<PAGE> 1
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 17, 1998)
[CFC LOGO]
$525,000,000
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
7.375% Collateral Trust Bonds Due 2003
- --------------------------------------------------------------------------------
This is a public offering by National Rural Utilities Cooperative Finance
Corporation of $525,000,000 of 7.375% collateral trust bonds due February 10,
2003. Interest is payable on February 10 and August 10 of each year, beginning
August 10, 2000.
The collateral trust bonds are not redeemable prior to maturity.
The collateral trust bonds should be delivered on or about February 10, 2000
through the book-entry facilities of the Depository Trust Company.
<TABLE>
<CAPTION>
COLLATERAL TRUST
BONDS
-----------------------
PER BOND TOTAL
-------- ------------
<S> <C> <C>
Public Offering Price....................................... 99.849% $524,207,250
Underwriting Discount....................................... 0.350% 1,837,500
Proceeds to National Rural Utilities
Cooperative Finance Corporation........................... 99.499% $522,369,750
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if the
prospectus supplement or the attached prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
February 7, 2000
<PAGE> 2
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT OR THE ATTACHED PROSPECTUS. NO ONE HAS BEEN
AUTHORIZED TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT
THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE ATTACHED
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF
THE DOCUMENT. WE ARE NOT MAKING AN OFFER OF THESE COLLATERAL TRUST BONDS IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
Use of Proceeds............................................. S-3
Capitalization.............................................. S-3
Selected Financial Information.............................. S-4
Recent Developments......................................... S-4
Description of the Bonds.................................... S-5
Underwriting................................................ S-7
PROSPECTUS
Available Information....................................... 2
Documents Incorporated by Reference......................... 2
The Company................................................. 3
Use of Proceeds............................................. 4
Summary Financial Information............................... 4
Capitalization.............................................. 5
Description of the Bonds.................................... 6
Limitations on Issuance of Bearer Bonds..................... 12
United States Taxation...................................... 12
Plan of Distribution........................................ 18
Legal Opinions.............................................. 19
Experts..................................................... 19
</TABLE>
S-2
<PAGE> 3
USE OF PROCEEDS
The net proceeds from the sale of the collateral trust bonds (the "bonds")
offered hereby are estimated to be $522,169,750 ($522,369,750 proceeds to
National Rural Utilities Cooperative Finance Corporation ("CFC") less estimated
issuance costs of $200,000). The proceeds will be used by CFC to repay
short-term indebtedness, primarily commercial paper issued through dealers at
varying rates, incurred to make loan advances to its members, and for general
corporate purposes.
CAPITALIZATION
The following table shows the capitalization of CFC as of November 30,
1999, and as adjusted to reflect the issuance of the bonds and the application
of the proceeds thereof.
<TABLE>
<CAPTION>
OUTSTANDING AS ADJUSTED
----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
SENIOR DEBT:
Short-term indebtedness(A)....................... $ 6,389,697 $ 5,867,527
Long-term debt(A)................................ 6,883,576 7,408,576
----------- -----------
Total senior debt(B)..................... 13,273,273 13,276,103
SUBORDINATED DEBT AND MEMBERS' EQUITY:
Deferrable subordinated debt(C).................. 400,000 400,000
Members' subordinated certificates(D)............ 1,308,550 1,308,550
Members' equity(E)............................... 274,538 274,538
----------- -----------
Total capitalization..................... $15,256,361 $15,259,191
=========== ===========
</TABLE>
- ------------
(A) Short-term indebtedness is used to fund CFC's short-, intermediate- and
long-term variable-rate loans, as well as its long-term fixed-rate loans on a
temporary basis. It generally consists of commercial paper with maturities of up
to nine months. To support its own commercial paper and its obligations with
respect to tax-exempt debt issued on behalf of members, CFC had at November 30,
1999, bank revolving credit agreements providing for borrowings aggregating up
to $5,492,500,000. CFC's ability to borrow under the revolving credit agreements
is subject to continued satisfaction of certain conditions, including the
maintenance of members' equity and members' subordinated certificates of at
least $1,373,900,000 increased each fiscal year after 1994 by 90% of net margins
not distributed to members and an average fixed charge coverage ratio over the
six most recent fiscal quarters of at least 1.025. The revolving credit
agreements also require a fixed charge coverage ratio of 1.05 for the preceding
fiscal year as a condition to the retirement of patronage capital and prohibit
CFC from pledging collateral in excess of 150% of the principal amount of
collateral trust bonds outstanding. Commercial paper in the amount of
$2,402,500,000, which is supported by a five-year revolving credit agreement, is
shown as long-term debt. Long-term debt also includes CFC's outstanding
collateral trust bonds and medium-term notes.
(B) At November 30, 1999, CFC had outstanding guarantees of tax-exempt
securities issued on behalf of members in the aggregate amount of
$1,046,310,000. Guaranteed tax-exempt securities include $933,800,000 of
long-term adjustable or floating/fixed-rate pollution control bonds which are
required to be remarketed at the option of the holders. CFC has agreed to
purchase any such bonds that cannot be remarketed. At November 30, 1999, CFC had
guaranteed its members' obligations in connection with certain lease
transactions and other debt in the amount of $731,599,000.
(C) As of November 30 1999, CFC had issued a total of $400,000,000 of
deferrable subordinated debt in the form of Quarterly Income Capital Securities
("QUICS"). QUICS are subordinate and junior in right of payment to senior
indebtedness. CFC has the right at any time and from time to time during the
term of the QUICS to defer the payment of interest for up to 20 consecutive
quarters.
(D) Subordinated certificates are subordinated obligations purchased by
members as a condition of membership and in connection with CFC's extension of
long-term credit to them. Those issued as a condition of membership
($641,985,000 at November 30, 1999) generally mature 100 years from issuance and
bear interest at 5% per annum. The others either mature 46 to 50 years from
issuance, or mature at the same time as, or amortize proportionately with, the
credit extended, and either are non-interest bearing or bear interest at varying
rates.
(E) CFC allocates its net margins among its members in proportion to
interest earned by CFC. CFC intends to return the amounts so allocated to its
members 70% in the following year and the remaining 30% after 15 years with due
regard for CFC's financial condition. The unretired allocations for fiscal years
1988-1993 are being retired over the 15-year period from 1994 through 2008. The
current policy of Rural Telephone Finance Cooperative ("RTFC"), a controlled
affiliate of CFC, is to retire 70% of current year's margins within 8 1/2 months
of the end of the fiscal year with the remainder to be retired at the discretion
of RTFC's Board of Directors. The current policy of Guaranty Funding
Cooperative, a controlled affiliate of CFC, is to retire 100% of current year's
margins shortly after the end of the fiscal year.
S-3
<PAGE> 4
SELECTED FINANCIAL INFORMATION
The following table summarizes CFC's results of operations and fixed charge
coverage for the six months ended November 30, 1999 and 1998 and the years ended
May 31, 1999 and 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, YEARS ENDED MAY 31,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating income........ $469,255 $372,381 $790,803 $637,573
======== ======== ======== ========
Operating margin........ 44,738 34,641 74,717 54,411
Nonoperating income..... 841 1,082 1,722 2,611
Gain on sale of land.... -- -- -- 5,194
-------- -------- -------- --------
Net margins............. $ 45,579 $ 35,723 $ 76,439 $ 62,216
======== ======== ======== ========
Fixed charge coverage
ratio(1).............. 1.12 1.12 1.12 1.12
======== ======== ======== ========
</TABLE>
- ------------
(1) Margins used to compute the fixed charge coverage ratio represent net
margins before extraordinary loss plus fixed charges. The fixed charges used
in the computation of the fixed charge coverage ratio consist of interest
and amortization of bond discount and bond issuance expenses.
RECENT DEVELOPMENTS
In July 1999, Deseret, Riverside and CFC reached an agreement with respect
to the settlement of the Riverside FERC and Utah state litigation. Under the
terms of the agreement, Deseret and Riverside agreed to amend the power service
agreement with respect to rates, terms and conditions for service thereunder. On
July 29, 1999, Riverside paid Deseret $25.1 million to buy down the rate Deseret
charges Riverside for power commencing in July 2002. In order to facilitate the
settlement, CFC issued an irrevocable letter of credit to Riverside for the
account of Deseret in the amount of $25.1 million, which may be drawn upon by
Riverside upon the occurrence of certain events more particularly described
therein, including Deseret's failure to perform certain obligations under the
power service agreement and the FERC's failure to approve the settlement. Any
draw under the letter of credit converts to a long-term loan to Deseret which is
repayable upon the terms set forth in a reimbursement agreement.
Deseret and Riverside filed the amended power service agreement and a
settlement agreement to which CFC is a party with the FERC on July 28, 1999,
together with an uncontested motion for interim rate approval. FERC approved the
motion on August 3, 1999. On August 20, 1999, the administrative law judge
certified the settlement agreement and amended power service agreement to the
FERC for approval. The Commission approved the settlement in January 2000.
As of November 30, 1999 and May 31, 1999, all loans to Deseret were on an
accrual status at a rate of 3.90%. The rate at which interest accrues will be
adjusted from time to time as events require to reflect the current estimate of
the amount CFC will receive through December 31, 2025.
At November 30, 1999, CFC's total exposure to Deseret was $668 million,
consisting of $578 million in loans and $90 million in guarantees.
S-4
<PAGE> 5
DESCRIPTION OF THE BONDS
The bonds will be issued under an indenture dated as of February 15, 1994,
between CFC and U.S. Bank National Association as trustee.
GENERAL
The bonds will be direct obligations of CFC secured by the pledge of
mortgage notes of members, cash and certain permitted investments. The bonds
mature on February 10, 2003, and will bear interest from the date of original
issuance at the rate stated on the cover page of this prospectus supplement.
Interest will be payable semiannually on February 10 and August 10 to the
persons in whose names the bonds are registered at the close of business on the
fifteenth day preceding the payment date, commencing August 10, 2000.
REDEMPTION
The bonds may not be redeemed prior to maturity.
SECURITY
The bonds will be secured under the indenture, equally with collateral
trust bonds previously issued and which may be subsequently issued under the
indenture, by the pledge with the trustee of eligible mortgage notes, cash and
permitted investments. See "Description of Bonds -- Security" in the prospectus.
On February 10, 2000, there will be pledged with the trustee approximately
$3,375 million of eligible mortgage notes, cash and permitted investments
against which $3,372 million of bonds will have been issued.
BOOK-ENTRY SYSTEM
The Depository Trust Company ("DTC") will act as securities depository for
the bonds. The bonds will be issued in fully-registered form in the name of Cede
& Co. (DTC's partnership nominee). One or more fully-registered certificates
will be issued as global securities for the bonds in the aggregate principal
amount of the bonds, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934. DTC holds securities that its participants deposit with DTC. DTC
also facilitates the settlement among direct participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in direct participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct participants include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations. DTC is owned
by a number of its direct participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks, and trust companies that clear through or
maintain a custodial relationship with a direct participant, either directly or
indirectly. The Rules applicable to DTC and its participants are on file with
the Securities and Exchange Commission.
Purchasers of bonds under the DTC system must be made by or through direct
participants, which will receive a credit for the bonds on DTC's records. The
ownership interest of each actual purchaser of bonds is in turn to be recorded
on the participants' records. Beneficial owners will not receive written
confirmation from DTC of their purchases, but beneficial owners are expected to
receive written confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the participant through which the
beneficial owner entered into the transaction. Transfers of ownership interests
in the bonds are to be accomplished by entries made on the books of participants
acting on behalf of beneficial owners. Beneficial owners will not receive
certificates representing their ownership interests in the bonds, except in the
event that use of the book-entry system for the bonds is discontinued.
S-5
<PAGE> 6
To facilitate subsequent transfers, all bonds deposited by direct
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of bonds with DTC and their registration in the name of
Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the bonds; DTC's records reflect only the identity
of the direct participants to whose accounts such bonds are credited, which may
or may not be the beneficial owners. The participants will remain responsible
for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by
participants to beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the bonds.
Under its usual procedures, DTC would mail an omnibus proxy to CFC as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
bonds are credited on the record date (identified in a listing attached to the
omnibus proxy).
Principal and interest payments on the bonds will be made to DTC. DTC's
practice is to credit direct participants' accounts on the payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date. Payments
by participants to beneficial owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such participant and not of DTC, CFC or the trustee, subject
to any statutory or regulatory requirements as may be in effect from time to
time. Payment of principal and interest to DTC is the responsibility of CFC or
the trustee, disbursement of such payments to direct participants shall be the
responsibility of DTC, and disbursements of such payments to the beneficial
owners shall be the responsibility of participants.
DTC may discontinue providing its services as securities depository with
respect to the bonds at any time by giving reasonable notice to CFC or the
trustee. Under such circumstances, in the event that a successor securities
depository is not obtained, bond certificates are required to be printed and
delivered.
CFC may decide to discontinue use of the system of book-entry transfers
through DTC (or a successor securities depository). In that event, bond
certificates will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that CFC believes to be reliable (including DTC),
but CFC takes no responsibility for the accuracy thereof.
Neither CFC, the trustee nor the underwriters will have any responsibility
or obligation to participants, or the persons for whom they act as nominees,
with respect to the accuracy of the records of DTC, its nominee or any
participant with respect to any ownership interest in the bonds, or payments to,
or the providing of notice for, participants or beneficial owners.
S-6
<PAGE> 7
UNDERWRITING
The underwriters named below have severally agreed to purchase, and CFC has
agreed to sell to them, severally, the principal amounts of bonds indicated
below. The underwriting agreement provides that the several obligations of the
underwriters are subject to certain conditions as therein set forth. The
underwriters will be obligated to purchase all the bonds if any of the bonds are
purchased.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER BONDS
----------- --------------
<S> <C>
Lehman Brothers Inc. ....................................... $105,000,000
Banc of America Securities LLC.............................. 105,000,000
Goldman, Sachs & Co......................................... 105,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .................................. 105,000,000
J.P. Morgan Securities Inc. ................................ 105,000,000
------------
$525,000,000
============
</TABLE>
CFC has been advised by the underwriters that the underwriters propose to
offer the bonds to the public initially at the offering price set forth on the
cover of this prospectus supplement and to certain dealers at such price less a
selling concession of 0.25% of the principal amount on the bonds. The
underwriters may allow and each such dealer may reallow to other dealers a
concession not exceeding 0.20% of the principal amount of the bonds. After the
initial public offering, such public offering price and such concessions and
reallowances may be changed.
In connection with the offering made hereby, the underwriters may purchase
and sell the bonds in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover short
positions created by the underwriters in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the bonds, and short
positions created by the underwriters involve the sale by the underwriters of a
greater aggregate principal amount of bonds than they are required to purchase
from CFC. The underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the bonds sold in the
offering may be reclaimed by the underwriters if such bonds are repurchased by
the underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the bonds, which may
be higher than the price that might otherwise prevail in the open market; and
these activities, if commenced, may be discontinued at any time. These
transactions may be effected in the over-the-counter market or otherwise.
The bonds are a new issue of securities with no established trading market.
CFC has been advised by the underwriters that they intend to make a market in
the bonds but are not obligated to do so and may discontinue any market making
at any time without notice. No assurance can be given as to the liquidity of the
trading market for the bonds. The bonds will not be listed on any securities
exchange.
CFC has agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933.
In the ordinary course of their respective businesses, the underwriters and
their affiliates have engaged, and may in the future engage, in commercial
banking and/or investment banking transactions with CFC and its affiliates.
See "Plan of Distribution" in the prospectus for further information
regarding the distribution of the bonds.
S-7
<PAGE> 8
[This Page Intentionally Left Blank]
<PAGE> 9
PROSPECTUS
[CFC LOGO]
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
$1,000,000,000
COLLATERAL TRUST BONDS
------------------------
We plan to issue from time to time up to $1,000,000,000 of Collateral Trust
Bonds. We will provide the specific terms of these securities in supplements to
this Prospectus. We may offer Collateral Trust Bonds to domestic and foreign
investors through:
- - direct sale, or
- - agents we designate, or
- - underwriters or a group of underwriters.
Investors may have tax consequences related to the purchase and sale of these
Collateral Trust Bonds. Please review the United States Taxation section on page
12 of this Prospectus.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
This Prospectus may not be used to consummate the sale of Collateral Trust Bonds
unless accompanied by a Prospectus Supplement.
------------------------
THE DATE OF THIS PROSPECTUS IS DECEMBER 17, 1998
<PAGE> 10
AVAILABLE INFORMATION
National Rural Utilities Cooperative Finance Corporation ("CFC") is subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, in accordance therewith, files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information can be inspected at the office
of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549, as well as at the Regional Offices of the Commission at 7 World Trade
Center, Suite 1300, New York, NY 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661-2511. Copies can also be obtained by mail
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, DC 20549 at the prescribed rates or through the
Commission's web site (http://www.sec.gov). In addition, certain of CFC's
securities are listed on, and reports and other information concerning CFC can
also be inspected at, the New York Stock Exchange, 20 Broad Street, New York, NY
10005.
---------------------
DOCUMENTS INCORPORATED BY REFERENCE
The following documents heretofore filed by CFC with the Commission pursuant to
the Exchange Act are incorporated by reference in this Prospectus.
1. CFC's Annual Report on Form 10-K for the fiscal year ended May 31, 1998.
2. CFC's Quarterly Report on Form 10-Q for the quarter ended August 31,
1998.
3. CFC's Current Reports on Form 8-K dated June 22, 1998, August 28, 1998,
September 25, 1998, October 7, 1998 and November 5, 1998.
All documents subsequently filed by CFC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, prior to the termination of the offering of the
Collateral Trust Bonds (the "Bonds"), shall be deemed to be incorporated in this
Prospectus by reference and to be a part hereof from the respective date of
filing of each such document. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
CFC will furnish without charge upon written or oral request by any person,
including any beneficial owner, to whom this Prospectus is delivered a copy of
any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference, other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates. Requests for such copies
should be directed to Steven L. Lilly, Senior Vice President and Chief Financial
Officer, National Rural Utilities Cooperative Finance Corporation, Woodland
Park, 2201 Cooperative Way, Herndon, VA 20171. Telephone requests may be
directed to (703) 709-6700.
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS. NO ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH DIFFERENT
INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF
THE DOCUMENT. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE
THE OFFER IS NOT PERMITTED.
2
<PAGE> 11
THE COMPANY
CFC was incorporated as a private, not-for-profit cooperative association under
the laws of the District of Columbia in April 1969. The principal purpose of CFC
is to provide its members with a source of financing to supplement the loan
programs of the Rural Utilities Service ("RUS") of the United States Department
of Agriculture. CFC makes loans primarily to its rural utility system members
("Utility Members") to enable them to acquire, construct and operate electric
distribution, generation, transmission and related facilities. CFC also makes
loans to service organization members ("Service Members") to finance office
buildings, equipment, related facilities and services provided by them to the
rural utility systems. CFC has also provided guarantees for tax-exempt financing
of pollution control facilities and other properties constructed or acquired by
its members, and in addition has provided loans or guarantees through National
Cooperative Services Corporation ("NCSC") in connection with certain lease
transactions of its members. Also, through Rural Telephone Finance Cooperative
("RTFC"), a controlled affiliate of CFC established in 1987, CFC provides
financing to rural telephone and telecommunications companies and their
affiliates. In addition, through Guaranty Funding Cooperative ("GFC"), a
controlled affiliate of CFC established in 1991, CFC provides financing for
certain members to refinance their debt to the Federal Financing Bank of the
United States Treasury ("FFB"). CFC's offices are located at Woodland Park, 2201
Cooperative Way, Herndon, VA 20171 and its telephone number is (703) 709-6700.
CFC's 1,052 members as of May 31, 1998 included 903 Utility Members, virtually
all of which are consumer-owned cooperatives, 75 Service Members and 74
associate members. The Utility Members included 835 distribution systems and 68
generation and transmission ("power supply") systems operating in 46 states and
U.S. territories.
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 daily based on CFC's
overall cost of long-term capital and may be obtained for any period from one
year through the life of the loan. 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 up to 20 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 $1,017.8 million of the
guaranteed pollution control debt (at May 31, 1998) had the right at certain
times to tender their pollution control bonds for remarketing, and, if they
cannot otherwise be remarketed, CFC has committed to purchase pollution control
bonds so tendered.
By policy, CFC maintains an allowance for loan losses at a level believed to be
adequate in relation to the quality and size of its loans and guarantees
outstanding. At May 31, 1998, the allowance was $250.1 million. At May 31, 1998,
CFC's ten largest borrowers, which were primarily power supply members, had
outstanding loans totaling $1,397.1 million which represented approximately
13.3% of CFC's total loans outstanding. As of May 31, 1998, outstanding
guarantees for these same ten largest borrowers totaled $976.2 million, which
represented 46.9% of CFC's total guarantees outstanding, including guarantees of
the maximum amounts of lease obligations at such date. On that date, no member
had loans and guarantees
3
<PAGE> 12
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, 1998, loans outstanding to Deseret (excluding loans
guaranteed by RUS) accounted for 3.1% of total loans outstanding. Guarantees
outstanding for Deseret accounted for 15.2% of total guarantees outstanding.
Total loans and guarantees outstanding to and for Deseret equalled 36.7% of
total Members' Equity, Members' Subordinated Certificates and the allowance for
loan losses.
USE OF PROCEEDS
Except as may be otherwise provided in a Prospectus Supplement, the net proceeds
from the sale of the Bonds will be added to the general funds of CFC 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. CFC
expects to incur additional indebtedness from time to time, the amount and terms
of which will depend upon the volume of its business, general market conditions
and other factors.
SUMMARY FINANCIAL INFORMATION
The following is a summary of selected financial data for each of the five years
ended May 31, 1998.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
For the year ended May 31:
Operating income................ $ 637,573 $ 564,439 $ 505,073 $ 440,109 $ 324,682
=========== ========== ========== ========== ==========
Operating margin................ $ 54,411 $ 51,530 $ 46,857 $ 41,803 $ 29,159
Nonoperating income............. 2,611 3,206 3,764 3,409 4,029
Gain on sale of land............ 5,194 -- -- -- --
Extraordinary loss(A)........... -- -- (1,580) -- --
----------- ---------- ---------- ---------- ----------
Net margins..................... $ 62,216 $ 54,736 $ 49,041 $ 45,212 $ 33,188
=========== ========== ========== ========== ==========
Fixed charge coverage
ratio(A)...................... 1.12 1.12 1.12 1.13 1.13
=========== ========== ========== ========== ==========
As of May 31:
Assets.......................... $10,682,888 $9,057,494 $8,054,089 $7,080,789 $6,224,296
=========== ========== ========== ========== ==========
Long-term debt(B)............... $ 4,697,296 $3,596,231 $3,682,421 $3,423,031 $2,841,220
=========== ========== ========== ========== ==========
Quarterly Income Capital
Securities.................... $ 200,000 $ 125,000 $ -- $ -- $ --
=========== ========== ========== ========== ==========
Members' Subordinated
Certificates.................. $ 1,229,166 $1,212,486 $1,207,684 $1,234,715 $1,222,858
=========== ========== ========== ========== ==========
Members' Equity................. $ 279,278 $ 271,594 $ 269,641 $ 270,221 $ 260,968
=========== ========== ========== ========== ==========
Leverage ratio(C)............... 6.37 5.84 5.69 5.13 4.63
=========== ========== ========== ========== ==========
Debt to equity ratio(D)......... 4.51 3.97 3.63 3.01 2.52
=========== ========== ========== ========== ==========
</TABLE>
- ---------------
(A) Extraordinary loss for the year ended May 31, 1996, represents the premium
in connection with the prepayment of Collateral Trust Bonds. Margins used to
compute the fixed charge coverage ratio represent net margins before
extraordinary loss plus fixed charges. The fixed charges used in the
computation of the fixed charge coverage ratio consist of interest and
amortization of bond discount and bond issuance expenses.
(B) Includes commercial paper reclassified as long-term debt and excludes $327.3
million, $268.7 million, $351.5 million, $262.7 million and $200.8 million
in long-term debt that comes due, matures and/or will be redeemed early
during fiscal years 1999, 1998, 1997, 1996 and 1995, respectively.
(C) In accordance with CFC's revolving credit agreements, the leverage ratio is
calculated by dividing debt and guarantees outstanding, excluding and
Quarterly Income Capital Securities and debt used to fund loans guaranteed
by the U.S. Government, by the total of Quarterly Income Capital Securities,
Members' Subordinated Certificates and Members' Equity.
4
<PAGE> 13
(D) The debt to equity ratio is calculated by dividing debt outstanding,
excluding Quarterly Income Capital Securities and debt used to fund loans
guaranteed by RUS, by the total of Quarterly Income Capital Securities,
Members' Subordinated Certificates, Members' Equity and the loan loss
allowance.
CFC has had outstanding guarantees for its members' indebtedness in each of the
fiscal years shown above. Members' interest expense on such indebtedness was
approximately $90.8 million for the year ended May 31, 1998.
CFC does not have outstanding any common stock and does not pay dividends. Under
current policies, CFC retires Patronage Capital Certificates, which represent
annual allocations of CFC's net margins, 70% during the next fiscal year, and
expects to retire the remaining 30% after 15 years with due regard for CFC's
financial condition.
CAPITALIZATION
The following table shows the capitalization of CFC as of August 31, 1998.
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
SENIOR DEBT:
Short-term Debt(A)........................................ $ 3,779,955
Long-term Debt(A)......................................... 5,460,652
-----------
Total Senior Debt(B).............................. 9,240,607
-----------
SUBORDINATED DEBT AND MEMBERS' EQUITY:
Quarterly Income Capital Securities(C).................... 400,000
Members' Subordinated Certificates(D)..................... 1,241,046
Members' Equity(E)........................................ 239,955
-----------
Total Capitalization.............................. $11,121,608
===========
</TABLE>
- ------------
(A) Short-term indebtedness is used to fund CFC's short-, intermediate- and
long-term variable rate loans, as well as its long-term fixed rate loans on
a temporary basis. It generally consists of commercial paper with maturities
of up to nine months. To support its own commercial paper and its
obligations with respect to tax-exempt debt issued on behalf of members, CFC
had at August 31, 1998, bank revolving credit agreements providing for
borrowings aggregating up to $5,217.5 million. CFC's ability to borrow under
the revolving credit agreements is subject to continued satisfaction of
certain conditions, including the maintenance of Members' Equity and
Members' Subordinated Certificates of at least $1,356.7 million increased
each fiscal year by 90% of net margins not distributed to members and an
average fixed charge coverage ratio over the six most recent fiscal quarters
of at least 1.025. The revolving credit agreements also require a fixed
charge coverage ratio of 1.05 for the preceding fiscal year as a condition
to the retirement of patronage capital and prohibit CFC from pledging
collateral in excess of 150% of the principal amount of Collateral Trust
Bonds outstanding. Commercial Paper in the amount of $2,345.0 million, which
is supported by a five-year revolving credit agreement, is shown as
long-term debt. Long-term debt also includes CFC's outstanding Collateral
Trust Bonds and Medium-Term Notes.
(B) At August 31, 1998, CFC had outstanding guarantees of tax-exempt securities
issued on behalf of members in the aggregate amount of $1,142.0 million.
Guaranteed tax-exempt securities include $1,012.9 million of long-term
adjustable or floating/fixed rate pollution control bonds which are required
to be remarketed at the option of the holders. CFC has agreed to purchase
any such pollution control bonds that cannot be remarketed. At August 31,
1998, CFC had guaranteed its members' obligations in connection with certain
lease transactions and other debt in the amount of $880.2 million.
(C) As of August 31, 1998, CFC had issued a total of $400.0 million of Quarterly
Income Capital Securities ("QUICS"). QUICS are subordinate and junior in
right of payment to senior indebtedness. CFC has the right at any time and
from time to time during the term of the QUICS to defer the payment of
interest for up to 20 consecutive quarters.
(D) Subordinated Certificates are subordinated obligations purchased by members
as a condition of membership and in connection with CFC's extension of
long-term credit to them. Those issued as a condition of membership ($644.8
million at August 31, 1998) generally mature 100 years from issuance
5
<PAGE> 14
and bear interest at 5% per annum. The others either mature 46 to 50 years
from issuance, or mature at the same time as, or amortize proportionately
with, the credit extended, and either are non-interest bearing or bear
interest at varying rates.
(E) CFC allocates its net margins among its members in proportion to interest
earned by CFC from such members. CFC intends to return the amounts so
allocated to its members 70% in the following year and the remaining 30%
after 15 years with due regard for CFC's financial condition. The unretired
allocations for fiscal years 1988-1993 are being retired over the 15-year
period from 1994 through 2008. The current policy of RTFC is to retire 70%
of current year's margins with 8 1/2 months of the end of the fiscal year
with the remainder to be retired at the discretion of RTFC's Board of
Directors. The current policy of GFC is to retire 100% of current year's
margins shortly after the end of the fiscal year.
DESCRIPTION OF THE BONDS
The Bonds are to be issued under an indenture dated as of February 15, 1994
(said Indenture, as supplemented from time to time, being herein called the
"Indenture"), between CFC and U.S. Bank National Association, as Trustee (the
"Trustee"), which Indenture is an exhibit to the Registration Statement of which
this Prospectus is a part. The following summaries of certain provisions of the
Indenture do not purport to be complete, and, where particular provisions of the
Indenture are referred to, such provisions, including definitions of certain
terms, are incorporated by reference as a part of such summaries, which are
qualified in their entirety by such reference. Section references in this
Description of Bonds are to sections of the Indenture.
CFC may maintain banking relationships in the ordinary course of business with
First Bank National Association, including the making of investments through,
and borrowings from, said bank.
The Indenture provides that additional debt securities may be issued thereunder
without limitation as to aggregate principal amount except as described below
under "Security," as authorized from time to time by CFC's Board of Directors.
(Sections 2.01, 2.02 and 2.03) Bonds issued at any time under the Indenture are
referred to herein collectively as "Bonds," which term does not include Series
E-2 and Series V Collateral Trust Bonds, which bonds were issued under a prior
indenture. The terms of Bonds of any series will be set forth in or pursuant to
a Board resolution or supplemental indenture adopted or entered into prior to
the time of the issuance thereof. (Sections 2.03 and 13.01) The Bonds will rank
and be secured equally and ratably with each other.
GENERAL
Reference is made to the Prospectus Supplement for the following terms of the
Bonds with respect to which this Prospectus is delivered:
(i) the title of such Bonds;
(ii) any limit upon the aggregate principal amount of such Bonds;
(iii) the persons to whom interest on such Bonds shall be payable, if other
than the persons in whose names such Bonds are registered;
(iv) the date or dates on which the principal of such Bonds is payable or
the method by which such date or dates shall be determined;
(v) the rate or rates, if any, at which such Bonds shall bear interest or
any method by which such rate or rates shall be determined;
(vi) the date or dates from which such interest, if any, shall accrue and
the date or dates on which such interest, if any, shall be payable;
(vii) the place or places at which the principal of and premium, if any,
and interest, if any, on such Bonds shall be payable and registration
of transfer or exchanges of such Bonds may be effected, and the
registrar for such Bonds;
6
<PAGE> 15
(viii) the terms and conditions upon which such Bonds may be redeemed,
including any sinking fund or other mandatory redemption provisions;
(ix) the denominations in which such Bonds shall be issuable if other than
denominations of $1,000 and any integral multiple thereof;
(x) the coin or currency in which payment of the principal of and
premium, if any, and interest, if any, on such Bonds shall be payable
(if other than the coin or currency in which such Bonds are
denominated), and, if the principal of or premium, if any, or
interest, if any, on such Bonds are to be payable, at the election of
CFC or a holder thereof, in a coin or currency other than that in
which such Bonds are denominated, the period or periods within which,
and the terms and conditions upon which, such election may be made,
and if denominated or payable in any coin or currency, including
composite currencies, other then U.S. dollars, the method by which
such Bonds shall be valued;
(xi) if the principal of or premium, if any, or interest, if any, on such
Bonds are to be payable in securities or other property at the
election of CFC or a holder thereof, the type and amount of such
securities or other property, or the method by which such amount shall
be determined, and the periods within which, and the terms and
conditions upon which, any such election may be made;
(xii) if the amount payable in respect of principal of or premium, if any,
or interest, if any, on such Bonds may be determined with reference
to an index, the manner in which such amounts shall be determined;
(xiii) if other than the principal amount thereof, the portion of the
principal amount of such Bonds, or any tranche thereof, which shall
be payable upon declaration of the acceleration of the maturity
thereof;
(xiv) the terms, if any, pursuant to which such Bonds may be converted into
or exchanged for shares of capital stock or other securities of CFC
or any other person;
(xv) if such Bonds are to be issued in global form, the depositary with
respect to such global Bond or Bonds and any limitations on the rights
of the holder or holders of such bonds to transfer or exchange the
same or to obtain the registration of transfer thereof or to obtain
certificates therefor in definitive form in lieu of temporary form;
(xvi) if such Bonds are to be issuable as bearer securities, any and all
matters incidental thereto;
(xvii) the right, if any, of CFC to limit or discharge the indenture as to
such Bonds;
(xviii) whether and under what circumstances CFC will pay additional
amounts on such Bonds held by a Person who is not a U.S. person in
respect of any tax, assessment or governmental charge withheld or
deducted and, if so, whether and on what terms CFC will have the
option to redeem such Bonds rather than pay such additional amounts;
and
(xix) any other terms of such Bonds not inconsistent with the Indenture.
(Section 2.03)
The Bonds may be issued in registered form without coupons, in a form registered
as to principal only with or without coupons, in bearer form with or without
coupons or any combination thereof. In addition, all or a portion of the Bonds
may be issued in temporary or definitive global form. Bonds in bearer form are
offered only to non-United States persons and to offices located outside the
United States of certain United States financial institutions. See "LIMITATIONS
ON ISSUANCE OF BEARER BONDS."
The Bonds may be sold for U.S. dollars, foreign currencies or foreign currency
units, and the principal (including any premium) and any interest on the Bonds
may be payable in U.S. dollars, foreign currencies or foreign currency units.
The Bonds may be issued in one or more series with the same or various
maturities at or above par or with an original issue discount. The specific
designation, aggregate principal amount, currency, currencies or currency unit
or units in which the principal, premium, if any, or interest, if any, is
payable,
7
<PAGE> 16
authorized denominations, purchase price, maturity, rate (or method of
calculation) and time of payment of any interest, any redemption terms, any
listing on a securities exchange, or other specific terms of the Bonds in
respect of which this Prospectus is being delivered ("Offered Bonds") are set
forth in the accompanying Prospectus Supplement or in a supplement thereto
relating to the specific Offered Bonds, together with the terms of offering of
the Offered Bonds.
SECURITY
The Bonds will be secured, equally with outstanding Bonds, by the pledge with
the Trustee of Eligible Collateral having an Allowable Amount of at least 100%
of the principal amount of Bonds outstanding. The Indenture provides that
Eligible Collateral shall consist of cash, Eligible Mortgage Notes of
Distribution System Members and Permitted Investments. The "Allowable Amount" of
cash is 100% thereof, the "Allowable Amount" of Eligible Mortgage Notes is the
amount advanced thereon and not repaid and the "Allowable Amount" of Permitted
Investments is their cost to CFC (exclusive of accrued interest and brokerage
commissions), except that the "Allowable Amount" of Permitted Investments traded
on a national securities exchange or in any over-the-counter market is their
fair market value as determined by CFC. For purposes of the Indenture and as
used in describing the Bonds herein, a "Member" is any person which is a member
or patron of CFC; and a "Distribution System Member" is a Member 50% or more of
whose gross operating revenues are derived from sales of electricity to ultimate
consumers. (Sections 1.01 and 3.01)
As a condition to the authentication and delivery of Bonds (or, for certain
series of Bonds, prior only to the first issuance thereof and if such
certification has not been made as of a date 90 days prior to the authentication
and delivery of such Bonds) or to the withdrawal of Collateral, and in any event
at least once a year, CFC must certify to the Trustee that:
(1) the Allowable Amount of Eligible Collateral pledged under the
Indenture is at least equal to 100% of the aggregate principal amount of
Bonds to be outstanding;
(2) each Eligible Mortgage Note included in the Eligible Collateral so
certified is an Eligible Mortgage Note of a Distribution System Member
having an Equity Ratio of at least 20% and an Average Coverage Ratio of at
least 1.35; and
(3) the aggregate Allowable Amount of all Eligible Mortgage Notes of
any one Distribution System Member so certified does not exceed 10% of the
aggregate Allowable Amount of all Eligible Collateral so certified.
(Sections 3.01, 6.01 and 7.13)
CFC is also entitled to the authentication and delivery of Bonds on the basis of
the retirement of outstanding Bonds at their final maturity or by redemption at
the option of CFC. (Sections 3.02 and 3.03)
The Indenture provides that Bonds of one or more other series may be issued
thereunder without limitation as to aggregate principal amount, subject to the
restriction described under "Restriction on Indebtedness", so long as the
Allowable Amount of Eligible Collateral pledged under the Indenture is at least
equal to the aggregate principal amount of Bonds to be outstanding and meets the
other requirements set forth herein. (Sections 2.03 and 13.01) "Eligible
Mortgage Note" means a note or bond of a Distribution System Member which is
secured by a Mortgage under which no default exists with respect to the
covenants required by the Indenture to be contained in a Mortgage (as described
below), unless consented to by the mortgagees to the extent permitted in the
Mortgage and the Indenture, and under which no "event of default" as defined in
the Mortgage shall have occurred and shall have resulted in the exercise of
remedies. (Section 1.01)
"Equity Ratio" is determined by dividing the sum of the Member's equities and
margins at the end of the particular year by the Member's total assets and other
debts at such date; and "Coverage Ratio" is determined by dividing the sum of
the Member's patronage capital and operating margins, non-operating
margins-interest, cash received in respect of power supply systems and other
capital credits, depreciation and amortization expense and interest expense with
respect to long-term debt by the Member's long-term debt service obligations in
respect of such year (but in the event any portion of such Member's long-term
debt is refinanced during such year the long-term debt service obligations
during such year in respect thereof will be based upon the larger of (x) an
annualization of such obligations with respect to the refinancing debt during
8
<PAGE> 17
the portion of the year such refinancing debt is outstanding and (y) the
long-term debt service obligations during the following year on such refinancing
debt). These terms are determined in accordance with the system of accounting
used for REA reporting or if such Member is not required to maintain its
accounts in accordance with such system, then in accordance with generally
accepted accounting principles, except that the Indenture requires that interest
expense and long-term debt service obligations include 33 1/3% of the amount by
which (x) rental payments by such Member with regard to certain property having
an initial cost greater than $250,000 exceed (y) 2% of such Member's equities
and margins, each in respect of such year. For RUS reporting purposes and for
purposes of CFC's calculation of borrowers' ratios, obligations under take-
or-pay power contracts, guaranties and other contingent obligations are not
considered debt of a Member. "Average Coverage Ratios" are computed by averaging
the best two of the three calendar years preceding the date of determination.
(Section 1.01) The effect of these provisions is to exclude from the computation
of the Coverage Ratio capital credits except to the extent received by the
Member in the form of cash.
The Indenture requires that each Mortgage securing an Eligible Mortgage Note be
a first mortgage on the property then owned or thereafter acquired by the Member
issuing the Note (or, in the case of certain public agency borrowers, on such
Member's revenues), subject to usual exceptions in mortgages of utility
companies, and that, if the Mortgage is a common mortgage with RUS or any other
lender, the mortgagees be secured equally and ratably. (Section 1.01 and
Schedule I) There are no requirements in the Indenture as to the value of the
property subject to the lien of a Mortgage.
The Indenture provides that, unless an Event of Default under the Indenture
exists, and other than certain limited duties specified in the Indenture, the
Trustee shall have no duties or responsibilities with regard to any Mortgage and
no responsibilities with regard to the value of any property subject thereto.
(Section 4.03)
"Permitted Investments" are defined to include certain obligations of or
guaranteed by the United States and of states and municipalities and agencies
thereof which are rated AA (or equivalent) or better by at least two nationally
recognized statistical rating agencies and which mature not more than two years
after purchase, certificates of deposit or time deposits of a bank or trust
company having at least $500,000,000 of capital and surplus and maturing not
more than two years after purchase and commercial paper of bank holding
companies or other corporate issuers (other than CFC) generally rated in the
highest category by at least two nationally recognized statistical rating
agencies and maturing not more than one year after purchase. (Section 5.03)
EXERCISE OF RIGHTS
Until the occurrence of an Event of Default under the Indenture, CFC retains the
right to control the exercise of rights and powers under Eligible Mortgage Notes
and Mortgages pledged under the Indenture. (Section 15.01) Mortgages which also
secure notes issued to RUS provide that RUS will have the exclusive right for an
initial 30-day period to initiate and control enforcement proceedings on behalf
of the holders of all the notes secured by the particular Mortgage, including
those held by the Trustee.
RESTRICTION ON INDEBTEDNESS
CFC may not incur any Superior Indebtedness or make any optional prepayment on
any Capital Term Certificate if, as a result, the principal amount of Superior
Indebtedness outstanding thereafter or on any future date, less the principal
amount of a Government or Government Insured Obligations held by CFC on the
determination date, would exceed 20 times the sum of the Members' equity in CFC
at the time of determination plus the principal amount of Capital Term
Certificates outstanding at the time of determination or at such given future
date, as the case may be. The principal amounts of Superior Indebtedness and
Capital Term Certificates to be outstanding on any future given date will be
computed after giving effect to maturities and sinking fund requirements.
(Section 7.11) "Superior Indebtedness" means all indebtedness of CFC (including
all guarantees by CFC of indebtedness of others) except Capital Term
Certificates. (Section 1.01). A "Capital Term Certificate" is defined for the
purposes of the Indenture as a note of CFC substantially in the form of the
Capital Term Certificates of CFC outstanding on the date of the Indenture and
any other indebtedness having substantially similar provisions as to
subordination. (Section 1.01). "Government or Government Insured Obligations"
means obligations held by CFC which relate to the RUS or successor
9
<PAGE> 18
programs and which are obligations of the United States or any agency thereof or
which are guaranteed or insured by the United States government or any agency
thereof. (Section 7.11) As of August 31, 1998, CFC had $11,247.8 million
outstanding of Superior Indebtedness and within the restrictions of the
Indenture was permitted to have outstanding an additional $26,372.2 million of
Superior Indebtedness.
Unless an Event of Default shall occur, CFC will be entitled to receive and
retain all payments on account of principal, premium and interest on the
Eligible Mortgage Notes and Permitted Investments on deposit with the Trustee.
(Section 4.02)
MODIFICATIONS
Modifications of the provisions of the Indenture may be made with the consent of
the holders of not less than a majority in aggregate principal amount of the
then outstanding Bonds, but, without the consent of the holder of each Bond
affected thereby, no such modification shall:
(i) effect a reduction, or an extension of the stated time of payment, of
the principal of or interest on any Bond or of any premium payable on
redemption,
(ii) permit the creation of any prior or equal lien on the securities or
other property pledged under the Indenture (except as expressly
permitted) or deprive the holder of any Bond (except as expressly
permitted) of the lien created by the Indenture, or
(iii) reduce the above-stated percentage of holders of Bonds whose consent
is required to modify the Indenture or the percentage of holders of
Bonds whose consent is required for any waiver under the Indenture.
(Section 13.02)
The Indenture provides that CFC and the Trustee may, without the consent of any
holders of Bonds, enter into supplemental indentures for the purposes, among
other things, of adding to CFC's covenants, establishing the form or terms of
Bonds of any series, changing or eliminating any restriction on the manner or
place of payment of principal of or interest on Bearer Bonds or, provided such
action shall not adversely affect the interests of the holders of any series of
Bonds in any material respect, curing ambiguities or inconsistencies in the
Indenture or making other provisions with respect to matters arising under the
Indenture. (Section 13.01)
WAIVER OF CERTAIN COVENANTS
The Indenture provides that CFC 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
Bonds at the time outstanding affected thereby (acting as one class) waive
compliance with such restrictive covenants. (Section 7.16)
EVENTS OF DEFAULT
The Indenture provides that the following constitute "Events of Default"
thereunder:
(i) default in the payment of interest on any Bonds continuing for 30
days;
(ii) default in the payment of the principal of (or, premium, if any, on)
any Bonds at their maturity or upon redemption;
(iii) default in the making of any sinking fund payment on any Bonds which
provide for mandatory sinking fund payments;
(iv) default in the performance of specified covenants in the Indenture
for 60 days after such default is known to any officer of CFC,
including the restriction on indebtedness and the covenant to
maintain Eligible Collateral outlined above;
(v) failure to perform any other covenant in the Indenture for 60 days
after notice from the Trustee to CFC or from holders of at least 25%
in principal amount of Bonds outstanding to the Trustee; and
(vi) specified events of bankruptcy, reorganization or insolvency.
(Section 9.01)
10
<PAGE> 19
CFC is required to file with the Trustee annually a written statement as to
CFC's compliance with the conditions and covenants under the Indenture. (Section
7.15) In case an Event of Default should occur and be continuing, the Trustee or
the holders of at least 25% in principal amount of the Bonds then outstanding
may declare the principal of the Bonds to be due and payable. Each declaration
may, under certain circumstances, be rescinded by the holders of a majority in
principal amount of the Bonds at the time outstanding. (Section 9.02)
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
shall be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Bonds, unless
such holders shall have offered to the Trustee reasonable security or indemnity.
Subject to such provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in principal amount of the Bonds at
the time outstanding shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. The Trustee is not
required to expend or risk its own funds or incur financial liability if it has
reasonable ground for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
(Sections 9.08, 10.01 and 10.03)
The Indenture provides that upon receipt by the Trustee of notice of an Event of
Default, declaring an acceleration or directing the time, method or place of
conducting a proceeding at law if an Event of Default has occurred and is
continuing, the Trustee shall, with respect to any series of Bonds represented
by a global bond or bonds, and may, with respect to any other series of Bonds,
establish a record dated for the purpose of determining holders of outstanding
Bonds of such series entitled to join in such notice. (Section 9.01)
SATISFACTION AND DISCHARGE; DEFEASANCE
At the request of CFC, the Indenture will cease to be in effect as to CFC
(except for certain obligations to register the transfer or exchange of Bonds
and hold moneys for payment in trust) with respect to the Bonds when (i) the
principal of and interest on Bonds and coupons, if any, have been paid and/or
the Company has deposited with the Trustee, in trust, money and U.S. Government
Obligations (as defined in the Indenture), which through the payment of interest
thereon and principal thereof in accordance with their terms will provide money
in an amount sufficient to pay all the principal of, and interest on, the Bonds
in accordance with the terms of the Bonds, or (ii) such Bonds or coupons are
deemed paid and discharged in the manner described in the next paragraph.
(Section 14.01)
Unless the Prospectus Supplement relating to the Offered Bonds provides
otherwise, CFC at its option (a) will be Discharged (as such term is defined in
the Indenture) from any and all obligations in respect of the Offered Bonds
(except for certain obligations to register the transfer or exchange of Bonds,
replace stolen, lost or mutilated Bonds and coupons, maintain paying agencies
and hold moneys for payment in trust) or (b) need not comply with certain
restrictive covenants of the Indenture (including those described above under
"Restriction on Indebtedness"), in each case after CFC deposits with the
Trustee, in trust, money, and, in the case of Bonds and coupons denominated in a
foreign currency, Foreign Government Securities, as defined in the Indenture,
which through the payment of interest thereon and principal thereof in
accordance with their terms will provide money in an amount sufficient to pay in
the currency, currencies or currency unit or units in which the Offered Bonds
are payable all the principal of, and interest on, the Offered Bonds on the
dates such payments are due in accordance with the terms of the Offered Bonds.
Among the conditions to CFC's exercising any such option, CFC is required to
deliver to the Trustee an opinion of counsel to the effect that the deposit and
related defeasance would not cause the holders of the Offered Bonds to recognize
income, gain or loss for United States federal income tax purposes and that the
holders will be subject to United States federal income tax in the same amounts,
in the same manner and at the same times as would have been the case if such
deposit and related defeasance has not occurred. (Section 14.02)
At the request of CFC, the Trustee will deliver or pay to CFC any U.S.
Government Obligations, Foreign Government Securities or money deposited, for
the purposes described in the preceding two paragraphs, with the Trustee by CFC
and which, in the opinion of a nationally-recognized firm of independent public
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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 CFC, at CFC's request,
U.S. Government Obligations, Foreign Government Securities or money deposited
with the Trustee for the purposes described in the preceding two paragraphs,
provided that, in the opinion of a nationally-recognized firm of independent
public accountants, immediately after such exchange the obligations, securities
or money then held by the Trustee will be in such amount as would then have been
required to be deposited with the Trustee for such purposes. (Section 14.02)
LIMITATIONS ON ISSUANCE OF BEARER BONDS
Under U.S. federal tax laws, certain limitations on offers, sales and delivery
apply to Bearer Bonds. These limitations, as well as additional information
regarding the U.S. federal income tax consequences in respect of a Bearer Bond,
will be set forth in any Prospectus Supplement providing for the issuance of
Bearer Bonds.
UNITED STATES TAXATION
The following is a summary of the principal U.S. federal income tax consequences
of the acquisition, ownership and disposition of Registered Bonds. The summary
reflects present law, which is subject to prospective and retroactive changes.
It is not intended as tax advice, and it does not describe all of the tax
considerations that may be relevant to a prospective purchaser. The summary
addresses only original purchasers of the Bonds that hold the Bonds as capital
assets. It does not address U.S. federal income tax issues relevant to
purchasers subject to special rules, such as banks, securities dealers, life
insurance companies, controlled foreign corporations, persons holding Bonds in
connection with a hedge or as a position in a "straddle" or persons having a
functional currency other than the U.S. dollar. The summary does not consider
the tax consequences of Bonds with terms other than those described in this
Prospectus. PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISERS ABOUT
THE TAX CONSEQUENCES OF AN INVESTMENT IN THE BONDS UNDER THE LAWS OF THE UNITED
STATES AND OTHER JURISDICTIONS WHERE PURCHASERS ARE SUBJECT TO TAXATION.
For the purposes of this discussion, "U.S. Holder" means (i) a beneficial owner
of the Bonds that is a citizen or resident of the United States, a corporation
or other entity taxable as a corporation organized in or under the laws of the
United States or any political subdivision thereof, a trust subject to the
control of a United States person and the primary supervision of a United States
court, or an estate the income of which is subject to U.S. federal income
taxation regardless of its source or (ii) any other beneficial owner as to which
income from the Bonds is effectively connected with the conduct of a trade or
business within the United States. The term "Non-U.S. Holder" refers to any
beneficial owner of the Bonds other than a U.S. Holder.
U.S. HOLDERS
PAYMENTS OF INTEREST
Interest on a Bond generally will be taxable to a U.S. Holder as ordinary
interest income at the time of receipt or accrual in accordance with the U.S.
Holder's method of accounting for U.S. federal income tax purposes. Special
rules for the interest on Bonds with original issue discount are described
below.
ORIGINAL ISSUE DISCOUNT
The following is a summary of the U.S. federal income tax consequences to U.S.
Holders of the purchase, ownership and disposition of Bonds issued with original
issue discount ("OID"). The following summary is based on sections 1271 through
1273 and section 1275 of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), and on certain final regulations of the U.S. Department of Treasury
issued in 1994 and 1996 (the "OID Regulations") interpreting these provisions.
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General. A U.S. Holder of a Bond issued at a discount with a maturity of more
than one year after the date of issue must include OID in income over the term
of the Bond regardless of such holder's regular method of tax accounting. The
U.S. Holder generally must include in gross income for the taxable year the sum
of the daily portions of OID that accrue on the Bond for each day during the
year in which such holder held the Bond. Accordingly, a U.S. Holder will be
required to include amounts attributable to OID in income before receiving cash
attributable to that income.
A Bond has OID for U.S. federal income tax purposes to the extent that the
Bond's stated redemption price at maturity exceeds its issue price. The issue
price of a Bond is the initial offering price at which a substantial amount of
the Bonds is sold to the public (excluding bond houses, brokers or similar
persons). The stated redemption price of a Bond is the total of all payments due
on the Bond other than payments of "qualified stated interest." A Bond is not
treated as issued at a discount, however, if the discount is less than 1/4 of 1
percent of the Bond's stated redemption price at maturity multiplied by the
number of complete years to maturity ("de minimis OID"). A Bond that bears
interest for any accrual period at a rate below the rate for the remaining term
of the Bond (e.g., a Bond with a "teaser rate") also will not be treated as
issued at a discount solely on account of that feature if the foregone interest
is less than 1/4 of 1 percent of the Bond's adjusted stated redemption price
multiplied by the number of complete years to maturity.
Qualified stated interest is interest that is payable unconditionally in cash or
in property (other than debt of the issuer) at least annually at either (a) a
single fixed rate that appropriately takes into account the length of the
interval between payments or (b) certain variable rates.
To determine the daily portions of OID, OID accruing during an accrual period is
divided by the number of days in the period. Except as described below under
"Variable Rate Bonds", the amount of OID accruing during an accrual period is
determined by using a constant yield to maturity method. The accrued amount for
any period is the excess of (i) the product of the Bond's adjusted issue price
at the beginning of the accrual period and its yield to maturity (determined on
the basis of compounding at the close of each accrual period and appropriately
adjusted for the length of the accrual period) over (ii) the amount of any
qualified stated interest payments allocable to the accrual period. The adjusted
issue price of a Bond at the beginning of any accrual period generally equals
the issue price of the Bond increased by the aggregate amount of OID that
accrued on that Bond in all prior accrual periods and reduced by the amount of
payments in prior accrual periods other than payments of qualified stated
interest.
A U.S. Holder of a Bond issued at a discount that purchases the Bond for more
than the Bond's adjusted issue price but less than or equal to the Bond's stated
redemption price at maturity may reduce the daily portions of OID includible in
gross income by daily portions of the acquisition premium paid for the Bond.
Variable Rate Bonds. Special rules apply to the U.S. Holder of a Bond that
bears interest at certain types of variable rates (a "Variable Rate Bond"). For
these purposes, a Variable Rate Bond is one that bears interest at the current
values of (i) one or more "qualified floating rates," (ii) a single fixed rate
followed by one or more qualified floating rates, (iii) a single "objective
rate" or (iv) a single fixed rate and an objective rate that is a "qualified
inverse floating rate". The current value of a rate referred to in the preceding
sentence is the value of such rate on any day that is no earlier than 3 months
prior to the first day on which that value is in effect and no later than 1 year
following that first day. A qualified floating rate is any floating rate the
variations in which reasonably can be expected to measure contemporaneous
variations in the cost of newly-borrowed funds (e.g., LIBOR). Although a
multiple of a qualified floating rate will generally not itself constitute a
qualified floating rate, a variable rate is a qualified floating rate if it is
equal to either (i) the product of a qualified floating rate and a fixed
multiple rate that is greater than 0.65 but not more than 1.35 or (ii) the
product of a qualified floating rate and a fixed multiple rate that is greater
than 0.65 but not more than 1.35, increased or decreased by a fixed rate. In
addition, under the OID Regulations, two or more qualified floating rates with
values within 25 basis points of each other (as determined on the Variable Rate
Bond's issue date) will be treated as a single qualified floating rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a maximum or minimum numerical limitation (i.e., a cap or floor) may, under
certain circumstances, fail to be treated as a qualified floating rate under the
OID Regulations unless such cap or floor is fixed
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<PAGE> 22
throughout the term of the Bond. An objective rate is any rate, other than a
qualified floating rate, that is determined using a single fixed formula and
that is based on objective financial or economic information and such
information is not based on information within the control of the issuer (as
defined in the applicable Treasury regulations) or unique to the circumstances
of such issuer. A rate will not be considered an objective rate, however, if it
is reasonably expected that the average value of the rate during the first half
of the Bond's term will be either significantly less than or significantly
greater than the average value of the rate during the final half of the Bond's
term. A qualified inverse floating rate is a fixed rate minus a qualified
floating rate whose variations can reasonably be expected to inversely reflect
contemporaneous variations in the qualified floating rate. A fixed rate for an
initial period of less than one year followed by a qualified floating rate or an
objective rate together constitute a single qualified floating rate or objective
rate if the value of the qualified floating rate or objective rate on the issue
date is intended to approximate the fixed rate. In addition, a combination of
rates described in the preceding sentence will be conclusively presumed to
constitute a single qualified floating rate or objective rate (as the case may
be) if the value of the qualified floating rate on the issue date does not
differ from the value of the fixed rate by more than 25 basis points.
In general, to compute the accrual of OID on a Variable Rate Bond, the OID
Regulations convert the Variable Rate Bond into a fixed rate debt instrument and
then apply the general rules discussed above to the deemed fixed rate debt
instrument. If a Variable Rate Bond provides for stated interest at either a
single qualified floating rate or objective rate that is unconditionally payable
at least annually, (a) all stated interest with respect to the Variable Rate
Bond is treated as qualified stated interest and (b) the amount of qualified
stated interest and the amount of OID, if any, that accrues during an accrual
period is determined under the rules applicable to fixed rate debt instruments
discussed above by assuming that the variable rate is a fixed rate equal to (i)
in the case of a qualified floating rate or qualified inverse floating rate, the
value, as of the issue date of the Variable Rate Bond, of the qualified floating
rate or the qualified inverse floating rate, or (ii) in the case of an objective
rate (other than a qualified inverse floating rate), a fixed rate that reflects
the yield that is reasonably expected for the Variable Rate Bond.
If the Variable Rate Bond does not provide for stated interest as described in
the preceding paragraph, to determine the amounts of interest and OID accruals
an "equivalent fixed rate debt instrument" must be constructed. The equivalent
fixed rate debt instrument has terms that are identical to those provided under
the Variable Rate Bond, except that the equivalent fixed rate debt instrument
provides for fixed rate substitutes in lieu of the qualified floating rates or
objective rate provided under the Variable Rate Bond. The fixed rate substitute
(a) for each qualified floating rate is the value of each such rate as of the
issue date of the Variable Rate Bond (with appropriate adjustment for any
differences in intervals between interest adjustment dates), (b) for a qualified
inverse floating rate is the value of the qualified inverse floating rate as of
the issue date of the Variable Rate Bond and (c) for an objective rate (other
than a qualified inverse floating rate) is a fixed rate that reflects the yield
that is reasonably expected for the Variable Rate Bond. The amounts of qualified
stated interest and OID, if any, are determined for the equivalent fixed rate
debt instrument under the rules applicable to fixed rate debt instruments as
described above and are taken into account as if the holder of the Bond held the
equivalent fixed rate debt instrument. Qualified stated interest or OID
allocable to an accrual period is increased (or decreased) if the interest
actually accrued or paid during an accrual period exceeds (or is less than) the
interest assumed to be accrued or paid during the accrual period under the
equivalent fixed rate debt instrument. This increase or decrease is an
adjustment to qualified stated interest for the accrual period if the equivalent
fixed rate debt instrument provides for qualified stated interest and the
increase or decrease is reflected in the amount actually paid during the accrual
period. Otherwise, this increase or decrease is an adjustment to OID for the
accrual period. If the Variable Rate Bond provides for interest at a qualified
floating rate or qualified inverse floating rate and also provides for stated
interest at a single fixed rate (other than a single fixed rate for an initial
period of less than one year that is intended to approximate the value of the
qualified floating or objective rate), in constructing the equivalent fixed rate
debt instrument, such a Variable Rate Bond is treated as if it provided for a
qualified floating rate (or qualified inverse floating rate, as the case may be)
instead of the fixed rate, which qualified floating (or inverse floating) rate
is such that the Variable Rate Bond would have the same fair market value as of
its issue date. The foregoing rules do not apply, and a Bond is treated as a
Contingent Payment Bond (defined below), if its issue price exceeds the total of
noncontingent principal payments by more than the lesser of (i) the
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<PAGE> 23
product of .015, the total noncontingent principal payments and the number of
complete years to maturity (or a lesser amount if principal is payable in
installments) or (ii) 15 percent of the total noncontingent principal payments.
Optional Redemption. For purposes of determining the yield and maturity of a
Bond, CFC will be presumed to exercise any right to redeem a Bond before its
stated maturity or to extend the maturity of a Bond if exercise would reduce the
yield on the Bond. Likewise, the U.S. Holder will be presumed to exercise any
right to require the redemption of a Bond or to extend the maturity of the Bond
if exercise would increase the yield on the Bond. If the Bond is not actually
redeemed on the date when the option was presumed to have been exercised, the
Bond will be treated only for the purposes of determining OID as having been
reissued at a price equal to that Bond's adjusted issue price on that date.
Short-Term Bonds. U.S. Holders that do not use the accrual method of accounting
for tax purposes generally will not be required to recognize OID on Bonds
maturing within one year of original issuance until they receive payments on the
Bonds. Taxpayers on the accrual method, regulated investment companies, common
trust funds, and certain others, however, must accrue OID on such short-term
Bonds on a straight-line basis unless they elect to accrue the discount on a
constant yield basis with daily compounding. The OID on a short-term Bond is the
amount by which the total principal and interest payments on the Bond exceed its
issue price. U.S. Holders may elect to include discount on such short-term Bonds
into income based on acquisition discount rather than OID. Acquisition discount
is the excess of a Bond's stated redemption price at maturity over the U.S.
Holder's basis in the Bond.
Gain recognized on the sale or exchange of a short-term Bond by a U.S. Holder
that has not accrued discount on the Bond will be ordinary income to the extent
attributable to accrued interest and OID. Such a holder also must defer
deductions for net interest expense on any borrowing attributable to the
short-term Bond to the extent that the expense does not exceed accrued but
unrecognized interest and OID (or acquisition discount) on the Bond.
ANTI-ABUSE RULE
The Internal Revenue Service can apply or depart from the rules contained in the
OID Regulations as necessary or appropriate to achieve a reasonable result where
a principal purpose in structuring a Bond or applying the otherwise applicable
rules is to achieve a result that is unreasonable in light of the purposes of
the applicable statutes (which generally are intended to achieve the clear
reflection of income for both sellers and purchasers of the Bonds).
MARKET DISCOUNT
A U.S. Holder that purchases a Bond at a market discount generally will be
required to treat payments other than qualified stated interest payments as
ordinary income to the extent of the accrued market discount and to treat gain
on the sale of the Bond as ordinary income to the extent of the accrued market
discount not previously included in income. See "Sale or Exchange of Bonds"
below. Market discount is the amount by which the stated redemption price at
maturity (or, in the case of a Bond with OID, the revised issue price) exceeds
the purchaser's basis in the Bond immediately after acquisition. A Bond is not
treated as purchased at a market discount, however, if the discount is less than
1/4 of 1 percent of the stated redemption price at maturity (or the revised
issue price) multiplied by the number of complete years remaining to maturity
("de minimis market discount"). (The revised issue price of a Bond is its
initial issue price increased by the amount of OID includible in the gross
income of previous holders.) Market discount on a Bond will accrue, at the
election of the holder, either ratably or at a constant yield to maturity. The
U.S. Holder may elect to take market discount into income as it accrues. Such
election applies to all debt instruments acquired in the tax year the election
is made and thereafter, and may not be revoked without the consent of the
Internal Revenue Service. Under certain circumstances, the U.S. Holder may be
required to defer deductions for interest expense attributable to debt incurred
or continued to purchase a Bond with market discount.
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PREMIUM
A U.S. Holder that purchases a Bond for more than its stated redemption price at
maturity may elect to amortize the bond premium. If a U.S. Holder makes such an
election, the amount of interest on the Bond otherwise to be included in the
U.S. Holder's income will be reduced each year by the amount of amortizable bond
premium allocable to such year on a constant yield to maturity basis (except to
the extent regulations may provide otherwise). Amortized bond premium will
reduce the U.S. Holder's basis in the Bond. If the Bond may be optionally
redeemed after the U.S. Holder acquires it at a price in excess of its stated
redemption price at maturity, special rules would apply which could result in a
deferral of the amortization of some Bond premium until later in the term of the
Bond. An election to amortize bond premium will apply to certain other debt
instruments that the U.S. Holder acquired at a premium, and the election may
have different tax consequences depending on when the debt instruments were
issued or acquired. A U.S. Holder should consult its tax adviser before making
an election to amortize bond premium.
INTEREST ELECTION
A U.S. Holder may elect, in the taxable year in which the U.S. Holder acquires a
Bond, to treat all interest on any Bond as OID and calculate the amount
includible in gross income under the constant yield method described above. For
purposes of this election, interest includes stated interest, acquisition
discount, OID, de minimis OID, market discount, de minimis market discount and
unstated interest, as adjusted by any amortizable bond premium or acquisition
premium. If a U.S. Holder makes this election for a Bond with market discount or
amortizable bond premium, the election is treated as an election under the
market discount or amortizable bond premium provisions, described above, and the
electing U.S. Holder will be required to amortize bond premium or include market
discount in income currently for all of its other debt instruments with market
discount or amortizable bond premium acquired during such tax year and in any
subsequent tax year. The election, once made, may not be revoked without the
consent of the Internal Revenue Service. U.S. Holders should consult with their
own tax advisers before making this election.
SALE OR EXCHANGE OF BONDS
Except to the extent that gain or loss is attributable to accrued but unpaid
interest or accrued market discount, a U.S. Holder generally will recognize
capital gain or loss upon a sale, exchange or complete retirement of a Bond
equal to the difference between the amount realized and the U.S. Holder's
adjusted basis in the Bond. The gain or loss generally will be long-term if the
Bond has been held for more than one year. The adjusted basis of a Bond
generally will equal its initial cost increased by any original issue discount,
market discount or acquisition discount with respect to the Bond previously
included in the U.S. Holder's gross income and reduced by the payments
previously received on the Bond, other than payments of qualified stated
interest, and by any amortized premium.
The tax consequences of the partial redemption of a Bond will depend upon the
price at which the U.S. Holder purchased the Bond. A U.S. Holder that purchased
a Bond at a de minimis market discount or purchased a Bond for more than its
revised issue price, but less than its principal amount, will recognize capital
gain equal to the difference between the principal prepayment and the U.S.
Holder's adjusted basis in the prepaid portion of the Bond. If a U.S. Holder
purchased a Bond at a market discount, (i) the principal prepayment will be
included in ordinary income to the extent of the accrued market discount (and it
is possible that amounts allocable to unaccrued market discount allocable to the
prepaid portion of the Bond will be recognized as capital gain) and (ii) any
principal prepayment exceeding the revised issue price allocable to the prepaid
portion of the Bond will be capital gain. If a U.S. Holder purchased a Bond for
more than its stated principal amount and has not elected to amortize bond
premium, the U.S. Holder will recognize a capital loss equal to any amount by
which the U.S. Holder's adjusted basis in the prepaid portion of the Bond
exceeds the amount of the principal prepayment. If the U.S. Holder has elected
to amortize bond premium, all or part of such excess might be deductible as
amortizable bond premium rather than as capital loss. Any capital gain or loss
will be long-term if the Bond has been held for more than one year. It is
possible that capital gain realized by holders of one or more classes of Bonds
could be considered gain realized upon the disposition of property that was part
of a "conversion transaction." A "conversion transaction" is any
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<PAGE> 25
transaction in which substantially all of the expected return is attributable to
the time value of the U.S. Holder's net investment, if (i) the U.S. Holder
entered the contract to sell the Bond substantially contemporaneously with
acquiring the Bond, (ii) the Bond is part of a straddle, (iii) the Bond is
marketed or sold as producing capital gains, or (iv) the transaction is
specified in certain Treasury regulations. If the sale or other disposition of
the Bond is part of a conversion transaction, all or any portion of the gain
realized upon the sale or other disposition of the Bonds would be treated as
ordinary income instead of capital gain.
FOREIGN CURRENCY BONDS
The tax treatment of Bonds the interest or principal on which may be determined
by reference to one or more foreign currencies will depend on the application of
special rules to the particular terms of the Bonds. The tax considerations
relevant to such Bonds will be described in an applicable Prospectus Supplement,
and each prospective purchaser should consult its tax adviser about such
matters.
CONTINGENT PAYMENT BONDS
The OID Regulations contain special rules for determining the timing and amount
of OID to be accrued in respect of Bonds providing for one or more contingent
payments ("Contingent Payment Bonds"). For this purpose, a Bond is not a
Contingent Payment Bond if it (i) is a Variable Rate Bond, (ii) provides for
alternate payment schedules upon the occurrence of contingencies or (iii) is a
foreign currency debt instrument. Under the OID Regulations, U.S. Holders
generally would be required to take contingent interest payments on Contingent
Payment Bonds into income on a yield to maturity basis in accordance with a
schedule of projected payments provided by CFC to U.S. Holders and would make
annual adjustments to income to account for the difference between actual
payments received and projected payment amounts accrued. Any gain recognized by
a U.S. Holder on the sale, exchange or retirement of a Contingent Payment Bond
is ordinary income. Any loss recognized by a U.S. Holder on the sale, exchange
or retirement of a Contingent Payment Bond is ordinary loss to the extent that
the U.S. Holder's total interest inclusions on the Contingent Payment Bond
exceed the total net negative adjustments the U.S. Holder took into account as
ordinary loss. Additional disclosure will be provided for in a Prospectus
Supplement in connection with any offering of Contingent Payment Bonds.
Prospective purchasers should consult their own tax advisers regarding the OID
Regulations in connection with ownership of a Bond that provides for contingent
payments.
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 issuer's stock or the holder is for U.S. income tax
purposes a controlled foreign corporation related to the issuer 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 issuer or a related person (as
defined in the code), (ii) income or profits of the issuer or a related person,
(iii) any change in the value of any property of the issuer or a related person,
or (iv) any dividend, partnership distribution, or similar payment made by the
issuer or a related person. To qualify for that exemption, a Non-U.S. Holder
must provide a statement signed under penalties of perjury certifying that the
holder is not a U.S. person for U.S. tax purposes and providing the holder's
name and address. In addition, the Treasury Department has recently issued
regulations regarding the withholding and information reporting rules. In
general, the new regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. However, the regulations would require
in the case of Bonds held by a foreign partnership that the certification
requirement described above be provided by the partners rather than by the
foreign partnership unless the partnership meets certain requirements and is
authorized as a "withholding foreign partnership" by the IRS. A look-through
rule would apply in the case of tiered partnerships. The regulations also
generally require a Non-U.S. Holder to provide a taxpayer identification number
in order to
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claim a reduced rate of withholding pursuant to a treaty. The regulations are
generally effective for payments made after December 31, 1999, subject to
certain transition rules. In particular, valid withholding certificates that are
held on December 31, 1999, generally remain valid until the earlier of December
31, 2000, or the due date of the expiration of the certificate under rules
currently in effect. Further, certificates dated prior to January 1, 1998, that
were valid as of January 1, 1998, remain valid until the end of 1998. Gain from
the sale or other disposition of a Bond by a Non-U.S. Holder is not subject to
U.S. federal income tax unless the Non-U.S. Holder is an individual who is
present in the United States for at least 183 days during the taxable year of
the disposition and certain other conditions are met.
Bonds held by a Non-U.S. Holder will not be subject to the U.S. federal estate
tax unless the holder actually or constructively owns at least 10% of the total
combined voting power of the issuer's stock.
INFORMATION REPORTING AND BACKUP WITHHOLDING
A 31% backup withholding of federal income tax and certain information reporting
requirements may apply to certain payments made on the Bonds and to the proceeds
from the disposition of a Bond if the holder is not a corporation, a financial
institution or otherwise entitled to an exemption. U.S. Holders that provide a
correct taxpayer identification number and Non-U.S. Holders that provide the
statement described above to establish an exemption from withholding tax
generally are exempt from backup withholding. Amounts withheld under the backup
withholding rules can be claimed as a refund or taken as a credit against the
holder's U.S. federal income tax liability on a properly filed annual income tax
return.
PLAN OF DISTRIBUTION
Bonds of any series may be purchased to be reoffered to the public through
underwriting syndicates led by Lehman Brothers Inc. or other underwriters (the
"Underwriters"). The Underwriters with respect to an underwritten offering of
Bonds are named in the Prospectus Supplement relating to such offering. Unless
otherwise set forth in the Prospectus Supplement, the obligations of the
Underwriters to purchase Bonds will be subject to certain conditions precedent
and each of the Underwriters with respect to a sale of Bonds will be obligated
to purchase all of its Bonds if any are purchased. The initial public offering
price and any discounts or concessions allowed or reallowed or paid to dealers
set forth in the Prospectus Supplement may be changed from time to time.
The place and time of delivery for the Offered Bonds in respect of which this
Prospectus is delivered are set forth in the Prospectus Supplement.
CFC has agreed to indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended.
Each Underwriter, dealer and agent participating in the distribution of any
Offered Bonds which are issuable in bearer form will agree that it will not
offer, sell or deliver, directly or indirectly, Offered Bonds in bearer form in
the United States or its possessions or to United States persons (other than
qualifying financial institutions) in connection with the original issuance of
the Offered Bonds. See "LIMITATIONS ON ISSUANCE OF BEARER BONDS".
The Offered Bonds may not be offered or sold directly or indirectly in Great
Britain other than to persons whose ordinary business it is to buy or sell
shares or debentures (except in circumstances which do not constitute an offer
to the public within the meaning of the Companies Act of 1985), and this
Prospectus and any Prospectus Supplement or any other offering material relating
to the Offered Bonds may not be distributed in or from Great Britain other than
to persons whose business involves the acquisition and disposal, or the holding,
of securities whether as principal or as agent.
Certain of the Underwriters or agents and their associates may engage in
transactions with and perform services for CFC in the ordinary course of
business.
In connection with the offering made hereby, the Underwriters may purchase and
sell the Bonds in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover
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short positions created by the Underwriters in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Bonds, and short
positions created by the Underwriters involve the sale by the Underwriters of a
greater aggregate principal amount of Bonds than they are required to purchase
from CFC. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the Bonds sold in the
offering may be reclaimed by the Underwriters if such Bonds are repurchased by
the Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Bonds, which may
be higher than the price that might otherwise prevail in the open market; and
these activities, if commenced, may be discontinued at any time. These
transactions may be effected in the over-the-counter market or otherwise.
LEGAL OPINIONS
The validity of the Bonds offered hereby will be passed upon for CFC 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 CFC's Annual Report on Form 10-K
for the year ended May 31, 1998, incorporated by reference in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are incorporated herein in
reliance upon the authority of said firm as experts in giving said reports.
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[CFC LOGO]
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
$525,000,000
7.375% COLLATERAL TRUST BONDS DUE 2003
---------------------------
PROSPECTUS SUPPLEMENT
February 7, 2000
---------------------------
LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
[LOGO] J.P. MORGAN & CO.
