acquisition premium paid for
the Bond.
Variable Rate Bonds. Special rules apply to the U.S. Holder of a Bond that
bears interest at certain types of variable rates (a "Variable Rate Bond"). For
these purposes, a Variable Rate Bond is one that bears interest at the current
values of (i) one or more "qualified floating rates," (ii) a single fixed rate
followed by one or more qualified floating rates, (iii) a single "objective
rate" or (iv) a single fixed rate and an objective rate that is a qualified
inverse floating rate. A qualified floating rate is any floating rate the
variations in which reasonably can be expected to measure contemporaneous
variations in the cost of newly-borrowed funds (e.g., LIBOR). Although a
multiple of a qualified floating rate will generally not itself constitute a
qualified floating rate, a variable rate is a qualified floating rate if it is
equal to either (i) the product of a qualified floating rate and a fixed
multiple rate that is greater than 0.65 but not more than 1.35 or (ii) the
product of a qualified floating rate and a fixed multiple rate that is greater
than 0.65 but not more than 1.35, increased or decreased by a fixed rate. In
addition, under the OID Regulations, two or more qualified floating rates with
values within 25 basis points of each other (as determined on the Variable Rate
Bond's issue date) will be treated as a single qualified floating rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a maximum or minimum numerical limitation (i.e., a cap or floor) may, under
certain circumstances, fail to be treated as a qualified floating rate under the
OID Regulations unless such cap or floor is fixed throughout the term of the
Bond. An objective rate is any rate, other than a qualified floating rate, that
is determined using a single fixed formula and that is based on objective
financial or economic information. A rate will not be considered an objective
rate, however, if it is reasonably expected that the average value of the rate
during the first half of the Bond's term will be either significantly less than
or significantly greater than the average value of the rate during the final
half of the Bond's term. A qualified inverse floating rate is a fixed rate minus
a qualified floating rate whose variations can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate. A
fixed rate for an initial period of less than one year followed by a qualified
floating rate or an objective rate together constitute a single qualified
floating rate or objective rate if the value of the qualified floating rate or
objective rate on the issue date is intended to approximate the fixed rate.
In general, to compute the accrual of OID on a Variable Rate Bond, the OID
Regulations convert the Variable Rate Bond into a fixed rate debt instrument and
then apply the general rules discussed above to the deemed fixed rate debt
instrument. If a Variable Rate Bond provides for stated interest at either a
single qualified floating rate or objective rate that is unconditionally payable
at least annually, (a) all stated interest with respect to the Variable Rate
Bond is treated as qualified stated interest and (b) the amount of qualified
stated interest and the amount of OID, if any, that accrues during an accrual
period is determined under the rules applicable to fixed rate debt instruments
discussed above by assuming that the variable rate is a fixed rate equal to (i)
in the case of a qualified floating rate or qualified inverse floating rate, the
value, as of the issue date of the Variable Rate Bond, of the qualified floating
rate or the qualified inverse floating rate, or (ii) in the case of an objective
rate (other than a qualified inverse floating rate), a fixed rate that reflects
the yield that is reasonably expected for the Variable Rate Bond.
If the Variable Rate Bond does not provide for stated interest as described
in the preceding paragraph, to determine the amounts of interest and OID
accruals an "equivalent fixed rate debt instrument" must be constructed. The
equivalent fixed rate debt instrument has terms that are identical to those
provided under the Variable Rate Bond, except that the equivalent fixed rate
debt instrument provides for fixed rate substitutes in lieu of the qualified
floating rates or objective rate provided under the Variable Rate Bond. The
fixed rate substitute (a) for each qualified floating rate is the value of each
such rate as of the issue date of the Variable Rate Bond (with appropriate
adjustment for any differences in intervals between interest adjustment dates),
(b) for a
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qualified inverse floating rate is the value of the qualified inverse floating
rate as of the issue date of the Variable Rate Bond and (c) for an objective
rate (other than a qualified inverse floating rate) is a fixed rate that
reflects the yield that is reasonably expected for the Variable Rate Bond. The
amounts of qualified stated interest and OID, if any, are determined for the
equivalent fixed rate debt instrument under the rules applicable to fixed rate
debt instruments as described above and are taken into account as if the holder
of the Bond held the equivalent fixed rate debt instrument. Qualified stated
interest or OID allocable to an accrual period is increased (or decreased) if
the interest actually accrued or paid during an accrual period exceeds (or is
less than) the interest assumed to be accrued or paid during the accrual period
under the equivalent fixed rate debt instrument. This increase or decrease is an
adjustment to qualified stated interest for the accrual period if the equivalent
fixed rate debt instrument provides for qualified stated interest and the
increase or decrease is reflected in the amount actually paid during the accrual
period. Otherwise, this increase or decrease is an adjustment to OID for the
accrual period. If the Variable Rate Bond provides for interest at a qualified
floating rate or qualified inverse floating rate and also provides for stated
interest at a single fixed rate (other than a single fixed rate for an initial
period of less than one year that is intended to approximate the value of the
qualified floating or objective rate), in constructing the equivalent fixed rate
debt instrument, such a Variable Rate Bond is treated as if it provided for a
qualified floating rate (or qualified inverse floating rate, as the case may be)
instead of the fixed rate, which qualified floating (or inverse floating) rate
is such that the Variable Rate Bond would have the same fair market value as of
its issue date. The foregoing rules do not apply, and a Bond is treated as a
Contingent Payment Bond (defined below), if its issue price exceeds the total of
noncontingent principal payments by more than the lesser of (i) the product of
.015, the total noncontingent principal payments and the number of complete
years to maturity (or a lesser amount if principal is payable in installments)
or (ii) 15 percent of the total noncontingent principal payments.
Optional Redemption. For purposes of determining the yield and maturity of
a Bond, the Company will be presumed to exercise any right to redeem a Bond
before its stated maturity or to extend the maturity of a Bond if exercise would
reduce the yield on the Bond. Likewise, the U.S. Holder will be presumed to
exercise any right to require the redemption of a Bond or to extend the maturity
of the Bond if exercise would increase the yield on the Bond. If the Bond is not
actually redeemed on the date when the option was presumed to have been
exercised, the Bond will be treated only for the purposes of determining OID as
having been reissued at a price equal to that Bond's adjusted issue price on
that date.
Short-Term Bonds. U.S. Holders that do not use the accrual method of
accounting for tax purposes generally will not be required to recognize OID on
Bonds maturing within one year of original issuance until they receive payments
on the Bonds. Taxpayers on the accrual method, regulated investment companies,
common trust funds, and certain others, however, must accrue OID on such
short-term Bonds on a straight-line basis unless they elect to accrue the
discount on a constant yield basis with daily compounding. The OID on a
short-term Bond is the amount by which the total principal and interest payments
on the Bond exceed its issue price. U.S. Holders may elect to include discount
on such short-term Bonds into income based on acquisition discount rather than
OID. Acquisition discount is the excess of a Bond's stated redemption price at
maturity over the U.S. Holder's basis in the Bond.
Gain recognized on the sale or exchange of a short-term Bond by a U.S.
Holder that has not accrued discount on the Bond will be ordinary income to the
extent attributable to accrued interest and OID. Such a holder also must defer
deductions for net interest expense on any borrowing attributable to the
short-term Bond to the extent that the expense does not exceed accrued but
unrecognized interest and OID (or acquisition discount) on the Bond.
ANTI-ABUSE RULE
The Internal Revenue Service can apply or depart from the rules contained
in the OID Regulations as necessary or appropriate to achieve a reasonable
result where a principal purpose in structuring a Bond or applying the otherwise
applicable rules is to achieve a result that is unreasonable in light of the
purposes of the applicable statutes (which generally are intended to achieve the
clear reflection of income for both sellers and purchasers of the Bonds).
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MARKET DISCOUNT
A U.S. Holder that purchases a Bond at a market discount generally will be
required to treat payments other than qualified stated interest payments as
ordinary income to the extent of the accrued market discount and to treat gain
on the sale of the Bond as ordinary income to the extent of the accrued market
discount not previously included in income. See "Sale or Exchange of Bonds"
below. Market discount is the amount by which the stated redemption price at
maturity (or, in the case of a Bond with OID, the revised issue price) exceeds
the purchaser's basis in the Bond immediately after acquisition. A Bond is not
treated as purchased at a market discount, however, if the discount is less than
1/4 of 1 percent of the stated redemption price at maturity (or the revised
issue price) multiplied by the number of complete years remaining to maturity
("de minimis market discount"). (The revised issue price of a Bond is its
initial issue price increased by the amount of OID includible in the gross
income of previous holders.) Market discount on a Bond will accrue, at the
election of the holder, either ratably or at a constant yield to maturity. The
U.S. Holder may elect to take market discount into income as it accrues. Such
election applies to all debt instruments acquired in the tax year the election
is made and thereafter, and may not be revoked without the consent of the
Internal Revenue Service. Under certain circumstances, the U.S. Holder may be
required to defer deductions for interest expense attributable to debt incurred
or continued to purchase a Bond with market discount.
PREMIUM
A U.S. Holder that purchases a Bond for more than its stated redemption
price at maturity may elect to amortize the bond premium. If a U.S. Holder makes
such an election, the amount of interest on the Bond otherwise to be included in
the U.S. Holder's income will be reduced each year by the amount of amortizable
bond premium allocable to such year on a constant yield to maturity basis
(except to the extent regulations may provide otherwise). Amortized bond premium
will reduce the U.S. Holder's basis in the Bond. If the Bond may be optionally
redeemed after the U.S. Holder acquires it at a price in excess of its stated
redemption price at maturity, special rules would apply which could result in a
deferral of the amortization of some Bond premium until later in the term of the
Bond. An election to amortize bond premium will apply to certain other debt
instruments that the U.S. Holder acquired at a premium, and the election may
have different tax consequences depending on when the debt instruments were
issued or acquired. A U.S. Holder should consult its tax adviser before making
an election to amortize bond premium.
INTEREST ELECTION
A U.S. Holder may elect, in the taxable year in which the U.S. Holder
acquires a Bond, to treat all interest on any Bond as OID and calculate the
amount includible in gross income under the constant yield method described
above. For purposes of this election, interest includes stated interest,
acquisition discount, OID, de minimis OID, market discount, de minimis market
discount and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium. If a U.S. Holder makes this election for a Bond with market
discount or amortizable bond premium, the election is treated as an election
under the market discount or amortizable bond premium provisions, described
above, and the electing U.S. Holder will be required to amortize bond premium or
include market discount in income currently for all of its other debt
instruments with market discount or amortizable bond premium acquired during
such tax year and in any subsequent tax year. The election, once made, may not
be revoked without the consent of the Internal Revenue Service. U.S. Holders
should consult with their own tax advisers before making this election.
SALE OR EXCHANGE OF BONDS
Except to the extent that gain or loss is attributable to accrued but
unpaid interest or accrued market discount, a U.S. Holder generally will
recognize capital gain or loss upon a sale, exchange or complete retirement of a
Bond equal to the difference between the amount realized and the U.S. Holder's
adjusted basis in the Bond. The gain or loss generally will be long-term if the
Bond has been held for more than one year, although the preferential 20% rate
applicable to individuals applies only in the case of a Bond held for more than
18 months. The adjusted basis of a Bond generally will equal its initial cost
increased by any original issue discount, market discount or acquisition
discount with respect to the Bond previously included in the U.S. Holder's gross
income and reduced
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by the payments previously received on the Bond, other than payments of
qualified stated interest, and by any amortized premium.
The tax consequences of the partial redemption of a Bond will depend upon
the price at which the U.S. Holder purchased the Bond. A U.S. Holder that
purchased a Bond at a de minimis market discount or purchased a Bond for more
than its revised issue price, but less than its principal amount, will recognize
capital gain equal to the difference between the principal prepayment and the
U.S. Holder's adjusted basis in the prepaid portion of the Bond. If a U.S.
Holder purchased a Bond at a market discount, (i) the principal prepayment will
be included in ordinary income to the extent of the accrued market discount (and
it is possible that amounts allocable to unaccrued market discount allocable to
the prepaid portion of the Bond will be recognized as capital gain) and (ii) any
principal prepayment exceeding the revised issue price allocable to the prepaid
portion of the Bond will be capital gain. If a U.S. Holder purchased a Bond for
more than its stated principal amount and has not elected to amortize bond
premium, the U.S. Holder will recognize a capital loss equal to any amount by
which the U.S. Holder's adjusted basis in the prepaid portion of the Bond
exceeds the amount of the principal prepayment. If the U.S. Holder has elected
to amortize bond premium, all or part of such excess might be deductible as
amortizable bond premium rather than as capital loss. Any capital gain or loss
will be long-term if the Bond has been held for more than one year, although the
preferential 20% rate applicable to individuals applies only in the case of a
Bond held for more than 18 months. It is possible that capital gain realized by
holders of one or more classes of Bonds could be considered gain realized upon
the disposition of property that was part of a "conversion transaction." A
"conversion transaction" is any transaction in which substantially all of the
expected return is attributable to the time value of the U.S. Holder's net
investment, if (i) the U.S. Holder entered the contract to sell the Bond
substantially contemporaneously with acquiring the Bond, (ii) the Bond is part
of a straddle, (iii) the Bond is marketed or sold as producing capital gains, or
(iv) the transaction is specified in certain Treasury regulations. If the sale
or other disposition of the Bond is part of a conversion transaction, all or any
portion of the gain realized upon the sale or other disposition of the Bonds
would be treated as ordinary income instead of capital gain.
FOREIGN CURRENCY BONDS
The tax treatment of Bonds the interest or principal on which may be
determined by reference to one or more foreign currencies will depend on the
application of special rules to the particular terms of the Bonds. The tax
considerations relevant to such Bonds will be described in an applicable
Prospectus Supplement, and each prospective purchaser should consult its tax
adviser about such matters.
CONTINGENT PAYMENT BONDS
The OID Regulations contain special rules for determining the timing and
amount of OID to be accrued in respect of Bonds providing for one or more
contingent payments ("Contingent Payment Bonds"). For this purpose, a Bond is
not a Contingent Payment Bond if it (i) is a Variable Rate Bond, (ii) provides
for alternate payment schedules upon the occurrence of contingencies or (iii) is
a foreign currency debt instrument. Under the OID Regulations, U.S. Holders
generally would be required to take contingent interest payments on Contingent
Payment Bonds into income on a yield to maturity basis in accordance with a
schedule of projected payments provided by the Company to U.S. Holders and would
make annual adjustments to income to account for the difference between actual
payments received and projected payment amounts accrued. Any gain recognized by
a U.S. Holder on the sale, exchange or retirement of a Contingent Payment Bond
is ordinary income. Any loss recognized by a U.S. Holder on the sale, exchange
or retirement of a Contingent Payment Bond is ordinary loss to the extent that
the U.S. Holder's total interest inclusions on the Contingent Payment Bond
exceed the total net negative adjustments the U.S. Holder took into account as
ordinary loss. Additional disclosure will be provided for in a Prospectus
Supplement in connection with any offering of Contingent Payment Bonds.
Prospective purchasers should consult their own tax advisers regarding the OID
Regulations in connection with ownership of a Bond that provides for contingent
payments.
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NON-U.S. HOLDERS
Interest received by a Non-U.S. Holder is exempt from U.S. federal income
tax unless the holder actually or constructively owns at least 10% of the total
combined voting power of the Company's stock or the holder is for U.S. income
tax purposes a controlled foreign corporation related to the Company through
stock ownership or is a bank receiving interest described in Section
881(c)(3)(A) of the Code. However, "contingent interest" paid to a Non-U.S.
Holder will be subject to a 30% tax (unless an applicable tax treaty eliminates
or reduces the rate of the tax and the Non-U.S. Holder complies with the
requirements for obtaining that reduction or elimination of the tax). For this
purpose, contingent interest is an amount of interest determined by reference to
(i) receipts, sales, or other cash flows of the Company or a related person,
(ii) income or profits of the Company or a related person, (iii) any change in
the value of any property of the Company or a related person, or (iv) any
dividend, partnership distribution, or similar payment made by the Company or a
related person. To qualify for that exemption, a Non-U.S. Holder must provide a
statement signed under penalties of perjury certifying that the holder is not a
U.S. person for U.S. tax purposes and providing the holder's name and address.
In addition, the Treasury Department has recently issued regulations regarding
the withholding and information reporting rules. In general, the new regulations
do not alter the substantive withholding and information reporting requirements
but unify current certification procedures and forms and clarify reliance
standards. However, the regulations would require in the case of Bonds held by a
foreign partnership that the certification requirement described above be
provided by the partners rather than by the foreign partnership unless the
partnership meets certain requirements and is authorized as a "withholding
foreign partnership" by the IRS. A look-through rule would apply in the case of
tiered partnerships. The regulations also generally require a Non-U.S. Holder to
provide a taxpayer identification number in order to claim a reduced rate of
withholding pursuant to a treaty. The regulations are generally effective for
payments made after December 31, 1998, subject to certain transition rules. In
particular, valid withholding certificates that are held on December 31, 1998,
generally remain valid until the earlier of December 31, 1999, or the due date
of the expiration of the certificate under rules currently in effect. Further,
certificates dated prior to January 1, 1998, that were valid as of January 1,
1998, remain valid until the end of 1998. Gain from the sale or other
disposition of a Bond by a Non-U.S. Holder is not subject to U.S. federal income
tax unless the Non-U.S. Holder is an individual who is present in the United
States for at least 183 days during the taxable year of the disposition and
certain other conditions are met.
Bonds held by a Non-U.S. Holder will not be subject to the U.S. federal
estate tax unless the holder actually or constructively owns at least 10% of the
total combined voting power of the Company's stock.
INFORMATION REPORTING AND BACKUP WITHHOLDING
A 31% backup withholding of federal income tax and certain information
reporting requirements may apply to certain payments made on the Bonds and to
the proceeds from the disposition of a Bond if the holder is not a corporation,
a financial institution or otherwise entitled to an exemption. U.S. Holders that
provide a correct taxpayer identification number and Non-U.S. Holders that
provide the statement described above to establish an exemption from withholding
tax generally are exempt from backup withholding. Amounts withheld under the
backup withholding rules can be claimed as a refund or taken as a credit against
the holder's U.S. federal income tax liability on a properly filed annual income
tax return.
PLAN OF DISTRIBUTION
Bonds of any series may be purchased to be reoffered to the public through
underwriting syndicates led by Lehman Brothers Inc. or other underwriters (the
"Underwriters"). The Underwriters with respect to an underwritten offering of
Bonds are named in the Prospectus Supplement relating to such offering. Unless
otherwise set forth in the Prospectus Supplement, the obligations of the
Underwriters to purchase Bonds will be subject to certain conditions precedent
and each of the Underwriters with respect to a sale of Bonds will be obligated
to purchase all of its Bonds if any are purchased. The initial public offering
price and any discounts or concessions allowed or reallowed or paid to dealers
set forth in the Prospectus Supplement may be changed from time to time.
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The place and time of delivery for the Offered Bonds in respect of which
this Prospectus is delivered are set forth in the Prospectus Supplement.
CFC has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
Each Underwriter, dealer and agent participating in the distribution of any
Offered Bonds which are issuable in bearer form will agree that it will not
offer, sell or deliver, directly or indirectly, Offered Bonds in bearer form in
the United States or its possessions or to United States persons (other than
qualifying financial institutions) in connection with the original issuance of
the Offered Bonds. See "LIMITATIONS ON ISSUANCE OF BEARER BONDS".
The Offered Bonds may not be offered or sold directly or indirectly in
Great Britain other than to persons whose ordinary business it is to buy or sell
shares or debentures (except in circumstances which do not constitute an offer
to the public within the meaning of the Companies Act of 1985), and this
Prospectus and any Prospectus Supplement or any other offering material relating
to the Offered Bonds may not be distributed in or from Great Britain other than
to persons whose business involves the acquisition and disposal, or the holding,
of securities whether as principal or as agent.
Certain of the Underwriters or agents and their associates may engage in
transactions with and perform services for the Company in the ordinary course of
business.
In connection with the offering made hereby, the Underwriters may purchase
and sell the Bonds in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Bonds, and short
positions created by the Underwriters involve the sale by the Underwriters of a
greater aggregate principal amount of Bonds than they are required to purchase
from the Company. The Underwriters also may impose a penalty bid, whereby
selling concessions allowed to broker-dealers in respect of the Bonds sold in
the offering may be reclaimed by the Underwriters if such Bonds are repurchased
by the Underwriters in stabilizing or covering transactions. These activities
may stabilize, maintain or otherwise affect the market price of the Bonds, which
may be higher than the price that might otherwise prevail in the open market;
and these activities, if commenced, may be discontinued at any time. These
transactions may be effected in the over-the-counter market or otherwise.
LEGAL OPINIONS
The validity of the Bonds offered hereby will be passed upon for the
Company by Milbank, Tweed, Hadley & McCloy, 1 Chase Manhattan Plaza, New York,
New York, and for the agents or Underwriters, if any, by Cravath, Swaine &
Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York.
EXPERTS
The audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended May 31, 1997, 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
giving said reports.
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$200,000,000
[CFC LOGO]
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
5.00% COLLATERAL TRUST BONDS,
DUE 2002
---------------------------
PROSPECTUS SUPPLEMENT
October 2, 1998
---------------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
