<PAGE>
FILED PURSUANT TO RULE 424(b)5
REGISTRATION STATEMENT NUMBER 33-57889-01
and 33-57889
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 9, 1996)
[LOGO]
$500,000,000
U S WEST CAPITAL FUNDING, INC.
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
UNCONDITIONALLY GUARANTEED AS TO PAYMENT OF PRINCIPAL, PREMIUM,
IF ANY, AND INTEREST, IF ANY, BY
U S WEST, INC.
------------
U S WEST Capital Funding, Inc. ("Capital Funding") may offer from time to
time up to $500,000,000 aggregate initial offering price, or the equivalent
thereof in one or more foreign or composite currencies, of its Medium-Term Notes
Due Nine Months or More from Date of Issue (the "Notes"). Such aggregate initial
offering price is subject to reduction as a result of the sale by Capital
Funding of other Debt Securities described in the accompanying Prospectus. Each
Note will be unconditionally guaranteed (the "Guarantees") as to payment of
principal, premium, if any, and interest by Capital Funding's corporate parent,
U S WEST, Inc. ("U S WEST"). Each Note will mature on any day nine months or
more from the date of issue, as specified in the applicable pricing supplement
hereto (each, a "Pricing Supplement"), and may be subject to redemption at the
option of Capital Funding or repayment at the option of the Holder thereof, in
each case, in whole or in part, prior to its Stated Maturity Date, as specified
in the applicable Pricing Supplement. In addition, each Note may be denominated
and/or payable in United States dollars or a foreign or composite currency, as
specified in the applicable Pricing Supplement. The Notes, other than Foreign
Currency Notes, will be issued in minimum denominations of $1,000 and integral
multiples thereof, unless otherwise specified in the applicable Pricing
Supplement, while Foreign Currency Notes will be issued in the minimum
denominations specified in the applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will bear interest at fixed rates ("Fixed Rate Notes") or at floating rates
("Floating Rate Notes"). The applicable Pricing Supplement will specify whether
a Floating Rate Note is a Regular Floating Rate Note, a Floating Rate/Fixed Rate
Note or an Inverse Floating Rate Note and whether the rate of interest thereon
is determined by reference to one or more of the CD Rate, the CMT Rate, the
Commercial Paper Rate, the Eleventh District Cost of Funds Rate, the Federal
Funds Rate, LIBOR, the Prime Rate or the Treasury Rate (each, an "Interest Rate
Basis"), or any other interest rate basis or formula, as adjusted by any Spread
and/or Spread Multiplier. Interest on each Floating Rate Note will accrue from
its date of issue and, unless otherwise specified in the applicable Pricing
Supplement, will be payable monthly, quarterly, semiannually or annually in
arrears, as specified in the applicable Pricing Supplement, and on the Maturity
Date. Unless otherwise specified in the applicable Pricing Supplement, the rate
of interest on each Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually or annually, as set forth therein and specified in the
applicable Pricing Supplement. Interest on each Fixed Rate Note will accrue from
its date of issue and, unless otherwise specified in the applicable Pricing
Supplement, will be payable semiannually in arrears on May 15 and November 15 of
each year and on the Maturity Date. The Notes may also be issued with original
issue discount, and such Notes may or may not pay any interest. See "Description
of Notes."
The interest rate, or formula for the determination of the interest rate,
applicable to each Note and the other variable terms thereof will be established
by Capital Funding on the date of issue of such Note and will be specified in
the applicable Pricing Supplement. Interest rates or formulae and other terms of
Notes are subject to change by Capital Funding, but no change will affect any
Note already issued or as to which an offer to purchase has been accepted by
Capital Funding.
Each Note will be issued in book-entry form (a "Book-Entry Note") or in
fully registered certificated form (a "Certificated Note"), as specified in the
applicable Pricing Supplement. Each Book-Entry Note will be represented by one
or more fully registered global securities (the "Global Securities") deposited
with or on behalf of The Depository Trust Company (the "Depositary") and
registered in the name of the Depositary or the Depositary's nominee. Interests
in the Global Securities will be shown on, and transfers thereof will be
effected only through, records maintained by the Depositary (with respect to its
participants) and the Depositary's participants (with respect to beneficial
owners).
--------------------------------
SEE "RISK FACTORS" ON PAGE S-2 FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT, THE PROSPECTUS OR
ANY SUPPLEMENT HERETO. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
AGENTS' DISCOUNTS AND
PRICE TO PUBLIC (1) COMMISSIONS (1)(2) PROCEEDS TO COMPANY (1)(3)
<S> <C> <C> <C>
Per Note............................ 100% .125% - .75% 99.875% - 99.25%
Total (4)........................... $500,000,000 $625,000 - $3,750,000 $499,375,000 - $496,250,000
</TABLE>
(1) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Goldman, Sachs & Co., Lehman Brothers, Lehman Brothers Inc., Morgan Stanley
& Co. Incorporated, Salomon Brothers Inc and Smith Barney Inc. (each, an
"Agent" and, collectively, the "Agents") will purchase the Notes, as
principal, from Capital Funding, for resale to investors and other
purchasers at varying prices relating to prevailing market prices at the
time of resale as determined by the applicable Agent, or, if so specified in
the applicable Pricing Supplement, for resale at a fixed offering price.
Unless otherwise specified in the applicable Pricing Supplement, any Note
sold to an Agent as principal will be purchased by such Agent at a price
equal to 100% of the principal amount thereof less a percentage of the
principal amount equal to the commission applicable to an agency sale (as
described below) of a Note of identical maturity. If agreed to by Capital
Funding and the applicable Agent, such Agent may utilize its reasonable
efforts on an agency basis to solicit offers to purchase the Notes at 100%
of the principal amount thereof, unless otherwise specified in the
applicable Pricing Supplement. Capital Funding will pay a commission to each
Agent, ranging from .125% to .75% of the principal amount of a Note,
depending upon its stated maturity, sold through such Agent. Commissions
with respect to Notes with stated maturities in excess of 40 years that are
sold through an Agent will be negotiated between Capital Funding and such
Agent at the time of such sale. See "Plan of Distribution."
(2) Capital Funding and U S WEST have agreed to indemnify the Agents against,
and to provide contribution with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See "Plan of
Distribution."
(3) Before deducting expenses payable by Capital Funding estimated at $250,000.
(4) Or the equivalent thereof in one or more foreign or composite currencies.
The Notes are being offered on a continuous basis by Capital Funding to or
through the Agents. Unless otherwise specified in the applicable Pricing
Supplement, the Notes will not be listed on any securities exchange. There is no
assurance that the Notes offered hereby will be sold or, if sold, that there
will be a secondary market for the Notes or liquidity in the secondary market if
one develops. Capital Funding reserves the right to cancel or modify the offer
made hereby without notice. Capital Funding or an Agent, if it solicits the
offer on an agency basis, may reject any offer to purchase Notes in whole or in
part. See "Plan of Distribution."
--------------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MORGAN STANLEY & CO.
INCORPORATED
SALOMON
BROTHERS INC
<PAGE>
SMITH BARNEY INC.
-------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 9, 1996.
<PAGE>
IN CONNECTION WITH THE OFFERING OF NOTES PURCHASED BY AN AGENT AS PRINCIPAL
ON A FIXED PRICE BASIS, SUCH AGENT MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
------------------------
THE FOLLOWING INFORMATION CONCERNING U S WEST, CAPITAL FUNDING, THE NOTES
AND THE GUARANTEES SUPPLEMENTS, AND SHOULD BE READ IN CONJUNCTION WITH, THE
INFORMATION CONTAINED IN THE ACCOMPANYING PROSPECTUS. CAPITALIZED TERMS USED IN
THIS PROSPECTUS SUPPLEMENT HAVE THE SAME MEANINGS AS IN THE ACCOMPANYING
PROSPECTUS.
RISK FACTORS
THIS PROSPECTUS SUPPLEMENT DOES NOT DESCRIBE ALL OF THE RISKS OF AN
INVESTMENT IN NOTES THAT RESULT FROM SUCH NOTES BEING DENOMINATED OR PAYABLE IN
OR DETERMINED BY REFERENCE TO A CURRENCY OR COMPOSITE CURRENCY OTHER THAN UNITED
STATES DOLLARS OR TO ONE OR MORE INTEREST RATE, CURRENCY OR OTHER INDICES OR
FORMULAS, OR OTHERWISE. CAPITAL FUNDING, U S WEST AND THE AGENTS DISCLAIM ANY
RESPONSIBILITY TO ADVISE PROSPECTIVE INVESTORS OF SUCH RISKS AS THEY EXIST AT
THE DATE OF THIS PROSPECTUS SUPPLEMENT OR AS THEY CHANGE FROM TIME TO TIME.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN FINANCIAL AND LEGAL ADVISORS AS
TO THE RISKS ENTAILED BY AN INVESTMENT IN SUCH NOTES AND THE AVAILABILITY OF
INVESTING IN SUCH NOTES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. SUCH NOTES
ARE NOT AN APPROPRIATE INVESTMENT FOR INVESTORS WHO ARE UNSOPHISTICATED WITH
RESPECT TO FOREIGN CURRENCY TRANSACTIONS OR TRANSACTIONS INVOLVING THE
APPLICABLE INTEREST RATE, CURRENCY OR OTHER INDICES OR FORMULAS. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER, AMONG OTHER FACTORS, THE MATTERS DISCUSSED
BELOW.
STRUCTURE RISKS
An investment in Notes indexed, as to principal, premium, if any, and/or
interest, if any, to one or more interest rate, currency (including exchange
rates and swap indices between currencies or composite currencies), or other
indices or formulas, either directly or inversely, entails significant risks
that are not associated with similar investments in a conventional fixed rate or
floating rate debt security. Such risks include, without limitation, the
possibility that such indices or fomulas may be subject to significant changes,
that no interest will be payable in respect of such Notes or will be payable at
a rate lower than applicable to a conventional fixed rate or floating rate debt
security issued by Capital Funding at the same time, that the repayment of
principal and/or premium, if any, with respect to such Notes may occur at times
other than that expected by the investor, and that the investor could lose all
or a substantial portion of principal and/or premium, if any, payable with
respect to such Notes on the Maturity Date (as defined under "Description of
Notes -- General"). Such risks depend on a number of interrelated factors,
including economic, financial and political events, over which Capital Funding
has no control. Additionally, if the formula used to determine the amount of
principal, premium, if any, and/or interest payable with respect to such Notes
contains a multiplier or leverage factor, the effect of any change in the
applicable index or indices or formula or formulas will be magnified. In recent
years, values of certain indices and formulas have been highly volatile and such
volatility may be expected to continue in the future. Fluctuations in the value
of any particular index or formula that have occurred in the past are not
necessarily indicative, however, of fluctuations that may occur in the future.
Any optional redemption feature of the Notes might affect the market value
of such Notes. Since Capital Funding may be expected to redeem such Notes when
prevailing interest rates are relatively low, an investor might not be able to
reinvest the redemption proceeds in a comparable security at an effective
interest rate as high as the interest rate on such Notes.
The Notes will not have an established trading market when issued, and there
can be no assurance of a secondary market for the Notes or liquidity in the
secondary market if one develops. See "Plan of Distribution."
The secondary market, if any, for Notes will be affected by a number of
factors independent of the creditworthiness of Capital Funding and the value of
the applicable index or indices, or formula or formulas, including the
complexity and volatility of each such index or formula, the method of
calculating the principal,
S-2
<PAGE>
premium, if any, and/or interest, if any, in respect of such Notes, the time
remaining to the maturity of such Notes, the outstanding amount of such Notes,
any redemption features of such Notes, the amount of other debt securities
linked to such index or formula and the level, direction and volatility of
market interest rates generally. Such factors also will affect the market value
of such Notes. In addition, certain Notes may be designed for specific
investment objectives or strategies and, therefore, may have a more limited
secondary market and experience more price volatility than conventional debt
securities. Investors may not be able to sell such Notes readily or at prices
that will enable investors to realize their anticipated yield. No investor
should purchase Notes unless such investor understands and is able to bear the
risk that such Notes may not be readily saleable, that the value of such Notes
will fluctuate over time and that such fluctuations may be significant.
EXCHANGE RATES AND EXCHANGE CONTROLS
An investment in Foreign Currency Notes (as defined under "Description of
Notes -- General") entails significant risks that are not associated with a
similar investment in a debt security denominated and payable in United States
dollars. Such risks include, without limitation, the possibility of significant
changes in the rate of exchange between the United States dollar and the
applicable Specified Currency (as defined under "Description of Notes--General")
and the possibility of the imposition or modification of exchange controls by
the applicable governments or monetary authorities. Such risks generally depend
on factors over which Capital Funding has no control, such as economic,
financial and political events and the supply and demand for the applicable
currencies or composite currencies. In addition, if the formula used to
determine the amount of principal, premium, if any, and/or interest, if any,
payable with respect to Foreign Currency Notes contains a multiplier or leverage
factor, the effect of any change in the applicable currencies or composite
currencies will be magnified. In recent years, rates of exchange between the
United States dollar and foreign or composite currencies have been highly
volatile and such volatility may be expected to continue in the future.
Fluctuations in any particular exchange rate that have occurred in the past are
not necessarily indicative, however, of fluctuations that may occur in the
future. Depreciation of the Specified Currency applicable to a Foreign Currency
Note against the United States dollar would result in a decrease in the United
States dollar-equivalent yield of such Foreign Currency Note, in the United
States dollar-equivalent value of the principal and premium, if any, payable on
the Maturity Date of such Foreign Currency Note, and, generally, in the United
States dollar-equivalent market value of such Foreign Currency Note.
Governments or monetary authorities have imposed from time to time, and may
in the future impose or revise, exchange controls at or prior to the date on
which any payment of principal of, or premium, if any, or interest, if any, on,
a Foreign Currency Note is due, which could affect exchange rates as well as the
availability of the Specified Currency on such date. Even if there are no
exchange controls, it is possible that the Specified Currency would not be
available on the applicable payment date due to other circumstances beyond the
control of Capital Funding. In such cases, Capital Funding will be entitled to
satisfy its obligations in respect of such Foreign Currency Note in United
States dollars. See "Special Provisions Relating to Foreign Currency Notes --
Payment Currency."
CREDIT RATINGS
The credit ratings assigned to Capital Funding's medium-term note program
may not reflect the potential impact of all risks related to structure and other
factors on the value of the Notes. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in the Notes and the suitability of such Notes in light of their
particular circumstances.
FUTURE TRANSACTIONS
U S WEST from time to time engages in preliminary discussions regarding
acquisitions, dispositions and other similar transactions. Any such transaction
may include, among other things, the transfer of certain assets, businesses or
interests, or the incurrence or assumption of indebtedness, and could be
material to the financial condition and results of operations of U S WEST. There
is no assurance that any such discussions will result in the consummation of any
such transaction.
S-3
<PAGE>
RECENT DEVELOPMENTS
CONTINENTAL ACQUISITION. On November 15, 1996, U S WEST acquired
Continental Cablevision, Inc., the third largest cable television system
operator in the United States, pursuant to an Agreement and Plan of Merger dated
as of February 26, 1996, as amended and restated as of June 27, 1996 and as
further amended as October 7, 1996, among U S WEST, Continental and a wholly
owned subsidiary of U S WEST (the "Merger"). The aggregate consideration paid by
U S WEST to shareholders of Continental consisted of 150,614,848 shares of Media
Stock, 20,000,000 shares of Series D Preferred Stock and $1,150,000,000 in cash.
In connection with the Merger, U S WEST also assumed all of Continental's
outstanding indebtedness, which approximated $6.5 billion. The businesses of
Continental and its subsidiaries have been attributed to the Media Group.
The following reflects the effect of U S WEST's announcement of the
Continental Merger on the ratings assigned to the senior unsecured indebtedness
of U S WEST and Capital Funding by the indicated rating agencies:
<TABLE>
<S> <C>
Moody's Investors Service, Inc. Baa1 Downgraded from A2
Standard & Poor's Rating Service BBB+ Downgraded from A+
Duff & Phelps Credit Rating Co. BBB+ Downgraded from A+
</TABLE>
RECAPITALIZATION. On November 1, 1995, U S WEST created the Communications
Stock, which is intended to reflect separately the performance of the
Communications Group, and the Media Stock, which is intended to reflect
separately the performance of the Media Group, and changed its state of
incorporation from Colorado to Delaware (the "Recapitalization"). The
Recapitalization was effected in accordance with the terms of an Agreement and
Plan of Merger, dated as of August 27, 1995, between U S WEST Colorado and U S
WEST pursuant to which (i) U S WEST Colorado was merged with and into U S WEST,
with U S WEST continuing as the surviving corporation and (ii) each outstanding
share of Common Stock, without par value, of U S WEST Colorado, was converted
into one share of Communications Stock and one share of Media Stock.
The Recapitalization was approved by U S WEST Colorado's shareholders at a
special meeting held on October 31, 1995. Implementation of the Recapitalization
has not resulted in the transfer of any assets from U S WEST or any of its
subsidiaries or altered the legal nature of U S WEST's obligations to its
creditors. Creditors of U S WEST, including the holders of the Notes, will
continue to benefit from the cash flow of the subsidiaries of U S WEST
comprising both the Communications Group and the Media Group, subject to the
satisfaction of obligations by such subsidiaries.
TELECOMMUNICATIONS ACT OF 1996. On February 8, 1996, President Clinton
signed the Telecommunications Act of 1996 (the "Telecommunications Act"), which
is intended to promote competition between local telephone companies,
long-distance carriers and cable television operators. The Telecommunications
Act replaces the Modification of Final Judgment, the antitrust consent decree
entered into in 1984 in connection with the divestiture by AT&T Corp. of its
local telephone businesses and the formation of U S WEST and the other regional
bell operating companies (the "RBOCs"). The Telecommunications Act permits local
telephone companies, long-distance carriers and cable television companies to
enter each other's lines of business. RBOCs will be permitted to provide
interLATA long distance services (long distance services between local access
and transport areas within their service regions) by opening their local
networks to facilities-based competition and satisfying a detailed list of
requirements, including permitting interconnection and number portability. The
Telecommunications Act will also eliminate most regulation of cable rates within
three years and lift the ban on cross-ownership between cable television and
telephone companies, thereby permitting the RBOCs to enter into the cable
business within their respective service regions so long as such entry is not
effected through the purchase of existing cable companies, except in rural
communities. In addition, the Telecommunications Act reaffirms the concept of
universal service and directs the Federal Communications Commission (the "FCC")
and state regulators to determine universal service funding
S-4
<PAGE>
policy. The FCC and state regulators have been given the responsibility to
interpret and oversee implementation of the Telecommunications Act. On August 1,
1996, the FCC established a framework of minimum national rules that will enable
the FCC and state regulators to begin implementation of local competition.
U S WEST/AIRTOUCH JOINT VENTURE. On July 25, 1994, U S WEST and AirTouch
Communications, Inc. ("AirTouch") announced an agreement to combine their
domestic cellular operations through a joint venture. On November 1, 1995, U S
WEST and AirTouch entered into Phase I of the joint venture pursuant to which U
S WEST and AirTouch are operating their domestic cellular properties separately
but are receiving centralized services from a wireless management company
("WMC") on a contract basis. In Phase II of the joint venture, U S WEST and
AirTouch will contribute their domestic cellular businesses to WMC to form the
third largest cellular company in the United States. The recent passage of the
Telecommunications Act has removed significant regulatory barriers and U S WEST
expects that Phase II will be consummated by early 1997, subject to the receipt
of certain regulatory and other approvals.
DESCRIPTION OF NOTES
The Notes will be issued as a series of Debt Securities under an Indenture,
dated as of April 15, 1988, as amended by a First Supplemental Indenture dated
as of November 1, 1995 and as further amended or supplemented from time to time
(the "Indenture"), among U S WEST, Capital Funding and First National Bank of
Santa Fe, as trustee (the "Trustee"). The Indenture is subject to, and governed
by, the Trust Indenture Act of 1939, as amended. The following summary of
certain provisions of the Notes and the Indenture does not purport to be
complete and is qualified in its entirety by reference to the actual provisions
of the Notes and the Indenture. Capitalized terms used but not defined herein
shall have the meanings given to them in the accompanying Prospectus, the Notes
or the Indenture, as the case may be. The term "Debt Securities," as used in
this Prospectus Supplement, refers to all debt securities, including the Notes,
issued and issuable from time to time under the Indenture. The following
description of Notes will apply to each Note offered hereby unless otherwise
specified in the applicable Pricing Supplement.
GENERAL
All Debt Securities, including the Notes, issued and to be issued under the
Indenture will be unsecured general obligations of Capital Funding and will rank
PARI PASSU with all other unsecured and unsubordinated indebtedness of Capital
Funding from time to time outstanding. For a description of the status of the
Guarantees, see "Description of Debt Securities and Guarantees -- Guarantees" in
the accompanying Prospectus. The Indenture does not limit the aggregate initial
offering price of Debt Securities that may be issued thereunder and Debt
Securities may be issued thereunder from time to time in one or more series up
to the aggregate initial offering price from time to time authorized by Capital
Funding for each series. As of the date of this Prospectus Supplement, $841
million aggregate principal amount of Debt Securities has been issued under the
Indenture and $520 million aggregate principal amount of such Debt Securities
remains outstanding. Capital Funding may, from time to time, without the consent
of the Holders of the Notes, provide for the issuance of Notes or other Debt
Securities under the Indenture in addition to the $500,000,000 aggregate initial
offering price of Notes offered hereby.
The Notes are currently limited to $500,000,000 aggregate initial offering
price, or the equivalent thereof in one or more foreign or composite currencies.
Each Note will mature on any day nine months or more from its date of issue (the
"Stated Maturity Date"), as specified in the applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement,
interest-bearing Notes will be either Fixed Rate Notes or Floating Rate Notes,
as specified in the applicable Pricing Supplement. The Notes may also be issued
with original issue discount ("Original Issue Discount Notes") and may or may
not bear any interest.
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will be denominated in, and payments of principal, premium, if any, and/or
interest will be made in, United States dollars. The Notes also may be
denominated in, and payments of principal, premium, if any, and/or interest, if
any, in respect thereof may be made in, one or more foreign or composite
currencies ("Foreign Currency Notes"). See "Special Provisions Relating to
Foreign Currency Notes -- Payments of Principal, Premium, if any, and Interest."
The
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currency or composite currency in which a Note is denominated (or, if such
currency or composite currency is no longer legal tender for the payment of
public and private debts, such other currency or composite currency of the
relevant country which is then legal tender for the payment of such debts) is
herein referred to as the "Specified Currency" with respect to such Notes.
References herein to "United States dollars," "U.S. dollars" or "$" are to the
lawful currency of the United States of America (the "United States").
Unless otherwise specified in the applicable Pricing Supplement, purchasers
are required to pay for the Notes in the applicable Specified Currencies. At the
present time, there are limited facilities in the United States for the
conversion of United States dollars into foreign or composite currencies and
vice versa, and commercial banks do not generally offer non-United States dollar
checking or savings account facilities in the United States. The Agent from or
through which a Foreign Currency Note is purchased will be prepared to arrange
for the conversion of United States dollars into the Specified Currency in order
to enable the purchaser to pay for such Foreign Currency Note, provided that a
request is made to such Agent on or prior to the fifth Business Day (as
hereinafter defined) preceding the date of delivery of such Foreign Currency
Note, or by such other day as determined by such Agent. Each such conversion
will be made by such Agent on such terms and subject to such conditions,
limitations and charges as such Agent may from time to time establish in
accordance with its regular foreign exchange practices. All costs of exchange
will be borne by the purchaser of each such Foreign Currency Note. See "Special
Provisions Relating to Foreign Currency Notes."
Interest rates offered by Capital Funding with respect to the Notes may
differ depending upon, among other factors, the aggregate principal amount of
Notes purchased in any single transaction. Notes with different variable terms
other than interest rates may also be offered concurrently to different
investors. Interest rates or formulae and other terms of Notes are subject to
change by Capital Funding from time to time, but no such change will affect any
Note previously issued or as to which an offer to purchase has been accepted by
Capital Funding.
Each Note will be issued as a Book-Entry Note represented by one or more
fully registered Global Securities or or as a fully registered Certificated
Note. The authorized denominations of each Note other than a Foreign Currency
Note will be $1,000 and integral multiples thereof, unless otherwise specified
in the applicable Pricing Supplement, while the authorized denominations of each
Foreign Currency Note will be specified in the applicable Pricing Supplement.
Citibank, N.A. through its corporate trust office in the Borough of
Manhattan in The City of New York (the "Paying Agent") will act as Capital
Funding's paying agent with respect to the Notes. Payments of principal of, and
premium, if any, and interest, if any, on, Book-Entry Notes will be made by
Capital Funding through the Paying Agent to the Depositary. See "-- Book-Entry
Notes." In the case of Certificated Notes, payment of principal and premium, if
any, due on the Stated Maturity Date or any prior date on which the principal,
or an installment of principal, of each Certificated Note becomes due and
payable, whether by the declaration of acceleration, call for redemption at the
option of Capital Funding, repayment at the option of the Holder or otherwise
(the Stated Maturity Date or such prior date, as the case may be, is herein
referred to as the "Maturity Date" with respect to the principal repayable on
such date) will be made in immediately available funds upon presentation and
surrender thereof (or, in the case of any repayment on an Optional Repayment
Date, upon presentation of such Certificated Note and a duly completed election
form in accordance with the provisions described below), at the office or agency
maintained by Capital Funding for such purpose in the Borough of Manhattan, The
City of New York, currently the corporate trust office of the Paying Agent
located at 111 Wall Street, New York, New York 10043. Payment of interest, if
any, due on the Maturity Date of a Certificated Note will be made to the person
to whom payment of the principal thereof and premium, if any, thereon shall be
made. Payment of interest, if any, due on a Certificated Note on any Interest
Payment Date (as hereinafter defined) other than the Maturity Date will be made
at the office or agency referred to above maintained by Capital Funding for such
purpose or, at the option of Capital Funding, may be made by check mailed to the
address of the Holder entitled thereto as such address shall appear in the Debt
Securities Register of Capital Funding. Notwithstanding the foregoing, a Holder
of $10,000,000 (or, if the Specified Currency is other than United States
dollars, the equivalent thereof in such Specified Currency) or more in aggregate
principal amount of Certificated Notes (whether having identical
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<PAGE>
or different terms and provisions) will be entitled to receive interest
payments, if any, on any Interest Payment Date other than the Maturity Date by
wire transfer of immediately available funds if appropriate wire transfer
instructions have been received in writing by the Paying Agent not less than 15
calendar days prior to such Interest Payment Date. Any such wire transfer
instructions received by the Paying Agent shall remain in effect until revoked
by such Holder. For special payment terms applicable to Foreign Currency Notes,
see "Special Provisions Relating to Foreign Currency Notes -- Payments of
Principal, Premium, if any, and Interest."
As used herein, "Business Day" means any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking institutions
are authorized or required by law, regulation or executive order to close in The
City of New York; provided, however, that, with respect to Foreign Currency
Notes, such day is also not a day on which banking institutions are authorized
or required by law, regulation or executive order to close in the Principal
Financial Center (as hereinafter defined) of the country issuing the Specified
Currency unless the Specified Currency is the European Currency Unit ("ECU"), in
which case such day is also not a day that appears as an ECU non-settlement day
on the display designated as "ISDE" on the Reuter Monitor Money Rates Service
(or is not a day designated as an ECU non-settlement day by the ECU Banking
Association) or, if ECU non-settlement days do not appear on that page (and are
not so designated), a day that is not a day on which payments in ECU cannot be
settled in the international interbank market); provided, further, that, with
respect to Notes as to which LIBOR is an applicable Interest Rate Basis, such
day is also a London Business Day (as hereinafter defined). "London Business
Day" means a day on which dealings in the Designated LIBOR Currency (as
hereinafter defined) are transacted in the London interbank market.
"Principal Financial Center" means (i) the capital city of the country
issuing the Specified Currency (except as described in the immediately preceding
paragraph with respect to ECU) or (ii) the capital city of the country to which
the Designated LIBOR Currency, if applicable, relates (or, in the case of ECU,
Luxembourg), except in such case, that with respect to United States dollars,
Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders, Italian
lire and Swiss francs, the "Principal Financial Center" shall be The City of New
York, Sydney, Toronto, Frankfurt, Amsterdam, Milan (solely in the case of clause
(i) above) and Zurich, respectively.
Book-Entry Notes may be transferred or exchanged only through the
Depositary. See "-- Book-Entry Notes." Registration of transfer or exchange of
Certificated Notes will be made at the office or agency maintained by Capital
Funding for such purpose in the Borough of Manhattan, The City of New York,
currently the corporate trust office of the Paying Agent located at 111 Wall
Street, New York, New York 10043. No service charge will be made by Capital
Funding or the Paying Agent for any such registration of transfer or exchange of
Notes, but Capital Funding may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith
(other than exchanges pursuant to the Indenture not involving any transfer).
REDEMPTION AT THE OPTION OF CAPITAL FUNDING
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will not be subject to any sinking fund. The Notes will be redeemable at the
option of Capital Funding prior to the Stated Maturity Date only if an Initial
Redemption Date is specified in the applicable Pricing Supplement. If so
specified, the Notes will be subject to redemption at the option of Capital
Funding on any date on and after the applicable Initial Redemption Date in whole
or from time to time in part in increments of $1,000 or such other minimum
denomination specified in such Pricing Supplement (provided that any remaining
principal amount thereof shall be at least $1,000 or such minimum denomination),
at the applicable Redemption Price (as hereinafter defined), together with
unpaid interest accrued thereon to the date of redemption, on notice given not
more than 90 nor less than 30 calendar days prior to the date of redemption and
in accordance with the provisions of the Indenture. "Redemption Price," with
respect to a Note, means an amount equal to the Initial Redemption Percentage
specified in the applicable Pricing Supplement (as adjusted by the Annual
Redemption Percentage Reduction, if applicable) multiplied by the unpaid
principal amount to be redeemed. The Initial Redemption Percentage, if any,
applicable to a Note shall decline at each anniversary of
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the Initial Redemption Date by an amount equal to the applicable Annual
Redemption Percentage Reduction, if any, until the Redemption Price is equal to
100% of the unpaid principal amount to be redeemed. See also "-- Discount
Notes."
REPAYMENT AT THE OPTION OF THE HOLDER
The Notes will be repayable by Capital Funding at the option of the Holders
thereof prior to the Stated Maturity Date only if one or more Optional Repayment
Dates are specified in the applicable Pricing Supplement. If so specified, the
Notes will be subject to repayment at the option of the Holder thereof on any
Optional Repayment Date in whole or from time to time in part in increments of
$1,000 or such other minimum denomination specified in the applicable Pricing
Supplement (provided that any remaining principal amount thereof shall be at
least $1,000 or such other minimum denomination), at a repayment price equal to
100% of the unpaid principal amount to be repaid, together with unpaid interest
accrued thereon to the date of repayment. For any Note to be repaid, such Note
must be received, together with the form thereon entitled "Option to Elect
Repayment" duly completed, by the Paying Agent at its corporate trust office (or
such other address of which Capital Funding shall from time to time notify the
Holders) not more than 60 nor less than 20 calendar days prior to the date of
repayment. Exercise of such repayment option by the Holder will be irrevocable.
See also "-- Discount Notes."
Only the Depositary may exercise the repayment option in respect of Global
Securities representing Book-Entry Notes. Accordingly, Beneficial Owners (as
hereinafter defined) of Global Securities that desire to have all or any portion
of the Book-Entry Notes represented by such Global Securities repaid must direct
the Participant (as hereinafter defined) through which they own their interest
to direct the Depositary to exercise the repayment option on their behalf by
delivering the related Global Security and duly completed election form to the
Paying Agent as aforesaid. In order to ensure that such Global Security and
election form are received by the Paying Agent on a particular day, the
applicable Beneficial Owner must so direct the Participant through which it owns
its interest before such Participant's deadline for accepting instructions for
that day. Different firms may have different deadlines for accepting
instructions from their customers. Accordingly, Beneficial Owners should consult
the Participants through which they own their interest for the respective
deadlines for such Participants. All instructions given to Participants by
Beneficial Owners of Global Securities relating to the option to elect repayment
shall be irrevocable. In addition, at the time such instructions are given, each
such Beneficial Owner shall cause the Participant through which it owns its
interest to transfer such Beneficial Owner's interest in the Global Security or
Securities representing the related Book-Entry Notes, on the Depositary's
records, to the Paying Agent. See "-- Book-Entry Notes."
If applicable, Capital Funding will comply with the requirements of Section
14(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules promulgated thereunder and any other securities laws or
regulations in connection with any such repayment.
Capital Funding may at any time purchase Notes at any price or prices in the
open market or otherwise. Notes so purchased by Capital Funding may, at the
discretion of Capital Funding, be held, resold or surrendered to the Trustee for
cancellation.
INTEREST
GENERAL
Unless otherwise specified in the applicable Pricing Supplement, each
interest-bearing Note will bear interest from its date of issue at the rate per
annum, in the case of a Fixed Rate Note, or pursuant to the interest rate
formula, in the case of a Floating Rate Note, in each case as specified in the
applicable Pricing Supplement, until the principal thereof is paid or duly made
available for payment. Unless otherwise specified in the applicable Pricing
Supplement, interest payments in respect of Fixed Rate Notes and Floating Rate
Notes will equal the amount of interest accrued from and including the
immediately preceding Interest Payment Date in respect of which interest has
been paid or duly made available for payment (or
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from and including the date of issue, if no interest has been paid or duly made
available for payment with respect to the applicable Note) to but excluding the
applicable Interest Payment Date or the Maturity Date, as the case may be (each,
an "Interest Period").
Interest on Fixed Rate Notes and Floating Rate Notes will be payable in
arrears on each Interest Payment Date and on the Maturity Date. Unless otherwise
specified in the applicable Pricing Supplement, the first payment of interest on
any such Note originally issued between a Record Date (as hereinafter defined)
and the related Interest Payment Date will be made on the Interest Payment Date
immediately following the next succeeding Record Date to the Holder on such next
succeeding Record Date. Unless otherwise specified in the applicable Pricing
Supplement, a "Record Date" shall be the fifteenth calendar day (whether or not
a Business Day) immediately preceding the related Interest Payment Date.
FIXED RATE NOTES
Unless otherwise specified in the applicable Pricing Supplement, interest on
Fixed Rate Notes will be payable on May 15 and November 15 of each year (each,
an "Interest Payment Date") and on the Maturity Date. Unless otherwise specified
in the applicable Pricing Supplement, interest on Fixed Rate Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
If any Interest Payment Date or the Maturity Date of a Fixed Rate Note falls
on a day that is not a Business Day, the required payment of principal, premium,
if any, and/or interest will be made on the next succeeding Business Day as if
made on the date such payment was due, and no interest will accrue on such
payment for the period from and after such Interest Payment Date or the Maturity
Date, as the case may be, to the date of such payment on the next succeeding
Business Day.
FLOATING RATE NOTES
Interest on Floating Rate Notes will be determined by reference to the
applicable Interest Rate Basis or Interest Rate Bases, which may, as described
below, include (i) the CD Rate, (ii) the CMT Rate, (iii) the Commercial Paper
Rate, (iv) the Eleventh District Cost of Funds Rate, (v) the Federal Funds Rate,
(vi) LIBOR, (vii) the Prime Rate, (viii) the Treasury Rate, or (ix) such other
Interest Rate Basis or interest rate formula as may be specified in the
applicable Pricing Supplement. The applicable Pricing Supplement will specify
certain terms with respect to which each Floating Rate Note is being delivered,
including: whether such Floating Rate Note is a "Regular Floating Rate Note," a
"Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," the Fixed
Rate Commencement Date, if applicable, Fixed Interest Rate, if applicable,
Interest Rate Basis or Bases, Initial Interest Rate, if any, Initial Interest
Reset Date, Interest Reset Dates, Interest Payment Dates, Index Maturity,
Maximum Interest Rate and/or Minimum Interest Rate, if any, and Spread and/or
Spread Multiplier, if any, as such terms are defined below. If one or more of
the applicable Interest Rate Bases is LIBOR or the CMT Rate, the applicable
Pricing Supplement will also specify the Designated LIBOR Currency and
Designated LIBOR Page or the Designated CMT Maturity Index and Designated CMT
Telerate Page, respectively, as such terms are defined below.
The interest rate borne by the Floating Rate Notes will be determined as
follows:
(i) Unless such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note," an "Inverse Floating Rate Note" or as having an
Addendum attached or having "Other/Additional Provisions" apply, in each
case relating to a different interest rate formula, such Floating Rate Note
will be designated as a "Regular Floating Rate Note" and, except as
described below or in the applicable Pricing Supplement, will bear interest
at the rate determined by reference to the applicable Interest Rate Basis or
Bases (a) plus or minus the applicable Spread, if any, and/or (b) multiplied
by the applicable Spread Multiplier, if any. Commencing on the first
Interest Reset Date, the rate at which interest on such Regular Floating
Rate Note shall be payable shall be reset as of each Interest Reset Date;
provided, however, that the interest rate in effect for the period, if any,
from the date of issue to the Initial Interest Reset Date will be the
Initial Interest Rate.
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(ii) If such Floating Rate Note is designated as a "Floating Rate/Fixed
Rate Note," then, except as described below or in the applicable Pricing
Supplement, such Floating Rate Note will bear interest at the rate
determined by reference to the applicable Interest Rate Basis or Bases (a)
plus or minus the applicable Spread, if any, and/or (b) multiplied by the
applicable Spread Multiplier, if any. Commencing on the first Interest Reset
Date, the rate at which interest on such Floating Rate/Fixed Rate Note shall
be payable shall be reset as of each Interest Reset Date; provided, however,
that (y) the interest rate in effect for the period, if any, from the date
of issue to the Initial Interest Reset Date will be the Initial Interest
Rate and (z) the interest rate in effect for the period from the Fixed Rate
Commencement Date to the Maturity Date will be the Fixed Interest Rate, if
such rate is specified in the applicable Pricing Supplement or, if no such
Fixed Interest Rate is so specified, the interest rate in effect thereon on
the day immediately preceding the Fixed Rate Commencement Date.
(iii) If such Floating Rate Note is designated as an "Inverse Floating
Rate Note," then, except as described below or in the applicable Pricing
Supplement, such Floating Rate Note will bear interest at the Fixed Interest
Rate minus the rate determined by reference to the applicable Interest Rate
Basis or Bases (a) plus or minus the applicable Spread, if any, and/or (b)
multiplied by the applicable Spread Multiplier, if any; provided, however,
that, unless otherwise specified in the applicable Pricing Supplement, the
interest rate thereon will not be less than zero. Commencing on the Initial
Interest Reset Date, the rate at which interest on such Inverse Floating
Rate Note shall be payable shall be reset as of each Interest Reset Date;
provided, however, that the interest rate in effect for the period, if any,
from the date of issue to the Initial Interest Reset Date will be the
Initial Interest Rate.
The "Spread" is the number of basis points (each basis point being one
hundredth of one percent) to be added to or subtracted from the related Interest
Rate Basis or Bases applicable to such Floating Rate Note. The "Spread
Multiplier" is the percentage of the related Interest Rate Basis or Bases
applicable to such Floating Rate Note by which such Interest Rate Basis or Bases
will be multiplied to determine the applicable interest rate on such Floating
Rate Note. The "Index Maturity" is the period to maturity of the instrument or
obligation with respect to which the related Interest Rate Basis or Bases will
be calculated.
Unless otherwise specified in the applicable Pricing Supplement, the
interest rate with respect to each Interest Rate Basis will be determined in
accordance with the applicable provisions below. Except as set forth above or in
the applicable Pricing Supplement, the interest rate in effect on each day shall
be (i) if such day is an Interest Reset Date, the interest rate determined as of
the Interest Determination Date (as hereinafter defined) immediately preceding
such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the
interest rate determined as of the Interest Determination Date immediately
preceding the most recent Interest Reset Date.
The applicable Pricing Supplement will specify whether the rate of interest
on the related Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually or annually or such other specified basis (each, an
"Interest Reset Period") and the dates on which such rate of interest will be
reset (each, an "Interest Reset Date"). Unless otherwise specified in the
applicable Pricing Supplement, the Interest Reset Dates will be, in the case of
Floating Rate Notes which reset: (i) daily, each Business Day; (ii) weekly, the
Wednesday of each week (with the exception of weekly reset Floating Rate Notes
as to which the Treasury Rate is an applicable Interest Rate Basis, which will
reset the Tuesday of each week, except as described below); (iii) monthly, the
third Wednesday of each month (with the exception of monthly reset Floating Rate
Notes as to which the Eleventh District Cost of Funds Rate is an applicable
Interest Rate Basis, which will reset on the first calendar day of the month);
(iv) quarterly, the third Wednesday of March, June, September and December of
each year; (v) semiannually, the third Wednesday of the two months specified in
the applicable Pricing Supplement; and (vi) annually, the third Wednesday of the
month specified in the applicable Pricing Supplement; provided, however, that,
with respect to Floating Rate/Fixed Rate Notes, the rate of interest thereon
will not reset after the applicable Fixed Rate Commencement Date. If any
Interest Reset Date for any Floating Rate Note would otherwise be a day that is
not a Business Day, such Interest Reset Date will be postponed to the next
succeeding day that is a Business Day, except that in the case of a
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Floating Rate Note as to which LIBOR is an applicable Interest Rate Basis and
such Business Day falls in the next succeeding calendar month, such Interest
Reset Date will be the immediately preceding Business Day.
The interest rate applicable to each Interest Reset Period commencing on the
related Interest Reset Date will be the rate determined by the Calculation Agent
as of the applicable Interest Determination Date and calculated on or prior to
the Calculation Date (as hereinafter defined), except with respect to LIBOR and
the Eleventh District Cost of Funds Rate, which will be calculated on such
Interest Determination Date. The "Interest Determination Date" with respect to
the CD Rate, the CMT Rate, the Commercial Paper Rate, the Federal Funds Rate and
the Prime Rate will be the second Business Day immediately preceding the
applicable Interest Reset Date; the "Interest Determination Date" with respect
to the Eleventh District Cost of Funds Rate will be the last working day of the
month immediately preceding the applicable Interest Reset Date on which the
Federal Home Loan Bank of San Francisco (the "FHLB of San Francisco") publishes
the Index (as hereinafter defined); and the "Interest Determination Date" with
respect to LIBOR will be the second London Business Day immediately preceding
the applicable Interest Reset Date, unless the Designated LIBOR Currency is
British pounds sterling, in which case the "Interest Determination Date" will be
the applicable Interest Reset Date. With respect to the Treasury Rate, the
"Interest Determination Date" will be the day in the week in which the
applicable Interest Reset Date falls on which day Treasury Bills (as hereinafter
defined) are normally auctioned (Treasury Bills are normally sold at an auction
held on Monday of each week, unless that day is a legal holiday, in which case
the auction is normally held on the following Tuesday, except that such auction
may be held on the preceding Friday); provided, however, that if an auction is
held on the Friday of the week preceding the applicable Interest Reset Date, the
"Interest Determination Date" will be such preceding Friday; and provided,
further, that if the Interest Determination Date would otherwise fall on an
Interest Reset Date, then such Interest Reset Date will be postponed to the next
succeeding Business Day. The "Interest Determination Date" pertaining to a
Floating Rate Note the interest rate of which is determined by reference to two
or more Interest Rate Bases will be the most recent Business Day which is at
least two Business Days prior to the applicable Interest Reset Date for such
Floating Rate Note on which each Interest Rate Basis is determinable. Each
Interest Rate Basis will be determined as of such date, and the applicable
interest rate will take effect on the applicable Interest Reset Date.
Notwithstanding the foregoing, a Floating Rate Note may also have either or
both of the following: (i) a maximum numerical limitation, or ceiling, on the
rate at which interest may accrue during any Interest Period (a "Maximum
Interest Rate") and (ii) a minimum numerical limitation, or floor, on the rate
at which interest may accrue during any Interest Period (a "Minimum Interest
Rate"). In addition to any Maximum Interest Rate that may be applicable to any
Floating Rate Note, the interest rate on Floating Rate Notes will in no event be
higher than the maximum rate permitted by New York law, as the same may be
modified by United States law of general application.
Except as provided below or in the applicable Pricing Supplement, interest
will be payable, in the case of Floating Rate Notes which reset: (i) daily,
weekly or monthly, on the third Wednesday of each month or on the third
Wednesday of March, June, September and December of each year, as specified in
the applicable Pricing Supplement; (ii) quarterly, on the third Wednesday of
March, June, September and December of each year; (iii) semiannually, on the
third Wednesday of the two months of each year specified in the applicable
Pricing Supplement; and (iv) annually, on the third Wednesday of the month of
each year specified in the applicable Pricing Supplement (each, an "Interest
Payment Date") and, in each case, on the Maturity Date. If any Interest Payment
Date other than the Maturity Date for any Floating Rate Note would otherwise be
a day that is not a Business Day, such Interest Payment Date will be postponed
to the next succeeding day that is a Business Day, except that in the case of a
Floating Rate Note as to which LIBOR is an applicable Interest Rate Basis and
such Business Day falls in the next succeeding calendar month, such Interest
Payment Date will be the immediately preceding Business Day. If the Maturity
Date of a Floating Rate Note falls on a day that is not a Business Day, the
required payment of principal, premium, if any, and
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interest will be made on the next succeeding Business Day with the same force
and effect as if made on the date such payment was due, and no interest will
accrue on such payment for the period from and after the Maturity Date to the
date of such payment on the next succeeding Business Day.
All percentages resulting from any calculation on Floating Rate Notes will
be rounded to the nearest one hundred-thousandth of a percentage point, with
five one-millionths of a percentage point rounded upwards (E.G., 9.876545% (or
.09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in
or resulting from such calculation on Floating Rate Notes will be rounded, in
the case of United States dollars, to the nearest cent or, in the case of a
foreign or composite currency, to the nearest unit (with one-half cent or unit
being rounded upwards).
With respect to each Floating Rate Note, accrued interest is calculated by
multiplying its principal amount by an accrued interest factor. Such accrued
interest factor is computed by adding the interest factor calculated for each
day in the applicable Interest Period. Unless otherwise specified in the
applicable Pricing Supplement, the interest factor for each such day will be
computed by dividing the interest rate applicable to such day by 360, in the
case of Floating Rate Notes for which the applicable Interest Rate Basis is the
CD Rate, the Commercial Paper Rate, the Eleventh District Cost of Funds Rate,
the Federal Funds Rate, LIBOR or the Prime Rate, or by the actual number of days
in the year in the case of Floating Rate Notes for which the applicable Interest
Rate Basis is the CMT Rate or the Treasury Rate. Unless otherwise specified in
the applicable Pricing Supplement, the interest factor for Floating Rate Notes
for which the interest rate is calculated with reference to two or more Interest
Rate Bases will be calculated in each period in the same manner as if only one
of the applicable Interest Rate Bases applied as specified in the applicable
Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, Citibank,
N.A. will be the "Calculation Agent." Upon request of the Holder of any Floating
Rate Note, the Calculation Agent will disclose the interest rate then in effect
and, if determined, the interest rate that will become effective as a result of
a determination made for the next succeeding Interest Reset Date with respect to
such Floating Rate Note. Unless otherwise specified in the applicable Pricing
Supplement, the "Calculation Date," if applicable, pertaining to any Interest
Determination Date will be the earlier of (i) the tenth calendar day after such
Interest Determination Date or, if such day is not a Business Day, the next
succeeding Business Day or (ii) the Business Day immediately preceding the
applicable Interest Payment Date or the Maturity Date, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, the
Calculation Agent will determine each Interest Rate Basis in accordance with the
following provisions.
CD RATE. Unless otherwise specified in the applicable Pricing Supplement,
"CD Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CD Rate (a "CD Rate Interest Determination Date"), the rate on such date for
negotiable United States dollar certificates of deposit having the Index
Maturity specified in the applicable Pricing Supplement as published by the
Board of Governors of the Federal Reserve System in "Statistical Release
H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)")
under the heading "CDs (Secondary Market)," or, if not published by 3:00 P.M.,
New York City time, on the related Calculation Date, the rate on such CD Rate
Interest Determination Date for negotiable United States dollar certificates of
deposit of the Index Maturity specified in the applicable Pricing Supplement as
published by the Federal Reserve Bank of New York in its daily statistical
release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any
successor publication ("Composite Quotations") under the heading "Certificates
of Deposit." If such rate is not yet published in either H.15(519) or Composite
Quotations by 3:00 P.M., New York City time, on the related Calculation Date,
then the CD Rate on such CD Rate Interest Determination Date will be calculated
by the Calculation Agent and will be the arithmetic mean of the secondary market
offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest
Determination Date, of three leading nonbank dealers in negotiable United States
dollar certificates of deposit in The City of New York (which may include the
Agents or their respective affiliates) selected by the Calculation Agent (after
consultation with Capital Funding) for negotiable certificates of deposit of
major United States money market banks for negotiable United States dollar
certificates of deposit with a remaining maturity closest to the Index Maturity
specified in the applicable Pricing Supplement in an amount that is
representative for a single transaction in that market at that time; provided,
however, that if
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the dealers so selected by the Calculation Agent are not quoting as mentioned in
this sentence, the CD Rate determined as of such CD Rate Interest Determination
Date will be the CD Rate in effect on such CD Rate Interest Determination Date.
CMT RATE. Unless otherwise specified in the applicable Pricing Supplement,
"CMT Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CMT Rate (a "CMT Rate Interest Determination Date"), the rate displayed on
the Designated CMT Telerate Page under the caption "...Treasury Constant
Maturities...Federal Reserve Board Release H.15...Mondays Approximately 3:45
P.M.," under the column for the Designated CMT Maturity Index for (i) if the
Designated CMT Telerate Page is 7055, the rate on such CMT Rate Interest
Determination Date and (ii) if the Designated CMT Telerate Page is 7052 the
weekly or monthly average, as specified in the applicable Pricing Supplement,
for the week or the month, as applicable, ended immediately preceding the week
or the month, as applicable, in which the related CMT Rate Interest
Determination Date falls. If such rate is no longer displayed on the relevant
page or is not displayed by 3:00 P.M., New York City time, on the related
Calculation Date, then the CMT Rate on such CMT Rate Interest Determination Date
will be such treasury constant maturity rate for the Designated CMT Maturity
Index as published in the relevant H.15(519). If such rate is no longer
published or is not published by 3:00 P.M., New York City time, on the related
Calculation Date, then the CMT Rate on such CMT Rate Interest Determination Date
will be such treasury constant maturity rate for the Designated CMT Maturity
Index (or other United States Treasury rate for the Designated CMT Maturity
Index) for the CMT Rate Interest Determination Date with respect to such
Interest Reset Date as may then be published by either the Board of Governors of
the Federal Reserve System or the United States Department of the Treasury that
the Calculation Agent determines to be comparable to the rate formerly displayed
on the Designated CMT Telerate Page and published in the relevant H.15(519). If
such information is not provided by 3:00 P.M., New York City time, on the
related Calculation Date, then the CMT Rate on the CMT Rate Interest
Determination Date will be calculated by the Calculation Agent and will be a
yield to maturity, based on the arithmetic mean of the secondary market offered
rates as of approximately 3:30 P.M., New York City time, on such CMT Rate
Interest Determination Date reported, according to their written records, by
three leading primary United States government securities dealers in The City of
New York (which may include the Agents or their respective affiliates) (each, a
"Reference Dealer") selected by the Calculation Agent (from five such Reference
Dealers selected by the Calculation Agent (after consultation with Capital
Funding) and eliminating the highest quotation (or, in the event of equality,
one of the highest) and the lowest quotation (or, in the event of equality, one
of the lowest)), for the most recently issued direct noncallable fixed rate
obligations of the United States ("Treasury Notes") with an original maturity of
approximately the Designated CMT Maturity Index and a remaining term to maturity
of not less than such Designated CMT Maturity Index minus one year. If the
Calculation Agent is unable to obtain three such Treasury Note quotations, the
CMT Rate on such CMT Rate Interest Determination Date will be calculated by the
Calculation Agent and will be a yield to maturity based on the arithmetic mean
of the secondary market offered rates as of approximately 3:30 P.M., New York
City time, on such CMT Rate Interest Determination Date of three Reference
Dealers in The City of New York (from five such Reference Dealers selected by
the Calculation Agent (after consultation with Capital Funding) and eliminating
the highest quotation (or, in the event of equality, one of the highest) and the
lowest quotation (or, in the event of equality, one of the lowest)), for
Treasury Notes with an original maturity of the number of years that is the next
highest to the Designated CMT Maturity Index and a remaining term to maturity
closest to the Designated CMT Maturity Index and in an amount of at least U.S.
$100 million. If three or four (and not five) of such Reference Dealers are
quoting as described above, then the CMT Rate will be based on the arithmetic
mean of the offer prices obtained and neither the highest nor the lowest of such
quotes will be eliminated; provided, however, that if fewer than three Reference
Dealers so selected by the Calculation Agent are quoting as mentioned herein,
the CMT Rate determined as of such CMT Rate Interest Determination Date will be
the CMT Rate in effect on such CMT Rate Interest Determination Date. If two
Treasury Notes with an original maturity as described in the second preceding
sentence have remaining terms to maturity equally close to the Designated CMT
Maturity Index, the Calculation Agent will obtain quotations for the Treasury
Note with the shorter remaining term to maturity.
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"Designated CMT Telerate Page" means the display on the Dow Jones Telerate
Service (or any successor service) on the page specified in the applicable
Pricing Supplement (or any other page as may replace such page on such service)
for the purpose of displaying Treasury Constant Maturities as reported in
H.15(519). If no such page is specified in the applicable Pricing Supplement,
the Designated CMT Telerate Page shall be 7052 for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of the
U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years) specified in
the applicable Pricing Supplement with respect to which the CMT Rate will be
calculated or, if no such maturity is specified in the applicable Pricing
Supplement, the Designated CMT Maturity Index shall be 2 years.
COMMERCIAL PAPER RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Commercial Paper Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Commercial Paper Rate (a "Commercial Paper
Rate Interest Determination Date"), the Money Market Yield (as hereinafter
defined) on such date of the rate for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement as published in H.15(519) under
the heading "Commercial Paper." In the event that such rate is not published by
3:00 P.M., New York City time, on the related Calculation Date, then the
Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date
will be the Money Market Yield of the rate for commercial paper having the Index
Maturity specified in the applicable Pricing Supplement as published in
Composite Quotations under the heading "Commercial Paper" (with an Index
Maturity of one month or three months being deemed to be equivalent to an Index
Maturity of 30 days or 90 days, respectively). If such rate is not yet published
in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on
the related Calculation Date, then the Commercial Paper Rate on such Commercial
Paper Rate Interest Determination Date will be calculated by the Calculation
Agent and will be the Money Market Yield of the arithmetic mean of the offered
rates at approximately 11:00 A.M., New York City time, on such Commercial Paper
Rate Interest Determination Date of three leading dealers of commercial paper in
The City of New York (which may include the Agents or their respective
affiliates) selected by the Calculation Agent (after consultation with Capital
Funding) for commercial paper having the Index Maturity specified in the
applicable Pricing Supplement placed for an industrial issuer whose bond rating
is "Aa", or the equivalent, from a nationally recognized statistical rating
organization; provided, however, that if the dealers so selected by the
Calculation Agent are not quoting as mentioned in this sentence, the Commercial
Paper Rate determined as of such Commercial Paper Rate Interest Determination
Date will be the Commercial Paper Rate in effect on such Commercial Paper Rate
Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage) calculated in
accordance with the following formula:
<TABLE>
<S> <C> <C>
D X 360
Money Market Yield = -------------- X 100
360 - (D X M)
</TABLE>
where "D" refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the applicable Interest Period.
ELEVENTH DISTRICT COST OF FUNDS RATE. Unless otherwise specified in the
applicable Pricing Supplement, "Eleventh District Cost of Funds Rate" means,
with respect to any Interest Determination Date relating to a Floating Rate Note
for which the interest rate is determined with reference to the Eleventh
District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest
Determination Date"), the rate equal to the monthly weighted average cost of
funds for the calendar month immediately preceding the month in which such
Eleventh District Cost of Funds Rate Interest Determination Date falls, as set
forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M.,
San Francisco time, on such Eleventh District Cost of Funds Rate Interest
Determination Date. If such rate does not appear on Telerate Page 7058 on such
Eleventh District Cost of Funds Rate Interest Determination Date, then the
Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds
Rate Interest Determination Date shall be the monthly
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weighted average cost of funds paid by member institutions of the Eleventh
Federal Home Loan Bank District that was most recently announced (the "Index")
by the FHLB of San Francisco as such cost of funds for the calendar month
immediately preceding such Eleventh District Cost of Funds Rate Interest
Determination Date. If the FHLB of San Francisco fails to announce the Index on
or prior to such Eleventh District Cost of Funds Rate Interest Determination
Date, the Eleventh District Cost of Funds Rate determined as of such Eleventh
District Cost of Funds Rate Interest Determination Date will be the Eleventh
District Cost of Funds Rate in effect on such Eleventh District Cost of Funds
Rate Interest Determination Date.
FEDERAL FUNDS RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Federal Funds Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Federal Funds Rate (a "Federal Funds Rate
Interest Determination Date"), the rate on such date for United States dollar
federal funds as published in H.15(519) under the heading "Federal Funds
(Effective)" or, if not published by 3:00 P.M., New York City time, on the
related Calculation Date, the rate on such Federal Funds Rate Interest
Determination Date as published in Composite Quotations under the heading
"Federal Funds/Effective Rate." If such rate is not published in either
H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the
related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate
Interest Determination Date will be calculated by the Calculation Agent and will
be the arithmetic mean of the rates for the last transaction in overnight United
States dollar federal funds arranged by three leading brokers of federal funds
transactions in The City of New York (which may include the Agents or their
respective affiliates) selected by the Calculation Agent (after consultation
with Capital Funding) prior to 9:00 A.M., New York City time, on such Federal
Funds Rate Interest Determination Date; provided, however, that if the brokers
so selected by the Calculation Agent are not quoting as mentioned in this
sentence, the Federal Funds Rate determined as of such Federal Funds Rate
Interest Determination Date will be the Federal Funds Rate in effect on such
Federal Funds Rate Interest Determination Date.
LIBOR. Unless otherwise specified in the applicable Pricing Supplement,
"LIBOR" means the rate determined in accordance with the following provisions:
(i) With respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference
to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be either: (a)
if "LIBOR Reuters" is specified in the applicable Pricing Supplement, the
arithmetic mean of the offered rates (unless the Designated LIBOR Page by
its terms provides only for a single rate, in which case such single rate
shall be used) for deposits in the Designated LIBOR Currency having the
Index Maturity specified in such Pricing Supplement, commencing on the
applicable Interest Reset Date, that appear (or, if only a single rate is
required as aforesaid, appears) on the Designated LIBOR Page as of 11:00
A.M., London time, on such LIBOR Interest Determination Date, or (b) if
"LIBOR Telerate" is specified in the applicable Pricing Supplement or if
neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the applicable
Pricing Supplement as the method for calculating LIBOR, the rate for
deposits in the Designated LIBOR Currency having the Index Maturity
specified in such Pricing Supplement, commencing on such Interest Reset
Date, that appears on the Designated LIBOR Page as of 11:00 A.M., London
time, on such LIBOR Interest Determination Date. If fewer than two such
offered rates so appear, or if no such rate so appears, as applicable, LIBOR
on such LIBOR Interest Determination Date will be determined in accordance
with the provisions described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which fewer
than two offered rates appear, or no rate appears, as the case may be, on
the Designated LIBOR Page as specified in clause (i) above, the Calculation
Agent will request the principal London offices of each of four major
reference banks (which may include affiliates of Agents) in the London
interbank market, as selected by the Calculation Agent (after consultation
with Capital Funding), to provide the Calculation Agent with its offered
quotation for deposits in the Designated LIBOR Currency for the period of
the Index Maturity specified in the applicable Pricing Supplement,
commencing on the applicable Interest Reset Date, to prime banks in the
London interbank market at approximately 11:00 A.M., London time, on
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such LIBOR Interest Determination Date and in a principal amount that is
representative for a single transaction in the Designated LIBOR Currency in
such market at such time. If at least two such quotations are so provided,
then LIBOR on such LIBOR Interest Determination Date will be the arithmetic
mean of such quotations. If fewer than two such quotations are so provided,
then LIBOR on such LIBOR Interest Determination Date will be the arithmetic
mean of the rates quoted at approximately 11:00 A.M., in the applicable
Principal Financial Center, on such LIBOR Interest Determination Date by
three major banks (which may include affiliates of the Agents) in such
Principal Financial Center selected by the Calculation Agent (after
consultation with Capital Funding) for loans in the Designated LIBOR
Currency to leading European banks, having the Index Maturity specified in
the applicable Pricing Supplement and in a principal amount that is
representative for a single transaction in the Designated LIBOR Currency in
such market at such time; provided, however, that if the banks so selected
by the Calculation Agent are not quoting as mentioned in this sentence,
LIBOR determined as of such LIBOR Interest Determination Date will be LIBOR
in effect on such LIBOR Interest Determination Date.
"Designated LIBOR Currency" means the currency or composite currency
specified in the applicable Pricing Supplement as to which LIBOR shall be
calculated or, if no such currency or composite currency is specified in the
applicable Pricing Supplement, United States dollars.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the
applicable Pricing Supplement, the display on the Reuter Monitor Money Rates
Service (or any successor service) on the page specified in such Pricing
Supplement (or any other page as may replace such page on such service) for the
purpose of displaying the London interbank rates of major banks for the
Designated LIBOR Currency, or (b) if "LIBOR Telerate" is specified in the
applicable Pricing Supplement or neither "LIBOR Reuters" nor "LIBOR Telerate" is
specified in the applicable Pricing Supplement as the method for calculating
LIBOR, the display on the Dow Jones Telerate Service (or any successor service)
on the page specified in such Pricing Supplement (or any other page as may
replace such page on such service) for the purpose of displaying the London
interbank rates of major banks for the Designated LIBOR Currency.
PRIME RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Prime Rate" means, with respect to any Interest Determination Date
relating to a Floating Rate Note for which the interest rate is determined with
reference to the Prime Rate (a "Prime Rate Interest Determination Date"), the
rate on such date as such rate is published in H.15(519) under the heading "Bank
Prime Loan." If such rate is not published prior to 3:00 P.M., New York City
time, on the related Calculation Date, then the Prime Rate shall be the
arithmetic mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME1 (as hereinafter defined) as such bank's
prime rate or base lending rate as in effect for such Prime Rate Interest
Determination Date. If fewer than four such rates appear on the Reuters Screen
USPRIME1 Page (as hereinafter defined) as such bank's prime rate or base lending
rate as in effect for such Prime Rate Interest Determination Date. If fewer than
four such rates appear on the Reuters Screen USPRIME1 Page for such Prime Rate
Interest Determination Date, then the Prime Rate shall be the arithmetic mean of
the prime rates or base lending rates quoted on the basis of the actual number
of days in the year divided by a 360-day year as of the close of business on
such Prime Rate Interest Determination Date by four major money center banks
(which may include affiliates of the Agents) in The City of New York selected by
the Calculation Agent (after consultation with Capital Funding). If fewer than
four such quotations are so provided, then the Prime Rate shall be the
arithmetic mean of four prime rates quoted on the basis of the actual number of
days in the year divided by a 360-day year as of the close of business on such
Prime Rate Interest Determination Date as furnished in The City of New York by
the major money center banks, if any, that have provided such quotations and by
a reasonable number of substitute banks or trust companies as are necessary in
order to obtain four such prime rate quotations, provided such substitute banks
or trust companies (which may include affiliates of the Agents) to obtain four
such prime rate quotations, provided such substitute banks or trust companies
are organized and doing business under the laws of the United States, or any
State thereof, each having total equity capital of at least $500 million and
being subject to supervision or examination by Federal or State authority,
selected by the Calculation Agent (after consultation with Capital Funding) to
provide such rate or rates; provided, however, that if the banks
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<PAGE>
or trust companies so selected by the Calculation Agent are not quoting as
mentioned in this sentence, the Prime Rate determined as of such Prime Rate
Interest Determination Date will be the Prime Rate in effect on such Prime Rate
Interest Determination Date.
"Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor Money
Rates Service (or any successor service) on the "USPRIME1" page (or such other
page as may replace the USPRIME1 page on such service) for the purpose of
displaying prime rates or base lending rates of major United States banks.
TREASURY RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Treasury Rate" means, with respect to any Interest Determination
Date relating to a Floating Rate Note for which the interest rate is determined
by reference to the Treasury Rate (a "Treasury Rate Interest Determination
Date"), the rate from the auction held on such Treasury Rate Interest
Determination Date (the "Auction") of direct obligations of the United States
("Treasury Bills") having the Index Maturity specified in the applicable Pricing
Supplement, as such rate is published in H.15(519) under the heading "Treasury
Bills-auction average (investment)" or, if not published by 3:00 P.M., New York
City time, on the related Calculation Date, the auction average rate of such
Treasury Bills (expressed as a bond equivalent on the basis of a year of 365 or
366 days, as applicable, and applied on a daily basis) as otherwise announced by
the United States Department of the Treasury. In the event that the results of
the Auction of Treasury Bills having the Index Maturity specified in the
applicable Pricing Supplement are not reported as provided by 3:00 P.M., New
York City time, on the related Calculation Date, or if no such Auction is held,
then the Treasury Rate will be calculated by the Calculation Agent and will be a
yield to maturity (expressed as a bond equivalent on the basis of a year of 365
or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean
of the secondary market bid rates, as of approximately 3:30 P.M., New York City
time, on such Treasury Rate Interest Determination Date, of three leading
primary United States government securities dealers (which may include the
Agents or their respective affiliates) selected by the Calculation Agent (after
consultation with Capital Funding), for the issue of Treasury Bills with a
remaining maturity closest to the Index Maturity specified in the applicable
Pricing Supplement; provided, however, that if the dealers so selected by the
Calculation Agent are not quoting as mentioned in this sentence, the Treasury
Rate determined as of such Treasury Rate Interest Determination Date will be the
Treasury Rate in effect on such Treasury Rate Interest Determination Date.
OTHER/ADDITIONAL PROVISIONS; ADDENDA
Any provisions with respect to the Notes, including the specification and
determination of one or more Interest Rate Bases, the calculation of the
interest rate applicable to a Floating Rate Note, the Interest Payment Dates,
the Maturity Date, any redemption or repayment provisions or any other term
relating thereto, may be modified and/or supplemented as specified under
"Other/Additional Provisions" on the face thereof or in an Addendum relating
thereto, if so specified on the face thereof and described in the applicable
Pricing Supplement.
AMORTIZING NOTES
Capital Funding may from time to time offer Notes ("Amortizing Notes") with
the amount of principal thereof and interest thereon payable in installments
over the term of such Notes. Unless otherwise specified in the applicable
Pricing Supplement, interest on each Amortizing Note will be computed on the
basis of a 360-day year of twelve 30-day months. Payments with respect to
Amortizing Notes will be applied first to interest due and payable thereon and
then to the reduction of the unpaid principal amount thereof. Further
information concerning additional terms and provisions of Amortizing Notes will
be specified in the applicable Pricing Supplement, including a table setting
forth repayment information for such Amortizing Notes.
DISCOUNT NOTES
Capital Funding may offer Notes ("Discount Notes") from time to time that
have an Issue Price (as specified in the applicable Pricing Supplement) that is
less than 100% of the principal amount thereof (i.e.
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par) by more than a percentage equal to the product of 0.25% and the number of
full years to the Stated Maturity Date. Discount Notes may not bear any interest
currently or may bear interest at a rate that is below market rates at the time
of issuance. The difference between the Issue Price of a Discount Note and par
is referred to herein as the "Discount." In the event of redemption, repayment
or acceleration of maturity of a Discount Note, the amount payable to the Holder
of such Discount Note will be equal to the sum of (i) the Issue Price (increased
by any accruals of Discount) and, in the event of any redemption of such
Discount Note (if applicable), multiplied by the Initial Redemption Percentage
(as adjusted by the Annual Redemption Percentage Reduction, if applicable) and
(ii) any unpaid interest accrued thereon to the date of such redemption,
repayment or acceleration of maturity, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, for
purposes of determining the amount of Discount that has accrued as of any date
on which a redemption, repayment or acceleration of maturity occurs for a
Discount Note, such Discount will be accrued using a constant yield method. The
constant yield will be calculated using a 30-day month, 360-day year convention,
a compounding period that, except for the Initial Period (as hereinafter
defined), corresponds to the shortest period between Interest Payment Dates for
the applicable Discount Note (with ratable accruals within a compounding
period), a coupon rate equal to the initial coupon rate applicable to such
Discount Note and an assumption that the maturity of such Discount Note will not
be accelerated. If the period from the date of issue to the initial Interest
Payment Date for a Discount Note (the "Initial Period") is shorter than the
compounding period for such Discount Note, a proportionate amount of the yield
for an entire compounding period will be accrued. If the Initial Period is
longer than the compounding period, then such period will be divided into a
regular compounding period and a short period with the short period being
treated as provided in the preceding sentence. The accrual of the applicable
Discount may differ from the accrual of original issue discount for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"), certain Discount
Notes may not be treated as having original issue discount within the meaning of
the Code, and Notes other than Discount Notes may be treated as issued with
original issue discount for federal income tax purposes. See "Certain United
States Federal Income Tax Considerations."
INDEXED NOTES
Capital Funding may from time to time offer Notes ("Indexed Notes") with the
amount of principal, premium, if any, and/or interest, if any, payable in
respect thereof to be determined with reference to the price or prices of
specified commodities or stocks, to the exchange rate of one or more designated
currencies (including a composite currency such as the ECU) relative to an
indexed currency or such other price or other items, in each case, as specified
in the applicable Pricing Supplement. In certain cases, Holders of Indexed Notes
may receive a principal payment on the Maturity Date that is greater than or
less than the principal amount of such Indexed Notes depending upon the relative
value on the Maturity Date of the specified indexed item. Information as to the
method for determining the amount of principal, premium, if any, and/or
interest, if any, payable in respect of Indexed Notes, certain historical
information with respect to the specified indexed item and any material tax
considerations associated with an investment in Indexed Notes will be set forth
in the applicable Pricing Supplement. See also "Risk Factors."
BOOK-ENTRY NOTES
Capital Funding has established a depository arrangement with The Depository
Trust Company with respect to the Book-Entry Notes, the terms of which are
summarized below. Any additional or differing terms of the depository
arrangement with respect to the Book-Entry Notes will be described in the
applic-
able Pricing Supplement.
Upon issuance, all Book-Entry Notes of like tenor and terms up to
$200,000,000 aggregate principal amount will be represented by a single Global
Security. Each Global Security representing Book-Entry Notes will be deposited
with, or on behalf of, the Depositary and will be registered in the name of the
Depositary or a nominee of the Depositary. No Global Security may be transferred
except as a whole by the
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Depositary to a nominee of the Depositary, or by a nominee of the Depositary to
the Depositary or to another nominee of the Depositary, or by the Depositary or
any such nominee to a successor of the Depositary or a nominee of such
successor.
So long as the Depositary or its nominee is the registered owner of a Global
Security, the Depositary or its nominee, as the case may be, will be the sole
Holder of the Book-Entry Notes represented thereby for all purposes under the
Indenture. Except as otherwise provided below, the Beneficial Owners of the
Global Security or Securities representing Book-Entry Notes will not be entitled
to receive physical delivery of Certificated Notes and will not be considered
the Holders thereof for any purpose under the Indenture, and no Global Security
representing Book-Entry Notes shall be exchangeable or transferrable.
Accordingly, each Beneficial Owner must rely on the procedures of the Depositary
and, if such Beneficial Owner is not a Participant, on the procedures of the
Participant through which such Beneficial Owner owns its interest in order to
exercise any rights of a Holder under such Global Security or the Indenture. The
laws of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. Such limits and laws
may impair the ability to transfer beneficial interests in a Global Security
representing Book-Entry Notes.
Unless otherwise specified in the applicable Pricing Supplement, each Global
Security representing Book-Entry Notes will be exchangeable for Certificated
Notes of like tenor and terms and of differing authorized denominations
aggregating an equal principal amount, only if (i) the Depositary notifies
Capital Funding that it is unwilling or unable to continue as Depositary for the
Global Securities, (ii) the Depositary ceases to be a clearing agency registered
under the Exchange Act, (iii) Capital Funding in its sole discretion determines
that the Global Securities shall be exchangeable for Certificated Notes or (iv)
there shall have occurred and be continuing an Event of Default with respect to
the Notes under the Indenture. Upon any such exchange, the Certificated Notes
shall be registered in the names of the Beneficial Owners of the Global Security
or Securities representing Book-Entry Notes, which names shall be provided by
the Depositary's relevant Participants (as identified by the Depositary) to the
Paying Agent.
The following is based on information furnished by the Depositary:
The Depositary will act as securities depository for the Book-Entry
Notes. The Book-Entry Notes will be issued as fully registered securities
registered in the name of Cede & Co. (the Depositary's partnership nominee).
One fully registered Global Security will be issued for each issue of
Book-Entry Notes, each in the aggregate principal amount of such issue, and
will be deposited with the Depositary. If, however, the aggregate principal
amount of any issue exceeds $200,000,000, one Global Security will be issued
with respect to each $200,000,000 principal amount and an additional Global
Security will be issued with respect to any remaining principal amount of
such issue.
The Depositary is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and
a "clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. The Depositary holds securities that its participants
("Participants") deposit with the Depositary. The Depositary also
facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Direct Participants of the Depositary ("Direct Participants") include
securities brokers and dealers (including the Agents), banks, trust
companies, clearing corporations and certain other organizations. The
Depositary is owned by a number of its Direct Participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the Depositary's
system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to the Depositary and its
Participants are on file with the Securities and Exchange Commission.
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Purchases of Book-Entry Notes under the Depositary's system must be made
by or through Direct Participants, which will receive a credit for such
Book-Entry Notes on the Depositary's records. The ownership interest of each
actual purchaser of each Book-Entry Note represented by a Global Security
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written
confirmation from the Depositary of their purchase, but Beneficial Owners
are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the
Direct or Indirect Participants through which such Beneficial Owner entered
into the transaction. Transfers of ownership interests in a Global Security
representing Book-Entry Notes are to be accomplished by entries made on the
books of Participants acting on behalf of Beneficial Owners. Beneficial
Owners of a Global Security representing Book-Entry Notes will not receive
Certificated Notes representing their ownership interests therein, except in
the event that use of the book-entry system for such Book-Entry Notes is
discontinued.
To facilitate subsequent transfers, all Global Securities representing
Book-Entry Notes which are deposited with, or on behalf of, the Depositary
are registered in the name of the Depositary's nominee, Cede & Co. The
deposit of Global Securities with, or on behalf of, the Depositary and their
registration in the name of Cede & Co. effect no change in beneficial
ownership. The Depositary has no knowledge of the actual Beneficial Owners
of the Global Securities representing the Book-Entry Notes; the Depositary's
records reflect only the identity of the Direct Participants to whose
accounts such Book-Entry Notes are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to
Direct Participants, by Direct Participants to Indirect Participants, and by
Direct and Indirect Participants to Beneficial Owners will by governed by
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with respect
to the Global Securities representing the Book-Entry Notes. Under its usual
procedures, the Depositary mails an Omnibus Proxy to Capital Funding as soon
as possible after the applicable record date. The Omnibus Proxy assigns Cede
& Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Book-Entry Notes are credited on the applicable record date
(identified in a listing attached to the Omnibus Proxy).
Principal, premium, if any, and/or interest, if any, payments on the
Global Securities representing the Book-Entry Notes will be made to the
Depositary. The Depositary's practice is to credit Direct Participants'
accounts on the applicable payment date in accordance with their respective
holdings shown on the Depositary's records unless the Depositary has reason
to believe that it will not receive payment on such date. Payments by
Participants to Beneficial Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the
accounts of customers in bearer form or registered in "street name", and
will be the responsibility of such Participant and not of the Depositary,
the Paying Agent, the Trustee or Capital Funding, subject to any statutory
or regulatory requirements as may be in effect from time to time. Payment of
principal, premium, if any, and/or interest to the Depositary is the
responsibility of Capital Funding, the Paying Agent or the Trustee,
disbursement of such payments to Direct Participants shall be the
responsibility of the Depositary, and disbursement of such payments to the
Beneficial Owners shall be the responsibility of Direct and Indirect
Participants.
If applicable, redemption notices shall be sent to Cede & Co. If less
than all of the Book-Entry Notes of like tenor and terms are being redeemed,
the Depositary's practice is to determine by lot the amount of the interest
of each Direct Participant in such issue to be redeemed.
A Beneficial Owner shall give notice of any option to elect to have its
Book-Entry Notes repaid by Capital Funding, through its Participant, to the
Paying Agent, and shall effect delivery of such Book-Entry Notes by causing
the Direct Participant to transfer the Participant's interest in the Global
Security or Securities representing such Book-Entry Notes, on the
Depositary's records, to the Paying Agent.
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The requirement for physical delivery of Book-Entry Notes in connection with
a demand for repayment will be deemed satisfied when the ownership rights in
the Global Security or Securities representing such Book-Entry Notes are
transferred by Direct Participants on the Depositary's records.
The Depositary may discontinue providing its services as securities
depository with respect to the Book-Entry Notes at any time by giving
reasonable notice to Capital Funding or the Paying Agent. Under such
circumstances, in the event that a successor securities depository is not
obtained, Certificated Notes are required to be printed and delivered.
Capital Funding may decide to discontinue use of system of book-entry
transfers through the Depositary (or a successor securities depository). In
that event, Certificated Notes will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's system has been obtained from sources that Capital Funding believes
to be reliable, but Capital Funding takes no responsibility for the accuracy
thereof.
SPECIAL PROVISIONS RELATING TO FOREIGN CURRENCY NOTES
GENERAL
Unless otherwise specified in the applicable Pricing Supplement, Foreign
Currency Notes will not be sold in, or to residents of, the country issuing the
applicable currency. The information set forth in this Prospectus Supplement is
directed to prospective purchasers who are United States residents and, with
respect to Foreign Currency Notes, is by necessity incomplete. Capital Funding
and the Agents disclaim any responsibility to advise prospective purchasers who
are residents of countries other than the United States with respect to any
matters that may affect the purchase, holding or receipt of payments of
principal of and premium, if any, and interest, if any, on Foreign Currency
Notes. Such persons should consult their own financial and legal advisors with
regard to such matters. See "Risk Factors -- Exchange Rates and Exchange
Controls".
PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST
Unless otherwise specified in the applicable Pricing Supplement, Capital
Funding is obligated to make payments of principal of, and premium, if any, and
interest, if any, on, a Foreign Currency Note in the Specified Currency. Any
such amounts payable by Capital Funding in the Specified Currency will, unless
otherwise specified in the applicable Pricing Supplement, be converted by the
Exchange Rate Agent named in the applicable Pricing Supplement into United
States dollars for payment to Holders. However, the Holder of a Foreign Currency
Note may elect to receive such amounts in the Specified Currency as hereinafter
described.
Any United States dollar amount to be received by a Holder of a Foreign
Currency Note will be based on the highest bid quotation in The City of New York
received by the Exchange Rate Agent at approximately 11:00 A.M., New York City
time, on the second Business Day preceding the applicable payment date from
three recognized foreign exchange dealers (one of whom may be the Exchange Rate
Agent) selected by the Exchange Rate Agent and approved by Capital Funding for
the purchase by the quoting dealer of the Specified Currency for United States
dollars for settlement on such payment date in the aggregate amount of such
Specified Currency payable to all Holders of Foreign Currency Notes scheduled to
receive United States dollar payments and at which the applicable dealer commits
to execute a contract. All currency exchange costs will be borne by the Holder
of such Foreign Currency Note by deductions from such payments. If three such
bid quotations are not available, payments will be made in the Specified
Currency.
A Holder of a Foreign Currency Note may elect to receive all or a specified
portion of any payment of the principal of, and premium, if any, and/or
interest, if any, on, such Foreign Currency Note in the Specified Currency by
submitting a written request for such payment to the Paying Agent at its
corporate trust office in The City of New York on or prior to the applicable
Record Date or at least fifteen calendar days prior to the Maturity Date, as the
case may be. Such written request may be mailed or hand delivered or sent by
cable,
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telex or other form of facsimile transmission. A Holder of a Foreign Currency
Note may elect to receive all or a specified portion of all future payments in
the Specified Currency and need not file a separate election for each payment.
Such election will remain in effect until revoked by written notice to the
Paying Agent, but written notice of any such revocation must be received by the
Paying Agent on or prior to the applicable Record Date or at least fifteen
calendar days prior to the Maturity Date, as the case may be. Holders of Foreign
Currency Notes to be held in the name of a broker or nominee should contact such
broker or nominee to determine whether and how an election to receive payments
in the Specified Currency may be made.
Payments of the principal of and premium, if any, and/or interest, if any,
on Foreign Currency Notes which are to be made in United States dollars will be
made in the manner specified herein with respect to Notes denominated in United
States dollars. See "Description of Notes -- General." Payments of interest, if
any, on Foreign Currency Notes which are to be made in the Specified Currency on
an Interest Payment Date other than the Maturity Date will be made by check
mailed to the address of the Holders of such Foreign Currency Notes as they
appear in the Debt Securities Register, subject to the right to receive such
interest payments by wire transfer of immediately available funds under the
circumstances described under "Description of Notes -- General". Payments of
principal of, and premium, if any, and/or interest, if any, on, Foreign Currency
Notes which are to be made in the Specified Currency on the Maturity Date will
be made by wire transfer of immediately available funds to an account with a
bank designated at least fifteen calendar days prior to the Maturity Date by
each Holder thereof, provided that such bank has appropriate facilities therefor
and that the applicable Foreign Currency Note is presented and surrendered at
the principal corporate trust office of the Paying Agent in time for the Trustee
to make such payments in such funds in accordance with its normal procedures.
Unless otherwise specified in the applicable Pricing Supplement, if the
Specified Currency is other than United States dollars, a Beneficial Owner of a
Global Security or Securities representing Book-Entry Notes which elects to
receive payments of principal, premium, if any, and/or interest, if any, in such
Specified Currency must notify the Participant through which it owns its
interest on or prior to the applicable Record Date or at least fifteen calendar
days prior to the Maturity Date, as the case may be, of such Beneficial Owner's
election. Such Participant must notify the Depositary of such election on or
prior to the third Business Day after such Record Date or at least twelve
calendar days prior to the Maturity Date, as the case may be, and the Depositary
will notify the Paying Agent of such election on or prior to the fifth Business
Day after such Record Date or at least ten calendar days prior to the Maturity
Date, as the case may be. If complete instructions are received by the
Participant from the Beneficial Owner and forwarded by the Participant to the
Depositary, and by the Depositary to the Paying Agent, on or prior to such
dates, then such Beneficial Owner will receive payments in the Specified
Currency.
PAYMENT CURRENCY
Except as set forth below, if the Specified Currency for a Foreign Currency
Note is a composite currency that is not available for the required payment of
principal, premium, if any, and/or interest, if any, in respect thereof due to
the imposition of exchange controls or other circumstances beyond the control of
Capital Funding, Capital Funding will be entitled to satisfy its obligations to
the Holder of such Foreign Currency Note by making such payment in United States
dollars on the basis of the Market Exchange Rate, computed by the Exchange Rate
Agent, on the second Business Day prior to such payment or, if such Market
Exchange Rate is not then available, on the basis of the most recently available
Market Exchange Rate or as otherwise specified in the Foreign Currency Note and
the applicable Pricing Supplement.
If the Specified Currency for a Foreign Currency Note is a composite
currency that is not available for the required payment of principal, premium,
if any, and/or interest, if any, in respect thereof due to the imposition of
exchange controls or other circumstances beyond the control of Capital Funding,
Capital Funding will be entitled to satisfy its obligations to the Holder of
such Foreign Currency Note by making such payment in United States dollars on
the basis of the equivalent of the composite currency in United States dollars.
The component currencies of the composite currency for this purpose
(collectively, the "Component Currencies" and each, a "Component Currency")
shall be the currency amounts that were
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components of the composite currency as of the last day on which the composite
currency was used. The equivalent of the composite currency in United States
dollars shall be calculated by aggregating the United States dollar equivalents
of the Component Currencies. The United States dollar equivalent of each of the
Component Currencies shall be determined by the Exchange Rate Agent on the basis
of the Market Exchange Rate on the second Business Day prior to the required
payment or, if such Market Exchange Rate is not then available, on the basis of
the most recently available Market Exchange Rate for each such Component
Currency, or as otherwise specified in the applicable Pricing Supplement.
If the official unit of any Component Currency is altered by way of
combination or subdivision, the number of units of the currency as a Component
Currency shall be replaced by an amount in such single currency equal to the sum
of the amounts of the consolidated Component Currencies expressed in such single
currency. If any Component Currency is divided into two or more currencies, the
amount of the original Component Currency shall be replaced by the amounts of
such two or more currencies, the sum of which shall be equal to the amount of
the original Component Currency.
The "Market Exchange Rate" for a Specified Currency other than United States
dollars means the noon dollar buying rate in The City of New York for cable
transfers for such Specified Currency as certified for customs purposes by (or,
if not so certified, as otherwise determined by) the Federal Reserve Bank of New
York. Any payment made in United States dollars under such circumstances where
the required payment is in a Specified Currency other than United States dollars
will not constitute an Event of Default under the Indenture with respect to the
Notes.
All determinations referred to above made by the Exchange Rate Agent shall
be at its sole discretion and shall, in the absence of manifest error, be
conclusive for all purposes and binding on the Holders of the Foreign Currency
Notes.
GOVERNING LAW; JUDGMENTS
The Notes will be governed by and construed in accordance with the laws of
the State of New York. If an action based on Foreign Currency Notes were
commenced in a court of the United States, it is likely that such court would
grant judgment relating to such Foreign Currency Notes only in United States
dollars. It is not clear, however, whether, in granting such judgment, the rate
of conversion into United States dollars would be determined with reference to
the date of default, the date of entry of the judgment or some other date. Under
current New York law, a state court in the State of New York rendering a
judgment in respect of a Foreign Currency Note would be required to render such
judgment in the Specified Currency, and such foreign currency judgment would be
converted into United States dollars at the exchange rate prevailing on the date
of entry of such judgment. Accordingly, Holders of Foreign Currency Notes would
be subject to exchange rate fluctuations between the time the amount of the
judgement is calculated and the time such amount is converted from United States
dollars into the applicable foreign currency or composite currency.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States Federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including changes in effective dates) or possible differing
interpretations. It deals only with Notes held as capital assets and does not
purport to deal with persons in special tax situations, such as financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, persons holding Notes as a hedge against currency
risks or as a position in a "straddle" for tax purposes, or persons whose
functional currency is not the United States dollar. It also does not deal with
holders other than original purchasers (except where otherwise specifically
noted). Persons considering the purchase of the Notes should consult their own
tax advisors concerning the application of United States Federal income tax laws
to their particular situations as well as any consequences of the purchase,
ownership and disposition of the Notes arising under the laws of any other
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation, partnership or
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other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) an estate or trust the income of
which is subject to United States Federal income taxation regardless of its
source or (iv) any other person whose income or gain in respect of a Note is
effectively connected with the conduct of a United States trade or business. As
used herein, the term "non-U.S. Holder" means a beneficial owner of a Note that
is not a U.S. Holder.
U.S. HOLDERS
PAYMENTS OF INTEREST. Payments of interest on a Note generally will be
taxable to a U.S. Holder as ordinary interest income at the time such payments
are accrued or are received (in accordance with the U.S. Holder's regular method
of tax accounting).
ORIGINAL ISSUE DISCOUNT. The following summary is a general discussion of
the United States Federal income tax consequences to U.S. Holders of the
purchase, ownership and disposition of Notes issued with original issue discount
("Original Issue Discount Notes"). The following summary is based upon final
Treasury regulations (the "OID Regulations") released by the Internal Revenue
Service ("IRS") on January 27, 1994, as amended on June 11, 1996, under the
original issue discount provisions of the Code.
For United States Federal income tax purposes, original issue discount is
the excess of the stated redemption price at maturity of a Note over its issue
price, if such excess equals or exceeds a DE MINIMIS amount (generally 1/4 of 1%
of the Note's stated redemption price at maturity multiplied by the number of
complete years to its maturity from its issue date or, in the case of a Note
providing for the payment of any amount other than qualified stated interest (as
hereinafter defined) prior to maturity, multiplied by the weighted average
maturity of such Note). The issue price of each Note in an issue of Notes equals
the first price at which a substantial amount of such Notes has been sold
(ignoring sales to bond houses, brokers, or similar persons or organizations
acting in the capacity of underwriters, placement agents, or wholesalers). The
stated redemption price at maturity of a Note is the sum of all payments
provided by the Note other than "qualified stated interest" payments. The term
"qualified stated interest" generally means stated interest that is
unconditionally payable in cash or property (other than debt instruments of the
issuer) at least annually at a single fixed rate. In addition, under the OID
Regulations, if a Note bears interest for one or more accrual periods at a rate
below the rate applicable for the remaining term of such Note (E.G., Notes with
teaser rates or interest holidays), and if the greater of either the resulting
foregone interest on such Note or any "true" discount on such Note (I.E., the
excess of the Note's stated principal amount over its issue price) equals or
exceeds a specified DE MINIMIS amount, then the stated interest on the Note
would be treated as original issue discount rather than qualified stated
interest.
Payments of qualified stated interest on a Note are taxable to a U.S. Holder
as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting). A U.S. Holder of an Original Issue Discount Note must include
original issue discount in income as ordinary interest for United States Federal
income tax purposes as it accrues under a constant yield method in advance of
receipt of the cash payments attributable to such income, regardless of such
U.S. Holder's regular method of tax accounting. In general, the amount of
original issue discount included in income by the initial U.S. Holder of an
Original Issue Discount Note is the sum of the daily portions of original issue
discount with respect to such Original Issue Discount Note for each day during
the taxable year (or portion of the taxable year) on which such U.S. Holder held
such Original Issue Discount Note. The "daily portion" of original issue
discount on any Original Issue Discount Note is determined by allocating to each
day in any accrual period a ratable portion of the original issue discount
allocable to that accrual period. An "accrual period" may be of any length and
the accrual periods may vary in length over the term of the Original Issue
Discount Note, provided that each accrual period is no longer than one year and
each scheduled payment of principal or interest occurs either on the final day
of an accrual period or on the first day of an accrual period. The amount of
original issue discount allocable to each accrual period is generally equal to
the difference between (i) the product of the Original Issue Discount Note's
adjusted issue price at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and appropriately adjusted to take into account the length of the
particular
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accrual period) and (ii) the amount of any qualified stated interest payments
allocable to such accrual period. The "adjusted issue price" of an Original
Issue Discount Note at the beginning of any accrual period is the sum of the
issue price of the Original Issue Discount Note plus the amount of original
issue discount allocable to all prior accrual periods minus the amount of any
prior payments on the Original Issue Discount Note that were not qualified
stated interest payments. Under these rules, U.S. Holders generally will have to
include in income increasingly greater amounts of original issue discount in
successive accrual periods.
A U.S. Holder who purchases an Original Issue Discount Note for an amount
that is greater than its adjusted issue price as of the purchase date and less
than or equal to the sum of all amounts payable on the Original Issue Discount
Note after the purchase date other than payments of qualified stated interest,
will be considered to have purchased the Original Issue Discount Note at an
"acquisition premium." Under the acquisition premium rules, the amount of
original issue discount which such U.S. Holder must include in its gross income
with respect to such Original Issue Discount Note for any taxable year (or
portion thereof in which the U.S. Holder holds the Original Issue Discount Note)
will be reduced (but not below zero) by the portion of the acquisition premium
properly allocable to the period.
Under the OID Regulations, Floating Rate Notes and Indexed Notes ("Variable
Notes") are subject to special rules whereby a Variable Note will qualify as a
"variable rate debt instrument" if (a) its issue price does not exceed the total
noncontingent principal payments due under the Variable Note by more than a
specified DE MINIMIS amount and (b) it provides for stated interest, paid or
compounded at least annually, at current values of (i) one or more qualified
floating rates, (ii) a single fixed rate and one or more qualified floating
rates, (iii) a single objective rate, or (iv) a single fixed rate and a single
objective rate that is a qualified inverse floating rate.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Note is denominated. Although a multiple of a qualified floating rate
will generally not itself constitute a qualified floating rate, a variable rate
equal to the product of a qualified floating rate and a fixed multiple that is
greater than .65 but not more than 1.35 will constitute a qualified floating
rate. A variable rate equal to the product of a qualified floating rate and a
fixed multiple that is greater than .65 but not more than 1.35, increased or
decreased by a fixed rate, will also constitute a qualified floating rate. In
addition, under the OID Regulations, two or more qualified floating rates that
can reasonably be expected to have approximately the same values throughout the
term of the Variable Note (E.G., two or more qualified floating rates with
values within 25 basis points of each other as determined on the Variable Note'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
numerical limitation (I.E., a cap) or a minimum numerical limitation (I.E., a
floor) may, under certain circumstances, fail to be treated as a qualified
floating rate under the OID Regulations unless such cap or floor is fixed
throughout the term of the Note. An "objective rate" is a rate that is not
itself a qualified floating rate but which is determined using a single fixed
formula and that is based on objective financial or economic information. A rate
will not qualify as an objective rate if it is based on information that is
within the control of the issuer (or a related party) or that is unique to the
circumstances of the issuer (or a related party), such as dividends, profits, or
the value of the issuer's stock (although a rate does not fail to be an
objective rate merely because it is based on the credit quality of the issuer).
A "qualified inverse floating rate" is any objective rate where such rate is
equal to a fixed rate minus a qualified floating rate, as long as variations in
the rate can reasonably be expected to inversely reflect contemporaneous
variations in the qualified floating rate. The OID Regulations also provide that
if a Variable Note provides for stated interest at a fixed rate for an initial
period of one year or less followed by a variable rate that is either a
qualified floating rate or an objective rate and if the variable rate on the
Variable Note's issue date is intended to approximate the fixed rate (E.G., the
value of the variable rate on the issue date does not differ from the value of
the fixed rate by more than 25 basis points), then the fixed rate and the
variable rate together will constitute either a single qualified floating rate
or objective rate, as the case may be.
If a Variable Note that provides for stated interest at either a single
qualified floating rate or a single objective rate throughout the term thereof
qualifies as a "variable rate debt instrument" under the OID
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Regulations, and if the interest on such Note is unconditionally payable in cash
or property (other than debt instruments of the issuer) at least annually, then
all stated interest on such Note will constitute qualified stated interest and
will be taxed accordingly. Thus, a Variable Note that provides for stated
interest at either a single qualified floating rate or a single objective rate
throughout the term thereof and that qualifies as a "variable rate debt
instrument" under the OID Regulations will generally not be treated as having
been issued with original issue discount unless the Variable Note is issued at a
"true" discount (I.E., at a price below the Note's stated principal amount) in
excess of a specified DE MINIMIS amount. The amount of qualified stated interest
and the amount of original issue discount, if any, that accrues during an
accrual period on such a Variable Note is determined under the rules applicable
to fixed rate debt instruments 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 qualified floating rate or
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 Note. The qualified stated interest
allocable to an accrual period is increased (or decreased) if the interest
actually paid during an accrual period exceeds (or is less than) the interest
assumed to be paid during the accrual period pursuant to the foregoing rules.
In general, any other Variable Note that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Variable Note. The OID Regulations
generally require that such a Variable Note be converted into an "equivalent"
fixed rate debt instrument by substituting any qualified floating rate or
qualified inverse floating rate provided for under the terms of the Variable
Note with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Variable Note's
issue date. Any objective rate (other than a qualified inverse floating rate)
provided for under the terms of the Variable Note is converted into a fixed rate
that reflects the yield that is reasonably expected for the Variable Note. In
the case of a Variable Note that qualifies as a "variable rate debt instrument"
and provides for stated interest at a fixed rate in addition to either one or
more qualified floating rates or a qualified inverse floating rate, the fixed
rate is initially converted into a qualified floating rate (or a qualified
inverse floating rate, if the Variable Note provides for a qualified inverse
floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Variable Note as of the Variable Note's issue date
is approximately the same as the fair market value of an otherwise identical
debt instrument that provides for either the qualified floating rate or
qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Variable Note is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Variable Note is converted into an "equivalent" fixed rate debt
instrument pursuant to the foregoing rules, the amount of original issue
discount and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the general original issue
discount rules to the "equivalent" fixed rate debt instrument and a U.S. Holder
of the Variable Note will account for such original issue discount and qualified
stated interest as if the U.S. Holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Variable Note during the accrual period.
If a Variable Note does not qualify as a "variable rate debt instrument"
under the OID Regulations, then the Variable Note would be treated as a
contingent payment debt obligation. It is not entirely clear under current law
how a Variable Note would be taxed if such Note were treated as a contingent
payment debt obligation. U.S. Holders should be aware that on June 11, 1996 the
Treasury Department issued final regulations (the "CPDI Regulations") concerning
the proper United States Federal income tax treatment of contingent payment debt
instruments. In general, the CPDI Regulations would cause the timing and
character of income, gain or loss reported on a contingent payment debt
instrument to substantially differ from the timing and character of income, gain
or loss reported on a contingent payment debt instrument
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under general principles of current United States Federal income tax law.
Specifically, the CPDI Regulations generally require a U.S. Holder of such an
instrument to include future contingent and noncontingent interest payments in
income as such interest accrues based upon a projected payment schedule.
Moreover, in general, under the CPDI Regulations, any gain recognized by a U.S.
Holder on the sale, exchange, or retirement of a contingent payment debt
instrument will be treated as ordinary income and all or a portion of any loss
realized could be treated as ordinary loss as opposed to capital loss (depending
upon the circumstances). The CPDI Regulations apply to debt instruments issued
on or after August 13, 1996. The proper United States Federal income tax
treatment of Variable Notes that are treated as contingent payment debt
obligations will be more fully described in the applicable Pricing Supplement.
Furthermore, any other special United States Federal income tax considerations,
not otherwise discussed herein, which are applicable to any particular issue of
Notes will be discussed in the applicable Pricing Supplement.
Certain of the Notes (i) may be redeemable at the option of Capital Funding
prior to their stated maturity (a "call option") and/or (ii) may be repayable at
the option of the holder prior to their stated maturity (a "put option"). Notes
containing such features may be subject to rules that differ from the general
rules discussed above. Investors intending to purchase Notes with such features
should consult their own tax advisors, since the original issue discount
consequences will depend, in part, on the particular terms and features of the
purchased Notes.
U.S. Holders may generally, upon election, include in income all interest
(including stated interest, acquisition discount, original issue discount, DE
MINIMIS original issue discount, market discount, DE MINIMIS market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium) that accrues on a debt instrument by using the constant
yield method applicable to original issue discount, subject to certain
limitations and exceptions.
SHORT-TERM NOTES. Notes that have a fixed maturity of one year or less
("Short-Term Notes") will be treated as having been issued with original issue
discount. In general, an individual or other cash method U.S. Holder is not
required to accrue such original issue discount unless the U.S. Holder elects to
do so. If such an election is not made, any gain recognized by the U.S. Holder
on the sale, exchange or maturity of the Short-Term Note will be ordinary income
to the extent of the original issue discount accrued on a straight-line basis,
or upon election under the constant yield method (based on daily compounding),
through the date of sale or maturity, and a portion of the deductions otherwise
allowable to the U.S. Holder for interest on borrowings allocable to the
Short-Term Note will be deferred until a corresponding amount of income is
realized. U.S. Holders who report income for United States Federal income tax
purposes under the accrual method, and certain other holders including banks and
dealers in securities, are required to accrue original issue discount on a
Short-Term Note on a straight-line basis unless an election is made to accrue
the original issue discount under a constant yield method (based on daily
compounding).
MARKET DISCOUNT. If a U.S. Holder purchases a Note, other than an Original
Issue Discount Note, for an amount that is less than its issue price (or, in the
case of a subsequent purchaser, its stated redemption price at maturity) or, in
the case of an Original Issue Discount Note, for an amount that is less than its
adjusted issue price as of the purchase date, such U.S. Holder will be treated
as having purchased such Note at a "market discount," unless such market
discount is less than a specified DE MINIMIS amount.
Under the market discount rules, a U.S. Holder will be required to treat any
partial principal payment (or, in the case of an Original Issue Discount Note,
any payment that does not constitute qualified stated interest) on, or any gain
realized on the sale, exchange, retirement or other disposition of, a Note as
ordinary income to the extent of the lesser of (i) the amount of such payment or
realized gain or (ii) the market discount which has not previously been included
in income and is treated as having accrued on such Note at the time of such
payment or disposition. Market discount will be considered to accrue ratably
during the period from the date of acquisition to the maturity date of the Note,
unless the U.S. Holder elects to accrue market discount on the basis of
semiannual compounding.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a Note with market discount until the
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maturity of the Note or certain earlier dispositions, because a current
deduction is only allowed to the extent the interest expense exceeds an
allocable portion of market discount. A U.S. Holder may elect to include market
discount in income currently as it accrues (on either a ratable or semiannual
compounding basis), in which case the rules described above regarding the
treatment as ordinary income of gain upon the disposition of the Note and upon
the receipt of certain cash payments and regarding the deferral of interest
deductions will not apply. Generally, such currently included market discount is
treated as ordinary interest for United States Federal income tax purposes. Such
an election will apply to all debt instruments acquired by the U.S. Holder on or
after the first day of the taxable year to which such election applies and may
be revoked only with the consent of the IRS.
PREMIUM. If a U.S. Holder purchases a Note for an amount that is greater
than the sum of all amounts payable on the Note after the purchase date other
than payments of qualified stated interest, such U.S. Holder will be considered
to have purchased the Note with "amortizable bond premium" equal in amount to
such excess. A U.S. Holder may elect to amortize such premium using a constant
yield method over the remaining term of the Note and may offset interest
otherwise required to be included in respect of the Note during any taxable year
by the amortized amount of such excess for the taxable year. However, if the
Note 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 Note. Any election to amortize bond premium applies to
all taxable debt obligations then owned and thereafter acquired by the U.S.
Holder on or after the first day of the first taxable year to which such
election applies and may be revoked only with the consent of the IRS.
DISPOSITION OF A NOTE. Except as discussed above, upon the sale, exchange
or retirement of a Note, a U.S. Holder generally will recognize taxable gain or
loss equal to the difference between the amount realized on the sale, exchange
or retirement (other than amounts representing accrued and unpaid interest) and
such U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax
basis in a Note generally will equal such U.S. Holder's initial investment in
the Note increased by any original issue discount included in income (and
accrued market discount, if any, if the U.S. Holder has included such market
discount in income) and decreased by the amount of any payments, other than
qualified stated interest payments, received and amortizable bond premium taken
with respect to such Note. Such gain or loss generally will be long-term capital
gain or loss if the Note were held for more than one year.
NOTES DENOMINATED, OR IN RESPECT OF WHICH INTEREST
IS PAYABLE, IN A FOREIGN CURRENCY
As used herein, "Foreign Currency" means a currency or composite currency
other than U.S. dollars.
PAYMENTS OF INTEREST IN A FOREIGN CURRENCY.
CASH METHOD. A U.S. Holder who uses the cash method of accounting for
United States Federal income tax purposes and who receives a payment of interest
on a Note (other than original issue discount or market discount) will be
required to include in income the United States dollar value of the Foreign
Currency payment (determined on the date such payment is received) regardless of
whether the payment is in fact converted to United States dollars at that time,
and such United States dollar value will be the U.S. Holder's tax basis in such
Foreign Currency.
ACCRUAL METHOD. A U.S. Holder who uses the accrual method of accounting for
United States Federal income tax purposes, or who otherwise is required to
accrue interest prior to receipt, will be required to include in income the
United States dollar value of the amount of interest income (including original
issue discount or market discount and reduced by amortizable bond premium to the
extent applicable) that has accrued and is otherwise required to be taken into
account with respect to a Note during an accrual period. The United States
dollar value of such accrued income will be determined by translating such
income at the average rate of exchange for the accrual period or, with respect
to an accrual period that spans two taxable years, at the average rate for the
partial period within the taxable year. A U.S. Holder may elect, however, to
S-28
<PAGE>
translate such accrued interest income using the rate of exchange on the last
day of the accrual period or, with respect to an accrual period that spans two
taxable years, using the rate of exchange on the last day of the taxable year.
If the last day of an accrual period is within five business days of the date of
receipt of the accrued interest, a U.S. Holder may translate such interest using
the rate of exchange on the date of receipt. The above election will apply to
other debt obligations held by the U.S. Holder and may not be changed without
the consent of the IRS. A U.S. Holder should consult a tax advisor before making
the above election. A U.S. Holder will recognize exchange gain or loss (which
will be treated as ordinary income or loss) with respect to accrued interest
income on the date such income is received. The amount of ordinary income or
loss recognized will equal the difference, if any, between the United States
dollar value of the Foreign Currency payment received (determined on the date
such payment is received) in respect of such accrual period and the United
States dollar value of interest income that has accrued during such accrual
period (as determined above).
PURCHASE, SALE AND RETIREMENT OF NOTES. A U.S. Holder who purchases a Note
with previously owned Foreign Currency will recognize ordinary income or loss in
an amount equal to the difference, if any, between such U.S. Holder's tax basis
in the Foreign Currency and the United States dollar fair market value of the
Foreign Currency used to purchase the Note, determined on the date of purchase.
Except as discussed above with respect to Short-Term Notes, upon the sale,
exchange or retirement of a Note, a U.S. Holder will recognize taxable gain or
loss equal to the difference between the amount realized on the sale, exchange
or retirement and such U.S. Holder's adjusted tax basis in the Note. Such gain
or loss generally will be capital gain or loss (except to the extent of any
accrued market discount not previously included in the U.S. Holder's income) and
will be long-term capital gain or loss if at the time of sale, exchange or
retirement the Note has been held by such U.S. Holder for more than one year. To
the extent the amount realized represents accrued but unpaid interest, however,
such amounts must be taken into account as interest income, with exchange gain
or loss computed as described in "Payments of Interest in a Foreign Currency"
above. If a U.S. Holder receives Foreign Currency on such a sale, exchange or
retirement the amount realized will be based on the United States dollar value
of the Foreign Currency on the date the payment is received or the Note is
disposed of (or deemed disposed of as a result of a material change in the terms
of the Note). In the case of a Note that is denominated in Foreign Currency and
is traded on an established securities market, a cash basis U.S. Holder (or,
upon election, an accrual basis U.S. Holder) will determine the United States
dollar value of the amount realized by translating the Foreign Currency payment
at the spot rate of exchange on the settlement date of the sale. A U.S. Holder's
adjusted tax basis in a Note will equal the cost of the Note to such holder,
increased by the amounts of any market discount or original issue discount
previously included in income by the holder with respect to such Note and
reduced by any amortized acquisition or other premium and any principal payments
received by the holder. A U.S. Holder's tax basis in a Note, and the amount of
any subsequent adjustments to such holder's tax basis, will be the United States
dollar value of the Foreign Currency amount paid for such Note, or of the
Foreign Currency amount of the adjustment, determined on the date of such
purchase or adjustment.
Gain or loss realized upon the sale, exchange or retirement of a Note that
is attributable to fluctuations in currency exchange rates will be ordinary
income or loss which will not be treated as interest income or expense. Gain or
loss attributable to fluctuations in exchange rates will equal the difference
between the United States dollar value of the Foreign Currency principal amount
of the Note, determined on the date such payment is received or the Note is
disposed of, and the United States dollar value of the Foreign Currency
principal amount of the Note, determined on the date the U.S. Holder acquired
the Note. Such Foreign Currency gain or loss will be recognized only to the
extent of the total gain or loss realized by the U.S. Holder on the sale,
exchange or retirement of the Note.
ORIGINAL ISSUE DISCOUNT. In the case of an Original Issue Discount Note or
Short-Term Note, (i) original issue discount is determined in units of the
Foreign Currency, (ii) accrued original issue discount is translated into United
States dollars as described in "Payments of Interest in a Foreign Currency --
Accrual Method" above and (iii) the amount of Foreign Currency gain or loss on
the accrued original issue
S-29
<PAGE>
discount is determined by comparing the amount of income received attributable
to the discount (either upon payment, maturity or an earlier disposition), as
translated into United States dollars at the rate of exchange on the date of
such receipt, with the amount of original issue discount accrued, as translated
above.
PREMIUM AND MARKET DISCOUNT. In the case of a Note with market discount,
(i) market discount is determined in units of the Foreign Currency, (ii) accrued
market discount taken into account upon the receipt of any partial principal
payment or upon the sale, exchange, retirement or other disposition of the Note
(other than accrued market discount required to be taken into account currently)
is translated into United States dollars at the exchange rate on such
disposition date (and no part of such accrued market discount is treated as
exchange gain or loss) and (iii) accrued market discount currently includible in
income by a U.S. Holder for any accrual period is translated into United States
dollars on the basis of the average exchange rate in effect during such accrual
period, and the exchange gain or loss is determined upon the receipt of any
partial principal payment or upon the sale, exchange, retirement or other
disposition of the Note in the manner described in "Payments of Interest in a
Foreign Currency -- Accrual Method" above with respect to computation of
exchange gain or loss on accrued interest.
With respect to a Note issued with amortizable bond premium, such premium is
determined in the relevant Foreign Currency and reduces interest income in units
of the Foreign Currency. Although not entirely clear, a U.S. Holder should
recognize exchange gain or loss equal to the difference between the United
States dollar value of the bond premium amortized with respect to a period,
determined on the date the interest attributable to such period is received, and
the United States dollar value of the bond premium determined on the date of the
acquisition of the Note.
EXCHANGE OF FOREIGN CURRENCIES. A U.S. Holder will have a tax basis in any
Foreign Currency received as interest or on the sale, exchange or retirement of
a Note equal to the United States dollar value of such Foreign Currency,
determined at the time the interest is received or at the time of the sale,
exchange or retirement. Any gain or loss realized by a U.S. Holder on a sale or
other disposition of Foreign Currency (including its exchange for United States
dollars or its use to purchase Notes) will be ordinary income or loss.
NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original issue
discount, if any) on a Note, unless such non-U.S. Holder is a direct or indirect
10% or greater shareholder of Capital Funding, a controlled foreign corporation
related to Capital Funding or a bank receiving interest described in section
881(c)(3)(A) of the Code. To qualify for the exemption from taxation, the last
United States payor in the chain of payment prior to payment to a non-U.S.
Holder (the "Withholding Agent") must have received in the year in which a
payment of interest or principal occurs, or in either of the two preceding
calendar years, a statement that (i) is signed by the beneficial owner of the
Note under penalties of perjury, (ii) certifies that such owner is not a U.S.
Holder and (iii) provides the name and address of the beneficial owner. The
statement may be made on an IRS Form W-8 or a substantially similar form, and
the beneficial owner must inform the Withholding Agent of any change in the
information on the statement within 30 days of such change. If a Note is held
through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in such case, the signed statement must be
accompanied by a copy of the IRS Form W-8 or the substitute form provided by the
beneficial owner to the organization or institution. The Treasury Department is
considering implementation of further certification requirements aimed at
determining whether the issuer of a debt obligation is related to holders
thereof.
Generally, a non-U.S. Holder will not be subject to Federal income taxes on
any amount which constitutes capital gain upon retirement or disposition of a
Note, provided the gain is not effectively connected with the conduct of a trade
or business in the United States by the non-U.S. Holder. Certain other
exceptions may be applicable, and a non-U.S. Holder should consult its tax
advisor in this regard.
S-30
<PAGE>
The Notes will not be includible in the estate of a non-U.S. Holder unless
the individual is a direct or indirect 10% or greater shareholder of Capital
Funding or, at the time of such individual's death, payments in respect of the
Notes would have been effectively connected with the conduct by such individual
of a trade or business in the United States.
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Notes to registered owners who are not
"exempt recipients" and who fail to provide certain identifying information
(such as the registered owner's taxpayer identification number) in the required
manner. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients. Payments made in
respect of the Notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption. Compliance with
the identification procedures described in the preceding section would establish
an exemption from backup withholding for those non-U.S. Holders who are not
exempt recipients.
In addition, upon the sale of a Note to (or through) a broker, the broker
must withhold 31% of the entire purchase price, unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or (ii)
the seller provides, in the required manner, certain identifying information
and, in the case of a non-U.S. Holder, certifies that such seller is a non-U.S.
Holder (and certain other conditions are met). Such a sale must also be reported
by the broker to the IRS, unless either (i) the broker determines that the
seller is an exempt recipient or (ii) the seller certifies its non-U.S. status
(and certain other conditions are met). Certification of the registered owner's
non-U.S. status would be made normally on an IRS Form W-8 under penalties of
perjury, although in certain cases it may be possible to submit other
documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
PLAN OF DISTRIBUTION
The Notes are being offered on a continuous basis for sale by Capital
Funding to or through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Goldman, Sachs & Co., Lehman Brothers, Lehman Brothers Inc.,
Morgan Stanley & Co. Incorporated, Salomon Brothers Inc and Smith Barney Inc.
(the "Agents"). The Agents, individually or in a syndicate, may purchase Notes,
as principal, from Capital Funding from time to time for resale to investors and
other purchasers at varying prices relating to prevailing market prices at the
time of resale as determined by the applicable Agent, or, if so specified in the
applicable Pricing Supplement, for resale at a fixed offering price. If agreed
to by Capital Funding and an Agent, such Agent may also utilize its reasonable
efforts on an agency basis to solicit offers to purchase the Notes at 100% of
the principal amount thereof, unless otherwise specified in the applicable
Pricing Supplement. Capital Funding will pay a commission to an Agent, ranging
from .125% to .75% of the principal amount of each Note, depending upon its
stated maturity, sold through such Agent as an Agent of Capital Funding.
Commissions with respect to Notes with stated maturities in excess of 40 years
that are sold through an Agent as an Agent of Capital Funding will be negotiated
between Capital Funding and such Agent at the time of such sale.
Unless otherwise specified in the applicable Pricing Supplement, any Note
sold to an Agent as principal will be purchased by such Agent at a price equal
to 100% of the principal amount thereof less a percentage of the principal
amount equal to the commission applicable to an agency sale of a Note of
identical maturity. An Agent may sell Notes it has purchased from Capital
Funding as principal to certain dealers less a concession equal to all or any
portion of the discount received in connection with such purchase. Such Agent
may allow, and such dealers may reallow, a discount to certain other dealers.
After the initial offering of Notes, the offering price (in the case of Notes to
be resold on a fixed price basis), the concession and the reallowance may be
changed.
S-31
<PAGE>
Capital Funding reserves the right to withdraw, cancel or modify the offer
made hereby without notice and may reject orders in whole or in part (whether
placed directly with Capital Funding or through an Agent). Each Agent will have
the right, in its discretion reasonably exercised, to reject in whole or in part
any offer to purchase Notes received by it on an agency basis.
Unless otherwise specified in the applicable Pricing Supplement, payment of
the purchase price of the Notes will be required to be made in immediately
available funds in the Specified Currency in The City of New York on the date of
settlement. See "Description of Notes -- General."
Upon issuance, the Notes will not have an established trading market. The
Notes will not be listed on any securities exchange. An Agent may from time to
time purchase and sell Notes in the secondary market, but no Agent is obligated
to do so, and there can be no assurance that there will be a secondary market
for the Notes or that there will be liquidity in the secondary market if one
develops. From time to time, an Agent may make a market in the Notes, but no
Agent is obligated to do so and may discontinue any market-making activity at
any time.
Each of the Agents may be deemed to be an "underwriter" within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"). Capital
Funding and U S WEST have agreed to indemnify the Agents against certain
liabilities (including liabilities under the Securities Act), or to contribute
to payments the Agents may be required to make in respect thereof. Capital
Funding has agreed to reimburse the Agents for certain other expenses.
Certain of the Agents and their affiliates have engaged and may in the
future engage in investment and commercial banking transactions with Capital
Funding and certain of its affiliates in the ordinary course of business.
From time to time, Capital Funding may issue and sell other Debt Securities
described in the accompanying Prospectus, and the amount of Notes offered hereby
is subject to reduction as a result of such sale.
S-32
<PAGE>
PROSPECTUS
[LOGO]
$4,150,000,000
U S WEST CAPITAL FUNDING, INC.
DEBT SECURITIES
UNCONDITIONALLY GUARANTEED AS TO PAYMENT OF PRINCIPAL,
PREMIUM, IF ANY, AND INTEREST, BY
U S WEST, INC.
U S WEST Capital Funding, Inc. ("Capital Funding") from time to time offers
its notes, debentures, or other debt securities (the "Debt Securities"), in one
or more series, up to an aggregate principal amount of $4,150,000,000 (or its
equivalent, based on the applicable exchange rate at the time of offering, in
such foreign currencies, or units of two or more thereof as shall be designated
by Capital Funding). Debt Securities may be issued in registered form without
coupons, bearer form with coupons attached, or in the form of a Global Security.
All Debt Securities will be unconditionally guaranteed as to payment of
principal, premium, if any, and interest by U S WEST, Inc. ("U S WEST").
When a particular series of Debt Securities is offered, a supplement to this
Prospectus will be delivered (the "Prospectus Supplement") together with this
Prospectus setting forth the terms of such Debt Securities, including, where
applicable, the specific designation, aggregate principal amount, denominations,
form of currency or currencies in which the principal, and premium, if any, and
interest are payable, maturity, rate (which may be fixed or variable) and time
of payment of interest, any terms for redemption or repurchase at the option of
Capital Funding or the holder, any terms for sinking fund payments, the initial
public offering price, the names of, and the principal amounts to be purchased
by, underwriters and the compensation of such underwriters, any listing of the
Debt Securities on a securities exchange, and the other terms in connection with
the offering and sale of such Debt Securities.
If an agent of Capital Funding or a dealer or an underwriter is involved in
the sale of the Debt Securities in respect of which this Prospectus is being
delivered, the agent's commission or dealer's or underwriter's discount will be
set forth in, or may be calculated from, the Prospectus Supplement. The net
proceeds to Capital Funding from such sale will be the purchase price of such
Debt Securities less such commission in the case of an agent, the purchase price
of such Debt Securities in the case of a dealer or the public offering price
less such discount in the case of an underwriter, and less, in each case, the
other attributable issuance expenses. The aggregate net proceeds to Capital
Funding from all the Debt Securities will be the purchase price of the Debt
Securities sold, less the aggregate of agents' commissions and dealers' and
underwriters' discounts and other expenses of issuance and distribution. The net
proceeds to Capital Funding from the sale of the Debt Securities will be set
forth in the Prospectus Supplement. See "Plan of Distribution" for possible
indemnification arrangements for any agents, dealers or underwriters.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is December 9, 1996.
<PAGE>
AVAILABLE INFORMATION
U S WEST is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports, proxy statements, and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements, and
other information concerning U S WEST can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World
Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, at prescribed rates.
The Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, including U S WEST. In addition,
such material is available for inspection at the New York and Pacific Stock
Exchanges.
U S WEST and Capital Funding have filed with the Commission a registration
statement on Form S-3 (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act of 1933
(the "Securities Act"). This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by U S WEST with the Commission
(File No. 1-8611) and are incorporated herein by reference: (i) Annual Report on
Form 10-K for the year ended December 31, 1995, (ii) Quarterly Reports on Form
10-Q for the quarters ended March 31, 1996, June 30, 1996 and September 30,
1996, and (iii) Current Reports on Form 8-K dated February 12, 1996, February
29, 1996, April 4, 1996, May 1, 1996, June 10, 1996, July 29, 1996, October 7,
1996, October 15, 1996, October 23, 1996 and November 15, 1996.
All documents filed by U S WEST pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Debt Securities shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such documents.
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 contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies and 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.
U S WEST and Capital Funding will provide without charge to each person to
whom a Prospectus is delivered, upon written or oral request of such person, a
copy of any or all of the documents which are incorporated by reference herein,
other than exhibits to such documents which are not specifically incorporated by
reference therein. Requests should be directed to Investor Relations, U S WEST,
Inc., 7800 East Orchard Road, Englewood, Colorado 80111 (telephone number (303)
793-6500).
------------------------
2
<PAGE>
U S WEST, INC.
U S WEST is a diversified global communications company engaged in the
telecommunications, cable, wireless communications and directory and information
services businesses. U S WEST conducts its businesses through two groups: the U
S WEST Communications Group (the "Communications Group") and the U S WEST Media
Group (the "Media Group"). The Communications Group provides telecommunications
services to more than 25 million residential and business customers in the
states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New
Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming
(collectively, the "Communications Group Region"). The Media Group is comprised
of (i) cable and telecommunications network businesses outside the
Communications Group Region and internationally, (ii) domestic and international
wireless communications network businesses and (iii) domestic and international
directory and information services businesses. U S WEST has two classes of
common stock: U S WEST Communications Group Common Stock, par value $.01 per
share (the "Communications Stock"), and U S WEST Media Group Common Stock, par
value $.01 per share (the "Media Stock"). The Communications Stock is intended
to reflect separately the performance of the Communications Group and the Media
Stock is intended to reflect separately the performance of the Media Group.
U S WEST CAPITAL FUNDING, INC.
Capital Funding is a wholly-owned subsidiary of U S WEST and was
incorporated under the laws of the State of Colorado in June 1986. Capital
Funding was incorporated to provide financing to U S WEST and its affiliates
through the issuance of indebtedness guaranteed by U S WEST. The principal
executive offices of Capital Funding are located at 7800 East Orchard Road,
Englewood, Colorado 80111 (telephone number (303) 793-6500).
USE OF PROCEEDS
Capital Funding will apply the net proceeds from the sale of the Debt
Securities to its general funds to be used for loans to U S WEST and affiliates
of U S WEST, which will in turn use the funds for general corporate purposes,
including acquisitions, the reduction of short-term and long-term borrowings,
and for other business opportunities. The amount and timing of these loans will
depend upon the future growth and financing requirements of U S WEST and its
affiliates.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges from
continuing operations of U S WEST for the periods indicated. For the purpose of
calculating this ratio, earnings consist of income from continuing operations
before income taxes and fixed charges. Fixed charges include interest on
indebtedness (excluding discontinued operations), guaranteed minority
interest-expense and the portion of rentals representative of the interest
factor.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
- ------------------------------------ ------------
1991 1992 1993 1994 1995 1995 1996
- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
3.11 3.85 2.38 4.85 4.03 3.98 3.67
</TABLE>
DESCRIPTION OF DEBT SECURITIES AND GUARANTEES
The following description sets forth certain general terms and provisions of
the Debt Securities and Guarantees to which any Prospectus Supplement may
relate. The particular terms and provisions of the series of Debt Securities
offered by a Prospectus Supplement and the extent to which such general terms
and provisions described below may apply thereto, will be described in the
Prospectus Supplement relating to such series of Debt Securities.
3
<PAGE>
The Debt Securities are to be issued under an Indenture ("Indenture"), dated
as of April 15, 1988, and amended as of November 1, 1995, among U S WEST,
Capital Funding, and First National Bank of Santa Fe ("Trustee"). As of the date
of this Prospectus, $841 million of Debt Securities have been issued under the
Indenture and $520 million of such Debt Securities remain outstanding. The
following summaries of certain provisions of the Debt Securities, the
Guarantees, and the Indenture do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all provisions of the Debt
Securities, the Guarantees, and the Indenture, including the definitions therein
of certain terms. Wherever particular sections or defined terms of the Indenture
are referred to, it is intended that such sections or defined terms shall be
incorporated herein by reference.
GENERAL
The Indenture does not limit the amount of Debt Securities which can be
issued thereunder and additional debt securities may be issued thereunder up to
the aggregate principal amount which may be authorized from time to time by, or
pursuant to a resolution of, Capital Funding's Board of Directors or by
supplemental indenture. Reference is made to the Prospectus Supplement for the
following terms of the particular series of Debt Securities being offered
hereby; (i) the title of the Debt Securities of the series; (ii) any limit upon
the aggregate principal amount of the Debt Securities of the series; (iii) the
date or dates on which the principal of the Debt Securities of the series will
mature; (iv) the rate or rates (or manner of calculations thereof), if any, at
which the Debt Securities of the series will bear interest, the date or dates
from which any such interest will accrue and on which such interest will be
payable, and, with respect to Debt Securities of the series in registered form,
the record date for the interest payable on any interest payment date; (v) the
place or places where the principal of and interest, if any, on the Debt
Securities of the series will be payable; (vi) any redemption or sinking fund
provisions; (vii) if other than the principal amount thereof, the portion of the
principal amount of Debt Securities of the series which will be payable upon
declaration of acceleration of the maturity thereof; (viii) whether the Debt
Securities of the series will be issuable in registered or bearer form or both,
any restrictions applicable to the offer, sale, or delivery of Debt Securities
in bearer form ("bearer Debt Securities"), and whether and the terms upon which
bearer Debt Securities will be exchangeable for Debt Securities in registered
form ("registered Debt Securities") and vice versa; (ix) whether and under what
circumstances Capital Funding will pay additional amounts on the Debt Securities
of the series held by a person who is not a U.S. person (as defined below) in
respect of taxes or similar charges withheld or deducted and, if so, whether
Capital Funding will have the option to redeem such Debt Securities rather than
pay such additional amounts; (x) whether the Debt Securities will be denominated
or provide for payment in United States dollars or a foreign currency or units
of two or more such foreign currencies; and (xi) any additional provisions or
other special terms not inconsistent with the provisions of the Indenture,
including any terms which may be required by or advisable under United States
laws or regulations or advisable in connection with the marketing of Debt
Securities of such series. (Section 2.01 and 2.02.) To the extent not described
herein, principal, premium, if any, and interest will be payable, and the Debt
Securities of a particular series will be transferable, in the manner described
in the Prospectus Supplement relating to such series.
Each series of Debt Securities will constitute unsecured and unsubordinated
indebtedness of Capital Funding, and will rank on a parity with Capital
Funding's other indebtedness, and will have the benefit of the Guarantees
described herein. However, since U S WEST is a holding company, the right of U S
WEST and, hence, the right of creditors of U S WEST (including the holders of
the Debt Securities) to participate in any distribution of the assets of any
subsidiaries of U S WEST, whether upon liquidation, reorganization, or
otherwise, is subject to prior claims of creditors of the subsidiary, except to
the extent that claims of U S WEST itself as a creditor of a subsidiary may be
recognized.
Debt Securities of any series may be issued as registered Debt Securities or
bearer Debt Securities or both as specified in the term of the series. Unless
otherwise indicated in the Prospectus Supplement, Debt Securities will be issued
in denominations of $1,000 and integral multiples thereof, and bearer Debt
Securities will not be offered, sold, resold, or delivered to U.S. persons in
connection with
4
<PAGE>
their original issuance. For purposes of this Prospectus, "U.S. person" means a
citizen, national, or resident of the United States, a corporation, partnership,
or other entity created or organized in or under the laws of the United States,
or any political subdivision thereof, or an estate or trust which is subject to
United States federal income taxation regardless of its source of income.
To the extent set forth in the Prospectus Supplement, except in special
circumstances set forth in the Indenture, interest on bearer Debt Securities
will be payable only against presentation and surrender of the coupons for the
interest installments evidenced thereby as they mature at a paying agency of
Capital Funding located outside of the United States and its possessions.
(Section 2.05(c).) Capital Funding will maintain such an agency for a period of
two years after the principal of such bearer Debt Securities has become due and
payable. During any period thereafter for which it is necessary in order to
conform to United States tax law or regulations, Capital Funding will maintain a
paying agent outside the United States and its possessions to which the bearer
Debt Securities may be presented for payment and will provide the necessary
funds therefor to such paying agent upon reasonable notice. (Section 2.04)
Bearer Debt Securities and the coupons related thereto will be transferable
by delivery. (Section 2.08(e).)
If appropriate, federal income tax consequences applicable to a series of
Debt Securities will be described in the Prospectus Supplement relating thereto.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in the form of one or more
fully registered global securities (each a "Global Security") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the Prospectus Supplement relating to such series. Unless and until it is
exchanged for Debt Securities in definitive registered form, a Global Security
may not be transferred except as a whole by the Depositary for such Global
Security to a nominee of such Depositary or by a nominee of such Depositary to
such Depositary or another nominee of such Depositary or by such Depositary or
any such nominee to a successor of such Depositary or a nominee of such
successor.
The specific terms of the depositary arrangements with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series. Capital Funding anticipates that the following provisions will
apply to all depositary arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security will credit the accounts held with it with the respective principal
amounts of the Debt Securities represented by such Global Security. Such
accounts shall be designated by the underwriters or agents with respect to such
Debt Securities or by Capital Funding if such Debt Securities are offered and
sold directly by Capital Funding. Ownership of beneficial interests in a Global
Security will be limited to persons that have accounts with the Depositary for
such Global Security ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests in such Global Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depositary for such Global Security or on the records
of participants. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture governing such Debt Securities. Except as provided below, owners of
beneficial interests in a Global Security will not be entitled to have Debt
Securities of the series represented by such Global Security registered in their
names, will not receive or be entitled to receive physical delivery of Debt
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture governing such Debt Securities.
5
<PAGE>
Principal, premium, if any, and interest payments on Debt Securities
registered in the name of a Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner of the
Global Security representing such Debt Securities. Neither Capital Funding, the
Trustee for such Debt Securities, any Paying Agent nor the Security Registrar
for such Debt Securities will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Security for such Debt Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Capital Funding expects that the Depositary for a series of Debt Securities
issued in the form of a Global Security, upon receipt of any payment of
principal, premium or interest, will credit immediately participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of the Global Security for such Debt Securities as shown
on the records of such Depositary. Capital Funding also expects that payments by
participants to owners of beneficial interests in such Global Security held
through such participants will be governed by standing instructions and
customary practices, as is now 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 participants.
If a Depositary for a series of Debt Securities is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
Capital Funding within 90 days, Capital Funding will issue Debt Securities of
such series in definitive form in exchange for the Global Security representing
such series of Debt Securities. In addition, Capital Funding may at any time and
in its sole discretion determine not to have the Debt Securities of a series
represented by a Global Security and, in such event, will issue Debt Securities
of such series in definitive form in exchange for the Global Security
representing such series of Debt Securities. In either instance, an owner of a
beneficial interest in a Global Security will be entitled to have Debt
Securities of the series represented by such Global Security equal in principal
amount to such beneficial interest registered in its name and will be entitled
to physical delivery of such Debt Securities in definitive form. Debt Securities
of such series so issued in definitive form will be issued in denominations of
$1,000 and integral multiples thereof and will be issued in registered form
only, without coupons.
GUARANTEES
U S WEST will unconditionally guarantee the due and punctual payment of the
principal, premium, if any, and interest on the Debt Securities when and as the
same shall become due and payable, whether at maturity, upon redemption, or
otherwise. (Section 2.15.) The Guarantees will rank equally with all other
unsecured and unsubordinated obligations of U S WEST.
EXCHANGE OF SECURITIES
To the extent permitted by the terms of a series of Debt Securities
authorized to be issued in registered form and bearer form, bearer Debt
Securities may be exchanged for an equal aggregate principal amount of
registered or bearer form Debt Securities of the same series and date of
maturity in such authorized denominations as may be requested upon surrender of
the bearer Debt Securities with all unpaid coupons relating thereto, at an
agency of Capital Funding maintained for such purpose and upon fulfillment of
all other requirements of such agent. (Section 2.08(b).) As of the date of this
Prospectus, United States Treasury regulations do not permit exchanges of
registered Debt Securities for bearer Debt Securities and, unless such
regulations are modified, the terms of a series of Debt Securities will not
permit registered Debt Securities to be exchanged for bearer Debt Securities.
LIENS ON ASSETS
If at any time, Capital Funding mortgages, pledges, or otherwise subjects to
any lien the whole or any part of any property or assets now owned or hereafter
acquired by it, except as hereinafter provided, Capital Funding will secure the
outstanding Debt Securities, and any other obligations of Capital Funding which
may then be outstanding and entitled to the benefit of a covenant similar in
effect to this covenant, equally and ratably with the indebtedness or
obligations secured by such mortgage, pledge, or lien, for as long as any such
indebtedness or obligation is so secured. The
6
<PAGE>
foregoing covenant does not apply to the creation, extension, renewal, or
refunding of mortgages or liens created or existing at the time property is
acquired, created within 180 days thereafter, or created for the purpose of
securing the cost of construction and improvement of property, or to the making
of any deposit or pledge to secure public or statutory obligations or with any
governmental agency at any time required by law in order to qualify Capital
Funding to conduct its business or any part thereof or in order to entitle it to
maintain self-insurance or to obtain the benefits of any law relating to
workers' compensation, unemployment insurance, old age pensions, or other social
security, or with any court, board, commission, or governmental agency as
security incident to the proper conduct of any proceeding before it. Nothing
contained in the Indenture prevents any entity other than Capital Funding from
mortgaging, pledging, or subjecting to any lien any of its property or assets,
whether or not acquired from Capital Funding or U S WEST. (Section 4.03.)
AMENDMENT AND WAIVER
Subject to certain exceptions, the Indenture may be amended or supplemented
by Capital Funding, U S WEST, and the Trustee with the consent of the holders of
a majority in principal amount of the outstanding Debt Securities of each series
affected by the amendment or supplement (with each series voting as a class), or
compliance with any provision may be waived with the consent of holders of a
majority in principal amount of the outstanding Debt Securities of each series
affected by such waiver (with each series voting as a class). However, without
the consent of each Debt Securityholder affected, an amendment or waiver may not
(i) reduce the amount of Debt Securities whose holders must consent to an
amendment or waiver; (ii) change the rate of or change the time for payment of
interest on any Debt Security; (iii) change the principal of or change the fixed
maturity of any Debt Security; (iv) waive a default in the payment of the
principal of or interest on any Debt Security; (v) make any Debt Security
payable in money other than that stated in the Debt Security; or (vi) impair the
right to institute suit for the enforcement of any payment on or with respect to
any Debt Security. (Section 9.02.) The Indenture may be amended or supplemented
without the consent of any Debt Securityholder (i) to cure any ambiguity,
defect, or inconsistency in the Indenture, the Debt Securities of any series or
the Guarantees; (ii) to provide for the assumption of all the obligations of
Capital Funding or U S WEST under the Debt Securities, any coupons related
thereto, the Guarantees, and the Indenture by any corporation in connection with
a merger, consolidation, transfer, or lease of Capital Funding's or U S WEST's
property and assets substantially as an entirety, as provided for in the
Indenture; (iii) to provide for uncertificated Debt Securities in addition to or
in place of certificated Debt Securities; (iv) to make any change that does not
adversely affect the rights of any Debt Securityholder; (v) to provide for the
issuance of and establish the form and terms and conditions of a series of Debt
Securities or the Guarantees endorsed thereon or to establish the form of any
certifications required to be furnished pursuant to the terms of the Indenture
or any series of Debt Securities; or (vi) to add to the rights of Debt
Securityholders. (Section 9.01.)
MERGER
Capital Funding or U S WEST may consolidate with or merger into, or transfer
or lease its property and assets substantially as an entirety to, another entity
if the successor entity is a corporation and assumes all the obligations, as the
case may be, of Capital Funding, under the Debt Securities, and any coupons
related thereto and the Indenture, or of U S WEST, under the Guarantees and the
Indenture, and if, after giving effect to such transaction, a Default or Event
of Default would not occur or be continuing. Thereafter, all such obligations of
Capital Funding or U S WEST, as the case may be, shall terminate. (Section 5.01
and 5.02.)
The general provisions of the Indenture do not afford holders of the Debt
Securities protection in the event of a highly-leveraged transaction,
reorganization, merger or similar transaction involving U S WEST or Capital
Funding that may adversely affect holders of the Debt Securities.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default"
with respect to a series of Debt Securities: (i) default in the payment of
interest on any Debt Security of each series for
7
<PAGE>
90 days; (ii) default in the payment of the principal of any Debt Security of
such series; (iii) failure by Capital Funding or U S WEST for 90 days after
notice to it to comply with any of its other agreements in the Debt Securities
of such series, in the Indenture, in the Guarantees, or in any supplemental
indenture; and (iv) certain events of bankruptcy or insolvency of Capital
Funding or the Guarantor. (Section 6.01.) If an Event of Default occurs with
respect to the Debt Securities of any series and is continuing, the Trustee or
the holders of at least 25% in principal amount of all of the outstanding Debt
Securities of that series may declare the principal (or, if the Debt Securities
of that series are original issue discount Debt Securities, such portion of the
principal amount as may be specified in the terms of that series) of all the
Debt Securities of that series to be due and payable. Upon such declaration,
such principal (or, in the case of original issue discount Debt Securities, such
specified amount) shall be due and payable immediately. (Section 6.02.)
Securityholders may not enforce the Indenture, the Debt Securities, or the
Guarantees, except as provided in the Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the Debt
Securities. (Section 7.01.) Subject to certain limitations, holders of a
majority in principal amount of the Debt Securities of each series affected
(with each series voting as a class) may direct the Trustee in its exercise of
any trust power. (Section 6.05.) The Trustee may withhold from Debt
Securityholders notice of any continuing default (except a default in payment of
principal or interest) if it determines that withholding notice is in their
interests. (Section 7.05.)
CONCERNING THE TRUSTEE
U S WEST and certain of its affiliates, including Capital Funding, maintain
banking relationships in the ordinary course of business with the Trustee. In
addition, the Trustee and certain of its affiliates serve as trustee,
authenticating agent, or paying agent with respect to certain debt securities of
U S WEST and its affiliates.
PLAN OF DISTRIBUTION
GENERAL
Capital Funding may sell the Debt Securities being offered hereby: (i)
directly to purchasers, (ii) through agents, (iii) through underwriters, (iv)
through dealers, or (v) through a combination of any such methods of sale.
The distribution of the Debt Securities may be effected from time to time in
one or more transactions either (i) at a fixed price or prices, which may be
changed; (ii) at market prices prevailing at the time of sale; (iii) at prices
related to such prevailing market prices; or (iv) at negotiated prices.
Offers to purchase Debt Securities may be solicited directly by Capital
Funding or by agents designated by Capital Funding from time to time. Any such
agent, which may be deemed to be an underwriter, as that term is defined in the
Securities Act, involved in the offer or sale of the Debt Securities in respect
of which this Prospectus is delivered will be named, and any commissions payable
by Capital Funding to such agent will be set forth, in the Prospectus Supplement
or the Pricing Supplement. Unless otherwise indicated in the Prospectus
Supplement or the Pricing Supplement, any such agent will be acting on a best
efforts basis for the period of its appointment. Agents may be customers of,
engage in transactions with, or perform services for, Capital Funding in the
ordinary course of business.
If an underwriter or underwriters are utilized in the sale, Capital Funding
and U S WEST will execute an underwriting agreement with such underwriters at
the time of sale to them and the names of the underwriters and the terms of the
transactions will be set forth in the Prospectus Supplement, which will be used
by the underwriters to make resales of the Debt Securities.
If a dealer is utilized in the sale of the Debt Securities in respect of
which this Prospectus is delivered, Capital Funding will sell such Debt
Securities to the dealer, as principal. The dealer may then resell such Debt
Securities to the public at varying prices to be determined by each dealer at
the time of resale.
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<PAGE>
Underwriters, dealers, agents, and other persons may be entitled, under
agreements which may be entered into with Capital Funding and U S WEST, to
indemnification against, or contribution with respect to, certain civil
liabilities, including liabilities under the Securities Act.
DELAYED DELIVERY ARRANGEMENTS
If so indicated in the Prospectus Supplement, Capital Funding will authorize
dealers or other persons acting as Capital Funding's agents to solicit offers by
certain institutions to purchase Debt Securities from Capital Funding pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and others, but in all cases, such institutions must be
approved by Capital Funding. The obligations of any purchaser under any such
contract will not be subject to any conditions except that (a) the purchaser of
the Debt Securities shall not at the time of delivery be prohibited under the
laws of the jurisdiction to which such purchaser is subject, and (b) if the Debt
Securities are also being sold to underwriters, Capital Funding shall have sold
to such underwriters the Debt Securities not sold for delayed delivery. The
dealers and such other persons will not have any responsibility in respect of
the validity or performance of such contracts.
EXPERTS
The consolidated and combined financial statements and financial statements
schedule included in U S WEST's Annual Report on Form 10-K for the year ended
December 31, 1995 are incorporated herein by reference in reliance on reports of
Coopers & Lybrand L.L.P., independent certified public accountants, given upon
the authority of that firm as experts in accounting and auditing. The
consolidated financial statements of Continental Cablevision, Inc. and
subsidiaries incorporated by reference in U S WEST's Current Report on Form 8-K
dated October 15, 1996 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated by reference herein,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
LEGAL OPINIONS
Certain legal matters relating to the Debt Securities and the Guarantees to
be offered hereby will be passed upon for Capital Funding and U S WEST by
Stephen E. Brilz, Corporate Counsel and Assistant Secretary of U S WEST, Inc.
9
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT, THE APPLICABLE PRICING SUPPLEMENT OR
THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT,
THE APPLICABLE PRICING SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY CAPITAL FUNDING OR THE AGENTS. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT, THE APPLICABLE PRICING SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE
MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF CAPITAL FUNDING SINCE THE
DATE HEREOF. THIS PROSPECTUS SUPPLEMENT, THE APPLICABLE PRICING SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Risk Factors................................... S-2
Recent Developments............................ S-4
Description of Notes........................... S-5
Special Provisions Relating to Foreign Currency
Notes......................................... S-21
Certain United States Federal Income Tax
Considerations................................ S-23
Plan of Distribution........................... S-31
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents By
Reference..................................... 2
U S WEST, Inc. ................................ 3
U S WEST Capital Funding, Inc. ................ 3
Use of Proceeds................................ 3
Ratio of Earnings to Fixed Charges............. 3
Description of Debt Securities and
Guarantees.................................... 3
Plan of Distribution........................... 8
Experts........................................ 9
Legal Opinions................................. 9
</TABLE>
$500,000,000
[U.S. WEST LOGO]
U S WEST
CAPITAL FUNDING, INC.
MEDIUM-TERM NOTES
UNCONDITIONALLY GUARANTEED AS TO PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND
INTEREST, IF ANY, BY
U S WEST, INC.
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MORGAN STANLEY & CO.
INCORPORATED
SALOMON BROTHERS INC
SMITH BARNEY INC.
DECEMBER 9, 1996
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