<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 23, 1998)
U.S. $604,121,000
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
MEDIUM-TERM NOTES, SERIES C
WITH MATURITIES OF NINE MONTHS OR MORE FROM DATE OF ISSUE
------------------------
National Rural Utilities Cooperative Finance Corporation ("CFC" or the
"Company") may offer from time to time its Medium-Term Notes, Series C (the
"Notes") for proceeds up to U.S. $604,121,000 (or the equivalent thereof if any
of the Notes are denominated in foreign currencies or currency units). See
"Description of the Medium-Term Notes--General" and "Plan of Distribution". Each
Note will mature on a date nine months or more from the date of issue, as set
forth on the face of such Note. Unless set forth in an accompanying Pricing
Supplement (a "Supplement") to this Prospectus Supplement, the Notes will not be
redeemable at the option of the Company or repayable at the option of the holder
prior to their stated maturity. The Notes denominated in U.S. dollars will be
issued in denominations of $1,000 and any integral multiple thereof. If the
Notes are to be denominated in a foreign currency or currency unit (a "Specified
Currency"), then the provisions with respect thereto will be set forth in the
applicable Supplement. See "Description of the Medium-Term Notes".
The Notes will be issued only in fully registered form and will be
represented by either a global security registered in the name of a nominee of
The Depository Trust Company, as Depositary (a "Book-Entry Note"), or a
certificate issued in definitive form (a "Certificated Note"), as set forth in
the applicable Supplement. Beneficial interests in Book-Entry Notes will be
shown on and transfer thereof will be effected only through the records
maintained by the Depositary's participants. See "Description of the Medium-Term
Notes--Book-Entry Notes". Except as described in "Description of the Medium-Term
Notes--Book-Entry Notes", owners of beneficial interests in Book-Entry Notes
will not be entitled to receive Certificated Notes and will not be considered
the holders of such Book-Entry Notes.
The interest rate or interest rate formula, issue price and stated maturity
for each Note and whether such Note is a Book-Entry Note or a Certificated Note
will be established by the Company at the date of issuance of such Note and will
be indicated in the applicable Supplement. Interest rates and interest rate
formulas are subject to change by the Company, but no such change will affect
the interest rate on, or interest rate formula for, any Note theretofore issued
or which the Company has agreed to sell. Unless otherwise indicated in the
applicable Supplement, the Notes will bear interest at a fixed rate (a "Fixed
Rate Note") or at a rate or rates determined by reference to LIBOR, the Treasury
Rate, the Commercial Paper Rate, the Prime Rate, the Fed Funds Rate, the CD Rate
or such other interest rate formula as may be designated in the applicable
Supplement (a "Base Rate"), as adjusted by a Spread and/or Spread Multiplier, if
any, applicable to such Notes (a "Floating Rate Note"). See "Description of the
Medium-Term Notes".
Unless otherwise indicated in the applicable Supplement, the Interest
Payment Dates for Fixed Rate Notes will be January 15 and July 15 of each year
and for Floating Rate Notes will be as specified under "Description of the
Medium-Term Notes--Floating Rate Notes".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT, ANY SUPPLEMENT HERETO OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<S> <C> <C>
==========================================================================================
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRICE TO AGENTS' DISCOUNTS AND
PUBLIC(1) COMMISSIONS(2)
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Per Note..................... 100% .125%-.750%
- ------------------------------------------------------------------------------------------
Total........................ $604,121,000(4)(5) $755,200-$4,530,900(4)(5)
==========================================================================================
<CAPTION>
PROCEEDS TO
THE COMPANY(2)(3)
<S> <C>
- ------------------------------------------------------------------------------------------
Per Note..................... 99.875%-99.250%
- ------------------------------------------------------------------------------------------
Total........................ $603,365,800-$599,590,100(4)(5)
==========================================================================================
</TABLE>
(1) Unless otherwise specified in a Supplement, Notes will be issued at 100% of
principal amount.
(2) The Company will pay to each Agent referred to below a commission, in the
form of a discount, ranging from .125% to .750% of the principal amount of
any Note, depending upon its stated maturity, sold through such Agent.
Commissions with respect to Notes with stated maturities in excess of 30
years that are sold through an Agent will be negotiated between the Company
and such Agent at the time of such sale. Either Agent, acting as principal,
may also purchase Notes at a discount for resale to investors or other
purchasers at varying prices related to prevailing market prices at the time
of resale as determined by the applicable Agent or, if so agreed, at a fixed
public offering price. Unless otherwise specified in the applicable
Supplement, any Note sold to an Agent as principal will be purchased by such
Agent at a price equal to 100% of the principal amount thereof less a
percentage equal to the commission applicable to an agency sale of a Note of
identical maturity. No commission will be payable on any Note sold directly
by the Company. The Company has agreed to indemnify the Agents against
certain liabilities, including liabilities under the Securities Act of 1933.
(3) Assuming Notes are issued at 100% of principal amount and before deducting
expenses payable by the Company estimated at U.S. $500,500.
(4) In U.S. dollars or the equivalent thereof in foreign currencies or currency
units.
(5) To be reduced as a result of any sales of the Notes to members of the
Company. See "Plan of Distribution".
------------------------
The Notes are being offered on a continuing basis by the Company through
Lehman Brothers, Lehman Brothers Inc. and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Agents"), which have agreed to use
their best efforts to solicit offers to purchase the Notes. The Notes may be
sold at or above par or at a discount to an Agent as principal for resale to
investors at varying prices related to prevailing market prices at the time of
resale as determined by such Agent or, if so agreed, at a fixed public offering
price. The Company has reserved the right to sell Notes directly on its own
behalf. The Notes will not be listed on any securities exchange, and there can
be no assurance that the Notes will be sold or that there will be a secondary
market for the Notes. The Company reserves the right to withdraw, cancel or
modify the offer or solicitation of offers made hereby without notice. The
Company, or the soliciting Agent, may reject any offer in whole or in part. See
"Plan of Distribution".
------------------------
LEHMAN BROTHERS MERRILL LYNCH & CO.
March 26, 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
PURCHASES OF NOTES TO COVER SOME OR ALL OF A SHORT POSITION IN THE NOTES
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION".
---------------------
DESCRIPTION OF THE MEDIUM-TERM NOTES
The following description of the particular terms of the Notes offered
hereby supplements and to the extent inconsistent therewith replaces the
description of the general terms of the Securities set forth under the heading
"Description of Securities" in the accompanying Prospectus, to which description
reference is made. The Notes are referred to in the Prospectus as the "Offered
Securities". Unless otherwise specified in an applicable Supplement, the
following description of the Notes will apply.
GENERAL
The Notes will be issued under the Indenture referred to in the
accompanying Prospectus, as supplemented by a First Supplemental Indenture dated
as of October 1, 1990 (the "Indenture"), with Harris Trust and Savings Bank, as
successor trustee (the "Trustee"). The Company has initially designated Bank of
Montreal Trust Company as its Paying Agent and Security Registrar for the Notes.
The Notes offered hereby constitute a single series for purposes of the
Indenture, unlimited in aggregate principal amount. See "Plan of Distribution".
Unless otherwise indicated in the applicable Supplement, currency amounts in
this Prospectus Supplement, the accompanying Prospectus and any Supplement are
stated in United States dollars ("$", "dollars", "U.S. dollars" or "U.S. $").
Each Note will mature nine months or more from the date of issue, as
selected by the initial purchaser and agreed to by the Company and as specified
in the applicable Supplement, and may be subject to redemption at the option of
the Company or repurchase at the option of the Holder prior to Stated Maturity
as set forth below under "Redemption and Repayment".
The Notes will be issuable only in fully registered form, and if
denominated in U.S. dollars, in denominations of $1,000 and integral multiples
of $1,000 in excess thereof. The authorized denominations of Notes not
denominated in U.S. dollars will be set forth in the applicable Supplement.
The Supplement relating to a Note will describe the following terms: (1)
the Specified Currency of such Note; (2) whether such Note is a Fixed Rate Note
or a Floating Rate Note; (3) if other than 100%, the price (expressed as a
percentage of the aggregate principal amount thereof) at which such Note will be
issued; (4) the date on which such Note will be issued; (5) the date on which
such Note will mature (the "Maturity Date"); (6) if such Note is a Fixed Rate
Note, the rate per annum at which such Note will bear interest; (7) if such Note
is a Floating Rate Note, the Base Rate, the Initial Interest Rate, the Interest
Payment Dates, the Reset Period, the Index Maturity, the Maximum Interest Rate
and the Minimum Interest Rate, if any, and the Spread and/or Spread Multiplier,
if any (all as defined herein), and any other terms relating to the particular
method of calculating the interest rate or rates for such Note; (8) whether such
Note may be redeemed or repaid prior to maturity, and if so, the provisions
relating to such redemption or repayment; (9) whether such Note will be issued
initially as a Book-Entry Note or a Certificated Note; and (10) any other terms
of such Note not inconsistent with the provisions of the Indenture.
Each Note will be issued initially as either a Book-Entry Note or a
Certificated Note. The depositary for the Book-Entry Notes will initially be The
Depository Trust Company in The City of New York (the "Depositary"). See
"Book-Entry Notes".
An Original Issue Discount Note is a Note which is issued at a price lower
than the principal amount thereof and which provides that upon redemption or
acceleration of the maturity thereof an amount less than the principal thereof
shall become due and payable. In the event of redemption or acceleration of the
maturity of an Original Issue Discount Note, the amount payable to the Holder of
such Note upon such redemption or acceleration will be determined in accordance
with the terms of the Note. For information respecting "original
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<PAGE> 3
issue discount" for United States federal income tax purposes, see "United
States Taxation--U.S. Holders--Original Issue Discount" in the Prospectus.
Unless otherwise indicated in the applicable Supplement, the Notes will be
denominated in U.S. dollars and payments of principal of, premium, if any, and
any interest on the Notes will be made in U.S. dollars. If any of the Notes are
to be denominated in a foreign currency (a currency other than U.S. dollars) or
currency unit, or if the principal of, premium, if any, and any interest on any
of the Notes is to be payable at the option of the Holder or the Company in a
currency, including a currency unit, other than that in which such Note is
denominated, the applicable Supplement will provide additional information,
including applicable exchange rate information, pertaining to the terms of such
Notes and other matters of interest to the Holders thereof.
Payments on Book-Entry Notes will be made through the Paying Agent to the
Depositary. See "Book-Entry Notes".
Payments of principal of, premium, if any, and any interest on any
Certificated Note payable at maturity or upon redemption will be made in
immediately available funds at the office of the Paying Agent in the Borough of
Manhattan, The City of New York, provided that payments in such funds will be
made only if such Notes are presented to the Paying Agent in time for the Paying
Agent to make such payments in such funds in accordance with its normal
procedures. The Company has initially designated Bank of Montreal Trust Company,
acting through its office in the Borough of Manhattan, The City of New York, as
its Paying Agent for the Notes. Interest on Certificated Notes (other than
interest payable at maturity or upon redemption) will be paid by check mailed to
the address of the person entitled thereto. Notwithstanding the foregoing, a
Holder of $10,000,000 or more in aggregate principal amount of Certificated
Notes of like tenor and terms will be entitled to receive such payment of
interest by wire transfer in immediately available funds, but only if
appropriate instructions have been received in writing by the Paying Agent on or
prior to the applicable Regular Record Date for such payment of interest.
Certificated Notes may be presented for registration of transfer or
exchange at the office of Bank of Montreal Trust Company in the Borough of
Manhattan, The City of New York. Book-Entry Notes may be transferred or
exchanged through a participating member of the Depositary. See "Book-Entry
Notes".
The Notes will be direct, unsecured obligations of the Company.
For a description of the rights attaching to different series of Securities
under the Indenture, see "Description of Securities" in the Prospectus.
INTEREST AND INTEREST RATES
Each Note will bear interest from the date of issue or from the most recent
Interest Payment Date to which interest on such Note has been paid or duly
provided for at the fixed rate per annum, or at the rate per annum determined
pursuant to the interest rate formula, stated therein and in the applicable
Supplement until the principal thereof is paid or made available for payment.
Interest will be payable on each Interest Payment Date and at maturity or upon
earlier redemption or repayment (each such date a "Maturity"). See "Description
of Securities--Payment and Paying Agents" in the Prospectus. Interest will be
payable to the Person in whose name a Note is registered at the close of
business on the Regular Record Date next preceding each Interest Payment Date;
provided, however, that interest payable at Maturity will be payable to the
Person to whom principal shall be payable. Unless otherwise indicated in the
applicable Supplement, the first payment of interest on any Note originally
issued between a Regular Record Date and an Interest Payment Date will be made
on the Interest Payment Date following the next succeeding Regular Record Date
to the registered holder on such next succeeding Regular Record Date.
Interest rates, or interest rate formulas, are subject to change by the
Company from time to time, but no such change will affect any Note already
issued or as to which an offer to purchase has been accepted by the Company.
Interest rates offered by the Company with respect to the Notes may differ
depending upon, among other things, the aggregate principal amount of Notes
purchased in any transaction. Notes with similar variable terms but different
interest rates may be offered concurrently at any time. The Company may also
concurrently offer Notes having different variable terms (as are described
herein or in any Prospectus Supplement or applicable
S-3
<PAGE> 4
Supplement). Unless otherwise indicated in the applicable Supplement, the
Interest Payment Dates and the Regular Record Dates for Fixed Rate Notes will be
as described below under "Fixed Rate Notes". Unless otherwise specified in the
applicable Supplement, the Interest Payment Dates for Floating Rate Notes will
be as described below under "Floating Rate Notes" and each Regular Record Date
for a Floating Rate Note will be the fifteenth calendar day (whether or not a
Business Day) next preceding each Interest Payment Date. If an Interest Payment
Date with respect to any Floating Rate Note would otherwise fall on a day that
is not a Business Day with respect to such Note, such Interest Payment Date will
be postponed to the following day that is a Business Day with respect to such
Note, except that in the case of a LIBOR Note, if such day falls in the next
calendar month, such Interest Payment Date will be the preceding day that is a
Business Day with respect to such LIBOR Note. If the Maturity of a Floating Rate
Note falls on a day that is not a Business Day, the payment of principal,
premium, if any, and interest will be made on the next succeeding Business Day
as if made on the date such payment was due, and no interest on such payment
will accrue for the period from and after such Maturity.
Each Note will bear interest at either (a) a fixed rate or rates or (b) a
variable rate determined by reference to an interest rate formula, which may be
based upon an Index Maturity. "Index Maturity" means the period to maturity of
the instrument or obligation on which the interest rate formula is based, as
specified in the applicable Supplement. A Floating Rate Note may also have
either or both of the following: (a) a maximum numerical interest rate
limitation, or ceiling, on the rate of interest which may accrue during any
interest period; and (b) a minimum numerical interest rate limitation, or floor,
on the rate of interest which may accrue during any interest period.
FIXED RATE NOTES
Each Fixed Rate Note will bear interest from its date of issue at the
annual rate stated on the face thereof (as specified in the applicable
Supplement). The Interest Payment Dates for the Fixed Rate Notes will be January
15 and July 15 of each year and the Regular Record Dates will be January 1 and
July 1 of each year. Interest on Fixed Rate Notes will be computed and paid on
the basis of a 360-day year of twelve 30-day months. Interest payments on Fixed
Rate Notes will equal the amount of interest accrued from and including the next
preceding Interest Payment Date in respect of which interest has been paid (or
from and including the date of issue, if no interest has been paid with respect
to such Fixed Rate Notes), to but excluding the related Interest Payment Date or
Maturity, as the case may be. If any Interest Payment Date or the Maturity of a
Fixed Rate Note falls on a day that is not a Business Day, the related payment
of principal, premium, if any, or interest will be made on the next succeeding
Business Day as if made on the date such payment was due, and no interest will
accrue on the amount so payable for the period from and after such Interest
Payment Date or Maturity, as the case may be.
FLOATING RATE NOTES
The interest rate on each Floating Rate Note will equal the interest rate
calculated by reference to the specified interest rate formula (as specified in
the applicable Supplement) plus or minus the Spread, if any, and/or multiplied
by the Spread Multiplier, if any. The "Spread" is the number of basis points
specified in the applicable Supplement as being applicable to the interest rate
for such Note and the "Spread Multiplier" is the percentage specified in the
applicable Supplement as being applicable to the interest rate for such Note.
The applicable Supplement relating to a Floating Rate Note will designate
one or more interest rate bases for such Floating Rate Note. Such basis or bases
will be determined by reference to: (a) the Commercial Paper Rate, in which case
such Note will be a Commercial Paper Rate Note, (b) the Prime Rate, in which
case such Note will be a Prime Rate Note, (c) LIBOR, in which case such Note
will be a LIBOR Note, (d) the Treasury Rate, in which case such Note will be a
Treasury Rate Note, (e) the Federal Funds Effective Rate, in which case such
Note will be a Fed Funds Note, (f) the CD Rate, in which case such Note will be
a CD Rate Note, or (g) such other interest rate basis or formula as is set forth
in such Supplement. The applicable Supplement for a Floating Rate Note also will
specify the Spread and/or Spread Multiplier, if any, and the maximum or minimum
interest rate limitation, if any, applicable to each Note. In addition, such
Supplement may define or particularize for each Note the following terms, if
applicable: Calculation Date, Initial Interest Rate, Interest Payment Dates,
Regular Record Dates, Index Maturity, Interest Determination Dates and Interest
Reset Dates with respect to such Note.
S-4
<PAGE> 5
The rate of interest on each Floating Rate Note will be reset daily,
weekly, monthly, quarterly, semi-annually or annually (each an "Interest Reset
Date"), as specified in the applicable Supplement. Unless otherwise specified in
the applicable Supplement, the Interest Reset Date will be, in the case of
Floating Rate Notes that reset daily, each Business Day; in the case of Floating
Rate Notes (other than Treasury Rate Notes) which reset weekly, the Wednesday of
each week; in the case of Treasury Rate Notes which reset weekly, except as set
forth in the next paragraph, the Tuesday of each week; in the case of Floating
Rate Notes which reset monthly, the third Wednesday of each month; in the case
of Floating Rate Notes which reset quarterly, the third Wednesday of March,
June, September and December; in the case of Floating Rate Notes which reset
semi-annually, the third Wednesday of two months of each year, as specified in
the applicable Supplement; and in the case of Floating Rate Notes which reset
annually, the third Wednesday of one month of each year, as specified in the
applicable Supplement; provided, however, that (a) the interest rate in effect
from the date of issue to the first Interest Reset Date with respect to a
Floating Rate Note will be the Initial Interest Rate (as set forth in the
applicable Supplement) and (b) unless otherwise specified in an applicable
Supplement, the interest rate in effect for the ten calendar days immediately
prior to Maturity, if applicable, will be that in effect on the tenth calendar
day preceding Maturity. If any Interest Reset Date for any Floating Rate Note
would otherwise be a day that is not a Business Day for such Floating Rate Note,
the Interest Reset Date for such Floating Rate Note will be postponed to the
next day that is a Business Day for such Floating Rate Note, except that in the
case of a LIBOR Note, if such Business Day is in the next succeeding calendar
month, such Interest Reset Date will be the immediately preceding Business Day.
"Business Day" means (a) with respect to any Note, any day that is not a
Saturday or Sunday and that, in The City of New York, is not a day on which
banking institutions generally are authorized or obligated by or pursuant to
law, regulation or executive order to close, and (b) with respect to LIBOR Notes
only, any such day on which dealings in deposits in U.S. dollars are transacted
in the London interbank market (a "London Business Day").
The date as of which the interest rate will be determined (the "Interest
Determination Date") pertaining to an Interest Reset Date for a Commercial Paper
Rate Note (the "Commercial Paper Interest Determination Date"), for a Prime Rate
Note (the "Prime Interest Determination Date"), for a Fed Funds Note (the "Fed
Funds Interest Determination Date") and for a CD Rate Note (the "CD Interest
Determination Date") will be the second Business Day preceding the Interest
Reset Date with respect to such Note. The Interest Determination Date pertaining
to an Interest Reset Date for a LIBOR Note (the "LIBOR Interest Determination
Date") will be the second London Business Day preceding such Interest Reset
Date. The Interest Determination Date pertaining to an Interest Reset Date for a
Treasury Rate Note (the "Treasury Interest Determination Date") will be the day
of the week in which such Interest Reset Date falls on which Treasury bills
would normally be auctioned. Treasury bills are usually sold at auction on
Monday of each week, unless that day is a legal holiday, in which case the
auction is usually held on the following Tuesday, except that such auction may
be held on the preceding Friday. If, as the result of a legal holiday, an
auction is so held on the preceding Friday, such Friday will be the Treasury
Interest Determination Date pertaining to the Interest Reset Date occurring in
the next succeeding week. If an auction date for Treasury bills falls on any
Interest Reset Date for a Treasury Rate Note, then such Interest Reset Date will
instead be the first Business Day immediately following such auction date.
Notwithstanding the maximum interest rate which may be applicable to any
Floating Rate Note pursuant to its terms, assuming that a court would enforce
the provisions of the Notes and the Indenture specifying New York law as the
governing law, the interest rate on the Floating Rate Notes will in no event be
higher than the maximum rate permitted by New York law, as the same may be
modified by United States law of general application. Under present New York
law, subject to certain exceptions, the maximum rate of interest for any loan in
an amount less than $250,000 is 16% per annum, and for any loan in the amount of
$250,000 or more but less than $2,500,000 is 25% per annum on a simple interest
basis. The limit may not apply to Floating Rate Notes in which $2,500,000 or
more has been invested.
Unless otherwise indicated in the applicable Supplement and except as
provided below, interest will be payable, in the case of Floating Rate Notes
which reset daily, weekly or monthly, on the third Wednesday of each month or on
the third Wednesday of March, June, September and December of each year (as
indicated in the applicable Supplement); in the case of Floating Rate Notes
which reset quarterly, on the third Wednesday of March, June, September and
December of each year; in the case of Floating Rate Notes which reset
semi-annually,
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<PAGE> 6
on the third Wednesday of the two months of each year specified in the
applicable Supplement; and in the case of Floating Rate Notes which reset
annually, on the third Wednesday of the month specified in the applicable
Supplement (each an "Interest Payment Date"), and in each case, at Maturity.
Unless otherwise indicated in the applicable Supplement, interest payments
for Floating Rate Notes will be the amount of interest accrued from and
including the most recent date in respect of which interest has been paid or
duly provided for, or from and including the date of issue, to, but excluding,
the Interest Payment Date or Maturity date; provided, however, that if the
Interest Reset Dates with respect to any Floating Rate Note are daily or weekly,
interest payable on any Interest Payment Date, other than interest payable on
any date on which principal on any such Note is payable, will include interest
accrued from but excluding the most recent Regular Record Date in respect of
which interest has been paid or duly provided for, or from and including the
date of issue, to and including the next preceding Regular Record Date,
provided, however, that interest payments on Floating Rate Notes made at
Maturity will include interest accrued to but excluding the date of Maturity.
Accrued interest from the date of issue or from the last date to which interest
has been paid is calculated by multiplying the face amount of a Floating Rate
Note by an accrued interest factor. Such accrued interest factor is computed by
adding the interest factors calculated for each day in the period for which
accrued interest is being calculated. The interest factor for each such day is
computed by dividing the interest rate applicable to such date by 360, in the
case of Commercial Paper Rate Notes, Prime Rate Notes, LIBOR Notes, Fed Funds
Notes or CD Rate Notes, or by the actual number of days in the year, in the case
of Treasury Rate Notes.
Upon the request of the holder of any Floating Rate Note, the Calculation
Agent will provide the interest rate then in effect, and, if determined, the
interest rate which will become effective as a result of a determination made on
the most recent Interest Determination Date with respect to such Floating Rate
Note. Unless otherwise provided in the applicable Supplement, Lehman Brothers
Inc., will be the calculation agent (the "Calculation Agent") with respect to
the Floating Rate Notes. Unless otherwise specified in the applicable Pricing
Supplement, the "Calculation Date," if applicable, pertaining to any Interest
Determination Date will be the earlier of (i) the tenth calendar day after such
Interest Determination Date, or, if such day is not a Business Day, the next
succeeding Business Day or (ii) the Business Day preceding the applicable
Interest Payment Date or Maturity, as the case may be.
All percentages resulting from any calculation on Floating Rate Notes will
be rounded to the nearest one hundred-thousandth of a percentage point, with
five one millionths of a percentage point rounded upwards (e.g., 9.876545% (or
.09876545) would be rounded to 9.87655% (or .0987655)), and all dollar amounts
used in or resulting from such calculation on Floating Rate Notes will be
rounded to the nearest cent or, in the case of Notes denominated other than in
United States dollars, the nearest unit (with one-half cent or unit being
rounded upward).
Commercial Paper Rate
Unless otherwise indicated in the applicable Supplement, "Commercial Paper
Rate" means, with respect to any Commercial Paper Interest Determination Date,
the Money Market Yield (as defined below) of the rate on such date for
commercial paper having the Index Maturity designated in the applicable
Supplement as published by the Board of Governors of the Federal Reserve System
in "Statistical Release H.15(519), Selected Interest Rates" or any successor
publication selected by the Calculation Agent of the Board of Governors of the
Federal Reserve System ("H.15(519)") under the caption "Commercial
Paper -- Nonfinancial". In the event that such rate is not published by 9:00
a.m., New York City time, on the Calculation Date pertaining to such Commercial
Paper Interest Determination Date, then the Commercial Paper Rate will be the
Money Market Yield of the rate on such Commercial Paper Interest Determination
Date for commercial paper having the Index Maturity designated in the applicable
Supplement as published by the Federal Reserve Bank of New York in its daily
statistical release "Composite 3:30 p.m. Quotations for U.S. Government
Securities" or any successor publication selected by the Calculation Agent
("Composite Quotations") under the heading "Commercial Paper". If such rate is
not yet published by 3:00 p.m., New York City time, on the Calculation Date
pertaining to such Commercial Paper Interest Determination Date, then the
Commercial Paper Rate for such Commercial Paper Interest Determination Date will
be calculated by the Calculation Agent and will be the Money Market Yield of the
arithmetic mean of the offered rates as of 11:00 A.M., New York City time, on
such Commercial Paper
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<PAGE> 7
Interest Determination Date of three leading dealers of commercial paper in New
York City selected by the Calculation Agent for commercial paper having the
Index Maturity designated in the applicable Supplement placed for an industrial
issuer whose bond rating is "AA", or the equivalent, from a nationally
recognized rating agency; provided, however, that if the dealers selected as
aforesaid by the Calculation Agent are not quoting as mentioned in this
sentence, the Commercial Paper Rate will be the Commercial Paper Rate then in
effect on such Commercial Paper Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage rounded, if
necessary, to the next higher one hundred thousandth of a percentage point)
calculated in accordance with the following formula:
<TABLE>
<S> <C>
D X 360
Money Market Yield = -------------- X 100
360 - (D X M)
</TABLE>
where "D" refers to the per annum rate for the commercial paper, quoted on a
bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the interest period for which interest is being calculated.
LIBOR
Unless otherwise indicated in the applicable Supplement, "LIBOR" will be
determined by the Calculation Agent in accordance with the following provisions:
(i) With respect to a LIBOR Interest Determination Date, LIBOR will
be, as specified in the applicable Supplement, either: (a) the arithmetic
mean of the offered rates for deposits in U.S. dollars having the Index
Maturity designated in the applicable Supplement, commencing on the second
London Business Day immediately following such LIBOR Interest Determination
Date, that appear on the Reuters Screen LIBO Page as of 11:00 A.M., London
time, on such LIBOR Interest Determination Date, if at least two such
offered rates appear on the Reuters Screen LIBO Page ("LIBOR Reuters"), or
(b) the rate for deposits in U.S. dollars having the Index Maturity
designated in the applicable Supplement, commencing on the second London
Business Day immediately following such LIBOR Interest Determination Date,
that appears on Telerate Page 3750 as of 11:00 A.M., London time, on such
LIBOR Interest Determination Date ("LIBOR Telerate"). "Reuters Screen LIBO
Page" means the display designated as page "LIBO" on the Reuters Monitor
Money Rates Service (or such other page as may replace page LIBO on that
service for the purpose of displaying London interbank offered rates of
major banks). "Telerate Page 3750" means the display designated as page
"3750" on the Telerate Service (or such other page as may replace the 3750
page on that service or such other service or services as may be nominated
by the British Bankers' Association for the purpose of displaying London
interbank offered rates for U.S. dollar deposits). If neither LIBOR Reuters
nor LIBOR Telerate is specified in the applicable Supplement, LIBOR will be
determined as if LIBOR Telerate had been specified. If fewer than two
offered rates appear on the Reuters Screen LIBO Page, or if no rate appears
on Telerate Page 3750, as applicable, LIBOR in respect of such LIBOR
Interest Determination date will be determined as if the parties had
specified the rate described in (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which
fewer than two offered rates appear on the Reuters Screen LIBO Page, as
specified in (i)(a) above, or on which no rate appears on Telerate Page
3750, as specified in (i)(b) above, as applicable, LIBOR will be determined
on the basis of the rates at which deposits in U.S. dollars having the
Index Maturity designated in the applicable Supplement are offered at
approximately 11:00 A.M., London time, on such LIBOR Interest Determination
Date by four major banks in the London interbank market selected by the
Calculation Agent (the "Reference Banks") to prime banks in the London
interbank market, commencing on the second London Business Day immediately
following such LIBOR Interest Determination Date and in a principal amount
equal to the amount of not less than $1,000,000 that is representative for
a single transaction in such market at such time. The Calculation Agent
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are
provided, LIBOR in respect of such LIBOR Interest Determination Date will
be the arithmetic mean of such quotations. If fewer than two quotations are
provided, LIBOR in respect to such LIBOR Interest Determination Date will
be the arithmetic mean of the rates quoted at
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approximately 11:00 A.M., New York City time, on such LIBOR Interest
Determination Date by three major banks in The City of New York selected by
the Calculation Agent for loans in U.S. dollars to leading European banks
having the Index Maturity designated in the applicable Pricing Supplement,
commencing on the second London Business Day immediately following such
LIBOR Interest Determination Date and in a principal amount equal to an
amount of not less than $1,000,000 that is representative for a single
transaction in such market at such time; provided, however, that if the
banks selected as aforesaid by the Calculation Agent are not quoting as
mentioned in this sentence, LIBOR with respect to such LIBOR Interest
Determination Date will be the interest rate otherwise in effect on such
LIBOR Interest Determination Date.
Prime Rate
Unless otherwise indicated in the applicable Supplement, "Prime Rate"
means, with respect to any Prime Interest Determination Date, the rate set forth
in H.15(519) for such date opposite the caption "Bank Prime Loan," or, if not so
published by 3:00 P.M., New York City time, on the Calculation Date pertaining
to such Prime Interest Determination Date, the Prime Rate will be calculated by
the Calculation Agent and will be the arithmetic mean of the rates of interest
publicly announced by each bank named on the Reuters Screen USPRIME I as such
bank's prime rate or base lending rate as in effect for such Prime Interest
Determination Date as quoted on the Reuters Screen USPRIME I on such Prime
Interest Determination Date, or, if fewer than four such rates appear on the
Reuters Screen USPRIME I for such Prime Interest Determination Date, the rate
shall be the arithmetic mean of the prime rates quoted on the basis of the
actual number of days in the year divided by 360 as of the close of business on
such Prime Interest Determination Date by at least two of the three major money
center banks in The City of New York selected by the Calculation Agent from
which quotations are requested. If fewer than two quotations are quoted as
aforesaid, the Prime Rate for such Prime Interest Determination Date shall be
calculated by the Calculation Agent and shall be the arithmetic means of the
prime rates quoted in The City of New York on such date by the appropriate
number of substitute banks or trust companies organized and doing business under
the laws of the United States, or any State thereof, having total equity capital
of at least $500 million and being subject to supervision or examination by a
federal or State authority, selected by the Calculation Agent to quote such rate
or rates; provided, however, that if the Prime Rate is not published in
H.15(519) and the banks or trust companies selected as aforesaid are not quoting
as mentioned in this sentence, the Prime Rate with respect to such Prime
Interest Determination Date will be the interest rate otherwise in effect on
such Prime Interest Determination Date. "Reuters Screen USPRIME I" means the
display designated as page "USPRIME I" on the Reuters Monitor Money Rates
Service (or such other page as may replace page USPRIME I on that service for
the purpose of displaying prime rates or base lending rates of major United
States banks).
Treasury Rate
Unless otherwise indicated in the applicable Supplement, "Treasury Rate"
means, with respect to any Treasury Interest Determination Date, the rate for
the most recent auction of direct obligations of the United States ("Treasury
bills") having the Index Maturity designated in the applicable Supplement as
published in H.15(519) under the heading "U.S. Government Securities--Treasury
Bills--Auction Average (Investment)" or, if not so published by 9:00 A.M., New
York City time, on the Calculation Date pertaining to such Treasury Interest
Determination Date, the Treasury Rate will be the auction average rate
(expressed as a bond equivalent on the basis of a year of 365 or 366 days, as
applicable, and applied on a daily basis) as otherwise announced by the United
States Department of the Treasury. If the results of the auction of Treasury
bills having the Index Maturity designated in the applicable Supplement are not
published or announced as provided above by 3:00 P.M., New York City time, on
such Calculation Date or if no such auction is held in a particular week, then
the Treasury Rate will be calculated by the Calculation Agent and will be a
yield to maturity, expressed as a bond equivalent (determined as described
above) of the arithmetic mean of the secondary market bid rates, as of
approximately 3:30 P.M., New York City time, on such Treasury Interest
Determination Date, of three leading primary United States government securities
dealers selected by the Calculation Agent, for the issue of Treasury bills with
a remaining maturity closest to the Index Maturity designated in the applicable
Supplement; provided, however, that if the dealers selected as aforesaid by the
Calculation Agent are not quoting as mentioned in this
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sentence, the Treasury Rate with respect to such Treasury Interest Determination
Date will be the Treasury Rate then in effect on such Treasury Interest
Determination Date.
Fed Funds Rate
Unless otherwise indicated in the applicable Supplement, "Fed Funds Rate"
means, with respect to any Fed Funds Interest Determination Date, the rate on
such date for Federal Funds as such rate shall be published in H.15(519) under
the heading "Federal Funds (Effective)" or, if not so published by 9:00 A.M.,
New York City time, on the Calculation Date pertaining to such Fed Funds
Interest Determination Date, the Fed Funds Rate will be the rate on such Fed
Funds Interest Determination Date as published in Composite Quotations under the
heading "Federal Funds/Effective Rate". If such rate is not published by 3:00
P.M., New York City time, on such Calculation Date, then the Fed Funds Rate on
such Fed Funds Interest Determination Date will be calculated by the Calculation
Agent and will be the arithmetic mean of the rates as of 9:00 A.M., New York
City time, on such Fed Funds Interest Determination Date for the last
transaction in overnight Federal Funds arranged by three leading brokers of
Federal Funds transactions in The City of New York selected by the Calculation
Agent; provided, however, that if the brokers selected as aforesaid by the
Calculation Agent are not quoting as mentioned in this sentence, the Fed Funds
Rate with respect to such Fed Funds Interest Determination Date will be the Fed
Funds Rate in effect on such Fed Funds Interest Determination Date.
CD Rate
Unless otherwise indicated in the applicable Supplement, "CD Rate" means,
with respect to any CD Interest Determination Date, the rate on such date for
negotiable certificates of deposit having the Index Maturity designated in the
applicable Supplement as published in H.15(519) under the heading "CDs
(Secondary Market)" or, if not so published by 9:00 A.M., New York City time, on
the Calculation Date pertaining to such CD Interest Determination Date, the CD
Rate will be the rate on such CD Interest Determination Date for negotiable
certificates of deposit of the Index Maturity designated in the applicable
Supplement as published in Composite Quotations under the heading "Certificates
of Deposit". If such rate is not published by 3:00 P.M., New York City time, on
such Calculation Date, then the CD Rate on such CD Interest Determination Date
will be calculated by the Calculation Agent and will be the arithmetic mean of
the secondary market offered rates as of 10:00 A.M., New York City time, on such
CD Interest Determination Date, of three leading nonbank dealers in negotiable
U.S. dollar certificates of deposit in The City of New York selected by the
Calculation Agent for negotiable certificates of deposit of major United States
money market banks (in the market for negotiable certificates of deposit) with a
remaining maturity closest to the Index Maturity designated in the applicable
Supplement in a denomination of $5,000,000 or, if greater, an amount that is
representative for a single transaction in the relevant market at the time;
provided, however, that if the dealers selected as aforesaid by the Calculation
Agent are not quoting as mentioned in this sentence, the CD Rate with respect to
such CD Interest Determination Date will be the CD Rate in effect on such CD
Interest Determination Date.
INDEXED NOTES
Notes may be issued as Indexed Notes, the principal amounts payable at
Maturity and/or the interest rate to be paid thereon to be determined by
reference to the relationship between two or more currencies, to the price of
one or more specified securities or commodities, to one or more securities or
commodities exchange indices or other indices or by other similar methods or
formulas. The Supplement relating to such an Indexed Note will describe, as
applicable, the method by which the amount of interest payable on any Interest
Payment Date and the amount of principal payable at Maturity in respect of such
Indexed Note will be determined, certain special tax consequences of the
purchase, ownership or disposition of such Indexed Notes, certain risks
associated with an investment in such Indexed Notes and other information
relating to such Indexed Notes.
Unless otherwise specified in the applicable Supplement, the maximum
principal amount payable at Maturity in respect of any Indexed Note will be an
amount equal to twice the face amount thereof and the minimum principal amount
so payable will be zero.
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Unless otherwise specified in the applicable Supplement, (i) for purposes
of determining whether Holders of the requisite principal amount of Securities
outstanding under the Indenture have made a demand or given a notice or waiver
or taken any other action, the outstanding principal amount of Indexed Notes
will be deemed to be the U.S. dollar equivalent, determined on the Original
Issue Date of such Indexed Note, of such principal and (ii) if the payment of
principal of and interest on any Indexed Note is accelerated in accordance with
the provisions described under "Description of Securities--Events of Default,
Notice and Waiver" in the Prospectus, then the Company shall pay to the Holder
of such Indexed Note on the date of acceleration the principal amount determined
by reference to the formula by which the principal amount of such Indexed Note
would be determined on the Stated Maturity thereof, as if the date of
acceleration were the Stated Maturity.
An investment in Indexed Notes entails significant risks, including wide
fluctuations in market value as well as in the amounts of payments due
thereunder, that are not associated with a similar investment in a conventional
debt security. Such risks depend on a number of factors including supply and
demand for the particular commodity and economic and political events over which
the Company has no control. Fluctuations in the price of any particular security
or commodity, in the rates of exchange between particular currencies or in
particular indices that have occurred in the past are not necessarily
indicative, however, of fluctuations in the price of rates of exchange that may
occur during the term of any Indexed Notes. Accordingly, prospective investors
should consult their own financial and legal advisors as to the risks entailed
by an investment in Indexed Notes. Indexed Notes are not an appropriate
investment for investors who are unsophisticated with respect to securities,
commodities and/or foreign currency transactions.
AMORTIZING NOTES
The Company may from time to time offer Amortizing Notes. Unless otherwise
specified in the applicable Supplement, interest on each Amortizing Note will be
computed on the basis of a 360-day year of twelve 30-day months. Payments with
respect to Amortizing Notes will be applied first to interest due and payable
thereon and then to the reduction of the unpaid principal amount thereof.
Further information concerning additional terms and conditions of any issue of
Amortizing Notes will be provided in the applicable Supplement. A table setting
forth repayment information in respect of each Amortizing Note will be included
in the applicable Supplement and set forth on such Notes.
INTEREST RATE RESET
If the Company has the option with respect to any Note to reset the
interest rate, in the case of a Fixed Rate Note, or to reset the Spread and/or
Spread Multiplier, in the case of a Floating Rate Note, the Supplement relating
to such Note will indicate such option, and, if so, (i) the date or dates on
which such interest rate or such Spread and/or Spread Multiplier, as the case
may be, may be reset (each an "Optional Reset Date") and (ii) the basis or
formula, if any, for such resetting.
The Company may exercise such option with respect to a Note by notifying
the Paying Agent of such exercise at least 45 but not more than 60 days prior to
an Optional Reset Date for such Note. Not later than 40 days prior to such
Optional Reset Date, the Paying Agent will mail to the Holder of such Note a
notice (the "Reset Notice"), first class, postage prepaid, setting forth (i) the
election of the Company to reset the interest rate, in the case of a Fixed Rate
Note, or the Spread and/or Spread Multiplier, in the case of a Floating Rate
Note, (ii) such new interest rate or such new Spread and/or Spread Multiplier,
as the case may be, and (iii) the provisions, if any, for redemption during the
period from such Optional Reset Date to the next Optional Reset Date or, if
there is no such next Optional Reset Date, to the Stated Maturity of such Note
(each such period a "Subsequent Interest Period"), including the date or dates
on which or the period or periods during which and the price or prices at which
such redemption may occur during such Subsequent Interest Period.
Notwithstanding the foregoing, not later than 20 days prior to an Optional
Reset Date for a Note, the Company may, at its option, revoke the interest rate,
in the case of a Fixed Rate Note, or the Spread and/or Spread Multiplier, in the
case of a Floating Rate Note, in either case provided for in the Reset Notice
and establish a higher interest rate, in the case of a Fixed Rate Note, or a
higher Spread and/or Spread Multiplier, in the case of a Floating Rate Note, for
the Subsequent Interest Period commencing on such Optional Reset Date by mailing
or
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causing the Paying Agent to mail notice of such higher interest rate or higher
Spread and/or Spread Multiplier, as the case may be, first class, postage
prepaid, to the Holder of such Note. Such notice will be irrevocable. All Notes
with respect to which the interest rate or Spread and/or Spread Multiplier is
reset on an Optional Reset Date will bear such higher interest rate, in the case
of a Fixed Rate Note, or higher Spread and/or Spread Multiplier, in the case of
a Floating Rate Note.
If the Company elects to reset the interest rate or the Spread and/or
Spread Multiplier of a Note, the Holder of such Note will have the option to
elect repayment of such Note by the Company on any Optional Reset Date at a
price equal to the principal amount thereof plus any accrued interest to such
Optional Reset Date. In order for a Note to be so repaid on an Optional Reset
Date, the Holder thereof must follow the procedures set forth below under
"Redemption and Repayment" for optional repayment, except that the period for
delivery of such Note or notification to the Paying Agent will be a least 25 but
not more than 35 days prior to such Optional Reset Date and except that a Holder
who has tendered a Note for repayment pursuant to a Reset Notice may by written
notice to the Paying Agent revoke any such tender for repayment until the close
of business on the tenth day prior to such Optional Reset Date.
EXTENSION OF MATURITY
If the Company has the option to extend the Stated Maturity of any Note for
one or more periods (each an "Extension Period") up to but not beyond the date
(the "Final Maturity Date") set forth in the Supplement relating to such Note,
such Supplement will indicate such option and the basis or formula, if any, for
setting the interest rate, in the case of a Fixed Rate Note, or the Spread
and/or Spread Multiplier, in the case of a Floating Rate Note, applicable to any
such Extension Period.
The Company may exercise such option with respect to a Note by notifying
the Paying Agent of such exercise at least 45 but not more than 60 days prior to
the Stated Maturity of such Note in effect prior to the exercise of such option
(the "Original Stated Maturity"). No later than 40 days prior to the Original
Stated Maturity, the Paying Agent will mail to the Holder of such Note a notice
(the "Extension Notice") relating to such Extension Period, first class, postage
prepaid, setting forth (i) the election of the Company to extend the Stated
Maturity of such Note, (ii) the new Stated Maturity, (iii) in the case of a
Fixed Rate Note, the interest rate applicable to the Extension Period or, in the
case of a Floating Rate Note, the Spread and/or Spread Multiplier applicable to
the Extension Period, and (iv) the provisions, if any, for redemption during the
Extension Period, including the date or dates on which or the period or periods
during which and the price or prices at which such redemption may occur during
the Extension Period. Upon the mailing by the Paying Agent of an Extension
Notice to the Holder of a Note, the Stated Maturity of such Note will be
extended automatically as set forth in the Extension Notice, and, except as
modified by the Extension Notice and as described in the next paragraph, such
Note will have the same terms as prior to the mailing of such Extension Notice.
Notwithstanding the foregoing, not later than 20 days prior to the Original
Stated Maturity for a Note, the Company may, at its option, revoke the interest
rate, in the case of a Fixed Rate Note, or the Spread and/or Spread Multiplier,
in the case of a Floating Rate Note, provided for in the Extension Notice and
establish a higher interest rate, in the case of a Fixed Rate Note, or a higher
Spread and/or Spread Multiplier, in the case of a Floating Rate Note, for the
Extension Period by mailing or causing the Paying Agent to mail notice of such
higher interest rate or higher Spread and/or Spread Multiplier, as the case may
be, first class, postage prepaid, to the Holder of such Note. Such notice will
be irrevocable. All Notes with respect to which the Stated Maturity is extended
will bear such higher interest rate, in the case of a Fixed Rate Note, or higher
Spread and/or Spread Multiplier, in the case of a Floating Rate Note, for the
Extension Period.
If the Company elects to extend the Stated Maturity of a Note, the Holder
of such Note will have the option to elect repayment of such Note by the Company
at the Original Stated Maturity at a price equal to the principal amount thereof
plus any accrued interest to such date. In order for a Note to be so repaid on
the Original Stated Maturity, the Holder thereof must follow the procedures set
forth below under "Redemption and Repayment" for optional repayment, except that
the period for delivery of such Note or notification to the Paying Agent will be
at least 25 but not more than 35 days prior to the Original Stated Maturity and
except that a Holder who has
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tendered a Note for repayment pursuant to an Extension Notice may by written
notice to the Paying agent revoke any such tender for repayment until the close
of business on the tenth day prior to the Original Stated Maturity.
RENEWABLE NOTES
The Company may from time to time offer Notes which will mature on an
Interest Payment Date specified in the applicable Pricing Supplement occurring
in or prior to the twelfth month following the Original Issue Date of such Notes
(the "Initial Maturity Date") unless the term of all or any portion of any such
Note (a "Renewable Note") is renewed in accordance with the procedures described
below.
On the Interest Payment Date occurring in the sixth month (unless a
different interval (the "Special Election Interval") is specified in the
applicable Supplement) prior to the Initial Maturity Date of a Renewable Note
(the "Initial Renewal Date") and on the Interest Payment Date occurring in each
sixth month (or in the last month of each Special Election Interval) after such
Initial Renewal Date (each, together with the Initial Renewal Date, a "Renewal
Date"), the term of such Renewable Note may be extended to the Interest Payment
Date occurring in the twelfth month (or, if a Special Election Interval is
specified in the applicable Supplement, the last month in a period equal to
twice the Special Election Interval) after such Renewal Date, if the Holder of
such Renewable Note elects to extend the term of such Renewable Note or any
portion thereof as described below. If a Holder does not elect to extend the
term of any portion of the principal amount of a Renewable Note during the
specified period prior to any Renewal Date, such portion will become due and
payable on the Interest Payment Date occurring in the sixth month (or the last
month in the Special Election Interval) after such Renewal Date (the "New
Maturity Date").
A Holder of a Renewable Note may elect to renew the term of such Renewable
Note, or if so specified in the applicable Supplement, any portion thereof, by
delivering a notice to such effect to the Trustee (or any duly appointed paying
agent) at the Corporate Trust Office not less than 15 nor more than 30 days
prior to such Renewal Date (unless another period is specified in the applicable
Supplement as the "Special Election Period"). Such election will be irrevocable
and will be binding upon each subsequent Holder of such Renewable Note. An
election to renew the term of a Renewable Note may be exercised with respect to
less than the entire principal amount of such Renewable Note only if so
specified in the applicable Supplement and only in such principal amount, or any
integral multiple in excess thereof, as is specified in the applicable
Supplement. Notwithstanding the foregoing, the term of the Renewable Notes may
not be extended beyond the Stated Maturity specified for such Renewable Notes in
the applicable Supplement.
If the Holder does not elect to renew the term, such Renewable Note must be
presented to the Trustee (or any duly appointed paying agent) simultaneously
with notice of such election (or, in the event notice of such election, together
with a guarantee of delivery within five Business Days, is transmitted on behalf
of a Holder from a member of a national securities exchange, the National
Association of Securities Dealers, Inc. (the "NASD") or a commercial bank or
trust company in the United States, within five Business Days of the date of
such notice). With respect to a Renewable Note that is a Certificated Note, as
soon as practicable following receipt of such Renewable Note the Trustee (or any
duly appointed paying agent) will issue in exchange therefor in the name of such
Holder (i) a Note, in a principal amount equal to the principal amount of such
exchanged Renewable Note for which the election to renew the term thereof was
exercised, with terms identical to those specified on such Renewable Note
(except for the Original Issue Date and the Initial Interest Rate and except
that such Note will have a fixed, nonrenewable Stated Maturity on the New
Maturity Date) and (ii) if such election is made with respect to less than the
full principal amount of such Holder's Renewable Note, a replacement Renewable
Note, in a principal amount equal to the principal amount of such exchanged
Renewable Note for which the election was made, with terms identical to such
exchanged Renewable Notes.
COMBINATION OF PROVISIONS
If so specified in the applicable Supplement, any Note may be subject to
all of the provisions, or any combination of the provisions, described above
under "Interest Rate Reset," "Extension of Maturity" and "Renewable Notes".
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REDEMPTION AND REPAYMENT
Unless one or more Redemption Dates ("Redemption Dates") are specified in
the applicable Supplement, the Notes will not be redeemable prior to their
Stated Maturity. If one or more Redemption Dates are so specified with respect
to any Note, the applicable Supplement will also specify one or more redemption
prices (expressed as a percentage of the principal amount of such Note)
("Redemption Prices") and the redemption period or periods ("Redemption
Periods") during which such Redemption Prices shall apply. Unless otherwise
specified in the applicable Supplement, any such Note will be redeemable at the
option of the Company at the specified Redemption Price applicable to the
Redemption Period during which such Note is to be redeemed, together with
interest accrued to the Redemption Date. Unless otherwise specified in the
applicable Supplement, the Notes will not be subject to any sinking fund. The
Company may redeem any of the Notes that are redeemable and remain outstanding
either in whole or from time to time in part, upon not less than 30 nor more
than 60 days' notice.
Unless otherwise specified in the applicable Supplement, Notes cannot be
repaid prior to Stated Maturity. If a Note is repayable at the option of the
Holder on a date or dates specified prior to Stated Maturity, the applicable
Supplement will set forth the price or prices of such repayment, together with
accrued interest to the date of repayment.
In order for a Note that is repayable at the option of the Holder to be
repaid, the Paying Agent must receive at least 30 days but not more than 60 days
prior to the repayment date (a) appropriate wire instructions and (b) either (i)
the Note with the form entitled "Option to Elect Repayment" attached to the Note
duly completed or (ii) a telegram, telex, facsimile transmission or letter from
a member of a national securities exchange or the NASD or a commercial bank or
trust company in the United States setting forth the name of the Holder of the
Note, the principal amount of the Note, the portion of the principal amount of
the Note to be repaid, the certificate number or a description of the tenor and
terms of the Note, a statement that the option to elect repayment is being
exercised thereby and a guarantee that the Note to be repaid with the form
entitled "Option to Elect Repayment" attached to the Note duly completed will be
received by the Paying Agent not later than five Business Days after the date of
such telegram, telex, facsimile transmission or letter and such Note and form
duly completed must be received by the Paying Agent by such fifth Business Day.
Exercise of the repayment option by the Holder of a Note will be irrevocable,
except as otherwise described above under "Interest Rate Reset" and "Extension
of Maturity." The repayment option may be exercised by the Holder of a Note for
less than the entire principal amount of the Note provided that the principal
amount of the Note remaining outstanding after repayment is an authorized
denomination. No transfer or exchange of any Note (or, in the event that any
Note is to be repaid in part, the portion of the Note to be repaid) will be
permitted after exercise of a repayment option. All questions as to the
validity, eligibility (including time of receipt) and acceptance of any Note for
repayment will be determined by the Trustee, whose determination will be final,
binding and non-appealable.
IF A NOTE IS REPRESENTED BY A BOOK-ENTRY NOTE, THE DEPOSITARY'S NOMINEE
WILL BE THE HOLDER OF SUCH NOTE AND THEREFORE WILL BE THE ONLY ENTITY THAT CAN
EXERCISE A RIGHT TO REPAYMENT. IN ORDER TO ENSURE THAT THE DEPOSITARY'S NOMINEE
WILL TIMELY EXERCISE A RIGHT TO REPAYMENT WITH RESPECT TO A PARTICULAR NOTE, THE
BENEFICIAL OWNER OF SUCH NOTE MUST INSTRUCT THE BROKER OR OTHER DIRECT OR
INDIRECT PARTICIPANT THROUGH WHICH IT HOLDS AN INTEREST IN SUCH NOTE TO NOTIFY
THE DEPOSITARY OF ITS DESIRE TO EXERCISE A RIGHT TO REPAYMENT. DIFFERENT FIRMS
HAVE DIFFERENT CUT-OFF TIMES FOR ACCEPTING INSTRUCTIONS FROM THEIR CUSTOMERS
AND, ACCORDINGLY, EACH BENEFICIAL OWNER SHOULD CONSULT THE BROKER OR OTHER
DIRECT OR INDIRECT PARTICIPANT THROUGH WHICH IT HOLDS AN INTEREST IN A NOTE IN
ORDER TO ASCERTAIN THE CUT-OFF TIME BY WHICH SUCH AN INSTRUCTION MUST BE GIVEN
IN ORDER FOR TIMELY NOTICE TO BE DELIVERED TO THE DEPOSITARY.
Notwithstanding anything in this Prospectus Supplement to the contrary,
unless otherwise specified in the applicable Supplement, if a Note is an
Original Issue Discount Note, the amount payable on such Note in the event of
redemption or repayment prior to its Stated Maturity will be the Amortized Face
Amount of such Note, as specified in the applicable Supplement, as of the
Redemption Date or the date of repayment, as the case may be.
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BOOK-ENTRY NOTES
The Depositary will act as securities depositary for Book-Entry Notes. The
Book-Entry Notes will be issued as fully-registered securities registered in the
name of Cede & Co. (the Depositary's partnership nominee). One fully-registered
Global Security will be issued for each issue of the Notes, each in the
aggregate principal amount of such issue, and will be deposited with the
Depositary. If, however, the aggregate principal amount of any issue exceeds
$200 million, one Global Security will be issued with respect to each $200
million of principal amount and an additional Global Security will be issued
with respect to any remaining principal amount of such issue.
The Depositary 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, as amended. The Depositary holds securities that its
participants ("Participants") deposit with the Depositary. The Depositary also
facilitates the settlement among Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
("Direct Participants") include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations. The
Depositary is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc., and the NASD. Access to
the Depositary's 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"). The rules applicable to the Depositary and its
Participants are on file with the Securities and Exchange Commission.
Purchases of Book-Entry Notes under the Depositary's system must be made by
or through Direct Participants, which will receive a credit for the Book-Entry
Notes on the Depositary's records. The ownership interest of each actual
purchaser of each Book-Entry Note ("Beneficial Owner") is in turn to be recorded
on the Direct and Indirect Participants' records. Beneficial Owners will not
receive written confirmation from the Depositary of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the Direct or Indirect Participant through which the Beneficial Owner
entered into the transaction. Transfers of ownership interests in the Book-Entry
Notes 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 Book-Entry Notes, except in the event
that use of the book-entry system for one or more Book-Entry Notes is
discontinued.
To facilitate subsequent transfers, all Global Securities deposited by
Participants with the Depositary are registered in the name of the Depositary's
partnership nominee, Cede & Co. The deposit of Global Securities with the
Depositary and their registration in the name of Cede & Co. effects no change in
beneficial ownership. The Depositary has no knowledge of the actual Beneficial
Owners of the Book-Entry Notes; the Depositary's records reflect only the
identity of the Direct Participants to whose accounts such Book-Entry Notes 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 the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect 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.
Redemption notices will be sent to Cede & Co. If less than all of the
Book-entry Notes are being redeemed, and unless otherwise notified by either the
Company or the Trustee, the Depositary's practice is to determine by lot the
amount of the interest of each Direct Participant in such issue to be redeemed.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
Book-Entry Notes. Under its usual procedures, the Depositary will mail an
Omnibus Proxy to the Company 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
S-14
<PAGE> 15
accounts the Book-Entry Notes are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
Principal and interest payments on the Book-Entry Notes will be made to the
Depositary. The Depositary's practice is to credit Direct Participants' accounts
on the payable date in accordance with their respective holdings shown on the
Depositary's records unless the Depositary 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 the Depositary, any Agents, or the Company, subject to any statutory
or regulatory requirements as may be in effect from time to time. Payment of
principal and interest to the Depositary is the responsibility of the Company or
Agents, disbursement of such payments to Direct Participants will be the
responsibility of the Depositary, and disbursement of such payments to the
Beneficial Owners will be the responsibility of Direct and Indirect
Participants.
A Beneficial Owner must give notice to elect to have its Book-Entry Notes
purchased or tendered, through its Participant, to the Paying Agent, and must
effect delivery of such Book-Entry Notes by causing the Direct Participant to
transfer the Participant's interest in the Book-Entry Notes, on the Depositary's
records, to the Paying Agent. The requirement for physical delivery of
Book-Entry Notes in connection with a demand for purchase or a mandatory
purchase will be deemed satisfied when the ownership rights in the Book-Entry
Notes are transferred by Direct Participants on the Depositary's records.
The Depositary may discontinue providing its services as securities
depositary with respect to the Book-Entry Notes at any time by giving reasonable
notice to the Company or the Agents. Under such circumstances, in the event that
a successor securities depositary is not obtained, Certificated Notes are
required to be printed and delivered in exchange for the Book-Entry Notes
represented by the Global Securities held by the Depositary.
The Company may decide to discontinue use of system of book-entry transfers
through the Depositary (or a successor securities depositary). In that event,
Certificated Notes will be printed and delivered in exchange for the Book-Entry
Notes represented by the Global Securities held by the Depositary.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
Neither the Company, the Trustee, any paying agent nor the registrar for
the Notes will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership interest
in a Global Security or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
REPURCHASE
The Company may at any time purchase Notes at any price or prices in the
open market or otherwise. Notes so purchased by the Company may be held or
resold or, at the discretion of the Company, surrendered to the Trustee for
cancellation.
OTHER PROVISIONS
Any provisions with respect to the determination of an Interest Rate Basis,
the specifications of Interest Rate Basis, calculation of the interest rate
applicable to, or the principal payable at Maturity on, any Note, its Interest
Payment Dates or any other matter relating thereto may be modified by the terms
as specified under "Other Provisions" on the face of such Note, or in an Annex
relating thereto if so specified on the face thereof, and in the applicable
Pricing Supplement.
PLAN OF DISTRIBUTION
Under the terms of an Agency Agreement dated June 19, 1996 (the "Agency
Agreement"), the Notes are offered on a continuing basis by the Company through
the Agents, which have agreed to use their best efforts to solicit purchases of
the Notes. The Company will pay each Agent a commission of from .125% to .750%
of the
S-15
<PAGE> 16
principal amount of each Note, depending on its stated maturity, sold through
such Agent. Commissions with respect to Notes with stated maturities in excess
of 30 years that are sold through an Agent will be negotiated between the
Company and such Agent at the time of such sale. The Company will have the sole
right to accept offers to purchase Notes and may reject any such offer, in whole
or in part. Each Agent will have the right, in its discretion reasonably
exercised, without notice to the Company, to reject any offer to purchase Notes
received by it, in whole or in part. The Company also may sell Notes to each
Agent, acting as principal, at or above par or at a discount to be agreed upon
at the time of sale, for resale to one or more investors or to one or more
broker-dealers (acting as principal for purposes of resale) at varying prices
related to prevailing market prices at the time of such resale, as determined by
such Agent or, if so agreed, at a fixed public offering price. Unless otherwise
specified in the applicable Supplement, any Note sold to an Agent as principal
will be purchased by such Agent at a price equal to 100% of the principal amount
thereof less a percentage equal to the commission applicable to an agency sale
of a Note of identical maturity. The Company has reserved the right to sell
Notes directly on its own behalf.
An Agent may sell Notes it has purchased from the Company as principal to
other dealers for resale to investors and other purchasers, and may allow any
portion of the discount received in connection with such purchase from the
Company to such dealers. After the initial public offering of Notes, the public
offering price (in the case of Notes to be resold at a fixed public offering
price), the concession and the discount may be changed.
Unless otherwise indicated in the applicable Supplement, payment of the
purchase price of Notes will be required to be made in funds immediately
available in New York City.
The Agents may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended. The Company has agreed to indemnify the
Agents against and contribute toward certain liabilities, including liabilities
under such Act. The Company has agreed to reimburse the Agents for certain
expenses.
The Company also may sell Notes or other medium-term notes on its own
behalf directly to its members. Any Notes so sold by the Company to its members
will reduce the remaining principal amount of Notes which may be offered by this
Prospectus Supplement and the Prospectus.
The Agents engage in transactions with and perform services for the Company
and certain of its affiliates in the ordinary course of business.
In connection with the offering made hereby, the Agents may purchase and
sell the Notes in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Agents 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 Notes, and short positions created by the Agents
involve the sale by the Agents of a greater aggregate principal amount of Notes
than they are required to purchase from the Company. The Agents also may impose
a penalty bid, whereby selling concessions allowed to broker-dealers in respect
of the Notes sold in the offering may be reclaimed by the Agents if such Notes
are repurchased by the Agents in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Notes, 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.
S-16
<PAGE> 17
PROSPECTUS
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
DEBT SECURITIES AND/OR WARRANTS
TO PURCHASE DEBT SECURITIES
------------------------
National Rural Utilities Cooperative Finance Corporation ("CFC" or the
"Company") intends to issue from time to time debt securities (the "Securities")
each of which will be a direct, unsecured obligation of the Company and which
will be offered to the public on terms determined by market conditions at the
time of sale, and/or Warrants to purchase Securities (the "Warrants"). The
Company may sell Securities and Warrants for proceeds up to $608,962,000, or the
equivalent thereof if any of the Securities or Warrants are denominated in a
foreign currency or a currency unit, (i) directly to purchasers, (ii) through
agents designated from time to time which initially are Lehman Brothers Inc. and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, or
(iii) through underwriters or a group of underwriters which may include Lehman
Brothers Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
The Securities 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
Securities may be issued in temporary or definitive global form. Securities 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 Securities".
The Securities and Warrants may be sold for U.S. dollars, foreign
currencies or foreign currency units, and the principal (including any premium)
and any interest on the Securities may be payable in U.S. dollars, foreign
currencies or foreign currency units. The Securities 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 Securities in respect of which this Prospectus is being
delivered ("Offered Securities") are set forth in the accompanying Prospectus
Supplement and in a supplement thereto relating to the specific Offered
Securities (together, the "Prospectus Supplement"), together with the terms of
offering of the Offered Securities. With regard to the Warrants, if any, in
respect of which this Prospectus is being delivered, the Prospectus Supplement
sets forth a description of the Offered Securities for which each Warrant is
exercisable and the offering price, if any, exercise price, duration and other
terms of such Warrant. Warrants may be sold in units with Securities or in
separate offerings, as specified in a Prospectus Supplement.
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 Securities may be set forth in the Prospectus Supplement relating
to the Offered Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OR
WARRANTS UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
------------------------
THE DATE OF THIS PROSPECTUS IS MARCH 23, 1998
<PAGE> 18
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING PURCHASES OF SECURITIES TO COVER SOME OR ALL OF A SHORT POSITION IN
THE SECURITIES 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 public reference facilities of the Commission, Judiciary Plaza,
450 Fifth Street, N.W., Room 1024, Washington, DC 20549, as well as at the
Regional Offices of the Commission at 7 World Trade Center, Suite 1300, New
York, NY 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, IL 60661-2511. Copies can also be obtained by mail from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, DC 20549 at the prescribed rates or through the Commission's
website (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, 7th Floor, New
York, NY 10005.
---------------------
DOCUMENTS INCORPORATED BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus.
1. The Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1997.
2. The Company's Quarterly Report 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 Securities, shall be deemed to be incorporated in this Prospectus by
reference and to be a part hereof from the respective date of filing of each
such document. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will furnish without charge upon written or oral request by any
person, including any beneficial owner, to whom this Prospectus is delivered a
copy of any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference, other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates. Requests for such copies
should be directed to Steven L. Lilly, Senior Vice President and Chief Financial
Officer, National Rural Utilities Cooperative Finance Corporation, Woodland
Park, 2201 Cooperative Way, Herndon, VA 20171-3025. 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> 19
THE COMPANY
National Rural Utilities Cooperative Finance Corporation ("CFC" or the
"Company") was incorporated as a private, not-for-profit cooperative association
under the laws of the District of Columbia in 1969. The principal purpose of CFC
is to provide its members with a source of financing to supplement the loan
program of the Rural 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
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 20171-3025 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 35 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 for these
same ten largest borrowers totaled $1,261.7 million, which represented 59.3% of
CFC's total guarantees
3
<PAGE> 20
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. At May
31, 1997, Deseret (excluding loans guaranteed by RUS) accounted for 4.1% of
loans outstanding. Guarantees outstanding for Deseret accounted for 13.7% of
total guarantees outstanding. Total loans and guarantees outstanding to and for
Deseret accounted for 38.1% of total Members' Equity, Members' Subordinated
Certificates and the allowance for loan and guarantee losses.
CFC fixed charge coverage ratio was as follows for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, YEAR ENDED MAY 31,
---------------------- ----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1.12 1.12 1.12 1.12 1.13 1.13 1.16
</TABLE>
Margins used to compute the fixed charge coverage ratio represent net
margins before extraordinary loss resulting from redemption premiums on bonds
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.
USE OF PROCEEDS
Except as may be otherwise provided in a Prospectus Supplement, the net
proceeds from the sale of the Securities will be added to the general funds of
the Company and will be available for making loans to members, the repayment of
short-term borrowings, the refinancing of existing long-term debt and for other
corporate purposes. The Company expects to incur additional indebtedness from
time to time, the amount and terms of which will depend upon the volume of its
business, general market conditions and other factors.
DESCRIPTION OF SECURITIES
The following description of the Securities summarizes certain general
terms and provisions of the Securities to which any Prospectus Supplement may
relate. The particular terms of the Securities and the extent, if any, to which
such general provisions may apply to any series of Securities will be described
in the Prospectus Supplement relating to such series.
The Securities are to be issued under an Indenture dated as of December 15,
1987, as supplemented by a First Supplemental Indenture dated as of October 1,
1990 between the Company and Harris Trust and Savings Bank, as successor Trustee
(as so supplemented, the "Indenture"). The Indenture does not limit the
aggregate principal amount of Securities which may be issued thereunder.
The statements under this heading are subject to the detailed provisions of
the Indenture and the Securities. Whenever particular provisions of the
Indenture and the Securities or terms defined therein are referred to, such
provisions or definitions are incorporated by reference herein as a part of the
statements made and the statements are qualified in their entirety by such
reference.
GENERAL
The Securities may be issued in fully registered form without coupons
("Registered Securities"), or in a form registered as to principal only with or
without coupons or in bearer form with or without coupons ("Bearer Securities")
or any combination thereof. Securities may also be issued in temporary or
definitive global bearer form. Unless otherwise specified in the Prospectus
Supplement accompanying the Offered Securities, the Securities will be only
Registered Securities. The Securities denominated in U.S. dollars will be
issued, unless otherwise set forth in the Prospectus Supplement accompanying the
Offered Securities, in denominations of $1,000 or an integral multiple thereof
for Registered Securities, and in denominations of $5,000 or an integral
multiple thereof for Bearer Securities.
The Securities will be direct, unsecured obligations of the Company.
If any of the Securities are sold for any foreign currency or currency unit
or if principal of (or premium, if any) or any interest on any of the Securities
is payable in any foreign currency or currency unit, the restrictions,
4
<PAGE> 21
elections, tax consequences, specific terms and other information with respect
to such issue of Securities and such foreign currency or currency unit will be
set forth in the Prospectus Supplement relating thereto.
The Securities may be issued in one or more series with the same or various
maturities at or above par or with an original issue discount. Offered
Securities bearing no interest or interest at a rate which at the time of
issuance is below market rates ("Original Issue Discount Securities") will be
sold at a discount (which may be substantial) below their stated principal
amount. See "United States Taxation--U.S. Holders--Original Issue Discount" for
a discussion of certain Federal income tax considerations with respect to any
such Original Issue Discount Securities.
Reference is made to the Prospectus Supplement for the following terms of
the Offered Securities: (i) the title and the limit, if any, on the aggregate
principal amount of Offered Securities; (ii) the percentage of their principal
amount at which the Offered Securities will be sold; (iii) the date or dates on
which the Offered Securities will mature; (iv) the rate or rates (which may be
fixed or variable) per annum, if any, at which the Offered Securities will bear
interest or the method of determining such rate or rates; (v) the date or dates
from which such interest, if any, shall accrue and the date or dates at which
such interest, if any, will be payable; (vi) the place where the principal of
(and premium, if any) and the interest, if any, on the Offered Securities will
be payable; (vii) the terms for redemption for early payment, if any, including
any mandatory or optional sinking fund or analogous provision; (viii) the
principal amount of the Offered Securities which are Original Issue Discount
Securities payable upon declaration of acceleration of the maturity of the
Offered Securities; (ix) the means of satisfaction and discharge of the
Indenture with respect to the Offered Securities; (x) any deletions or
modifications of or additions to the Events of Default or covenants of the
Company; (xi) the currency, currencies or currency unit or units for which the
Offered Securities may be purchased and the currency, currencies or currency
unit or units in which the payment of principal of (and premium, if any) and
interest, if any, on such Offered Securities will be made and, if the Company or
the Holders of Offered Securities may elect for such payment in a currency,
currencies or currency unit or units other than that in which the Offered
Securities are stated to be payable, then the period or periods within which,
and the terms and conditions upon which, such election may be made and, if the
amount of such payments may be determined with reference to an index based on a
currency, currencies or currency unit or units, other than that in which the
Offered Securities are stated to be payable, then the manner in which such
amounts shall be determined; (xii) whether the Offered Securities will 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, including
temporary and definitive global form, or any combination thereof and the
circumstances, if any, upon which such Offered Securities may be exchanged for
Offered Securities issued in a different form; (xiii) whether and under what
circumstances the Company will pay additional amounts to any Holder of Offered
Securities who is not a United States person (as defined under "United States
Taxation") in respect of any tax, assessment or governmental charge required to
be withheld or deducted and, if so, whether the Company will have the option to
redeem rather than pay additional amounts; (xiv) whether the covenants described
below under "Restriction on Indebtedness" will not apply to the Offered
Securities; and (xv) any other terms of the Offered Securities not inconsistent
with the Indenture. (Section 301)
EXCHANGE, REGISTRATION AND TRANSFER
Unless otherwise specified in the applicable Prospectus Supplement,
Registered Securities of any series will be exchangeable for other Registered
Securities of the same series and of a like aggregate principal amount and tenor
of different authorized denominations. In addition, if Securities of any series
are issuable as both Registered Securities and Bearer Securities, at the option
of the Holder upon request confirmed in writing, and subject to the terms of the
Indenture, Bearer Securities (with all unmatured coupons, except as provided
below, and all matured coupons in default) of such series will be exchangeable
into Registered Securities of the same series of any authorized denominations
and of a like aggregate principal amount and tenor. Bearer Securities with
coupons appertaining thereto surrendered in exchange for Registered Securities
between a Regular Record Date or a Special Record Date and the relevant date for
payment of interest must be surrendered without the coupon relating to such date
for payment of interest and interest will not be payable in respect of the
Registered Security issued in exchange for such Bearer Security, but will be
payable only to the Holder of such coupon when due in accordance with the terms
of the Indenture. Bearer Securities will not be issued in exchange for
Registered Securities. No
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service charge will be made for any registration of transfer or exchange of the
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge in connection therewith. (Section 305)
Unless otherwise specified in the applicable Prospectus Supplement,
Securities may be presented for exchange as provided above, and Registered
Securities may be presented for registration of transfer (with the form of
transfer endorsed thereon duly executed), at the office of the Security
Registrar or at the office of any transfer agent designated by the Company for
such purpose with respect to any series of Securities and referred to in an
applicable Prospectus Supplement. Such transfer or exchange will be effected
upon the Security Registrar or such transfer agent, as the case may be, being
satisfied with the documents of title and identity of the person making the
request. The Company has appointed Bank of Montreal Trust Company as Security
Registrar. (Section 305) If a Prospectus Supplement refers to any transfer
agents (in addition to the Security Registrar) initially designated by the
Company with respect to any series of Securities, the Company may at any time
rescind the designation of any such transfer agent or approve a change in the
location through which any such transfer agent acts, except that, if Securities
of a series are issuable solely as Registered Securities, the Company will be
required to maintain a transfer agent in each Place of Payment for such series
and, if Securities of a series are issuable as Bearer Securities, the Company
will be required to maintain (in addition to the Security Registrar) a transfer
agent in a Place of Payment for such series. The Company may at any time
designate additional transfer agents with respect to any series of Securities.
(Section 1002)
In the event of any redemption in part, the Company will not be required
to: (i) issue, register the transfer of or exchange Securities of any series
during a period beginning at the opening of business 15 days before any
selection of Securities of that series to be redeemed and ending at the close of
business on (a) if Securities of the series are issuable only as Registered
Securities, the day of mailing of the relevant notice of redemption and (b) if
Securities of the series are issuable only as Bearer Securities, the day of the
first publication of the relevant notice of redemption or, if Securities of the
series are also issuable as Registered Securities and there is no publication,
the day of mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Registered Security, or portion thereof, called for
redemption, except the unredeemed portion of any Registered Security being
redeemed in part; or (iii) exchange any Bearer Security called for redemption,
except to exchange such Bearer Security for a Registered Security of that series
and like tenor which is simultaneously surrendered for redemption. (Section 305)
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of (and premium, if any) and any interest on Registered Securities
will be made at the office of such Paying Agent or Paying Agents as the Company
may designate from time to time, except that at the option of the Company
payment of any interest may be made by check mailed to the address of the Person
entitled thereto as such address shall appear in the Security Register. (Section
301) Unless otherwise indicated in an applicable Prospectus Supplement, payment
of any installment of interest on Registered Securities will be made to the
Person in whose name such Registered Security is registered at the close of
business on the Regular Record Date for such interest. (Section 307)
Unless otherwise indicated in an applicable Prospectus Supplement, the
office of Bank of Montreal Trust Company in the Borough of Manhattan, The City
of New York will be designated as the Company's sole Paying Agent for payments
with respect to Offered Securities that are issuable solely as Registered
Securities and as the Company's Paying Agent in the Borough of Manhattan, The
City of New York, for payments with respect to Offered Securities. Any Paying
Agents outside the United States and any other Paying Agents in the United
States initially designated by the Company for the Offered Securities will be
named in an applicable Prospectus Supplement. The Company may at any time
designate additional Paying Agents or rescind the designation of any Paying
Agent or approve a change in the office through which any Paying Agent acts,
except that, unless otherwise indicated in an applicable Prospectus Supplement,
if Securities of a series are issuable solely as Registered Securities, the
Company will be required to maintain a Paying Agent in each Place of Payment for
such series and, if Securities of a series are issuable as Bearer Securities,
the Company will be required to maintain (i) a Paying Agent in the Borough of
Manhattan, The City of New York, for payments with respect to any
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Registered Securities of the series (and for payments with respect to Bearer
Securities of the series in certain circumstances) and (ii) a Paying Agent in a
Place of Payment located outside the United States where Bearer Securities of
such series and any coupons appertaining thereto may be presented and
surrendered for payment. (Section 1002)
All moneys paid by the Company to a Paying Agent for the payment of
principal of (and premium, if any) or any interest on any Security or coupon
that remains unclaimed at the end of two years after such principal, premium or
interest shall have become due and payable will be repaid to the Company and the
Holder of such Security or coupon will thereafter, as an unsecured general
creditor, look only to the Company for payment thereof. (Section 1003)
RESTRICTION ON INDEBTEDNESS
The Company may not incur any Superior Indebtedness (as defined below) or
make any optional prepayment on any Capital Term Certificate if, as a result,
the principal amount of Superior Indebtedness outstanding, less a principal
amount thereof equal to the principal amount of Government or Government Insured
Obligations (as defined in the Indenture) held by the Company, thereafter or on
any future date would exceed 20 times the sum of the Members' equity in the
Company 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 1007) "Superior Indebtedness" means all indebtedness of the Company
(including all guarantees by the Company of indebtedness of others) except
Capital Term Certificates. A "Capital Term Certificate" is defined for the
purposes of the Indenture as a note of the Company substantially in the form of
the capital term certificates of the Company outstanding on the date of the
Indenture and any other indebtedness having substantially similar provisions as
to subordination. As of November 30, 1997, the Company 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.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company, without the consent of the Holders
of any of the Outstanding Securities, may consolidate with or merge into any
other corporation or transfer its assets substantially as an entirety to any
Person provided that: (i) the successor is a corporation organized under the
laws of any domestic jurisdiction; (ii) the successor corporation assumes the
Company's obligations under the Indenture and the Securities issued thereunder;
(iii) immediately after giving effect to the transaction, no Event of Default
(as defined below under "Events of Default, Notice and Waiver") and no event
that, after notice or lapse of time, or both, would become an Event of Default,
shall have occurred and be continuing; and (iv) certain other conditions are
met. (Section 801)
MODIFICATION OF THE INDENTURE
The Indenture provides that the Company and the Trustee may, without the
consent of any Holders of Securities, enter into supplemental indentures for the
purposes, among other things, of adding to the Company's covenants, adding
additional Events of Default, establishing the form or terms of Securities of
any series, changing or eliminating any restriction on the manner or place of
payment of principal of or interest on Bearer Securities or, provided such
action shall not adversely affect the interests of the Holders of any series of
Securities in any material respect, curing ambiguities or inconsistencies in the
Indenture or making other provisions with respect to matters arising under the
Indenture. (Section 901)
The Indenture contains provisions permitting the Company, with the consent
of the Holders of not less than a majority in principal amount of the
Outstanding Securities of all affected series (acting as one class), to execute
supplemental indentures adding any provisions to or changing or eliminating any
of the provisions of the Indenture or modifying the rights of the Holders of the
Securities of such series, except that no such supplemental indenture may,
without the consent of the Holders of all the Outstanding Securities affected
thereby, among other
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things: (i) change the maturity of the principal of, or any installment of
principal of or interest on, any of the Securities; (ii) reduce the principal
amount thereof (or any premium thereon) or the rate of interest, if any,
thereon; (iii) reduce the amount of the principal of Original Issue Discount
Securities payable on any acceleration of maturity; (iv) change the currency,
currencies or currency unit or units in which any of the Securities or any
premium or interest thereon is payable; (v) change any obligation of the Company
to maintain an office or agency in the places and for the purposes required by
the Indenture; (vi) impair the right to institute suit for the enforcement of
any payment on or after the applicable maturity date; (vii) reduce the
percentage in principal amount of the Outstanding Securities of any series, the
consent of the Holders of which is required for any such supplemental indenture
or for any waiver of compliance with certain provisions of, or of certain
defaults under, the Indenture; or (viii) with certain exceptions, to modify the
provisions for the waivers of certain covenants and defaults and any of the
foregoing provisions. (Section 902)
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 Outstanding Securities affected thereby (acting as one class)
waive compliance with such restrictive covenants. (Section 1009)
EVENTS OF DEFAULT, NOTICE AND WAIVER
An Event of Default in respect of any series of Securities (unless it is
either inapplicable to a particular series or has been modified or deleted with
respect to any particular series) is defined in the Indenture to be: (i) a
default for 30 days in the payment of any installment of interest upon any of
the Securities of such series when due; (ii) a default in the payment of
principal of (or premium, if any, on) any of the Securities of such series when
due; (iii) a default in the deposit of any sinking fund payment when the same
becomes due by the terms of the Securities of such series; (iv) a default in the
performance, or breach, of the covenant of the Company described above under
"Restrictions on Indebtedness" which shall not have been remedied for a period
of 60 days after such default has become known to an officer of the Company; (v)
a default by the Company in the performance, or breach, of any of its other
covenants or warranties in the Indenture which shall not have been remedied for
a period of 60 days after notice from the Trustee thereunder or the Holders of
not less than 25% in principal amount of the Outstanding Securities of such
series; (vi) certain events of bankruptcy, insolvency or reorganization of the
Company; and (vii) such other events as may be specified for each series.
(Section 501)
The Indenture provides that if an Event of Default specified therein in
respect of any series of Outstanding Securities shall have happened and be
continuing, either the Trustee or the Holders of not less than 25% in principal
amount of the Outstanding Securities of such series may declare the principal
(or, if such Securities are Original Issue Discount Securities, such portion of
the principal amount as may be specified by the terms of such Securities) of all
of the Outstanding Securities of such series to be immediately due and payable.
(Section 502)
The Indenture provides that the Holders of not less than a majority in
principal amount of the Outstanding Securities of any series may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee, with
respect to the Securities of such series, provided that such Trustee may act in
any way that is not inconsistent with such directions and may decline to act if
any such direction is contrary to law or to the Indenture or would involve such
Trustee in personal liability. (Section 507)
The Indenture provides that the Holders of not less than a majority in
principal amount of the Outstanding Securities of any series may on behalf of
the Holders of all of the Outstanding Securities of such series waive any past
default with respect to such series and its consequences, except a default (i)
in the payment of the principal of (or premium, if any) or any interest on any
of the Securities of such series or (ii) in respect of a covenant or provision
which, under the terms of the Indenture, cannot be modified or amended without
the consent of the Holders of all of the Outstanding Securities of such series
affected thereby. (Section 508)
The Indenture contains provisions entitling the Trustee, subject to the
duty during an Event of Default in respect of any series of Securities to act
with the required standard of care, to be indemnified by the Holders of the
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Securities of such series before proceeding to exercise any right or power at
the request of the Holders of the Securities of such series. (Sections 601 and
603)
The Indenture provides that the Trustee will, within 90 days after the
occurrence of a default in respect of any series of Securities, give to the
Holders of the Securities of such series notice of all uncured and unwaived
defaults known to it; provided, however, that, except in the case of a default
in the payment of the principal of (or premium, if any) or any interest on, or
any sinking fund or purchase fund installment with respect to, any of the
Securities of such series, the Trustee will be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interest of the Holders of the Securities of such series; and provided,
further, that such notice shall not be given until at least 60 days after the
occurrence of an Event of Default regarding the performance, or breach, of any
covenant or warranty of the Company other than for the payment of the principal
of (or premium, if any) or any interest on, or any sinking fund installment with
respect to, any of the Securities of such series. The term default for the
purpose of this provision only means any event that is, or after notice or lapse
of time, or both, would become, an Event of Default with respect to the
Securities of such series. (Section 602)
The Indenture requires the Company to file annually with the Trustee a
certificate, executed by two officers of the Company, indicating whether the
Company is in default under the Indenture. (Section 1008)
MEETINGS
The Indenture contains provisions for convening meetings of the Holders of
Securities of a series if Securities of that series are issuable as Bearer
Securities. (Section 1201) A meeting may be called at any time by the Trustee,
and also, upon request, by the Company or the Holders of at least 10% in
principal amount of the Outstanding Securities of such series, in any such case
upon notice given in accordance with "Notices" below. (Section 1202) Persons
entitled to vote a majority in principal amount of the Outstanding Securities of
a series shall constitute a quorum at a meeting of Holders of Securities of such
series, except that in the absence of a quorum, a meeting, called by the Company
or the Trustee shall be adjourned for a period of not less than 10 days, and in
the absence of a quorum at any such adjourned meeting, the meeting shall be
further adjourned for a period of not less than 10 days, at which further
adjourned meeting persons entitled to vote 25% in aggregate principal amount of
the Outstanding Securities of such series shall constitute a quorum. Except for
any consent which must be given by the Holder of each Outstanding Security
affected thereby, as described above under "Modification of the Indenture", and
subject to the provisions described in the last sentence under this subheading,
any resolution presented at a meeting or adjourned meeting duly reconvened at
which a quorum is present may be adopted by the affirmative vote of the lesser
of (i) the Holders of a majority in principal amount of the Outstanding
Securities of that series and (ii) 66 2/3% in aggregate principal amount of
Outstanding Securities of such series represented and voting at the meeting;
provided, however, that any resolution with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action which may be
made, given or taken by the Holders of a specified percentage, which is less
than a majority, in principal amount of Outstanding Securities of a series may
be adopted at a meeting or adjourned meeting duly reconvened at which a quorum
is present by the affirmative vote of the lesser of (i) the Holders of such
specified percentage in principal amount of the Outstanding Securities of that
series and (ii) a majority in principal amount of Outstanding Securities of such
series represented and voting at the meeting. Any resolution passed or decision
taken at any meeting of Holders of Securities of any series duly held in
accordance with the Indenture will be binding on all Holders of Securities of
that series and the related coupons. With respect to any consent, waiver or
other action which the Indenture expressly provides may be given by the Holders
of a specified percentage of Outstanding Securities of all series affected
thereby (acting as one class), only the principal amount of Outstanding
Securities of any series represented at a meeting or adjourned meeting duly
reconvened at which a quorum is present as aforesaid and voting in favor of such
action shall be counted for purposes of calculating the aggregate principal
amount of Outstanding Securities of all series affected thereby favoring such
action. (Section 1204)
NOTICES
Except as otherwise provided in the Indenture, notices to Holders of Bearer
Securities will be given by publication at least once in a daily newspaper in
The City of New York and London and in such other city or
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cities as may be specified in such Bearer Securities and will be mailed to such
Persons whose names and addresses were previously filed with the Trustee, within
the time prescribed for the giving of such notice. Notices to Holders of
Registered Securities will be given by mail to the address of such Holders as
they appear in the Security Register. (Section 106)
TITLE
Title to any Bearer Security (including any Bearer Security in temporary or
definitive global bearer form) and any coupons appertaining thereto will pass by
delivery. The Company, the Trustee and any agent of the Company or the Trustee
may treat the bearer of any Bearer Security and the bearer of any coupon and the
registered owner of any Registered Security as the absolute owner thereof
(whether or not such Security or coupon shall be overdue and notwithstanding any
notice to the contrary) for the purpose of making payment and for all other
purposes. (Section 308)
REPLACEMENT OF SECURITIES AND COUPONS
Any mutilated Security and any Security with a mutilated coupon
appertaining thereto will be replaced by the Company at the expense of the
Holder upon surrender of such mutilated Security or Security with a mutilated
coupon to the Trustee. Securities or coupons that become destroyed, stolen or
lost will be replaced by the Company at the expense of the Holder upon delivery
to the Trustee of evidence of the destruction, loss or theft thereof
satisfactory to the Company and the Trustee; in the case of any coupon which
becomes destroyed, stolen or lost, such coupon will be replaced (upon surrender
to the Trustee of the Security with all appurtenant coupons not destroyed,
stolen or lost) by issuance of a new Security in exchange for the Security to
which such coupon appertains. In the case of a destroyed, lost or stolen
Security or coupon an indemnity satisfactory to the Trustee and the Company may
be required at the expense of the Holder of such Security or coupon before a
replacement Security will be issued. (Section 306)
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 Securities and hold moneys for payment in trust) with respect to the
Securities when all such Securities have been cancelled by the Trustee, or, in
the case of Securities and coupons not delivered to the Trustee for
cancellation, (i) such Securities or coupons have become due and payable, will
become due and payable at their stated maturity within one year, or are to be
called for redemption within one year, and, in each case, the Company has
deposited with the Trustee, in trust, money, and, in the case of Securities and
coupons denominated in U.S. dollars, U.S. Government Obligations (as defined in
the Indenture) or, in the case of Securities 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 units or units in which the Offered
Securities are payable all the principal of, and interest on, the Offered
Securities on the dates such payments are due in accordance with the terms of
the Offered Securities, or (ii) such Securities or coupons are deemed paid and
discharged in the manner described in the next paragraph. (Section 401)
Unless the Prospectus Supplement relating to the Offered Securities
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 Securities (except for certain obligations to register the transfer or
exchange of Securities, replace stolen, lost or mutilated Securities 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
Securities and coupons denominated in U.S. dollars, U.S. Government Obligations
or, in the case of Securities and coupons denominated in a foreign currency,
Foreign Government Securities, 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 Securities are payable all the principal of, and interest on, the
Offered Securities on the dates such payments are
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due in accordance with the terms of the Offered Securities. 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 Securities to recognize
income, gain or loss for United States federal income tax purposes and that the
Holders will be subject to United States federal income tax in the same amounts,
in the same manner and at the same times as would have been the case if such
deposit and related defeasance has not occurred. (Section 403)
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 403)
GOVERNING LAW
The Indenture, the Securities and the coupons will be governed by, and
construed in accordance with, the laws of the State of New York. (Section 113)
THE TRUSTEE
Harris Trust and Savings Bank, Chicago, Illinois is the Trustee under the
Indenture.
DESCRIPTION OF WARRANTS
The following statements with respect to the Warrants are summaries of, and
subject to, the detailed provisions of one or more separate Warrant Agreements
(each a "Warrant Agreement") between the Company and one or more banking
institutions or trust companies as Warrant Agents (each a "Warrant Agent"). A
form of Warrant Agreement will be filed as an exhibit to the Registration
Statement prior to the issuance of any Warrant.
GENERAL
Warrants, evidenced by Warrant Certificates (the "Warrant Certificates"),
may be issued under a Warrant Agreement independently or together with any
Offered Securities and may be attached to or separate from such Offered
Securities. If Warrants are offered, the Prospectus Supplement will describe the
terms of the Warrants, including the following: (i) the offering price, if any,
including the currency, currencies or currency unit or units in which such price
will be payable; (ii) the designation, aggregate principal amount and terms of
the Offered Securities purchasable upon exercise of the Warrants; (iii) if
applicable, the designation and terms of the Offered Securities with which the
Warrants are issued and the number of Warrants issued with each such Offered
Security; (iv) if applicable, the date on and after which the Warrants and the
related Offered Securities will be separately transferable; (v) the principal
amount of Offered Securities purchasable upon exercise of one Warrant and the
price or prices at which, and the currency, currencies or currency unit or units
in which such principal amount of Offered Securities may be purchased upon
exercise; (vi) the date on which the right to exercise the Warrants shall
commence and the date on which such right shall expire; (vii) United States
Federal income tax consequences; (viii) whether the Warrants represented by the
Warrant Certificates will be issued in registered or unregistered form or both;
and (ix) any other terms of the Warrants.
Warrant Certificates, if any, may be exchanged for new Warrant Certificates
of different denominations and may (if in registered form) be presented for
registration of transfer at the corporate trust office of the Warrant
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Agent, which will be listed in the Prospectus Supplement, or at such other
office as may be set forth therein. Warrantholders do not have any of the rights
of Holders of Offered Securities (except to the extent that the consent of
Warrantholders may be required for certain modifications of the terms of the
Indenture) and are not entitled to payments of principal (or premium, if any),
or interest, if any, on such Offered Securities.
EXERCISE OF WARRANTS
Warrants may be exercised by surrendering the Warrant Certificate, if any,
at the corporate trust office or other designated office of the Warrant Agent,
with the form of election to purchase on the reverse side of the Warrant
Certificate, if any, properly completed and executed, and by payment in full of
the exercise price, as set forth in the Prospectus Supplement. Upon exercise of
Warrants, the Warrant Agent will, as soon as practicable, deliver the Offered
Securities issuable upon the exercise of the Warrants in authorized
denominations in accordance with the instructions of the exercising
Warrantholder and at the sole cost and risk of such holder. If less than all of
the Warrants evidenced by the Warrant Certificate, if any, are exercised, a new
Warrant Certificate will be issued for the remaining amount of unexercised
Warrants, if sufficient time exists prior to the expiration date.
LIMITATIONS ON ISSUANCE OF BEARER SECURITIES
Under U.S. federal tax laws, certain limitations on offers, sales and
delivery apply to Bearer Securities. These limitations, as well as additional
information regarding the U.S. federal income tax consequences in respect of a
Bearer Security, will be set forth in any Prospectus Supplement providing for
the issuance of Bearer Securities.
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
Securities. 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 Securities that
hold the Securities 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 holding Securities 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 Securities 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
SECURITIES 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 Securities 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 Securities
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
Securities other than a U.S. Holder.
U.S. HOLDERS
PAYMENTS OF INTEREST
Interest on a Security 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 Securities with original issue discount are
described below.
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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 Securities 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 (the "OID Regulations") interpreting these provisions.
General. A U.S. Holder of a Security 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 Security. 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
Security for each day during the year on which such holder held the Security.
Accordingly, a U.S. Holder will be required to include amounts attributable to
OID in income before receiving cash attributable to that income.
A Security has OID for U.S. federal income tax purposes to the extent that
the Security's stated redemption price at maturity exceeds its issue price. The
issue price of a Security is the initial offering price at which a substantial
amount of the Securities is sold to the public (excluding bond houses, brokers
or similar persons). The stated redemption price of a Security is the total of
all payments due on the Security other than payments of "qualified stated
interest." A Security is not treated as issued at a discount, however, if the
discount is less than 1/4 of 1 percent of the Security's stated redemption price
at maturity multiplied by the number of complete years to maturity ("de minimis
original issue discount"). If a Security bears interest for any accrual period
at a rate below the rate for the remaining term of the Security (e.g., a
Security with a "teaser rate") the Security's stated redemption price at
maturity, for purposes of determining whether the Security has de minimis
original issue discount, is treated as equal to the Security's issue price plus
the greater of the amount of foregone interest on such security or any "true"
discount on such Security (i.e., the excess of the Security's stored principal
amount over its issue price).
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 original issue discount, original issue
discount accruing during an accrual period is divided by the number of days in
the period. Except as described below under "Variable Rate Securities," the
amount of original discount 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 Security's adjusted issue price at the
beginning of the accrual period and its yield to maturity (determined on the
basis of compounding at the close of each accrual period and appropriately
adjusted for the length of the accrual period) over (ii) the amount of any
qualified stated interest payments allocable to the accrual period. The adjusted
issue price of a Security at the beginning of any accrual period generally
equals the issue price of the Security increased by the aggregate amount of
original issue discount that accrued on that Security 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 Security issued at a discount that purchases the
Security for more than the Security's adjusted issue price but less than or
equal to the Security's stated redemption price at maturity may reduce the daily
portions of original issue discount includible in gross income by daily portions
of the acquisition premium paid for the Security.
Variable Rate Securities. Special rules apply to the U.S. Holder of a
Security that bears interest at certain types of variable rates (a "Variable
Rate Security"). For these purposes, a Variable Rate Security 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
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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 Security'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 Security. An objective rate is a 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 outside of the
issuer's control. 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 Security's term will be either significantly less than or
significantly greater than the average value of the rate during the final half
of the Security'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 cost of newly borrowed
funds. A fixed rate for an initial period of one year or less followed by a
qualified floating rate or an objective rate together constitute a single
qualified floating 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 Security, the
OID Regulations convert the Variable Rate Security 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 Security 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 Security is treated as qualified stated interest and (b)
the amount of OID, if any, 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
Security, 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 Security.
If the Variable Rate Security 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 Security, 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 Security. 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 Security (with appropriate
adjustment for any differences in intervals between interest adjustment dates),
(b) for a qualified inverse floating rate is the value of the qualified inverse
floating rate as of the issue date of the Variable Rate Security 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
Security. 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 Security 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 of 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
Security 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 one year or less 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 Security 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 Security would have a fair market value as of its issue date that
is approximately the same as the fair market value of an otherwise identical
debt instrument that provides for either the qualified floating rate or the
qualified inverse floating rate rather than the fixed rate.
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The foregoing rules do not apply, and a Security is treated as a Contingent
Payment Security (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)
and (ii) 15 percent of the total noncontingent principal payments.
Optional Redemption. For purposes of determining the yield and maturity of
a Security, the Company will be presumed to exercise any right to redeem a
Security before its stated maturity or to extend the maturity of a Security if
exercise would reduce the yield on the Security. Likewise, the holder will be
presumed to exercise any right to require the redemption of a Security or to
extend the maturity of the Security if exercise would increase the yield on the
Security. If the Security is not actually redeemed on the date when the option
was presumed to have been exercised, the Security will be treated only for
purposes of determining yield as having been reissued at a price equal to that
Security's adjusted issue price on that date.
Short-Term Securities. U.S. Holders that do not use the accrual method of
accounting for tax purposes generally will not be required to recognize original
issue discount on Securities maturing within one year of original issuance until
they receive payments on the Securities. Taxpayers on the accrual method,
regulated investment companies, common trust funds, and certain others, however,
must accrue original issue discount on such short-term Securities on a
straight-line basis unless they elect to accrue the discount on a constant yield
basis with daily compounding. The original issue discount on a short-term
Security is the amount by which the total principal and interest payments on the
Security exceed its issue price. U.S. Holders may elect to include discount on
such short-term Securities into income based on acquisition discount rather than
original issue discount. Acquisition discount is the excess of a Security's
stated redemption price at maturity over the U.S. Holder's basis in the
Security.
Gain recognized on the sale or exchange of a short-term Security by a U.S.
Holder that has not accrued discount on the Security will be ordinary income to
the extent attributable to accrued interest and original issue discount. Such a
holder also must defer deductions for net interest expense on any borrowing
attributable to the short-term Security to the extent that the expense does not
exceed accrued but unrecognized interest and original issue discount (or
acquisition discount) on the Security.
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 Security 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
Securities).
MARKET DISCOUNT
A U.S. Holder that purchases a Security 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 Security as ordinary income to the extent of the accrued
market discount not previously included in income. See "Sale or Exchange of
Securities" below. Market discount is the amount by which the stated redemption
price at maturity (or, in the case of a Security with OID, the revised issue
price) exceeds the purchaser's basis in the Security immediately after
acquisition. A Security 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 Security is its initial issue price increased by the
amount of OID includible in the gross income of previous holders.) Market
discount on a Security 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
Security with market discount.
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PREMIUM
A U.S. Holder that purchases a Security 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 Security 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 Security. If the Security 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 premium until later in the term
of the Security. 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.
INTEREST ELECTION
A U.S. Holder may elect, in the taxable year in which the U.S. Holder
acquires a Security, to treat all interest on any Security 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 Security 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 SECURITIES
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
Security equal to the difference between the amount realized and the U.S.
Holder's adjusted basis in the Security. The gain or loss generally will be
long-term if the Security has been held for more than one year, although the 20%
preferential capital gains rate applicable for non-corporate holders only
applies if the Securities have been held for more than 18 months. The adjusted
basis of a Security generally will equal its initial cost increased by any
original issue discount, market discount or acquisition discount with respect to
the Security previously included in the U.S. Holder's gross income and reduced
by the payments previously received on the Security, other than payments of
qualified stated interest, and by any amortized premium.
The tax consequences of the partial redemption of a Security will depend
upon the price at which the U.S. Holder purchased the Security. A U.S. Holder
that purchased a Security at a de minimis market discount or purchased a
Security 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 Security. If a U.S. Holder purchased a Security 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 will be recognized as capital gain) and (ii) any
principal prepayment exceeding the revised issue price allocable to the prepaid
portion of the Security will be capital gain. If a U.S. Holder purchased a
Security 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 Security 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 Security has been held for more than one
year, although the 20% preferential capital gains rate applicable for
non-corporate holders only applies if the Securities have been held for more
than 18 months. It is possible that capital gain realized by holders of one or
more classes of Securities could be considered gain realized upon the
disposition of property that was part of a
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"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 Security substantially contemporaneously with acquiring the Security,
(ii) the Security is part of a straddle, (iii) the Security 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 Security is part
of a conversion transaction, all or any portion of the gain realized upon the
sale or other disposition of the Securities would be treated as ordinary income
instead of capital gain.
FOREIGN CURRENCY SECURITIES
The tax treatment of Securities 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 Securities. The tax
considerations relevant to such Securities will be described in an applicable
Prospectus Supplement, and each prospective purchaser should consult its tax
adviser about such matters.
CONTINGENT PAYMENT SECURITIES
The OID Regulations contain special rules for determining the timing and
amount of OID to be accrued in respect of Securities providing for one or more
contingent payments ("Contingent Payment Securities"). For this purpose, a
Security is not a Contingent Payment Security if it (i) is a Variable Rate
Security, (ii) provides for alternate payment schedules upon the occurrence of
contingencies if certain other requirements are met 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
Securities 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. Additional disclosure
will be provided for in a Prospectus Supplement in connection with any offering
of Contingent Payment Securities. Prospective purchasers should consult their
own tax advisers regarding the OID Regulations in connection with ownership of a
Security that provides for contingent payments.
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 Securities 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
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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 Security 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.
Securities 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 Securities and
to the proceeds from the disposition of a Security 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
The Company may sell the Securities and/or Warrants being offered hereby
(i) directly to purchasers, (ii) through agents or (iii) through underwriters or
a group of underwriters which may include Lehman Brothers Inc. and/or Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Offers to purchase Offered Securities and/or Warrants may be solicited
directly by the Company or by agents designated by the Company from time to
time. Unless otherwise indicated in the Prospectus Supplement, any such agent
will be acting on a best-efforts basis for the period of its appointment. Agents
may be entitled under agreements which may be entered into with the Company to
indemnification by the Company against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Act").
If an underwriter or underwriters are utilized in the sale, the Company
will enter into an underwriting agreement with such underwriters at the time of
sale to them and the names of the underwriters and the terms of the transaction
will be set forth in the Supplement, which will be used by the underwriters to
make resales of the Offered Securities and/or Warrants in respect of which this
Prospectus is delivered to the public. The underwriters may be entitled, under
the underwriting agreement, to indemnification by the Company against certain
liabilities, including liabilities under the Act.
The agents and underwriters may be deemed to be underwriters and any
discounts, commissions or concessions received by them from the Company or any
profit on the resale of Offered Securities and/or Warrants by them may be deemed
to be underwriting discounts and commissions under the Act. Any such person who
may be deemed to be an underwriter and any such compensation received from the
Company will be described in the Prospectus Supplement.
If so indicated in the Prospectus Supplement, the Company will authorize
agents and underwriters to solicit offers by certain institutions to purchase
Offered Securities and/or Warrants from the Company at the public offering price
set forth in the Prospectus Supplement pursuant to delayed delivery contracts
("Contracts") providing for payment and delivery on the date stated in the
Prospectus Supplement. Each Contract will be for an amount not less than, and
unless the Company otherwise agrees the aggregate principal amount of Offered
Securities and/or Warrants sold pursuant to Contracts will be not less nor more
than, the respective amounts stated in the Prospectus Supplement. Institutions
with whom Contracts, when authorized, may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions, but will in all cases be
subject to the approval of the Company. Contracts will not be subject to any
conditions except that the purchase by an institution of the Offered Securities
and/or Warrants covered by its Contract shall not at the time of delivery be
prohibited under the laws of any jurisdiction in the United States to which such
institution is subject. A commission indicated in the
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Prospectus Supplement will be granted to agents and underwriters soliciting
purchases of Offered Securities pursuant to Contract accepted by the Company.
Agents and underwriters will have no responsibility in respect of the delivery
or performance of Contracts.
The place and time of delivery for the Offered Securities and Warrants in
respect of which this Prospectus is delivered are set forth in the Supplement.
Each underwriter, dealer and agent participating in the distribution of any
Offered Securities which are issuable in bearer form will agree that it will not
offer, sell or deliver, directly or indirectly, Offered Securities 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 Securities. See "Limitations on Issuance of Bearer Securities".
The Offered Securities 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 Securities 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.
All Offered Securities will be a new issue of securities with no
established trading market. Any underwriters to whom Offered Securities are sold
by the Company for public offering and sale may make a market in such Offered
Securities, but such underwriters will not be 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 any Offered Securities.
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 Agents may purchase and
sell the Securities in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover short
positions created by the Agents 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 Securities, and short
positions created by the Agents involve the sale by the Agents of a greater
aggregate principal amount of Securities than they are required to purchase from
the Company. The Agents also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the Securities sold in the
offering may be reclaimed by the Agents if such Securities are repurchased by
the Agents in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Securities,
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 Securities offered hereby will be passed upon for the
Company by Milbank, Tweed, Hadley & McCloy, 1 Chase Manhattan Plaza, New York,
New York, and for the agents or underwriters, if any, by Cravath, Swaine &
Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York.
EXPERTS
The audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended May 31, 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
accounting and auditing in giving said reports.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN AS CONTAINED IN THIS PROSPECTUS SUPPLEMENT, ANY SUPPLEMENT HERETO AND
THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT, ANY SUPPLEMENT HERETO AND
THE ACCOMPANYING PROSPECTUS 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 SUPPLEMENT, ANY SUPPLEMENT HERETO OR THE
ACCOMPANYING PROSPECTUS 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 CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SINCE ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Supplement
Description of the Medium-Term Notes... S-2
Plan of Distribution................... S-15
Prospectus
Available Information.................. 2
Documents Incorporated by Reference.... 2
The Company............................ 3
Use of Proceeds........................ 4
Description of Securities.............. 4
Description of Warrants................ 11
Limitations on Issuance of Bearer
Securities........................... 12
United States Taxation................. 12
Plan of Distribution................... 18
Legal Opinions......................... 19
Experts................................ 19
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LOGO
U.S. $604,121,000
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE
CORPORATION
MEDIUM-TERM NOTES, SERIES C
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PROSPECTUS SUPPLEMENT
MARCH 26, 1998
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LEHMAN BROTHERS
MERRILL LYNCH & CO.
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