-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UZ8nGybqgJlFlZPD3Skdqn0wGaqUv5T84/B1SN1qA4324yP2CO/iDdlPVz/0UlP0 CUBenDo5edwm1pAytx2sgg== 0000070502-96-000331.txt : 19960828 0000070502-96-000331.hdr.sgml : 19960828 ACCESSION NUMBER: 0000070502-96-000331 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960827 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/ CENTRAL INDEX KEY: 0000070502 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS BUSINESS CREDIT INSTITUTION [6159] IRS NUMBER: 520891669 STATE OF INCORPORATION: DC FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07102 FILM NUMBER: 96621352 BUSINESS ADDRESS: STREET 1: 2201 COOPERATIVE WAY CITY: HERNDON STATE: VA ZIP: 22071-3025 BUSINESS PHONE: 7037096700 MAIL ADDRESS: STREET 1: 2201 COOPERATIVE WAY CITY: HERNDON STATE: VA ZIP: 22071-3025 10-K 1 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Fee Required $250.00 For the fiscal year ended May 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-7102 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION (Exact name of registrant as specified in its charter) DISTRICT OF COLUMBIA (State or other jurisdiction of incorporation or organization) 52-0891669 (I.R.S. Employer Identification Number) WOODLAND PARK 2201 COOPERATIVE WAY, HERNDON, VA 20171 (Address of principal executive offices) (Registrant's telephone number, including area code, is 703-709-6700) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered 9.50% Collateral Trust Bonds, Series T, Due 1997 New York Stock Exchange 8.50% Collateral Trust Bonds, Series U, Due 1998 New York Stock Exchange 9.00% Collateral Trust Bonds, Series V, Due 2021 New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge in definitive proxy or information state- ments incorporated by reference in Part IV of this Form 10-K or any amendment to this Form 10-K. Yes X No . The Registrant has no common or voting stock. DOCUMENTS INCORPORATED BY REFERENCE: None 2 TABLE OF CONTENTS Part No. Item No. Page I. 1. Business 1 Members 1 Loans and Guarantees 2 General 2 Loan and Guarantee Policies 6 Long-Term Loans to Utility Members 6 Intermediate-Term Loans to Utility Members 8 Short-Term Loans to Utility Members 8 Loans to Telecommunication Borrowers 8 Loans to Associate Members 9 RUS Guaranteed Loans 9 Guarantees of Pollution Control Facility and Utility Property Financings 10 Guarantees of Lease Transactions 10 Guarantees of Tax Benefit Transfers 10 Other 11 CFC Financing Factors 11 Tax Status 14 Investment Policy 14 Other Sources of Loans to CFC Members 14 Employees 14 The Rural Electric and Telephone Systems 15 General 15 The RUS Program 15 Distribution Systems 16 Power Supply Systems 16 Telephone Systems 17 Regulation and Competition 17 Financial Information 18 Composite Financial Statements 20 2. Properties 24 3. Legal Proceedings 24 4. Submission of Matters to a Vote of Security Holders 24 II. 5. Market for the Registrant's Common Equity and Related Stockholder Matters 25 6. Selected Financial Data 25 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 8. Financial Statements and Supplementary Data 37 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37 III. 10. Directors and Executive Officers of the Registrant 38 Compliance with Section 16(a) of the Exchange Act 41 11. Executive Compensation 42 12. Security Ownership of Certain Beneficial Owners and Management 44 13. Certain Relationships and Related Transactions 44 IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45 3 PART I Item 1. Business. National Rural Utilities Cooperative Finance Corporation (the "Company" or "CFC") was incorporated as a private, not-for-profit cooperative association under the laws of the District of Columbia in April 1969. The principal purpose of CFC is to provide its members with a source of financing to supplement the loan programs of the Rural Utilities Service ("RUS") of the United States Department of Agriculture. CFC makes loans primarily to its rural utility system members ("Utility Members") to enable them to acquire, construct and operate electric distribution, generation, transmission and related facilities. Most CFC long-term loans to Utility Members have been made in conjunction with concurrent loans from RUS and are secured equally and ratably with RUS's loans by a single mortgage. CFC also has provided guarantees for tax-exempt financings of pollution control facilities and other properties constructed or acquired by its members, and in addition, has provided guarantees of taxable debt in connection with certain lease and other transactions of its members. CFC's 1,051 members as of May 31, 1996, included 903 Utility Members, virtually all of which are consumer-owned cooperatives, 74 service members and 74 associate members. The Utility Members included 838 distribution systems and 65 generation and transmission ("power supply") systems operating in 46 states and U.S. territories. At December 31, 1994, CFC's member rural electric systems provided service to about 70% of the contiguous continental land territory of the United States, serving approximately 12.2 million consumers, representing an estimated 32.0 million ultimate users of electricity, and owned approximately $66.5 billion (before depreciation of $19.4 billion) in total utility plant. Rural Telephone Finance Cooperative ("RTFC") was incorporated as a taxable cooperative association in the State of South Dakota in September 1987. RTFC is a controlled affiliate of CFC and was created for the purpose of providing financing to its rural telecommunication members and affiliates. RTFC's bylaws and voting members' agreement require that the majority of RTFC's Board of Directors be elected from individuals designated by CFC. CFC is the sole source of funding for RTFC. See Note 1 to Combined Financial Statements for summary financial information relating to RTFC at May 31, 1996. As of that date, RTFC had 425 members. Guaranty Funding Cooperative ("GFC") was organized in December 1991 as a taxable cooperative association owned by its member rural electric systems and CFC to provide a source of funds for members to refinance their RUS guaranteed debt previously held by the Federal Financing Bank of the United States Treasury ("FFB"). GFC is a controlled affiliate of CFC (the majority of its directors are appointed by CFC). All loans from GFC are guaranteed by RUS. CFC is the sole source of funding for GFC. See Note 1 to Combined Financial Statements for summary financial information relating to GFC at May 31, 1996. As of May 31, 1996, GFC had four members. Except as indicated, financial information presented herein includes CFC, RTFC and GFC on a combined basis. National Cooperative Services Corporation ("NCSC") was organized in 1981 as a taxable cooperative, owned and operated by its member rural electric distribution systems, to provide specialized financing and services to the cooperative rural electric industry that CFC could not otherwise provide due to competitive, regulatory or other reasons. NCSC has an independent Board of Directors, with CFC providing all management services through a contractual arrangement. CFC is the source for essentially all of NCSC's financing capabilities through direct loans or, predominantly, providing credit enhancements (guarantees) of debt issued by NCSC in the public and private credit markets. NCSC's financial statements are not combined or consolidated with CFC's. Members CFC currently has five classes of members: Class A-cooperative or nonprofit distribution systems; Class B-cooperative or nonprofit power supply systems which are federations of Class A or other Class B members; Class C-statewide and regional associations which are wholly-owned or controlled by Class A or Class B members; Class D-national associations of cooperatives; and Associate Members-nonprofit groups or entities organized on a cooperative basis which are owned, controlled or operated by Class A, B or C members and which provide non-electric services primarily for the benefit of ultimate consumers. Associate Members are not entitled to vote at any meeting of the members and are not eligible to be represented on CFC's Board of Directors. 4 Membership in RTFC is limited to CFC and commercial or cooperative corporations eligible to receive loans or other assistance from RUS and which are engaged (or plan to be engaged) in providing telephone or tele- communication services to ultimate users and affiliates of such corporations. Membership in GFC is limited to CFC and cooperative or nonprofit Utility Member systems who have refinanced all or a portion of their FFB debt through CFC. Set forth below is a table showing by state or U.S. territory, at May 31, 1996, the total number of CFC, RTFC and GFC members (memberships in each other have been eliminated and corporations which belong to more than one of CFC, RTFC and GFC have been counted only once), the percentage of loans and the percentage of loans and guarantees outstanding.
Number Loan and Number Loan and of Loan Guarantee of Loan Guarantee members % % members % % Alabama 32 1.7% 2.1% Nevada 5 0.1% 0.1% Alaska 28 1.4% 1.1% New Hampshire 6 3.1% 2.4% American Samoa 1 0.0% 0.0% New Jersey 1 0.1% 0.1% Arizona 20 1.1% 1.4% New Mexico 18 1.2% 0.9% Arkansas 29 2.9% 3.6% New York 14 0.1% 0.1% California 10 0.3% 0.2% North Carolina 47 3.4% 3.8% Colorado 34 3.7% 4.0% North Dakota 31 0.6% 0.4% Delaware 1 0.2% 0.2% Ohio 35 1.2% 1.0% District of Columbia 5 1.2% 0.9% Oklahoma 53 3.4% 3.3% Florida 20 4.4% 6.6% Oregon 37 1.9% 1.5% Georgia 69 8.0% 6.2% Pennsylvania 21 1.1% 1.0% Guam 1 0.0% 0.0% South Carolina 36 3.8% 3.4% Idaho 15 0.7% 0.6% South Dakota 52 0.6% 0.5% Illinois 51 6.1% 4.7% Tennessee 24 1.0% 0.8% Indiana 55 1.4% 2.4% Texas 117 11.0% 9.8% Iowa 100 2.1% 1.7% Utah 6 2.2% 4.7% Kansas 52 3.0% 2.7% Vermont 9 0.8% 0.6% Kentucky 36 2.1% 3.6% Virgin Islands 1 0.7% 0.6% Louisiana 16 1.8% 1.4% Virginia 20 2.1% 2.0% Maine 9 0.6% 0.5% Washington 21 1.0% 0.8% Maryland 2 1.1% 0.9% West Virginia 3 0.0% 0.0% Massachusetts 1 0.0% 0.0% Wisconsin 59 1.7% 1.4% Michigan 23 1.1% 0.8% Wyoming 18 1.3% 1.0% Minnesota 71 4.2% 4.8% Sub-Total 1,476 100.0% 100.0% Mississippi 24 2.6% 2.7% Add Duplicates 4 Missouri 66 3.5% 4.7% Total Members 1,480 Montana 38 2.1% 1.7% Nebraska 33 0.3% 0.3%
Loans and Guarantees General CFC provides its Utility Members with a source of financing to supplement the loan programs of RUS. CFC provides the majority of total non-RUS direct funding and guarantees obtained by members. CFC's interest rates on loans to its members are set to reflect the cost of its funds allocated to such loans, operating and other expenses and a reasonable margin (see "Loan and Guarantee Policies"). Substantially all long-term and some intermediate-term loans are secured, while substantially all short-term loans are unsecured. Long-term loans generally have maturities of up to 35 years. Fixed rate long-term loans generally provide for a fixed interest rate for terms of one to 30 years (but not beyond the maturity of the loan). Upon expiration of the term, the borrower may select another fixed rate term or a variable rate. Variable rate long-term loans have an interest rate which 5 varies monthly as determined by CFC. Intermediate- and short-term loans are made for terms not exceeding 60 months. CFC adjusts the rate monthly on out- standing short- and intermediate-term loans. On notification to borrowers, CFC may adjust the rate semimonthly. Interest rates are established by CFC and are not tied to any external index, however some rates may be capped at a percentage over prime. Telecommunication loans are secured long-term fixed or variable rate loans with maturities generally not exceeding 15 years and short-term unsecured loans. CFC has also provided guarantees for tax-exempt financings of pollution control facilities and utility properties constructed or acquired by its members and for members' obligations under certain lease transactions (see "Loan and Guarantee Policies"). Set forth below is a table showing loans outstanding to borrowers as of May 31, 1996, 1995 and 1994 and the weighted average interest rates thereon and loans committed but unadvanced to borrowers at May 31, 1996.
Loans committed Loans outstanding and weighted average interest but unadvanced rates thereon at May 31, at May 31,1996(A)(B) (Dollar Amounts In Thousands) 1996 1995 1994 Long-term fixed rate secured loans(C): Distribution Systems (D) $2,380,587 7.29% $1,645,551 7.68% $1,502,454 7.69% $ 36,117 Power Supply Systems (D) 247,556 7.71% 253,208 7.68% 273,186 7.56% 1,214 Telecommunication Organizations 134,497 8.66% 141,144 8.98% 119,600 9.16% _ Service Organizations (D)(E) 77,205 8.03% 81,521 9.27% 94,104 9.53% 3,140 Associate Members 1,542 10.25% 1,569 10.25% 1,606 10.25% - Total long-term fixed rate secured loans 2,841,387 7.41% 2,122,993 7.83% 1,990,950 7.85% 40,471 Long-term variable rate secured loans (F): Distribution Systems 2,717,494 6.45% 2,553,590 6.50% 2,172,799 4.65% 839,861 Power Supply Systems 202,249 6.45% 191,967 6.50% 170,683 4.65% 626,926 Telecommunication Organizations 764,911 6.55% 704,427 6.64% 499,506 4.92% 202,971 Service Organizations (E) 46,376 6.45% 53,332 6.50% 39,487 4.65% 71,400 Associate Members 47,541 6.19% 42,561 6.20% 29,089 4.45% 38,979 Total long-term variable rate secured loans 3,778,571 6.47% 3,545,877 6.52% 2,911,564 4.69% 1,780,137 Refinancing variable rate loans guaranteed by RUS: Power Supply Systems 416,637 6.47% 429,129 7.27% 533,545 4.87% - Intermediate-term secured loans: Distribution Systems 4,831 6.60% 4,176 6.85% 4,112 4.90% 2,300 Power Supply Systems 53,614 6.60% 40,237 6.85% 21,316 4.90% 168,123 Service Organizations 27,652 6.60% 11,429 6.85% 2,099 4.90% 9,384 Total intermediate-term secured loans 86,097 6.60% 55,842 6.85% 27,527 4.90% 179,807 Intermediate-term unsecured loans: Distribution Systems 16,019 6.45% 11,392 6.50% 13,046 4.90% 41,572 Power Supply Systems 28,957 6.45% 47,443 6.50% 84,515 4.90% 67,190 Telecommunication Organizations 12,048 6.80% 3,255 7.54% 1,265 5.05% 8,501 Total intermediate-term unsecured loans 57,024 6.52% 62,090 6.56% 98,826 4.90% 117,263 Short-term unsecured loans (G): Distribution Systems 409,664 6.60% 445,962 6.85% 276,373 4.90% 2,191,156 Power Supply Systems 25,763 6.60% 10,267 6.85% 14,048 4.90% 930,710 Telecommunication Organizations 63,813 7.15% 34,637 7.60% 31,176 5.65% 278,811 Service Organizations 23,467 6.60% 25,653 6.85% 11,812 4.90% 77,499 Associate Members 9,240 6.60% 7,651 6.85% 3,084 4.90% 15,685 Total short-term loans 531,947 6.67% 524,170 6.90% 336,493 4.97% 3,493,861
6
Loans committed Loans outstanding and weighted average interest but unadvanced rates thereon at May 31, at May 31, 1996(A) (B) (Dollar Amounts In Thousands) 1996 1995 1994 Nonperforming loans(H): Distribution Systems $ 1,739 7.20% $ 1,830 7.21% $ 1,933 8.27% $ - Power Supply Systems 23,555 6.48% 25,811 6.57% 27,948 4.75% - Telecommunication Organizations - - - - 2,098 6.13% - Associate Members - - - - 12,961 9.00% - Total nonperforming loans 25,294 6.53% 27,641 6.61% 44,940 6.19% - Restructured loans(I): Distribution Systems 2,576 18.37% 2,654 18.37% 2,667 18.37% - Power Supply Systems 205,074 9.13% 180,521 9.01% 160,873 8.32% - Service Organizations 1,711 6.45% 1,803 6.50% 1,833 4.62% - Total restructured loans 209,361 9.22% 184,978 9.12% 165,373 8.44% - Total loans 7,946,318 6.85% 6,952,720 7.01% 6,109,218 5.87% 5,611,539 Less: Allowance for loan and guarantee losses 218,047 205,596 188,196 - Net loans $7,728,271 $6,747,124 $5,921,022 $5,611,539
(A) The interest rates in effect at August 1, 1996, for loans to electric members were 7.60% for long-term loans with a seven-year fixed rate term, 6.20% on variable rate long-term loans and 6.35% on intermediate- and short-term loans. The rates in effect at August 1, 1996, on loans to telecommunication organizations were 8.25% for long-term loans with a seven-year fixed rate term, 6.30% on long-term variable rate loans, 6.55% on intermediate-term loans and 6.90% on short-term loans.The rates in effect at August 1, 1996, on loans to associate members were 8.15% for long-term loans with a seven-year fixed rate term loans, 6.20% on long- term variable rate loans and 6.35% on short-term loans. (B) Unadvanced commitments include loans approved by CFC for which loan contracts have not yet been executed or for which loan contracts have been executed, but funds have not been advanced. Long-term unadvanced loan commitments that do not have an interest rate associated with the commitment have been listed as variable rate commitments. Rates, fixed or variable, will be set at the time of advance, on the amount of the advance. (C) Includes $198.3 million and $30.4 million of unsecured loans at May 31, 1996 and 1995. (D) During calendar year 1997, $131.5 million of such outstanding fixed rate loans, which currently have a weighted average interest rate of 9.07% per annum, will become subject to rate adjustment. During the first quarter of calendar year 1996, long-term fixed rate loans totaling $46.6 million had their interest rates adjusted. These loans will be eligible to read just their interest rate again during the first quarter of calendar year 1997 to the lowest long-term fixed rate offered during 1996 for the term selected. At January 1 and May 31, 1996, the seven-year long-term fixed rate was 6.65% and 7.65%, respectively. (E) CFC had loans outstanding to NCSC in each of the periods shown. Long- term fixed rate loans outstanding to NCSC as of May 31, 1996, 1995 and 1994, were $31.8 million, $48.5 million and $47.8 million, respectively. In addition, as of May 31, 1996, 1995 and 1994, CFC had unadvanced long- term loan commitments to NCSC in the amounts of $15.4 million, $12.3 million and $14.7 million, respectively. (F) Includes $84.6 million, $41.4 million and $3.5 million of unsecured loans at May 31, 1996, 1995 and 1994. (G) Includes $92.7 million, $30.9 million and $18.2 million of secured loans at May 31, 1996, 1995 and 1994. (H) The rates on nonperforming loans are the weighted average of the stated rates on such loans as of the dates shown and do not necessarily relate to the interest recognized by CFC from such loans. 7 (I) The rates on restructured loans are the weighted average of the effective rates (based on the present value of scheduled future cashflows) as of the dates shown and do not necessarily relate to the interest recognized by CFC on such loans. Set forth below are the weighted average interest rates earned by CFC (recognized in the case of nonperforming and restructured loans) on all loans outstanding during the fiscal years ended May 31. INTEREST RATES EARNED ON LOANS 1996 1995 1994 Long-term fixed rate 7.92% 8.63% 8.63% Long-term variable rate 6.30% 5.90% 4.08% Telecommunication organizations 6.86% 6.70% 5.58% Refinancing loans guaranteed by RUS 6.75% 6.07% 4.01% Intermediate-term 6.57% 6.19% 4.41% Short-term 6.49% 6.29% 4.38% Associate members 6.46% 5.40% 4.21% Nonperforming 0.25% 1.56% 1.19% Restructured 1.49% 1.92% 2.33% All loans 6.77% 6.72% 5.66% At May 31, 1996, CFC's ten largest exposures, which were all power supply members, had outstanding loans from CFC totaling $763.1 million (excluding $368.0 million of loans guaranteed by RUS), which represented approximately 9.6% of CFC's total loans outstanding. As of May 31, 1996, outstanding CFC guarantees for these same ten borrowers totaled $1,528.3 million which represented 67.5% of CFC's total guarantees outstanding, including guarantees of the maximum amounts of lease obligations at such date. On that date, no member had outstanding loans and guarantees in excess of 10% of the aggregate amount of CFC's outstanding loans and guarantees; however, one of the ten largest borrowers, Deseret Generation & Transmission Co-operative ("Deseret"), was in financial difficulty (see Note 10 to Combined Financial Statements). At May 31, 1996, loans outstanding to Deseret (excluding loans guaranteed by RUS) accounted for 2.0% of total loans outstanding and guarantees outstanding to Deseret accounted for 13.4% of total guarantees outstanding. Total loans and guarantees outstanding to Deseret equaled 27.2% of total Members' Equity, Members' Subordinated Certificates and the allowance for loan and guarantee losses. Set forth below is a table showing CFC's guarantees as of the dates indicated. Substantially all guarantees have been provided on behalf of power supply members. May 31, 1996 1995 1994 (Dollar Amounts In Thousands) Long-term tax-exempt bonds $1,317,655* $1,496,930* $1,494,200* Debt portions of leveraged lease transactions 432,516 568,662 646,472 Indemnifications of tax benefit transfers 363,702 389,755 414,512 Other guarantees 135,567 119,575 100,643 Total $2,249,440 $2,574,922 $2,655,827 * Includes $1,168.9 million, $1,200.1 million and $1,214.6 million at May 31, 1996, 1995 and 1994, respectively, of adjustable rate pollution control bonds which can be tendered for purchase at specified times at the option of the holders (in the case of $370.1 million, $376.7 million, and $382.9 million of such bonds outstanding at May 31, 1996, 1995 and 1994, respectively, at any time on seven days' notice, in the case of $248.8 million, $254.5 million and $289.5 million outstanding at May 31, 1996, 1995 and 1994, respectively, at any time on a minimum of one day's notice and in the case of the remainder on a five-week or semiannual basis). CFC has agreed to purchase any such bonds that cannot be remarketed. Since the inception of the program CFC has not been required to purchase any such bonds. 8 Loan Contingencies CFC maintains a loan and guarantee loss allowance to cover losses that may be incurred in the course of lending or extending credit enhancements. The allowance is periodically evaluated by management with the Board of Directors. CFC classifies a loan as nonperforming if interest or principal payments are contractually past due 90 days or more, repayment in accordance with the original terms is not expected due to court order or ultimate repayment is otherwise not expected. Loans in which the original terms have been modified as a result of a borrower's financial difficulties are classified as restructured. Interest income on nonperforming loans is recognized on a cash basis as long as CFC believes the collateral value supports the out- standing principal balance. Loan and Guarantee Policies Long-Term Loans to Utility Members Under new lending criteria, established in early 1994, distribution systems must generally achieve an Average Modified DSC (as described herein) of 1.35. The new DSC (also called the "Modified DSC" or "MDSC") calculation is the ratio of (x) operating margins and patronage capital plus interest on long- term debt (including all interest charged to construction) plus depreciation and amortization expense plus Non-operating Margins-Interest plus cash received in respect of generation and transmission and other capital credits to (y) long-term debt service obligations. Distribution systems will also be required to have achieved a 20% ratio of equity to total assets at the end of the preceding calendar year (the "Equity" test) to be eligible collateral for pledging under the 1994 Collateral Trust Bond Indenture. The average MDSC is computed using the average of the best two of three calendar years' ratios preceding the date of determination. The borrower is required to maintain these ratios at or above the minimum loan eligibility requirements as long as there is a balance outstanding on the loan. Under present RUS policy, a system which meets the RUS concurrent mortgage requirement for Average TIER and Average DSC (as described herein) of 1.50 and 1.25, respectively, will generally be required to borrow a portion of its financial requirements from a supplemental lender. TIER is the ratio of (x) margins and patronage capital as defined under "The Rural Electric Systems---Financial Information" plus interest on long-term debt (including all interest charged to construction) to (y) interest on long-term debt (including all interest charged to construction). DSC is the ratio of (x) net margins and patronage capital plus interest on long-term debt (including all interest charged to construction) plus depreciation and amortization expense to (y) long-term debt service obligations. In applying the tests, obligations under contracts providing for payment whether or not the purchaser in fact receives electric power from the seller, guarantees and other contingent obligations are not considered debt, nor is interest on the proposed CFC loan given effect. In determining the eligibility of a member for a long-term loan, each of the above ratios is averaged for the best two of three calendar years preceding the date of determination, resulting in the "Average TIER" and "Average DSC". The extent of the supplemental loan required generally reflects the revenue productivity of the borrower's investment in plant, as measured by the ratio of its investment in plant to its operating revenues (the "plant-revenue ratio"). RUS regulations, however, permit borrowers which meet certain rate disparity, consumer income or extremely high rate tests to qualify for 100% RUS loans. Further, the Administrator of RUS has the authority to approve 100% RUS loans according to new qualifications established in 1993, or at his/her discretion on a case-by-case basis. It is anticipated that many CFC loans to distribution systems will continue to be made in conjunction with loans by RUS. However, in addition to making concurrent loans, CFC's loan policy permits it to make 100% loans to member systems which meet the applicable borrowing requirements. As of May 31, 1996, CFC had a total of $1,586.6 million in long-term loans committed and out- standing to 73 Utility Members which did not have long-term RUS loans out- standing. These systems have either prepaid their RUS loans or have never incurred any RUS debt. Under CFC policy, a member power supply system having Average TIER and Average DSC of at least 1.0 in each case is eligible for a long-term loan from CFC. Loans have been made both for additions to or acquisition of existing power supply facilities and in connection with the construction of new power supply projects. Loans have also been made in connection with the termination costs associated with certain plant construction for canceled power supply projects. However, most loans to CFC member power supply systems for new generating plants and transmission facilities have been made by other lenders (principally the FFB, which has typically offered rates lower than CFC's) under repayment guarantees from RUS, with RUS's rights as guarantor secured by a mortgage on the system's properties. 9 Under the RUS mortgage, distribution borrowers are required to design their rates to cover all operating expenses, including all payments in respect of principal and interest on notes when due, provide and maintain reasonable working capital and to maintain a TIER of not less than 1.5 and a DSC of not less than 1.25. CFC has made and may continue to approve long-term secured loans to borrowers which fall below CFC's loan eligibility requirements. Such loans are made on a case-by-case basis, based upon the submission by the borrower of, among other things, a long-range financial forecast which indicates that the borrower will, in future years, meet the applicable borrowing requirements. During the past five years, such loans accounted for 8.5% of the total dollar amount of loans approved. While certain borrowers may not meet the eligibility requirements at the time of loan approval, such borrowers may meet the eligibility requirements by the time the loan is fully advanced or CFC is providing financings to other such borrowers who are restructuring RUS debt obligations and thus will potentially be competitive with other utilities. The rate charged for long-term fixed rate mortgage loans is designed to reflect CFC's estimated overall cost of fixed rate capital allocated to its fixed rate mortgage loans (including Capital Term and other Subordinated Certificates, Collateral Trust Bonds, Medium-Term Notes, variable rate borrowings supported by interest rate exchange agreements and Members' Equity) plus increments estimated to cover general and administrative expenses, a provision for loan and guarantee losses and a reasonable margin. Long-term fixed rate loans provide for a fixed interest rate for periods of one to 30 years. Upon expiration of the interest rate period, the borrower may select another fixed rate term of one to 30 years (but not beyond the maturity of the loan) or in certain instances may repay the loan or convert to another interest rate program. The rate on long-term fixed rate loans is set at the time of advance. In the event that there is more than one advance, each advance will receive the fixed rate in effect at the time of advance for the selected maturity period. Long- term fixed rate loans approved prior to May 31, 1984 had the fixed rate set at the time the loan was approved. Long-term fixed rate loans approved between May 31, 1984 and December 31, 1987 bear the applicable fixed rate in effect at the time of the first advance. CFC also makes long-term loans with variable interest rates. Such loans are funded primarily from available variable rate sources, and the rate is adjusted monthly to reflect CFC's cost of capital raised to fund these loans plus increments estimated to cover general and administrative expenses, a provision for loan and guarantee losses and the maintenance of a reasonable margin. A borrower may convert a long-term loan from the variable rate to a fixed rate at any time with no fee. Some fixed rate loans may be converted to variable rate loans at any time, subject to the payment of a conversion fee and in certain cases, borrower's regulatory approval. Prepayment of concurrent loans, where permitted by CFC and RUS, or otherwise agreed to by CFC and RUS, will be apportioned pro-rata between RUS and CFC based on the respective balances of their concurrent loans outstanding as of the date of prepayment. Prior to January 1, 1994, no fee was required on the prepayment of a standard seven-year fixed rate loan that was prepaid during a repricing cycle. Now all prepayments except those required to maintain the original RUS/CFC concurrent loan proportions will be subject to a prepayment fee. Until December 1993, most long-term borrowers were required to purchase from CFC subordinated loan capital term certificates in an amount up to 7% of the loan amount. These certificates amortize along with the loan. For all loans advanced after December 1993, distribution systems may be required to purchase subordinated loan capital term certificates in an amount up to 3% of the loan amount or may not be required to purchase any certificates depending upon the borrower's leverage ratio with CFC (the ratio of the outstanding and available loan funds to subordinated certificates and allocated but unretired patronage capital), including the new loan. Power Supply members are required to purchase the certificates in amounts up to 10% of the loan amount. CFC long-term loans made in conjunction with concurrent RUS loans are generally for terms of 35 years and under present policy are payable, after a short period during which interest only is payable, in level quarterly installments which include both accrued interest and a portion of the principal. Substantially all of CFC's present long-term mortgage loans to Utility Members are secured by a first mortgage lien upon all property (other than office equipment and vehicles) at any time owned by the borrower and future revenues. In the case of members whose property is already subject to a mortgage to RUS, RUS approval of the loan is required, even in the case of a 100% CFC loan, in order to accommodate RUS's 10 mortgage lien so that CFC may share ratably in the security provided by the mortgaged property. CFC and RUS are then mortgagees in common, entitled to the security in proportion to the unpaid principal amounts of their respective loans. Mortgages do not require that the value of the mortgaged property be equal to the obligations secured thereby. Events of default under the long-term mortgages include default in the payment of the mortgage notes, default (continuing after grace periods in some cases) in the performance of the covenants in the loan agreements or the mortgages, and events of bankruptcy and insolvency. Under common mortgages securing long-term CFC loans to distribution system members, RUS has the sole right to exercise remedies on behalf of all holders of mortgage notes for 30 days after default. If RUS does not act within 30 days or if RUS is not legally entitled to act on behalf of all noteholders, CFC may exercise remedies. Under common mortgages securing long-term CFC loans to, or guarantee reimbursement obligations of, power supply members, RUS retains substantial control over the exercise of mortgage remedies. Intermediate-Term Loans to Utility Members Intermediate-term loans are made to members for terms of up to five years. The interest rates on intermediate-term loans are adjusted monthly (and may be adjusted semimonthly) to cover CFC's cost of capital raised to fund these loans plus increments estimated to cover general and administrative expenses, a provision for loan and guarantee losses and the maintenance of a reasonable margin. Intermediate-term loans that are classified as secured are secured by a first mortgage lien upon all property (other than office equipment and vehicles) at any time owned by the borrower and future revenues. Borrowers are generally not required to purchase additional Subordinated Certificates in CFC in conjunction with an intermediate-term loan. Short-Term Loans to Utility Members CFC makes short-term line of credit loans to its member distribution systems in amounts based on the system's monthly operation and maintenance expenses and prior year's additions to plant. Power supply systems are eligible for lines of credit in amounts up to a maximum of $50 million, based on the system's quarterly operation and maintenance expenses. Loans made to distribution and power supply systems under such lines of credit are generally unsecured; are for terms agreed to by the system and CFC and may be prepaid without premium and reborrowed in whole or in part during such term. Short- term loans with terms greater than 12 months are required to be paid down to a zero balance for five consecutive business days during each 12-month period. The interest rates on short-term line of credit loans are adjusted monthly (and may be adjusted semimonthly) to cover CFC's cost of capital raised to fund these loans plus increments estimated to cover general and administrative expenses, a provision for loan and guarantee losses and the maintenance of a reasonable margin. Borrowers are not required to purchase additional Subordinated Certificates in CFC in conjunction with a short-term loan. Loans to Telecommunication Borrowers RTFC makes long-term loans to rural telecommunication companies for the acquisition of telecommunication systems and the construction or upgrade of telephone, cellular and cable television systems as well as other legitimate corporate purposes. Under RTFC policy, a telephone system with an Average DSC and an Average TIER of 1.25 and 1.50, respectively, is eligible for a long-term mortgage loan from RTFC. A cable television system with an Average DSC of 1.25 is eligible for a long-term mortgage loan. A cellular telephone system is eligible for a long-term mortgage loan if it can demonstrate the ability to achieve an Average DSC of 1.10 by the fifth year of operations, and maintain that requirement annually thereafter. Security for RTFC long-term loans made to RUS borrowers generally consists of a first mortgage lien on the assets and revenues of the system on a pari passu basis with RUS. Security from non-RUS borrowers is considered on a case-by-case basis but generally a loan will not exceed 80% of the estimated initial value of the collateral. Long-term loans are made to RTFC borrowers for terms generally up to 15 years and amortized quarterly over the life of the loan. Borrowers with long-term loans approved after May 31, 1995 or with approved long-term loans that had not been advanced by May 31, 1995 will be required to purchase Subordinated Certificates from RTFC in amounts equal to 5% of the loan amount. Prior to May 31, 1995, borrowers were required to purchase Subordinated Certificates in amounts equal to 5% or 10% of the long- term loan amount, depending on the borrower classification. 11 The interest rate on long-term loans can be fixed for the full term of the loan or for a predetermined period. Alternatively, the borrower may elect a variable rate which is adjusted monthly (and may be adjusted semimonthly). A long-term variable rate loan may be converted to a fixed rate at any time. A long-term fixed rate loan may be converted to a variable rate without payment of a fee on a rate adjustment date, or at any other time upon payment of a fee, which is calculated to ensure that RTFC is made whole on the funding placed for that loan. RTFC provides intermediate-term equipment financing for periods up to five years. These loans are provided on an unsecured basis and are used to finance the purchase price and installation costs of central office equipment, support assets and other communication products. Intermediate-term equipment financing loans are generally made to operating telephone companies with an equity level of at least 25% of total assets and which have achieved a DSC ratio for each of the previous two calendar years of at least 1.75. RTFC also provides short-term financing to telecommunication systems for periods up to 60 months. These short-term loans are typically in the form of a revolving line of credit which requires the borrower to pay off the balance for five consecutive business days at least once during each 12-month period. These loans are provided on an unsecured basis and are used primarily for normal cash management. Lines of credit are available to tele- communication systems generally in amounts not to exceed the greater of five percent of total assets or 25% of equity in excess of 35% of total assets. Borrowers are not required to purchase Subordinated Certificates in RTFC as a condition to receiving a line of credit. Interim financing lines of credit are also made available to RTFC members which have an RUS and/or Rural Telephone Bank ("RTB") loan pending and have received approval from RUS to obtain interim financing. These loans are for terms up to 24 months and must be retired with advances from the RUS/RTB long-term loans. RTFC interest rates on all loans are set to cover the cost of funds, plus an increment estimated to cover general and administrative expenses, a provision for loan losses and the maintenance of a reasonable margin. RTFC obtains funding for its loans through back-to-back borrowing from CFC, which in turn has a security interest in all RTFC's loans. Loans to Associate Members CFC also makes loans to Associate Members, which are non-profit or cooperative organizations owned, controlled or operated by a CFC Class A, B or C Member or by CFC (sponsor) and engaged primarily in furnishing nonelectric services within the sponsor's service area. Long-term loans are available to Associate Members for periods of one to 35 years and are secured by the assets financed or by a guarantee from a Utility Member, or both. The rate on these loans, to the extent funding sources are available, may be fixed for the full term of the loan or for a predetermined period. Alternatively, the borrower may elect a variable rate which is adjusted monthly (and may be adjusted semi- monthly). Associate Members with long-term loans approved after May 31, 1995 or with approved long-term loans that had not been advanced by May 31, 1995 will be required to purchase a Subordinated Certificate equal to 5% of the loan amount. Prior to May 31, 1995, an Associate Member was required to purchase a Subordinated Certificate equal to 10% of the long-term loan amount. CFC also provides short-term loans to Associate Members for periods of up to 60 months. The short-term loans are generally revolving lines of credit which may require the borrower to pay off the balance for five consecutive business days during each 12-month period. Borrowers are not required to purchase a Subordinated Certificate as a condition to receiving a short-term loan. Short-term interest rates are set monthly (and may be adjusted semimonthly). These loans are generally unsecured but are guaranteed by operating Utility Members of CFC. Associate Member interest rates are set to cover the cost of funds plus an increment estimated to cover general and administrative expenses, a provision for loan losses and a reasonable margin. RUS Guaranteed Loans In connection with legislation which allowed certain systems to prepay existing borrowings from The FFB without prepayment penalties or fees, CFC established a program under which it made long-term loans to members for the purpose of prepaying these loans. Each note evidencing such a loan was issued to a trust which in turn issued certificates evidencing its ownership to CFC. The principal and interest payments on these notes are 100% guaranteed by RUS. Under RUS regulations, the note rate may not exceed the rate borne by the system's prepaid borrowings from the FFB adjusted to reflect savings accrued since prepayment of the note compared with the rate on the prepaid borrowing. The systems are required to pay service fees to CFC in connection with these transactions. Most of 12 these loans that have not been sold in public offerings have been transferred to GFC ($411.4 million of the $416.6 million outstanding at May 31, 1996.) In addition, CFC services $679.3 million of these loans, held by the trustee, which have been sold in public offerings. Guarantees of Pollution Control Facility and Utility Property Financings CFC has guaranteed debt issued in connection with the construction or acquisition by CFC members of pollution control, solid waste disposal, industrial development and electric distribution facilities. Such debt is issued by governmental authorities and the interest thereon is exempt from Federal income taxation. The proceeds of the offering are made available to the member system, which in turn is obligated to pay the governmental authority amounts sufficient to service the debt. The debt, which is guaranteed by CFC, may include short- and long-term obligations. In the event of a default by a system for nonpayment of debt service, CFC is obligated to pay any required amounts under its guarantee and the bond issue will not be accelerated so long as CFC performs under its guarantee. The system is required to repay, on demand, any amount advanced by CFC pursuant to its guarantee. This repayment obligation is secured by a common mortgage with RUS on all the system's assets, but CFC may not exercise remedies there- under for up to two years following default. However, if the debt is accelerated because of a determination that the interest thereon is not tax-exempt, the system's obligation to reimburse CFC for any guarantee payments will be treated as a long-term loan. In connection with these transactions, the systems generally must purchase unsecured Subordinated Certificates from CFC in an amount up to 12% of the principal amount guaranteed and maturing at the final maturity of the related debt (but not less than 20 years). These certificates generally bear interest at the greater of the 34-year FFB interest rate, the interest rate on the longest maturity of the debt being guaranteed or 90% of the rate on the loan from CFC used to purchase the certificate. In addition, if a debt service reserve fund is created by CFC to secure the debt being issued, the system must buy an additional Subordinated Certificate, maturing at the time of the final maturity of the debt, in the amount of such reserve. No interest is paid on such certificate, but any earnings from investments held by the trustee of such debt service reserve funds will be credited against the system's debt service obligations. The system is also required to pay to CFC initial and/or on-going servicing fees in connection with these transactions. Certain guaranteed long-term debt bears interest at variable rates which are adjusted at intervals of one to 270 days, weekly, each five weeks or semi- annually to a level expected to permit their resale or auction at par. At the option of the member on whose behalf it is issued and provided funding sources are available, rates on such debt may be fixed until maturity. Holders have the right to tender the debt for purchase at par when it bears interest at a variable rate and CFC has committed to purchase debt so tendered if it cannot otherwise be remarketed. If CFC held the securities, the cooperative would pay interest to CFC at its intermediate-term loan rate. Guarantees of Lease Transactions CFC has a program of lending to or guaranteeing debt issued by NCSC in connection with leveraged lease transactions. In such transactions, NCSC has lent money to an industrial or financial company (a "Lessor") for the purchase of a power plant (or an undivided interest therein) or utility equipment which was then leased to a CFC member ("the Lessee") under a lease requiring the Lessee to pay amounts sufficient to permit the Lessor to service the loan. The loans were made on a non-recourse basis to the Lessor but were secured by the property leased and the owner's rights as Lessor. NCSC borrowed the funds it lent either under a CFC guarantee or on an interim basis directly from CFC and purchased from CFC a Subordinated Certificate in an amount up to 12% of the amount CFC guaranteed or lent. The Subordinated Certificates generally bear interest at a rate equal to the FFB rate for 34-year loans or 90% of CFC's loan rate and are repaid proportionally as the amount guaranteed decreases. NCSC is also obligated to pay administrative and/or guarantee fees to CFC in connection with these transactions. Such fees are reimbursed to NCSC by the Lessee in each transaction. Guarantees of Tax Benefit Transfers CFC has also guaranteed members' obligations to indemnify against loss of tax benefits in certain tax benefit transfers that occurred in 1981 and 1982. A member's obligation to reimburse CFC for any guarantee payments would be treated as a long-term loan, secured on a pari passu basis with RUS by a first lien on substantially all the member's property to the extent of any cash received by the member at the outset of the transaction. The remainder would be treated as an intermediate-term loan secured by a subordinated mortgage on substantially all of the member's property. Due to changes in Federal tax law in 1982, no further guarantees of this nature have occurred since 1982 and no more are anticipated. In 13 connection with these transactions, the members purchased from CFC an un- secured Subordinated Certificate in an amount up to 12% of the amount guaranteed. Other CFC may provide other loans and guarantees as requested by its members. Such loans and guarantees will generally be made on a secured basis with interest rates and guarantee fees set to cover CFC's cost of capital, general and administrative expenses, a provision for loan and guarantee losses and maintenance of a reasonable margin. In connection with these transactions, the system generally must purchase from CFC an unsecured Subordinated Certificate in an amount up to 12% of the amount guaranteed or lent. CFC Financing Factors Funding for the Company's loan programs is derived from Members' Equity (net margins, retained as allocated but unreturned patronage capital), from the issuance of its Subordinated Certificates to members (see Note 3 to Combined Financial Statements), Collateral Trust Bonds, Medium-Term Notes, Commercial Paper and Bank Bid Notes. CFC's ability to obtain short- and long-term funds from external sources as needed depends on such factors as its credit ratings and reputation in the investment community, its financial condition and that of its members, the depth and liquidity of the markets in which it partici- pates, market factors outside of its control, its ability to conduct its operations to meet or exceed the financial standards of performance expected by investment markets and credit rating agencies and the continued support of its members. Each year CFC allocates its net margins (operating margin plus nonoperating income) among its borrowers in proportion to interest earned by CFC from such borrowers within various loan pools. These allocations are evidenced by Patronage Capital Certificates which bear no interest or dividends and have no stated maturity. These amounts are available for use in CFC's operations pending their retirement. As a condition of membership, CFC members have subscribed to Capital Term Certificates, which like CFC's other Subordinated Certificates are unsecured subordinated obligations of CFC. They generally mature 100 years after issuance and bear interest at the rate of 5% per annum. The purchase of Subordinated Certificates may also be required as a condition of each long- term loan and certain intermediate-term loans made by CFC to its members (Subordinated Certificates issued in connection with loans made prior to June 1, 1983, earn 3% annually, and Subordinated Certificates for loans approved on or after that date are noninterest-bearing). Subordinated Certificates, bearing interest at various rates, are also required to be purchased in connection with CFC guarantees of member debt. The maturity of Subordinated Certificates purchased in connection with loans and guarantees generally coincides with the maturity of the related loan or guaranteed debt. Membership certificates and loan and guarantee certificates represented 53% and 47%, respectively, of total Subordinated Certificates outstanding at May 31, 1996. To fund a portion of its long-term fixed rate loan program, CFC issues inter- mediate- and long-term senior secured Collateral Trust Bonds and senior unsecured Medium-Term Notes with differing maturities, interest rates and redemption provisions. The Collateral Trust Bonds are secured by pledges of eligible mortgage notes with a principal amount at least equal to the total amount of bonds outstanding. If certain minimum eligibility ratios are not maintained, the mortgage notes affected must be replaced with other eligible collateral. In addition, variable rate funding supported by an equal amount of interest rate exchange agreements is used to fund long-term fixed rate loans (see Note 5 to Combined Financial Statements). The Company issues Commercial Paper through dealers and directly to members and other eligible nonmember investors to provide funds for short-, intermediate- and long-term variable rate loans to members, including RUS guaranteed loans, and temporarily to fund long-term fixed rate loans to members prior to funding with long-term debt. Commercial Paper could also be used to fund purchases of tax-exempt securities which CFC may be obligated to purchase pursuant to its commitment to act as standby purchaser. In addition, CFC may issue Commercial Paper in excess of its own funding needs in order to provide its members an investment vehicle for their excess funds; CFC uses the proceeds from such issuances to purchase short-term obligations of other issuers. Commercial Paper outstanding at May 31, 1996, 1995 and 1994, net of discount related to the issuance of dealer Commercial Paper, was approximately $4,718.1 million, $3,892.6 million, and $3,429.0 million, respectively. The outstanding Commercial Paper at May 31, 1996, 1995 and 1994 had average maturities of 35 days, 68 days and 36 days, respectively. The amount of such outstanding Commercial Paper sold directly by CFC to its members and eligible nonmembers as a percentage of total outstanding Commercial Paper was 26% as of May 31, 1996 versus 29% at May 31, 1995. 14 CFC also issues short-term Bank Bid Notes to fund its variable rate loans. These bid notes are unsecured loan obligations. Bid note facilities are un- committed lines of credit for which CFC does not pay a fee. The amount of Bank Bid Notes outstanding as of May 31, 1996, 1995 and 1994 was $183.5 million, $350.0 million, and $209.0 million, respectively. As of May 31, 1996, CFC had three revolving credit agreements totaling $5,050.0 million which are used principally to provide liquidity support for CFC's outstanding commercial paper, CFC's guaranteed commercial paper issued by NCSC and the adjustable or floating/fixed rate put bonds which CFC guarantees, and to which it is standby purchasers for the benefit of its members. Two of these credit agreements, which total a combined $4,550.0 million, were executed with 60 banks, with J.P. Morgan Securities, Inc. and The Bank of Nova Scotia as Co-Syndication Agents and Morgan Guaranty Trust Company of New York as Administrative Agent. Under these agreements, CFC can borrow up to $2,730.0 million until February 28, 2000 (the "five-year facility"), and $1,820.0 million until February 25, 1997 (the "364-day facility"). Any amounts outstanding under these facilities will be due on the respective maturity dates. A third revolving credit agreement for $500.0 million was executed on April 30, 1996 with ten banks, including the Bank of Nova Scotia as Administrative and Syndication Agent (the "BNS facility"). This agreement has a 364-day revolving credit period which terminates April 29, 1997 during which CFC can borrow, and such borrowings, may be converted to a 1-year term loan at the end of the revolving credit period. In connection with the five-year facility, CFC pays a per annum facility fee of .10 of 1% and per annum commitment fee of .025 of 1%. The per annum facility fee for both agreements with a 364-day maturity is .08 of 1% and there is no commitment fee at CFC's current credit rating level. If CFC's long-term ratings decline, these fees may be increased by no more then .1250 of 1%. Generally, pricing options are the same under all three agreements and will be at one or more rates as defined in the agreements, as selected by CFC. The revolving credit agreements require CFC among other things to maintain Members' Equity and Members' Subordinated Certificates of at least $1,346.3 million as of May 31, 1996, an increase of $1.3 million compared to the $1,345.0 million required at May 31, 1995. Each year, the required amount of Members' Equity and Members' Certificates is increased by 90% of net margins not distributed to members. CFC is also required to maintainan average fixed charge coverage ratio over the six most recent fiscal quarters of at least 1.025 and prohibit the retirement of patronage capital unless CFC has achieved a fixed charge coverage ratio of 1.05 for the preceding fiscal year. The credit agreements prohibit CFC from incurring senior debt (including guarantees but excluding indebtedness incurred to fund RUS guaranteed loans) in an amount in excess of ten times the sum of Members' Equity and subordinated debt and restrict, with certain exceptions, the creation by CFC of liens on its assets and contain certain other conditions to borrowing. The agreements also prohibit CFC from pledging collateral in excess of 150% of the principal amount of Collateral Trust Bonds outstanding. Provided that CFC is in compliance with these financial covenants (including that CFC has no material contingent or other liability or material litigation that was not disclosed by or reserved against in its most recent annual financial statements) and is not in default, CFC may borrow under the agreements until the termination date. As of May 31, 1996 CFC was in compliance with all covenants and conditions. As of May 31, 1996 there were no borrowings outstanding under the revolving credit agreements. On the basis of the five-year facility, at May 31, 1996, CFC classified $2,730.0 million of its notes payable outstanding as long-term debt. CFC expects to maintain more than $2,730.0 million of notes payable outstanding during the next 12 months. If necessary, CFC can refinance such notes payable on a long-term basis by borrowing under the five-year facility, subject to the conditions therein. Interest rates charged on loans by CFC include the cost of funds incurred by CFC plus increments estimated to cover general and administrative expenses, a provision for loan and guarantee losses and to provide margins in amounts considered by CFC to be consistent with sound financial practice. While interest rates are set to cover estimated costs and to provide reasonable margins, CFC does not always match the maturity of its borrowings to those of its loans. CFC generally finances its long-term loans to members through borrowings having shorter maturities than the loans; however, CFC generally finances its fixed rate loans with funds whose maturities generally coincide with, or exceed, the rate adjustment cycle of the loan. 15 Set forth below is a table showing CFC's outstanding borrowings and the weighted average interest rates thereon as of the dates shown:
Amounts Outstanding at May 31, (Dollar Amounts In Thousands) 1996 1995 1994 Long- and intermediate-term debt: (A) 9.50% Series T Collateral Trust Bonds, Due 1997 (B)(1) 150,000 150,000 150,000 8.50% Series U Collateral Trust Bonds, Due 1998(1) 149,800 149,800 149,800 7.40% Series A Collateral Trust Bonds, Due 2007 (C)(1) - - 2,819 Floating Rate Series E-2 Collateral Trust Bonds, Due 2010(1) 2,178 2,189 2,253 9.00% Series O Collateral Trust Bonds, Due 2016(C)(1) - 82,289 87,400 9.00% Series V Collateral Trust Bonds, Due 2021(1) 150,000 150,000 150,000 Floating Rate Series 1994A Collateral Trust Bonds, Due 1996(B)(2) 150,000 150,000 6.45% Collateral Trust Bonds, Due 2001(2) 100,000 - - 6.50% Collateral Trust Bonds, Due 2002(2) 100,000 - - 5.95% Collateral Trust Bonds, Due 2003(2) 100,000 - - 6.65% Collateral Trust Bonds, Due 2005(2) 50,000 - - 7.20% Collateral Trust Bonds, Due 2015(2) 50,000 - - Medium-Term Notes and weighted average interest rates 604,252 (6.68%) 573,637 (7.23%) 472,208 (6.99%) Total long- and intermediate-term debt and weighted average interest rates (D) (E) 1,606,230 (7.20%) 1,257,915 (7.90%) 1,014,480 (8.06%) Members' Subordinated Certificates, including advance payments and weighted average interest rates (F) 1,073,924 (4.29%) 1,096,466 (4.36%) 1,086,529 (4.46%) Total long- and intermediate-term debt and Members' Subordinated Certificates and weighted average interest rates $2,680,154 (6.03%) $2,354,381 (6.25%) $2,101,009 (6.20%) Short-term debt(G) and weighted average interest rates(H) $4,901,570 (5.41%) $4,242,570 (6.11%) $3,637,975 (4.23%) Total debt and weighted average interest rates at May 31 $7,581,724 (5.63%) $6,596,951 (6.16%) $5,738,984 (4.95%)
_________ (1) Collateral Trust Bonds issued under the 1972 Indenture. (2) Collateral Trust Bonds issued under the 1994 Indenture. (A) Net of $0.2 million, $1.1 million and $0.2 million principal amount of bonds held in treasury at May 31, 1996, 1995 and 1994, respectively, all of which was purchased in connection with CFC's deferred compensation program. (B) Collateral Trust Bonds maturing during fiscal year 1997 have been reclassified to short-term debt in the balance sheet. (C) The Series O Collateral Trust Bonds were called on March 16, 1996. The Series A Collateral Trust Bonds were called on December 1, 1994, at par. (D) Excludes $2,730.0 million, $2,430.0 million, and $2,030.0 million of Commercial Paper classified as long-term debt as of May 31, 1996, 1995 and 1994, respectively (see Note 4 to Combined Financial Statements). (E) Total long- and intermediate-term debt includes $639.0 million which will be due or is expected to be redeemed during fiscal year 1997. (F) Excluding $102.5 million, $114.1 million and $107.1 million of Debt Service Reserve Certificates and $31.4 million, $24.3 million and $29.3 million of subscribed but unissued Subordinated Certificates as of May 31, 1996, 1995 and 1994, respectively, since such funds are not generally available for investing in earning assets. (G) Net of discount; includes $2,730.0 million, $2,430.0 million and $2,030.0 million of Commercial Paper classified as long-term debt as of May 31, 1996, 1995 and 1994, respectively. Includes $183.5 million, $350.0 million, and $209.0 million of Bank Bid Notes at May 31, 1996, 1995 and 1994, respectively (see Note 4 to Combined Financial Statements). 16 (H) Average interest rates are weighted on the basis of amounts of out- standing borrowings without adjustment for bank credit compensation arrangements for short-term borrowings and without adjustment for Collateral Trust Bonds due within one year and reclassified as notes payable. Set forth below are the weighted average costs incurred by CFC on its short- term borrowings (Commercial Paper and Bank Bid Notes) and on its long-term borrowings (Collateral Trust Bonds, Medium-Term Notes and interest rate swaps) for the period shown. Years Ended May 31, 1996 1995 1994 Short-term borrowings 5.83% 5.59% 3.67% Long-term borrowings 7.99% 8.15% 8.63% Total short- and long-term borrowings 6.33% 6.15% 5.14% Tax Status In 1969, CFC obtained a ruling from the Internal Revenue Service (the "IRS") recognizing CFC's exemption from the payment of Federal income taxes under Section 501(c)(4) of the Internal Revenue Code. Such exempt status could be removed as a result of changes in legislation or in administrative policy or as a result of changes in CFC's business. CFC believes that its operations have not changed materially from those described to the IRS. CFC's affiliates RTFC and GFC are taxable Subchapter T corporations. Investment Policy Surplus funds are invested pursuant to policies adopted by CFC's Board of Directors. Under present policy, surplus funds may be invested in direct obligations of or obligations guaranteed by the United States or agencies thereof, the World Bank, or certain high quality commercial paper, obligations of foreign governments, Eurodollar deposits, bankers' acceptances, bank letters of credit, certificates of deposit or working capital acceptances. The policy also permits investments in certain types of repurchase agreements with highly rated financial institutions, whereby the assets consist of eligible securities listed above set aside in a segregated account. CFC typically has two types of funds available for investment: (1) the debt service reserve funds held by the Collateral Trust Bond Trustee under the Collateral Trust Bond Indenture between CFC and Chemical Bank ("1972 Indenture"), used to make bond interest and sinking fund payments; and (2) member loan payments and Commercial Paper investments in excess of the daily cash funding requirements. Debt service reserve funds are invested with maturities scheduled to coincide with interest and sinking fund payment dates. Other Sources of Loans to CFC Members In addition to CFC, there are other lending sources which supplement RUS financing. At May 31, 1996, CFC had long-term mortgage loans committed or outstanding to distribution systems totaling approximately $5,974.1 million, and to CFC's knowledge other lenders, excluding RUS, had loans, at May 31, 1996, totaling approximately $840.6 million. At May 31, 1996, CFC had committed or outstanding long-term mortgage loans for power supply projects totaling approximately $1,494.5 million, of which $416.6 million was fully guaranteed by RUS, and to CFC's knowledge other lenders, excluding RUS and FFB, had such loans committed or outstanding for power supply projects in a total amount of approximately $3,022.1 million. Employees At May 31, 1996, CFC had 148 employees, including engineering, financial and legal personnel, management specialists, credit analysts, accountants and support staff. CFC believes that its relations with its employees are good. 17 THE RURAL ELECTRIC AND TELEPHONE SYSTEMS General CFC's 903 rural electric Utility Members as of May 31, 1996, were drawn from the approximately 915 (at December 31, 1994) rural electric utility systems (the "systems") which were eligible for RUS loans. A large proportion of the eligible systems are members of CFC and information regarding these systems is available in the Annual Statistical Reports of RUS (the "RUS Reports"), therefore commentary in this section is based on information about the systems generally, rather than CFC members alone (see Note on page 19). However, the Composite Financial Statements on pages 20 to 24 relate only to CFC Utility Members. At December 31, 1994 and for the year then ended, CFC's members accounted for approximately 98% of the total utility plant, 94% of the total equity, 97% of the net margins and 93% of the total number of systems covered by RUS Reports, and CFC believes that its members are representative of the systems as a whole. Although generally stable retail rates have been the historical pattern for RUS borrowers, in the 1970's and early 1980's rising costs of fuel, material, labor, capital and wholesale power required rate increases by most of the distribution systems. Increases in costs have also resulted in rate increases by the power supply systems. Virtually all power contracts between power supply systems and their member distribution systems provide for rate increases to cover increased costs of supplying power, although in certain cases such increases must be approved by regulatory agencies. During the last five years, costs and rates have generally been stable. The RUS Program Since the enactment of the Rural Electrification Act in 1936 (the "Act"), RUS has financed the construction of electric generating plants, transmission facilities and distribution systems in order to provide electricity to persons in rural areas who were without central station service. Principally through the organization of systems under the RUS loan program in 46 states and U.S. territories, the percentage of farms and residences in rural areas of the United States receiving central station electric service increased from 11% in 1934 to almost 99% currently. Rural electric systems serve 11% of all consumers of electricity in the United States and its territories. They account for approximately 8% of total sales of electricity and about 7% of energy generation and generating capacity. In 1949, the Act was amended to allow RUS to lend for the purpose of furnishing and improving rural telephone service. At December 31, 1994, 695 of RUS's 919 telephone borrowers provided service to 4.4 million sub- scribers throughout the United States and its territories (reporting information was not available for the remaining 224 borrowers). The Act provides for RUS to make insured loans and to provide other forms of financial assistance to borrowers. RUS is authorized to make direct loans, at below market rates, to systems which are eligible to borrow from it. RUS is also authorized to guarantee loans which have been used mainly to provide financing for construction of Bulk Power Supply Projects. Guaranteed loans bear interest at a rate agreed upon by the borrower and the lender (which generally has been the FFB). For telephone borrowers, RUS also provides financing through the RTB. The RTB is a government corporation providing financing at rates reflecting its cost of capital. RUS exercises a high degree of financial and technical supervision over borrowers' operations. Its loans and guarantees are generally secured by a mortgage on substantially all of the system's property and revenues. For fiscal year 1996 (which ends on September 30, 1996), RUS will approve $635.1 million in electric insured loans, of which $90.5 million are at a 5% interest rate and $544.6 million are at municipal bond equivalent rates. In addition, RUS is authorized to approve $300 million in loan guarantees during fiscal year 1996. For fiscal year 1997, both the House and Senate Agriculture Appropriation Committees have approved RUS electric insured loan levels of $650 million, of which $125 million would be at the 5% rate, and $525 million would be at municipal rates. An additional $300 million would be available in loan guarantees. This legislation is proceeding through the normal appropriations process. Because the levels approved by the House and Senate are identical, it is anticipated that these will also be the final levels approved by the Congress. Legislation enacted in 1994 allows RUS electric borrowers to prepay their loans to RUS at a discount based on the government's cost of funds at the time of prepayment. If a borrower chooses to prepay its notes, it becomes ineligible for future RUS loans for a period of ten years, but remains eligible for RUS loan guarantees. As of July 31, 1996, 77 borrowers had either fully prepaid or partially prepaid their RUS notes, under these provisions, in the total amount of $1,177.9 million. A total of 59 of these borrowers have selected CFC to refinance a total of $1,005.8 million of this amount. 18 Distribution Systems Distribution systems are local utilities distributing electric power, generally purchased from wholesale sources, to consumers in their service areas. Virtually all are locally-managed cooperative, non-profit associations, and most have been in operation for at least 40 years. At December 31, 1994, the approximate number of consumers served by RUS electric borrowers was 12.2 million, representing an estimated 32.0 million ultimate users. Aggregate operating revenues of the distribution systems from sales of electric energy for the year ended December 31, 1994, totaled $16.5 billion, of which 64% was derived from the sales of electricity to resi- dential consumers (farm and non-farm), 30% from such sales to commercial and industrial consumers and the remainder from sales to various other consumers. The composite TIER of CFC member distribution systems increased from 2.54 in 1993 to 3.16 in 1994. The composite DSC ratio decreased from 2.44 in 1993 to 2.26 in 1994. The composite MDSC ratio decreased from 2.21 in 1993 to 2.09 in 1994. Composite equity as a percent of total assets for member distri- bution systems increased from 40.83% at December 31, 1993 to 41.53% at December 31, 1994. Wholesale power supply contracts ordinarily guarantee neither an uninterrupted supply nor a constant cost of power. Contracts with RUS-financed power supply systems (which generally require the distribution system to purchase all its power requirements from the power supply system) provide for rate increases to pass along increases in sellers' costs. The wholesale power contracts permit the power supply system, subject to approval by RUS and, in certain circumstances, regulatory agencies, to establish rates to its members so as to produce revenues sufficient, with revenues from all other sources, to meet the costs of operation and maintenance (including, without limitation, replace- ments, insurance, taxes and administrative and general overhead expenses) of all generating, transmission and related facilities, to pay the cost of any power and energy purchased for resale, to pay the costs of generation and transmission, to make all payments on account of all indebtedness and leases of the power supply system and to provide for the establishment and maintenance of reasonable reserves. The rates under the wholesale power contracts are required to be reviewed by the Board of Directors of the power supply system at least annually. Power contracts with investor-owned utilities and power supply systems which do not borrow from RUS generally have rates subject to regulation by the Federal Energy Regulatory Commission. Contracts with Federal agencies generally permit rate changes by the selling agency (subject, in some cases, to Federal regulatory approval). In the case of many distribution systems, only one power supplier is within a feasible distance to provide wholesale electricity. Power Supply Systems Power supply systems are utilities which purchase or generate electric power and provide it wholesale to distribution systems for delivery to the ultimate retail consumer. Of the 63 operating power supply systems financed in whole or in part by RUS or CFC at December 31, 1995, 62 were cooperatives owned directly or indirectly by groups of distribution systems and one was govern- ment owned. Of this number, 39 had generating capacity of at least 100 megawatts, and nine had no generating capacity. Seven of the nine systems with no generating capacity operated transmission lines to supply certain distribution systems, and one is currently building its first transmission facilities. Certain other power supply systems had been formed but did not yet own generating or transmission facilities. At December 31, 1995, the 55 power supply systems reporting to RUS owned interests in 145 generating plants representing generating capacity of approximately 29,597 megawatts, or approximately 4.3% of the nation's estimated electric generating capacity, and served 716 RUS distribution system borrowers (representing an average for the year of approximately 8.5 million consumers). Certain of the power supply systems which own generating plants lease these facilities to others and purchase their power requirements from the lessee-operators. Of the power supply systems' total generating capacity in place as of December 31, 1995, steam plants accounted for 94.2% (including nuclear capacity representing approximately 10.1% of such total generating capacity), internal combustion plants accounted for 5.5% and hydroelectric plants accounted for 0.3%. RUS loans and loan guarantees as of December 31, 1995, have provided funds for the installation of over 34,031 megawatts (including nuclear capacity of approximately 3,806 megawatts, or 11.2% of the total) of which 1,279 megawatts or 3.8% of the total have officially been canceled. The high level of growth in demand for electricity experienced in the 1970's was not expected to decline in the 1980's and the power supply systems continued their construction programs in anticipation of continued growth in demand. During the 1980's, however, slower growth in power requirements of the systems reduced the need for additional generating capacity in most areas of the country. Thus, many areas are now experiencing a surplus of generating capacity and, as a result, some power supply systems have significant amounts of fixed costs for power plant investment not fully supported 19 by increased revenues (see Note 10 to Combined Financial Statements for further information concerning certain CFC members experiencing this problem). While the level of funds needed for new generating units is expected to be low over the next few years, the need for transmission and capital additions will continue to generate substantial long-term capital requirements. The power supply systems are expected to continue to seek to satisfy these requirements primarily through the RUS loan guarantee program. Telephone Systems As of December 31, 1994 (complete data at December 31, 1995 was not yet available), there were 919 telephone systems that were RUS borrowers, (RUS had collected financial data on 695). The 695 telephone systems included 199 cooperative not-for-profit organizations and 496 commercial for-profit organizations. These organizations provided telephone service to approximately 4.4 million consumers and owned approximately 725,430 miles of telephone lines. Total assets at December 31, 1994 were $10.8 billion, with a composite TIER of 4.49 and composite equity ratio of 46.8%. The tele- phone systems operate in all fifty states and seven U.S. territories. The RTB was created by a 1971 amendment to the Act to serve as a source of supplemental financing for rural telephone systems. To initially capitalize the RTB, between 1971 and 1991 the government purchased $592 million in Class A stock of the RTB. RTB borrowers, who are required to purchase class B stock in an amount equal to five percent of the amount of each loan, have, as of June 30, 1995, invested $524 million. In addition, borrowers and other eligible entities have purchased $112 million in Class C stock of the RTB. The Act provides that the RTB is to redeem and retire the government's Class A stock as soon as practicable after September 30, 1995, but not to the extent that the bank's board determines that such retirement would impair the operation of the RTB. The minimum amount of Class A stock to be retired each year after September 30, 1995 is the amount of the Class B stock that is issued during that year. Language in the United States Government Fiscal Year 1996 House Agriculture Appropriation limits the amount of Class A stock that can be redeemed in fiscal year 1996 to five percent of the amount of Class A stock outstanding. Similar language is expected to be included in the fiscal year 1997 Appropriations Bill. Regulation and Competition The degree of regulation of rural electric systems by state authorities varies from state to state. The retail rates of rural electric systems are regulated in 16 states (in which there are 250 systems). Distribution systems in these states account for 35% of the total operating revenues and patronage capital of all distribution systems nationwide. State agencies, principally public utility commissions, of 19 states regulate those states' 289 systems as to the issuance of long-term debt securities. In five states (in which there are 52 systems) state agencies regulate, to varying degrees, the issuance of short- term debt securities. Since 1967, the Federal Power Commission and its successor, the Federal Energy Regulatory Commission ("FERC"), which regulates interstate sales of energy at wholesale, has taken the position that it lacks jurisdiction to regulate cooperative rural electric systems which are current borrowers from RUS. However, rural electric cooperatives that pay off their RUS debt or never incur RUS debt may be regulated by FERC with respect to financing and/or rates. Varying degrees of territorial protection against competing utility systems are provided to distribution systems in 41 states (in which over 92% of the distribution systems are located). Changes in administrative or legislative policy in several states, or Federal legislation, may result in more or in less territorial protection for the distribution systems. In addition to competition from other utility systems, some distribution systems have expressed increasing concern about the loss of desirable suburban service areas as a result of annexation by expanding municipal or franchised investor-owned utility systems, regardless of the degree of territorial protection otherwise provided by applicable law. The systems are also subject to competition from alternate sources of energy such as bottled gas, natural gas, fuel oil, diesel generation, wood stoves and self- generation. The systems, in common with the electric power industry generally, may incur substantial capital expenditures and increases in operating costs in order to meet the requirements of both present and future Federal, state and local standards relating to safety and environmental quality control. These include possible requirements for burying distribution lines and meeting air and water quality standards. 20 The 1990 amendments to the Clean Air Act of 1970 (the "Amendments"), required utilities and others to reduce emissions. The Amendments contain a range of compliance options and a phase-in period which will help mitigate the immediate costs of implementation. Many of CFC's member systems already comply with the provisions of the Amendments. CFC is currently monitoring the overall impact of the Amendments on individual member systems, which must implement compliance plans and operating or equipment modifications for Phase II of the Act (2000). Compliance plans for member systems with units affected in Phase I primarily involved fuel switching to low-sulfur coal. The trading of emission allowances may also be an economical alternative in Phase II. Some member systems originally believed to be affected by the Amendments have developed strategies designed to minimize the Amendments' impact. At this time, it is not anticipated that the Amendments will have a material adverse impact on the quality of CFC's loan portfolio. In March 1995, the FERC published a Notice of Proposed Rulemaking ("NOPR") to solicit comments regarding pending policy changes aimed at opening whole- sale power sales to competition. This NOPR would require jurisdictional public utilities (including investor-owned electric utilities and cooperatives that are not RUS borrowers) that own, control, or operate transmission facilities to file non-discriminatory open access transmission tariffs that provide others with the same transmission services they provide themselves. On April 24, 1996, the FERC issued orders 888 and 889 incorporating its findings during the rulemaking process. Order 888 provides for competitive wholesale power sales by requiring jurisdictional public utilities that own, control, or operate transmission facilities to file non-discriminatory open access transmission tariffs that provide others with transmission service comparable to the service they provide themselves. The reciprocity provision associated with Order 888 also provides comparable access to transmission facilities of non-jurisdictional utilities (including RUS borrowers and municipal and other publicly owned electric utilities) that use jurisdictional utilities' transmission systems. The order further provides for the recovery of stranded costs from departing wholesale customers with agreements dated prior to July 11, 1994. After that date, stranded costs must be agreed upon in the service agreement. Order 889 provides for a real time electronic information system referred to as the Open Access Same-Time Information System ("OASIS"). It also addresses standards of conduct to ensure that transmission owners and their affiliates do not have an unfair competitive advantage by using transmission to sell power. Presently, many of the issues surrounding the implementation of Orders 888 and 889 remain unresolved. These issues are anticipated to be resolved in part by litigation on a case by case basis before the FERC and through the appellate process. Due to the uncertainty of this litigation, CFC is unable to estimate the ultimate impact of these orders on its member systems, however open access transmission as a national policy has long been sought by electric cooperatives so that investor-owned utilities cannot use their ownership of transmission to the disadvantage of the cooperatives. Section 211 of the Federal Power Act as amended by the Energy Policy Act of 1992 classifies any cooperative with significant transmission assets as a "transmitting utility" for purposes of this section. Under the provisions of this Act, FERC has the authority to order such cooperatives to provide open access for unaffiliated entities. This provision also authorizes FERC to require investor-owned and other utilities to provide the same open access transmission for the benefit of cooperatives. Electric cooperatives have strongly supported section 211 for this reason. Under sections 205 and 206 of the Federal Power Act, cooperatives that pay off their RUS debt are treated as "jurisdictional public utilities". FERC is proceeding under the legal theory that, under these sections, it can order "jurisdictional public utilities" to provide open access. All telephone systems are regulated by the Federal Communications Commission with respect to long distance access rates. Most states also regulate local rates. Financial Information The systems differ from investor-owned utilities in that the vast majority are cooperative, non-profit organizations operating under policies which provide that rates should be established so as to minimize rates over the long term. Revenues in excess of operating costs and expenses are referred to as "net margins and patronage capital" and are treated as equity capital furnished by the systems' consumers. This "capital" is transferred to a balance sheet account designated as "patronage capital", and is usually allocated to consumers in proportion to their patronage. Such capital is not refunded to them for a period of years during which time it is available to the system to be used for proper corporate purposes. Subject to their applicable contractual obligations, the systems may refund such capital to their members when doing so will not impair the systems' financial condition. In the terminology of the Uniform System of Accounts prescribed by RUS for its borrowers, "operating revenues and patronage capital" refers to all utility operating income received during a given period. Similar to the practice followed by investor-owned utilities pursuant to FERC procedures and as prescribed by RUS, the systems capitalize as a cost of construction, the interest charges on borrowed funds ("interest charged to construction") and the estimated unearned interest attributable to internally- generated funds ("allowance for funds used during construction") used in the construction of generation, and to a lesser extent transmission and distribution facilities. This accounting 21 policy, which increases net margins by the amounts of these actual and imputed interest charges, is based on the premise that the cost of financing construction is an expenditure serving to increase the productive capacity and value of the utility's assets and thus should be included in the cost of the assets constructed and recovered over the life of the assets. In the case of power supply systems, RUS has included in its direct loans and guarantees of loans amounts sufficient to meet the estimated interest charges during construction. If the foregoing accounting policy were not followed, utilities would presumably request regulatory permission, if applicable, to increase their rates to cover such costs. The amounts of interest charged to construction and allowance for funds used during construction capitalized by distribution systems are relatively insignificant. Because power supply systems generally expend substantial amounts on long-term construction projects, the application of this accounting policy may result in sub- stantially lower interest expense and in substantially higher net margins for such systems during construction than would be the case if such a policy were not followed. On the following pages are tables providing composite statements of revenues, expenses and patronage capital from the RUS Reports of distribution systems which were members of CFC and power supply systems which were members of CFC during the five years ended December 31, 1994, and their respective composite balance sheets at the end of each such year. Complete RUS data for the year ended December 31, 1995 was not available prior to the filing of this report. ________ NOTE: Statistical information in the RUS Reports has not been examined by CFC's independent public accountants, and the number and geographical dispersion of the systems have made impractical an independent investigation by CFC of the statistical information available from RUS. The RUS Reports are based upon financial statements submitted to RUS, subject to year-end audit adjustments, by reporting RUS borrowers and do not, with minor exceptions, take into account current data for certain systems, primarily those which are not active RUS borrowers. 22
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS The following are unaudited figures which are based upon financial statements submitted to RUS or to CFC by CFC Member Distribution Systems Years Ended December 31, (Dollar Amounts In Thousands) 1994 1993 1992 1991 1990 Operating revenues and patronage capital $16,163,578 $15,072,400 $13,921,515 $13,446,544 $12,819,204 Operating deductions: Cost of power (1) 10,174,716 9,882,450 9,211,421 8,979,920 8,558,404 Distribution expense (operations) 386,235 366,148 346,183 327,787 307,649 Distribution expense (maintenance) 699,253 643,390 589,722 558,291 528,746 Administrative and general expense (2) 1,506,729 1,398,749 1,287,224 1,215,158 1,137,154 Depreciation and amortization expense 942,435 879,957 828,966 775,049 724,951 Taxes 417,471 396,024 365,473 337,898 313,403 Total 14,126,839 13,566,718 12,628,989 12,194,103 11,570,307 Utility operating margins 2,036,739 1,505,682 1,292,526 1,252,441 1,248,897 Non-operating margins 135,347 110,612 157,912 175,993 201,798 Power supply capital credits (3) 260,335 274,250 219,638 201,708 163,580 Total 2,432,421 1,890,544 1,670,076 1,630,142 1,614,275 Interest on long-term debt (4) 752,749 730,078 749,594 763,070 741,465 Other deductions 52,574 36,644 27,841 18,953 22,607 Total 805,323 766,722 777,435 782,023 764,072 Net margins and patronage capital $1,627,098 $1,123,822 $ 892,641 848,119 $ 850,203 TIER (5) 3.16 2.54 2.19 2.11 2.15 DSC (6) 2.26 2.44 2.07 2.13 2.16 MDSC (7) 2.09 2.21 1.99 2.06 2.05 Number of systems included 828 825 821 819 820
____________ (1) Includes cost of purchased power, power production and transmission expense, separately listed in the applicable RUS report. (2) Includes sales expenses, consumer accounts and customer service and informational expense as well as other administrative and general expenses, separately listed in the applicable RUS report. (3) Represents net margins of power supply systems and other associated organizations allocated to their member distribution systems and added in determining net margins and patronage capital of distribution systems under RUS accounting practices. Cash distributions of this credit have rarely been made by the power supply systems and such other organizations to their members. (4) Interest on long-term debt is net of interest charged to construction, which is stated separately as a credit in RUS Reports. For a description of the reasons for, and the effect on net margins and patronage capital of, the accounting policies governing interest charged to construction and allowance for funds used during construction, see "Financial Information". CFC believes that amounts incurred by distribution systems for interest charged to construction and allowance for funds used during construction are immaterial relative to their total interest on long-term debt and net margins and patronage capital. (5) The ratio of (x) interest on long-term debt (in each year including all interest charged to construction) and net margins and patronage capital to (y) interest on long-term debt (in each year including all interest charged to construction). (6) The ratio of (x) net margins and patronage capital plus interest on long-term debt (including all interest charged to construction) plus depreciation and amortization to (y) long-term debt service obligations. (7) Modified DSC ("MDSC") is the ratio of (x) operating margins and patronage capital plus interest on long-term debt (including all interest charged to construction) plus depreciation and amortization expense plus Non-operating Margins-Interest plus cash received in respect of generation and transmission and other capital credits to (y) long-term debt service obligations. 23
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMPOSITE BALANCE SHEETS AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS The following are unaudited figures which are based upon financial statements submitted to RUS or to CFC by CFC Member Distribution Systems At December 31, (Dollar Amounts In Thousands) 1994 1993 1992 1991 1990 Assets and other debits: Utility plant: Utility plant in service $31,162,069 $29,172,898 $27,502,596 $25,846,550 $24,370,100 Construction work in progress 799,327 697,329 619,764 615,425 623,356 Total utility plant 31,961,396 29,870,227 28,122,360 26,461,975 24,993,456 Less: accumulated provision for depreciation and amortization 8,631,903 7,992,325 7,401,028 6,812,221 6,330,979 Net utility plant 23,329,493 21,877,902 20,721,332 19,649,754 18,662,477 Investments in associated organizations (1) 3,051,840 2,847,260 2,585,621 2,405,290 2,255,370 Current and accrued assets 3,789,699 3,733,893 3,611,874 3,624,025 3,585,399 Other property and investments 456,923 366,452 343,734 323,445 311,937 Deferred debits 472,536 463,194 439,529 342,855 287,294 Total assets and other debits $31,100,491 $29,288,701 $27,702,090 $26,345,369 $25,102,477 Liabilities and other credits: Net worth: Memberships $ 114,080 $ 100,689 $ 98,450 $ 93,207 $ 91,827 Patronage capital and other equities (2) 12,804,404 11,859,273 10,826,559 9,966,135 9,275,621 Total net worth 12,918,484 11,959,962 10,925,009 10,059,342 9,367,448 Long-term debt (3) 15,020,664 14,569,363 14,303,024 13,958,473 13,461,363 Current and accrued liabilities 2,260,514 2,066,601 1,898,868 1,755,336 1,734,385 Deferred credits 714,083 598,997 555,618 554,149 521,339 Miscellaneous operating reserves 186,746 93,778 19,571 18,069 17,942 Total liabilities and other credits $31,100,491 $29,288,701 $27,702,090 $26,345,369 $25,102,477 Equity Percentage (4) 41.5% 40.8% 39.4% 38.2% 37.3% Number of systems included 828 825 821 819 820
(1) Includes investments in service organizations, power supply capital credits and investments in CFC. (2) Includes non-refundable donations or contributions in cash, services or property from states, municipalities, other government agencies, individuals and others for construction purposes separately listed in the applicable RUS Report. (3) Principally debt to RUS and includes $3,989,914, $3,607,159, $3,536,794, $3,435,994 and $3,283,689 for the years 1994, 1993, 1992, 1991 and 1990, respectively, due to CFC. (4) Determined by dividing total net worth by total assets and other debits. 24
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS The following are unaudited figures which are based upon financial statements submitted to RUS or to CFC by CFC Member Power Supply Systems Years Ended December 31, (Dollar Amounts In Thousands) 1994 1993 1992 1991 1990 Operating revenues and patronage capital $9,972,873 $9,976,560 $ 9,111,434 $ 8,615,165 $ 8,553,618 Operating deductions: Cost of power (1) 6,760,543 6,606,419 5,855,131 5,541,332 5,461,628 Distribution expense (operations) 14,668 14,391 12,959 11,445 9,451 Distribution expense (maintenance) 14,703 11,081 11,300 11,315 10,611 Administrative and general expense (2) 431,645 433,278 390,521 363,646 338,256 Depreciation and amortization expense 930,483 902,810 872,657 819,586 821,943 Taxes 241,775 223,122 233,420 239,588 182,279 Total 8,393,817 8,191,101 7,375,988 6,986,912 6,824,168 Utility operating margins 1,579,056 1,785,459 1,735,446 1,628,253 1,729,450 Non-operating margins 221,003 328,958 280,810 329,419 328,349 Power supply capital credits (3) 32,531 47,838 30,771 28,405 12,452 Total 1,832,590 2,162,255 2,047,027 1,986,077 2,070,251 Interest on long-term debt (4) 1,857,644 2,014,794 2,075,939 1,999,107 1,968,531 Other deductions 129,794 184,902 137,344 42,862 203,548 Total 1,987,438 2,199,696 2,213,283 2,041,969 2,172,079 Net margins and patronage $ (154,848) $ (37,441) $ (166,256) $ (55,892) $ (101,828) TIER (5) .93 .98 .92 .97 .95 DSC (6) 1.01 1.03 1.05 1.06 1.05 Number of systems included (7) 53 50 50 49 50
(1) Includes cost of purchased power, power production and transmission expense, separately listed in the applicable RUS Report. (2) Includes sales expenses and consumer accounts expense and consumer service and informational expense as well as other administrative and general expenses, separately listed in the applicable RUS Report. (3) Certain power supply systems purchase wholesale power from other power supply systems of which they are members. Power supply capital credits represent net margins of power supply systems allocated to member power supply systems on the books of the selling power supply systems. This item has been added in determining net margins and patronage capital of the purchasing power supply systems under RUS accounting practices. Cash distributions of this credit have rarely been made by the selling power supply systems to their members. This item also includes net margins of associated organizations allocated to CFC power supply members and added in determining net margins and patronage capital of the CFC member systems under RUS accounting practices. (4) Interest on long-term debt is net of interest charged to construction. Allowance for funds used during construction has been included in non- operating margins. For a description of the reasons for, and the effect on net margins and patronage capital of, the accounting policies governing interest charged to construction and allowance for funds used during construction, see "Financial Information". According to un- published information furnished by RUS, interest charged to construction and allowance for funds used during construction for CFC power supply members in the years 1990-1994 were as follows: 25 Allowance for Interest Charged Funds used (Dollar Amounts In Thousands) to Construction During Construction Total 1994 $ 46,773 $ 8,913 $ 55,686 1993 49,237 8,621 57,858 1992 54,093 4,396 58,489 1991 49,495 5,241 54,736 1990 55,670 6,615 62,285 (5) The ratio of (x) interest on long-term debt (in each year including all interest charged to construction) and net margins and patronage capital to (y) interest on long-term debt (in each year including all interest charged to construction). The TIER calculation includes the operating results of six systems which failed to make debt service payments or are operating under a debt restructure agreement, without which the composite TIER would have been 1.31, 1.20, 1.15, 1.15, and 1.08 for the years ended December 31, 1994, 1993, 1992, 1991 and 1990, respectively. (6) The ratio of (x) net margins and patronage capital plus interest on long- term debt (including all interest charged to construction) plus depreciation and amortization to (y) long-term debt service obligations (including all interest charged to construction). The DSC calculation includes the operating results of six systems which failed to make debt service payments or are operating under a debt restructure agreement. Without these systems, the composite DSC would have been 1.24, 1.21, 1.22, 1.26, and 1.21 for the years ended December 31, 1994, 1993, 1992, 1991 and 1990, respectively. (7) Thirteen CFC power supply system members are not required to report to RUS since they are not currently borrowers from RUS. These systems, with the exception of Old Dominion Electric Cooperative, are either in the developmental stage or act as coordinating agents for their members. Their inclusion would not have a material effect on this data. 26
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMPOSITE BALANCE SHEETS AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS The following are unaudited figures which are based upon financial statements submitted to RUS or to CFC by CFC Member Power Supply Systems At December 31, (Dollar Amounts In Thousands) 1994 1993 1992 1991 1990 Assets and other debits: Utility plant: Utility plant in service $32,934,304 $32,240,926 $31,375,391 $29,433,524 $29,421,761 Construction work in progress 1,624,978 1,469,882 1,324,432 911,262 695,229 Total utility plant 34,559,282 33,710,808 32,699,823 30,344,786 30,116,990 Less: accumulated provision for depreciation and amortization 10,777,786 9,936,528 8,983,913 7,786,074 7,032,102 Net utility plant 23,781,496 23,774,280 23,715,910 22,558,712 23,084,888 Investments in associated organizations(1) 248,677 992,921 865,162 740,554 654,419 Current and accrued assets 3,997,466 4,284,613 4,076,841 4,239,802 4,094,006 Other property and investments 2,483,232 1,899,809 1,717,451 1,503,526 1,447,443 Deferred debits 4,366,377 4,078,879 1,879,607 1,445,868 2,236,808 Total assets and other debits $34,877,248 $35,030,502 $32,254,971 $30,488,462 $31,517,564 Liabilities and other credits: Net worth: Memberships $ 322 $ 252 $ 246 $ 244 $ 250 Patronage capital and other equities 246,262 432,095 315,793 593,505 544,872 Total net worth 246,584 432,347 316,039 593,749 545,122 Long-term debt (2) 28,779,577 28,528,640 28,838,255 27,060,357 27,989,365 Current and accrued liabilities 2,747,022 1,185,182 1,531,722 1,391,762 1,492,713 Deferred credits 1,206,488 1,849,906 1,071,393 1,344,641 1,113,545 Miscellaneous operating reserves 1,897,577 3,034,427 497,562 97,953 376,819 Total liabilities and other credits $34,877,248 $35,030,502 $32,254,971 $30,488,462 $31,517,564 Number of systems included (3) 53 50 50 49 50
(1) Includes investments in service organizations, power supply capital credits and investments in CFC. (2) Principally debt to RUS or debt guaranteed by RUS and loaned by FFB and includes $881,278, $876,084, $633,105, $526,513 and $596,072 for the years 1994, 1993, 1992, 1991 and 1990, respectively, due to CFC. (3) Thirteen CFC power supply system members are not required to report to RUS since they are not currently borrowers from RUS. These systems, with the exception of Old Dominion Electric Cooperative, are either in developmental stages or act as coordinating agents for their members. Their inclusion would not have a material effect on these data. Item 2. Properties. CFC owns and operates a headquarters facility in Fairfax County, Virginia. This facility consists of a six-story office building with separate parking garage situated on four acres of land. The company also owns an additional 31.5 acres of unimproved land adjacent to the building. There are no plans at this time for future development of either parcel of land. Item 3. Legal Proceedings. None. Item 4. Submission of Matters to a Vote of Security Holders. None. 27 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Inapplicable. Item 6. Selected Financial Data. The following is a summary of selected financial data for each of the five years ended May 31, 1996.
(Dollar Amounts In Thousands) 1996 1995 1994 1993 1992 For the year ended May 31: Operating income $ 505,073 $ 440,109 $ 324,682 $ 336,387 $ 402,255 Operating margin $ 46,857 $ 41,803 $ 29,159 $ 38,352 $ 42,809 Nonoperating income 3,764 3,409 4,029 3,296 2,744 Extraordinary loss (A) (1,580) - - (3,161) (1,398) Net margins $ 49,041 $ 45,212 $ 33,188 $ 38,487 $ 44,155 Fixed charge coverage ratio (A) 1.12 1.13 1.13 1.16 1.14 As of May 31: Assets $ 8,054,089 $ 7,080,789 $ 6,224,296 $ 5,464,144 $ 5,401,473 Long-term debt (B) $ 3,682,421 $ 3,423,031 $ 2,841,220 $ 3,095,488 $ 2,971,074 Members' subordinated certificates $ 1,207,684 $ 1,234,715 $ 1,222,858 $ 1,215,547 $ 1,221,095 Members' equity $ 269,641 $ 270,221 $ 260,968 $ 258,299 $ 246,320 Leverage ratio (C) 5.69 5.13 4.63 4.41 4.44
(A) During the years ended May 31, 1996, 1993 and 1992 CFC paid premiums totaling $1.6 million, $3.2 million and $1.4 million, respectively, in connection with the prepayment of Collateral Trust Bonds. Margins used to compute the fixed charge coverage ratio represent net margins before extraordinary loss plus fixed charges. The fixed charges used in the computation of the fixed charge coverage ratio consist of interest and amortization of bond discount and bond issuance expenses. (B) Includes commercial paper reclassified as long-term debt and excludes $351.5 million, $262.7 million, $200.8 million, $286.8 million and $494.5 million in long-term debt that comes due, matures and/or will be redeemed early during fiscal years 1997, 1996, 1995, 1994 and 1993, respectively (see Note 5 to Combined Financial Statements). (C) In accordance with CFC's revolving credit agreements, the leverage ratio is calculated by dividing debt and guarantees outstanding, excluding debt used to fund loans guaranteed by the U.S. Government, by the total of Members' Subordinated Certificates and Members' Equity. CFC has had outstanding guarantees for its members' indebtedness in each of the fiscal years shown above. Members' interest expense on such indebtedness was approximately $121.3 million for the year ended May 31, 1996. The Company does not have outstanding any common stock and does not pay dividends. Under current policies, CFC retires Patronage Capital Certificates, which represent annual allocations of CFC's net margins, 70% during the next fiscal year and expects to retire the remaining 30% after 15 years, if permitted by CFC's contractual obligations and to the extent that the Board of Directors in its discretion may determine from time to time that the financial condition of CFC will not be impaired as a result. 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The management discussion and analysis contains statements that may be considered forward looking. In making these statements, CFC has made an evaluation of estimates, risks and uncertainties related to each circumstance. The actual results may differ from the estimates and assumptions discussed in this presentation, which could cause the actual results to differ materially. Overview The following discussion and analysis is designed to provide a better under- standing of the Company's combined financial condition and results of operations and as such should be read in conjunction with the Combined Financial Statements, including the notes thereto. CFC was formed in 1969 by rural electric cooperatives to provide them with a source of funds to supplement the financing provided by RUS. The Company was organized as a cooperative in which each member receives one vote. Under CFC's bylaws, the Board of Directors must be comprised of 22 individuals who are either general managers or directors of members. CFC was granted tax- exempt status under Section 501(c)(4) of the Internal Revenue Code. In 1987, RTFC was formed by CFC to provide a source of funds for the rural telephone industry. Like CFC, RTFC is a cooperative. However, RTFC's bylaws and voting members' agreement require that the majority of RTFC's Board of Directors be elected from individuals designated by CFC. The remaining board positions are filled by individuals nominated by the other RTFC members. Because CFC has control of the RTFC Board, RTFC's financial condition and results of operations are combined with those of CFC. (Unless stated other- wise, all references to CFC refer to the combined results of CFC, RTFC and all other CFC controlled affiliates.) The principal concept of CFC is to provide a mechanism through which the rural electric cooperatives can achieve better access to the debt markets. Each rural electric cooperative which joins CFC agrees to purchase subordinated subscription certificates from CFC as described below. CFC's operations consist of providing loans, financial guarantees and other financial services to its rural electric, telephone and other related organizations. In connection with any long-term loan or guarantee made by CFC to or on behalf of one of its members, CFC generally requires that the member make an additional investment in CFC by purchasing loan or guarantee certificates. Like the original subscription certificates, the loan and guarantee certificates are unsecured and subordinate to other debt. The subscription and loan and guarantee certificates (together, "Subordinated Certificates") along with patronage capital provide CFC's base capitalization. On a regular basis, CFC obtains debt financing in the market by issuing long- term fixed rate or variable rate Collateral Trust Bonds, intermediate-term fixed or variable rate Medium-Term Notes, Commercial Paper and Bank Bid Notes. In addition, CFC obtains debt financing from its membership and other qualified investors through the direct sale of its Commercial Paper and Medium-Term Notes. CFC's primary objective as a cooperative is to provide its members with the lowest possible loan and guarantee rates. Therefore, CFC marks up its funding costs only to the extent necessary to cover its operating expenses and a provision for loan and guarantee losses and to provide for margins sufficient to preserve interest coverage in light of CFC's financing objectives. To the extent members contribute to CFC's base capital with Subordinated Certificates carrying below-market interest rates, CFC can offer proportionally lower interest rates on its loans to members. CFC is required by the cooperative laws under which it is incorporated to allocate its earnings to its members in proportion to the members' contributions to those earnings. CFC thus allocates its net margins based on each member's participation in loan programs during the year. CFC's performance is closely tied to the performance of its member rural electric and telephone utility systems due to the near 100% concentration of its loan and guarantee portfolio in those industries. The following provides an analysis of both CFC's performance and a discussion of the quality of CFC's loan and guarantee portfolio. 29 Financial Condition At May 31, 1996, CFC had $8.1 billion in total assets. Approximately $7.7 billion or 96% of these assets consisted of loans made to CFC's members. The remaining $0.4 billion consisted of other assets to support CFC's operations. Except as required for the debt service account and unless excess cash is invested overnight, generally CFC does not use funds to invest in debt or equity securities. At May 31, 1996, 86% of CFC's loan portfolio consisted of 35-year long-term secured amortizing loans, including long-term loans classified as non- performing and restructured. The remaining 14% consisted of short- and intermediate-term secured and unsecured lines of credit and long-term loans guaranteed by the United States Government. Approximately 38% or $3.0 billion in long-term loans carry a fixed rate of interest. All other loans, including $3.8 billion in long-term loans, are subject to interest rate adjustment monthly or semimonthly. In addition to its loans, CFC had provided approximately $2.2 billion in guarantees for its members at May 31, 1996. These guarantees relate primarily to tax-exempt financed pollution control equipment and to leveraged lease transactions for equipment and plant. At May 31, 1996, CFC had also committed to lend an additional amount of approximately $5.6 billion to its members. Most unadvanced loan commitments contain a material adverse change clause. As many of these commitments are provided for operational back-up liquidity, CFC does not anticipate funding the majority of the commitments outstanding. CFC funds its assets through the sale of Subordinated Certificates, retained equity and other debt instruments. As discussed previously, Subordinated Certificates include both original membership subscription certificates and loan and guarantee certificates, all of which are subordinate to other CFC debt. At May 31, 1996, subscription certificates totaled $638 million. These certificates generally mature in 70 to 100 years and generally pay interest at 5.0%. At May 31, 1996, loan certificates totaled $333 million and carried a weighted average interest rate of 1.1%. At May 31, 1996, guarantee certificates totaled $236 million and carried a weighted average interest rate of 4.7%. Both the loan certificates and guarantee certificates are long-term instruments which generally amortize at a rate equivalent to that of the loan or guarantee to which they relate. On a combined basis, Subordinated Certificates carried a weighted average interest rate of 4.3%. The issuance of zero percent loan certificates is expected to exceed the issuance of 5.0% subscription certificates. Therefore, management expects this average interest rate to decline over time. CFC's net margins are allocated each year to CFC's member borrowers. Prior to fiscal year 1994, CFC's policy was to retire net margins on a first-in, first-out seven year cycle. Fiscal year 1994 net margins were retired 50% in the next fiscal year, with the remaining 50% to be held for 15 years. During fiscal year 1995, CFC adjusted its retirement policy to return 70% of net margins in the next fiscal year, with the remaining 30% to the held for 15 years and then retired, if permitted by CFC's contractual obligations and to the extent that the Board of Directors in its discretion may determine from time to time that the financial condition of CFC will not be impaired as a result. During the next 13 years, CFC will retire the existing six years of unretired allocations representing net margins for fiscal years 1988 to 1993. The unretired allocations (Members' Equity) do not earn interest and are junior to all debt instruments, including Subordinated Certificates. At May 31, 1996, CFC had $270 million in retained equity. Subordinated Certificates, in conjunction with retained Members' Equity, supply CFC's base capitalization. CFC enters the capital markets through the issuance of Collateral Trust Bonds, Medium-Term Notes, Commercial Paper and Bank Bid Notes. At May 31, 1996, CFC had $852 million in fixed rate long-term Collateral Trust Bonds and $150 million in variable rate Collateral Trust Bonds outstanding. Under its Collateral Trust Bond Indentures, CFC must pledge as collateral, eligible mortgage notes from its borrowers, evidencing loans equal in principal amount to at least 100% of the outstanding Bonds. At May 31, 1996, CFC had pledged $1,094 million in mortgage notes. During fiscal year 1996, CFC issued a total of $400 million in Collateral Trust Bonds in five separate debt offerings. During fiscal year 1996, CFC effected the early redemption of the $83.2 million Series O Collateral Trust Bonds, at a premium. In February 1994, CFC had entered into a new Collateral Trust Bond Indenture, with First Bank National Association as trustee ("1994 Indenture"), under which future series of Collateral Trust Bonds will be issued. Virtually all Collateral Trust Bonds were offered to outside investors in underwritten public offerings. At May 31, 1996, CFC had $604 million outstanding in Medium-Term Notes. Medium-Term Notes are issued for terms of 270 days to 30 years and are unsecured obligations of CFC. Medium-Term Notes outstanding to CFC's members totaled $339 million at May 31, 1996. The remaining $265 million were sold through dealers to outside investors. 30 At May 31, 1996, CFC had $4,718 million outstanding in Commercial Paper with a weighted average maturity of 35 days. Commercial Paper notes are issued with maturities up to 270 days and are unsecured obligations of CFC. Commercial Paper outstanding to CFC's members totaled $1,170 million at May 31, 1996. The remaining $3,482 million was sold through dealers to outside investors. In addition, CFC obtains funds from various banking institutions under Bank Bid Note arrangements, similar to bank lines of credit. The notes are issued for terms up to three months and are unsecured obligations of CFC. At May 31, 1996, CFC had $184 million outstanding in Bank Bid Notes. During the year, total assets increased by $973 million. Net loan balances increased by $982 million or 15%. Gross loans increased by a total of $994 million, partially offset by an increase in the allowance for loan and guarantee losses of $12 million, over the prior year. As a percentage of the portfolio, long-term loans (excluding loans guaranteed by RUS) represented 86% at May 31, 1996, compared to 85% at May 31, 1995. Long-term fixed rate loans represented 44% and 38% of the total long-term loans at May 31, 1996 and 1995. Loans converting from a variable rate to a fixed rate for the year ended May 31, 1996, totaled $606 million, an increase from the $75 million that converted for the year ended May 31, 1995. Offsetting the conversions to the fixed rate were $103 million and $117 million of loans that converted from the fixed rate to the variable rate or selected a variable rate upon the expiration of the current fixed interest rate period, for the years ended May 31, 1996 and 1995. This resulted in a net conversiont of $503 million from the variable rate to the fixed rate for the year ended May 31, 1996 compared to a net conversion of $42 million from the fixed rate to the variable rate for the year ended May 31, 1995. The increase in total loans outstanding at May 31, 1996, was primarily due to an increase of $718 million in long-term fixed rate loans, and an increase of $233 million in long-term variable rate loans The increase to loans outstanding for fiscal year 1996 was primarily due to the advance of funds for the purpose of repaying RUS loans. CFC also experienced an increase in the amount of 100% loans advanced to borrowers for purposes other than the repayment of RUS debt. There were also additional advances made for the purchase of local telephone exchange properties, although not at the levels experienced during fiscal years 1995 and 1994. During the year, CFC substantially increased its short-term debt outstanding to fund the increase in variable rate loans outstanding. Notes Payable, which consists of Commercial Paper, Bank Bid Notes and Collateral Trust Bonds that mature within one year, increased $959 million. The increase in Notes Payable during fiscal year 1996 was due to the increase in variable rate loans outstanding and the reclassification of $300 million in Collateral Trust Bonds due within one year. At May 31, 1996, CFC's short-term debt consisted of $3,482 million in dealer Commercial Paper, $1,170 million in Commercial Paper issued to CFC's members, $66 million in Commercial Paper issued to certain nonmembers, $184 million in Bank Bid Notes and $300 million in Collateral Trust Bonds due within one year. The Commercial Paper sold to CFC's members and certain nonmembers increased by $126 million, the amount of Bank Bid Notes outstanding decreased by $166 million and Commercial Paper sold through CFC's dealers increased by $699 million from the prior year. CFC's commercial paper and bid notes had a weighted average maturity of 34 days at May 31, 1996. As described in the footnotes to the Combined Financial Statements, CFC reclassifies a portion of its short-term debt as long-term, as it has the ability (subject to certain conditions) to refinance this short-term debt on a long-term basis under its revolving credit agreements. CFC renegotiated its revolving credit agreements during the fourth quarter of fiscal year 1995 and was able to reclassify $2,730 million and $2,430 million in short-term debt as long-term at May 31, 1996 and 1995, respectively. During fiscal year 1996, long-term debt outstanding increased by $348 million. The increase in long-term debt outstanding was due to the issuance of a total of $400 million in fixed rate Collateral Trust Bonds, a net increase of $31 million in Medium-Term Notes outstanding and an increase of $300 in the amount of short-term debt supported by the revolving credit agreement, offset by the early redemption of $83 million of fixed rate Collateral Trust Bonds and the reclassification of $300 million of Collateral Trust Bonds maturing within one year as Notes Payable. Deferred income (primarily fees from loan conversions) decreased by $8 million, due to the recognition of $10 million in conversion fees into income during fiscal year 1996 offset by $2 million in fees deferred on new loan conversions. CFC will amortize the remaining $11 million of deferred fees into income over the next two years. Subordinated Certificates and Members' Equity decreased by $28 million to $1,477 million at May 31, 1996, compared to $1,505 million at May 31, 1995. Due to recent policy changes, significant increases in Subordinated Certificates and Members' Equity are not anticipated. During fiscal year 1995, CFC adopted policy changes that reduced the amount of 31 Subordinated Certificates required to be purchased as a precondition to receiving a loan advance and increased the amount of allocated net margins to be retired in the next fiscal year from 50% to 70%. Off-balance sheet, CFC experienced an increase of $574 million in loan commitments. Guarantees outstanding decreased by $325 million due to scheduled principal repayments, the early redemption of one pollution control bond issue and the refinancing of a lease. CFC's leverage ratio increased during the year from 5.13 at May 31, 1995, to 5.69 at May 31, 1996. The ratio is calculated after excluding all debt associated with the funding of the RUS 100% guaranteed loans. Subordinated Certificates are treated as equity in the calculation of the leverage ratio. This increase was primarily due to an increase in loans outstanding to members financed by the issuance of short-term debt, Collateral Trust Bonds and Medium-Term Notes. CFC contemplates that its leverage ratio will continue to increase as it secures debt capital to accommodate its members' financing requirements, due to the slightly accelerated patronage capital retirements and reduced upfront Subordinated Certificate purchase requirements. CFC modified its patronage capital retirement program by retiring 70% of the prior year's allocation of net margins to borrowers in the succeeding fiscal year and retaining the remaining 30% for at least 15 years. In addition, CFC reduced borrowers' upfront Subordinated Certificate purchase requirements to 0-3% of the loan amount depending on the borrower's leverage ratio with CFC, including the new loan amount. Both actions more efficiently utilize Members Equity invested in CFC and provide more competitively priced loans. The increase in the leverage ratio may to some extent be offset by the possible issuance of deferred subordinated debentures, which will be treated by CFC as equity for the purpose of the leverage calculation. CFC will retain the flexibility to further amend its capital retention policies to retain members' investments in CFC consistent with maintaining acceptable financial ratios. Margin Analysis Fiscal Year 1996 versus 1995 Results CFC uses an interest coverage ratio instead of the dollar amount of gross or net margins as a primary performance indicator, since CFC's net margins are subject to fluctuation as interest rates change. During the year ended May 31, 1996, CFC achieved a Times Interest Earned Ratio ("TIER") of 1.12. This was slightly lower than the prior fiscal year TIER of 1.13. Management has established a 1.10 TIER as its minimum operating objective. CFC has earned TIER's of 1.16, 1.13, 1.13 and 1.12 for the years ended May 31, 1993, 1994, 1995 and 1996, respectively. Earned TIER is a reflection of CFC's ability to cover the interest expense on funding. The stated goal of management is to earn a TIER of at least 1.10. The decrease in TIER from 1.16 for 1993 to 1.13 for 1994 was due to the conversion of approximately $500 million of long-term loans from a fixed rate to a variable rate from the second half of 1993 through the end of 1994 and due to a declining interest rate environment. The conversion of the loans from a fixed rate to a variable rate, along with the declining interest rate environment led to a decrease of 88 bp in the yield earned on CFC's loan portfolio to 5.66% for 1994, compared to 6.54% for 1993. During 1995, CFC again earned a TIER of 1.13. While the earned TIER did not change from 1994, the yield on the portfolio increased to 6.72%, a 106 bp increase over 1994. The increase in the portfolio yield was driven by increases to the interest rates on CFC's funding. The increase in yield was offset by a decrease to the TIER factor used in the pricing of loans during the last three quarters of the year. The earned TIER for 1996 decreased to 1.12, due to the use of the reduced pricing factor for the whole year. For the year ended May 31, 1996, operating income totaled $505 million, an increase of $65 million over the prior year. The increase to operating income was due to a positive volume variance of $65 million. Average loans outstanding increased by $903 million from $6,553 million at May 31, 1995 to $7,456 million at May 31, 1996. The average yield on loans outstanding increased slightly for the year ended May 31, 1996, 6.77% compared to 6.72% for the prior year. For the year ended May 31, 1996, the cost of funds totaled $426 million, an increase of $65 million over the prior year. Included in the cost of funds is interest expense on CFC's Subordinated Certificates and other debt instruments offset by earnings on debt service investments. The increase in the cost of funds was due to a positive volume variance of $53 million and a positive rate variance of $12 million. As stated above, the average loan volume increased by $903 million during the year. The average interest rate on all funding increased from 5.51% for the year ended May 31, 1995 to 5.71% for the year ended May 31, 1996. Gross margins for both years totaled $79 million. The overall gross margin yield dropped from 1.21% for the year ended May 31, 1995 to 1.06% for the year ended May 31, 1996. This is a result of the pricing factor changes described above. 32 General and administrative expenses were approximately $20 million for both years. The provision to the allowance for loan and guarantee losses for fiscal year 1996 totaled $12 million, a reduction of $5 million from the prior year. Total expenses for the year ended May 31, 1996 were $32 million, a decrease of $5 million from the year ended May 31, 1995. Non-operating income for fiscal year 1996 increased slightly to $4 million. During fiscal year 1996, CFC effected the early redemption of the Series O Collateral Trust Bonds, recording an extraordinary loss for the redemption premium of $2 million. The sum of the non-operating income and the extra- ordinary loss represent a net decrease of $1 million compared to the non- operating income of $3 million for fiscal year 1995. Overall, CFC's net margins increased by $4 million for the year ended May 31, 1996 to a total of $49 million. Fiscal Year 1995 versus 1994 Results For the year ended May 31, 1995, operating income totaled $440 million, an increase of $115 million over the prior year. Operating income includes interest earned on loans and conversion fees. The increase in operating income was due to the general increase in interest rates. This increase reflected a positive rate variance of $74 million and a positive volume variance of $41 million. For the year ended May 31, 1995, cost of funds totaled $361 million, an increase of $98 million from the prior year. Included in cost of funds is interest expense on CFC's Subordinated Certificates and other debt instruments partially offset by interest earnings on debt service investments. The increase in cost of funds was due to the effects of increases in general market interest rates on CFC's variable rate debt instruments. This increase reflected a positive rate variance of $67 million and a positive volume variance of $31 million. For the year ended May 31, 1995, gross margins totaled $79 million. This represented an increase from the prior fiscal year of $17 million. This increase was primarily a result of the general increase in interest rates and to the increase in loans outstanding. General and administrative expenses increased by $3 million over the prior year. This increase is a result of one-time expenses associated with the changeover from a mainframe computer environment to a client server computer environment, accelerated write-off of deferred expenses and a major office renovation. During fiscal year 1995, CFC also added $17 million to its loan and guarantee loss allowance, an increase of $2 million over the prior year. Total expenses were $37 million, an increase of $5 million over the prior year. Nonoperating income includes guarantee fee income and any other gains and losses. Nonoperating income decreased by $1 million, from $4 million for the year ended May 31, 1994 to $3 million for the year ended May 31, 1995. Overall, CFC's net margins increased $12 million from $33 million for the year ended May 31, 1994 to $45 million for the year ended May 31, 1995. As described earlier, this increase was a result of an increasing interest rate environment and an increase in loans outstanding. CFC's achieved TIER of 1.13 represents no change from the prior year's achieved TIER. The following is a summary of CFC's operating results as a percentage of average loans outstanding for the last three fiscal years ending May 31, 1996, 1995 and 1994. 1996 1995 1994 Interest on loans 6.77% 6.72% 5.66% Less: Cost of funds 5.71% 5.51% 4.58% Gross operating margin 1.06% 1.21% 1.08% General and administrative expenses 0.26% 0.30% 0.29% Provision for loan and guarantee losses 0.16% 0.26% 0.27% Total expenses 0.42% 0.56% 0.56% Operating margin 0.64% 0.65% 0.52% Nonoperating income (1) 0.02% 0.05% 0.07% Net margins 0.66% 0.70% 0.59% TIER 1.12 1.13 1.13 (1) Nonoperating income includes the extraordinary loss in fiscal year 1996 resulting from the prepayment of debt. 33 Loan and Guarantee Portfolio Assessment Portfolio Diversity CFC and its combined affiliates make loans and provide financial guarantees to their qualified members. The combined memberships include rural electric distribution systems, rural electric generation and transmission systems, telecommunication systems, statewide rural electric and telecommunication associations, and associate organizations. The following chart summarizes loans and guarantees outstanding by member class at May 31, 1996, 1995 and 1994. Percentage of Total 1996 1995 1994 Distribution Systems 54.37% 49.08% 45.52% Power Supply Systems 33.38% 38.87% 44.34% Service Organizations 1.77% 1.82% 2.15% Telecommunication Organizations 9.57% 9.27% 7.46% Associate Members 0.91% 0.96% 0.53% Total 100.00% 100.00% 100.00% CFC's members are widely dispersed throughout the United States and its territories, including 46 states, the District of Columbia, Guam, Samoa and the U.S. Virgin Islands. At May 31, 1996, 1995 and 1994 no state or territory had over 9.9%, 9.1% and 8.2%, respectively, of total loans and guarantees outstanding. CFC believes that the risk of lending to utilities industries is mitigated somewhat by the fact that many of CFC's electric borrowers as utilities do not have immediate competition in the sale of their services to most of their customers and the fact that many of the services members provide are essential to consumers. Credit Concentration In addition to the geographic diversity of the portfolio, CFC limits its exposure to any one borrower. The majority of the largest single exposures are concentrated in the power supply systems due to their large plant and equipment requirements. At May 31, 1996, the total exposure outstanding to any one borrower did not exceed 4.6% of total loans (excluding loans guaranteed by RUS) and guarantees outstanding. At May 31, 1996, CFC had $2,294 million in loans outstanding, excluding loans guaranteed by RUS, and $2,109 million in guarantees outstanding to its largest 40 borrowers, representing 29% of total loans outstanding and 93% of total guarantees outstanding. Credit exposure to the largest 40 borrowers represented 43% of total credit exposure at May 31, 1996, compared to 45% at May 31, 1995. CFC's ten largest credit exposures represented 22% and 26% of total exposure at May 31, 1996 and 1995, respectively. Security Provisions Except when providing lines of credit, CFC typically lends to its members on a secured basis. At May 31, 1996, approximately 7.5% of CFC's total loans and guarantees were unsecured. Approximately 36.9% of the unsecured loans and guarantees represent obligations of borrowers for the initial phase(s) of RUS note buyout. Upon completion of the buyout from RUS, CFC will receive a first lien security on all assets and future revenues. The total of unsecured loans and guarantees would represent 4.7% of total loans and guarantees if the partial note buyout obligations were excluded. CFC's long-term loans are typically secured pro-rata with other secured lenders, if any (primarily RUS), by all assets and future revenues of the borrower. Short-term loans are generally unsecured lines of credit. Guarantees are secured on a pro-rata basis with other secured creditors by all assets and future revenues of the borrower or by the underlying financed asset. In addition to the collateral received, CFC also requires that its borrowers set rates designed to achieve certain financial ratios. Portfolio Quality The following table summarizes the key composite operating results of CFC's two main borrower types, distribution and power supply systems, which together comprised 87.7% and 87.9% of CFC's total loan and guarantee portfolio at May 31, 1996 and 1995. The information presented below is as of December 31, and taken from the RUS data contained on pages 20 to 24. CFC Distribution Member Borrowers Composite Results 1994 1993 1992 TIER 3.16 2.54 2.19 DSC 2.26 2.44 2.07 MDSC 2.09 2.21 1.99 Equity percentage 41.50% 40.83% 39.44% CFC Power Supply Member Borrowers Composite Results 1994 1993 1992 TIER 1.31 1.20 1.15 DSC 1.24 1.21 1.22 Equity percentage 9.29% 9.68% 8.03% NOTE: The power supply composite results have been presented without the operating results of six systems experiencing financial difficulties. CFC had credit exposure to four of the six borrowers (see footnote 10 to the Combined Financial Statements for a detailed description of these borrowers). Most CFC power supply borrowers sell the majority of their power under all- power-requirements contracts with their member distribution systems. These contracts allow, subject to regulatory requirements and competitive constraints for the recovery of all costs at the power supply level. Due to the contractual connection between the power supply and distribution systems, total combined system equity (power supply equity plus the equity at its affiliated distribution systems) has typically been maintained at the distribution level. As with CFC, to the extent distribution systems can fund their assets with retained Members' Equity (i.e., unretired capital credits), overall funding costs for plant and equipment are reduced. Distribution systems can, in turn, pass these savings on to their member/consumers in the form of lower utility rates. The effectiveness of the all-power-requirements contract is dependent on the individual systems' right and ability (legal as well as economic) to establish rates to cover all costs. The boards of directors of most of CFC's power supply and distribution members have the authority to establish binding rates for their consumer members. Some states regulate rate setting and can there- fore override the system's internal rate setting procedures. However, most CFC members are not externally rate regulated. CFC has 838 distribution members of which 590 are not regulated. Of the remaining 248 distribution systems, 164 are regulated only on a streamlined basis. At the power supply level, 43 of 65 members are not rate regulated. During the past few years, power supply members have been increasing their equity levels. Under recently changed RUS underwriting standards, in order to qualify for additional RUS loan funds, power supply systems may be required to maintain, or demonstrate an ability to reach, a 20% of assets equity level, or they must obtain guarantees from their affiliated distribution systems. Nonperforming and Restructured Loans CFC classifies a borrower as nonperforming when any one of the following criteria are met: (1) principal or interest payments on any loan to the borrower are past due 90 days or more, (2) the borrower is operating under protection of the bankruptcy court, or (3) for some other reason, management does not expect the timely repayment of principal or interest. Once a borrower is classified as nonperforming, interest on its loans is recognized on a cash basis. Alternatively, CFC may choose to apply all cash received to the reduction of principal, thereby forgoing interest income recognition. At May 31, 1996, nonperforming loans totaled $25.3 million, a decrease of $2.3 million over the prior year-end. The decrease was due to principal repayments received during the year. There were no new loans classified as nonperforming during the year. 35 Loans classified as restructured are loans for which agreements have been executed that change the original terms of the loan, generally a change to the originally scheduled cashflows. At May 31, 1996, restructured loans totaled $209.4 million, an increase of $24.4 million from the prior year. Restructured loans in the amount of $205.1 million, $131.1 million and $111.5 million were on a nonaccrual basis with respect to the recognition of interest income at May 31, 1996, 1995 and 1994, respectively. The increase in restructured loans outstanding was due to the advance of funds in accordance with the restructured loan agreements. No new loans were restructured during the year. The majority of CFC's problem loan situations arose prior to the past five years as a result of excess capacity or canceled capacity additions after the plant and equipment construction cycle of the mid-1980s. Since 1986, when power supply construction-in-progress represented 16.3% of total power supply plant, power supply members have reduced the level of plant additions (see Note 10 to Combined Financial Statements for a more complete discussion of certain loan and guarantee contingencies). NONPERFORMING AND RESTRUCTURED ASSETS As of May 31, (Dollar Amounts In Thousands) 1996 1995 1994 Nonperforming loans $25,294 $27,641 $44,940 Percent of loans and guarantees outstanding 0.25% 0.29% 0.51% Restructured loans $209,361 $184,978 $165,373 Percent of loans and guarantees outstanding 2.05% 1.94% 1.89% Total nonperforming and restructured loans $234,655 $212,619 $210,313 Percent of loans and guarantees outstanding 2.30% 2.23% 2.40% Allowance for Loan and Guarantee Losses CFC maintains an allowance for potential loan and guarantee losses which is periodically reviewed by management for adequacy. In performing this assessment, management considers various factors including an analysis of the financial strength of CFC's borrowers, delinquencies, loan charge-off history, underlying collateral, and economic and industry conditions. At May 31, 1996, the allowance for loan and guarantee losses totaled $218.0 million, an increase of $12.5 million from the prior year-end. The allowance represented 861.7% of nonperforming loans and 2.14% of total loans and guarantees outstanding at year-end. Since its inception in 1969, CFC has charged off loan balances in the total amount of $28.4 million, net of recoveries. Management believes that the allowance for loan and guarantee losses is adequate to cover any portfolio losses which have occurred or may occur. The following chart presents a summary of the allowance for loan and guarantee losses at May 31, 1996, 1995 and 1994. ALLOWANCE FOR LOAN AND GUARANTEE LOSSES Years Ended May 31, (Dollar Amounts In Thousands) 1996 1995 1994 Beginning balance $205,596 $188,196 $172,571 Provision for loan and guarantee losses 12,451 17,400 15,625 Ending balance $218,047 $205,596 $188,196 As a percentage of loans and guarantees outstanding 2.14% 2.16% 2.15% 36 Asset/Liability Management A key element of CFC's funding operations is the monitoring and management of interest rate and liquidity risk. This process involves controlling asset and liability volumes, repricing terms and maturity schedules to stabilize gross operating margins and retain liquidity. Interest Rate Risk CFC is subject to interest rate risk to the extent CFC's loans are subject to interest rate adjustment at different times than the liabilities which fund those assets. Therefore, CFC's interest rate risk management policy involves the close matching of asset and liability repricing terms within a range of 5% of total assets. CFC measures the matching of funds to assets by comparing the amount of fixed rate assets repricing or amortizing to the total fixed rate debt maturing over the next year. At May 31, 1996 CFC had $199 million in fixed rate assets amortizing or repricing and $343 million in fixed rate liabilities maturing during fiscal year 1997. The difference, $144 million, represents the fixed rate liabilities in excess of the amount required to match fund the fixed rate assets maturing during the next year. CFC's difference of $144 million at May 31, 1996 represents 1.8% of total assets. CFC funds variable rate assets which reprice monthly with short-term liabilities, primarily Commercial Paper and Bank Bid Notes, both of which are primarily issued with original maturities under 90 days. CFC funds fixed rate loans with fixed rate Collateral Trust Bonds, Medium-Term Notes, Subordinated Certificates and Members' Equity. With the exception of Subordinated Certificates, which are generally issued at rates below CFC's long-term cost of funding and with extended maturities, CFC's liabilities have average maturities that closely match the repricing terms of CFC's fixed interest rate loans. CFC also uses Commercial Paper supported by interest rate exchange agreements to fund its portfolio of fixed rate loans. Certain of CFC's Collateral Trust Bonds and Medium-Term Notes were issued with early redemption provisions. To the extent borrowers are allowed to convert their fixed rate loans to a variable interest rate and to the extent it is beneficial, CFC takes advantage of these early redemption privileges. However, because conversions can take place at different intervals from early redemptions, CFC charges conversion fees designed to compensate for any additional interest rate risk assumed by the Company.
INTEREST RATE GAP ANALYSIS (Fixed Assets/Liabilities) As of May 31, 1996 (Dollar Amounts In Millions) Over 1 yr. Over 3 yrs. Over 5 yrs. Over 10 yrs. Less than but less but less but less but less Over 1 year than 3 yrs. than 5 yrs. than 10 yrs. than 20 yrs. 20 yrs. Total Assets: Loan Amortization and repricing $198.9 $625.5 $466.4 $859.4 $562.3 $126.9 $2,839.4 Total Assets $198.9 $625.5 $466.4 $859.4 $562.3 $126.9 $2,839.4 Liabilities and Equity: Long-Term Debt $339.1 $319.6 $162.2 $414.3 $ 52.2 $150.0 $1,437.4 Subordinated Certificates 4.1 13.8 29.5 444.8 412.9 57.0 962.1 Equity - - 229.7 - 17.2 - 246.9 Total Liabilities and Equity $343.2 $333.4 $421.4 $859.1 $482.3 $207.0 $2,646.4 Gap * $(144.3) $292.1 $ 45.0 $ 0.3 $ 80.0 $(80.1) $ 193.0 Cumulative Gap $(144.3) $147.8 $192.8 $193.1 $273.1 $193.0 Cumulative Gap as a % of Total Assets 1.79% 1.84% 2.39% 2.40% 3.39% 2.40%
* Loan amortization/repricing over/(under) debt maturities 37 Liquidity CFC is subject to liquidity risk, which includes market factors beyond its control, to the extent cash repayments on its assets are insufficient to cover the cash requirements on maturing liabilities and other sources of funds with which to make debt repayments are not available. For the most part, CFC funds its long-term loans with much shorter term maturity debt instruments. As a result, CFC has to manage its liquidity risk by ensuring that other sources of funding are available to make debt maturity payments. CFC accomplishes this in four ways. First, CFC maintains revolving credit agreements which (subject to certain conditions) allow CFC to borrow funds on terms of up to five years. Second, CFC has maintained investment grade ratings, facilitating access to the capital markets. Third, CFC maintains shelf registrations for Collateral Trust Bonds, Medium-Term Notes and Deferred Subordinated Debentures which (absent market disruptions and assuming CFC remains creditworthy) could be issued at fixed or variable rates (deferred subordinated debentures may only be issued at fixed rates), in sufficient amounts to fund the next 18 to 24 months' funding requirements. Fourth, CFC obtains much of its funding directly from its members and believes this funding is more stable than funding obtained from outside sources. Fifth, CFC holds marketable grantor trust certificates which could be resold in the public or private capital market. CFC's long- and short-term debt and guarantees are rated by three of the major credit rating agencies, Moody's Investors Service ("Moody's"), Standard and Poor Corporation ("S&P") and Fitch Investors Service ("Fitch"). During May 1994, S&P and Fitch upgraded CFC's ratings on Collateral Trust Bonds from AA- to AA and the ratings on Medium-Term Notes, guaranteed lease debt and guaranteed bonds from A+ to AA-. CFC's short-term debt and guarantee ratings from these agencies were reaffirmed at the highest level A-1+ by S&P and F-1+ by Fitch. Moody's reaffirmed CFC's current ratings, and lists CFC's ratings outlook as stable. The following table presents CFC's credit ratings at year-end. Moody's Standard & Poor's Fitch Investors Service Corporation Investors Service Direct Collateral Trust Bonds Aa3 AA AA Medium-Term Notes A1 AA- AA- Commercial Paper P1 A-1+ F-1+ Guarantees Leveraged Lease Debt A1 AA- AA- Pooled Bonds Aa3 AA- AA- Other Bonds A1 AA- AA- Short-Term P1 A-1+ F-1+ The ratings listed above have the meaning as defined by each of the respective rating agencies and are not recommendations to buy, sell or hold securities and are subject to revision or withdrawal at any time by the rating organizations. At May 31, 1996 and 1995, CFC's members provided 37.4% and 41.7% of total capitalization as follows: 38 MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION As of May 31, (Dollar Amounts In Thousands) % of % of 1996 Total 1995 Total Commercial Paper $1,170,039 24.8% $1,049,474 27.0% Long-term debt (primarily Medium-Term Notes) 338,977 26.0% 366,662 29.2% Subordinated Certificates 1,207,684 100.0% 1,234,715 100.0% Members' Equity 269,641 100.0% 270,221 100.0% Total $2,986,341 $2,921,072 Percentage of total capitalization 37.4% 41.7% The total amount of member investments increased by $65.2 million or 2.2% at May 31, 1996, compared to May 31, 1995. Total member investment as a percentage of total capitalization decreased due to the increase in nonmember debt required to fund the growth in loans. Total capitalization at May 31, 1996 was $7,982.8 million, an increase of $979.6 million over the total capitalization of $7,003.2 million at May 31, 1995. When the loan and guarantee loss allowance is added to both membership contributions and total capitalization, the percentages of membership investments to total capitalization are 39.1% and 43.4% at May 31, 1996 and 1995, respectively. Historical Results The following chart provides CFC's key operating results over the last six years.
SELECTED KEY FINANCIAL DATA (Dollar Amounts In Thousands) 1996 1995 1994 1993 1992 As of May 31: Net loans $7,728,271 $6,747,124 $5,921,022 $5,112,471 $5,003,095 Total liabilities $6,576,764 $5,575,853 $4,740,470 $3,990,298 $3,933,682 Total Subordinated Certificates and Members' Equity $1,477,325 $1,504,936 $1,483,826 $1,473,846 $1,467,791 Guarantees $2,249,440 $2,574,922 $2,655,827 $2,813,731 $2,876,074 Leverage ratio (1) 5.69 5.13 4.63 4.41 4.44 Debt/Equity (2) 3.63 3.01 2.52 2.24 2.24 For the Years Eended May 31: Gross margins $ 78,994 $ 78,771 $ 61,452 $ 70,975 $ 87,392 Net margins $ 49,041 $ 45,212 $ 33,188 $ 38,487 $ 44,155 TIER (3) 1.12 1.13 1.13 1.16 1.14
(1) The leverage ratio is calculated by dividing debt and guarantees out- standing, excluding debt used to fund loans guaranteed by RUS, by the total of Members' Subordinated Certificates and Members' Equity. (2) The debt/equity ratio is calculated by dividing debt outstanding, excluding debt used to fund loans guaranteed by RUS, by the total of Members' Subordinated Certificates, Members' Equity and the loan and guarantee loss allowance. (3) TIER is calculated by dividing net margins before extraordinary items plus the cost of funds by the cost of funds. Financial and Industry Outlook During the coming year, management expects CFC's borrowers to continue to utilize the variable interest rate programs to a greater extent than the fixed interest rate program. This is due primarily to the positive interest yield curve and due partly to CFC's borrowers diversifying the interest terms on their long-term debt. As the demand for variable interest rate loans increases, either through conversions from the fixed interest rate program or through new loan advances, CFC will continue to match fund these loans as to rate with variable interest rate debt instruments and will continue to redeem, to the extent possible and economically beneficial, its fixed interest rate debt instruments. These variable rate loans at the borrower level typically represent a small portion of the borrower's overall capitalization. 39 During fiscal year 1996, CFC advanced approximately $626 million to borrowers for the purpose of prepaying their RUS loans. From March 1994, the date final regulations were adopted, through July 1996, CFC has advanced a total of $1,005.8 million to borrowers for the purpose of prepaying their RUS loans. CFC had an additional $73.9 million in loan commitments to be advanced as the final portion of partial note buyouts, in which initial advances were made during 1996. CFC has been selected as the lender for almost 89% of the RUS debt refinancings. There are applications pending at RUS for an additional $50.4 million of buyouts, in which CFC has been selected as the lender and has approved loan commitments. Future volume of RUS note prepayments will depend on a number of factors including interest rates, tax consequences and possible acquisition or other business opportunities available to the members. CFC does not expect large volumes of prepayment requests to be made at any one time, but believes that there will be a steady stream of activity. During 1994, two large telecommunications companies, GTE and U.S. West, were in the process of divesting properties in various areas of the country. During fiscal years 1994 and 1995, CFC extended approximately $600 million in loan commitments, through RTFC, to telecommunications members that had submitted bids on these properties. The increase in telephone loans out- standing as of May 31, 1996 was due to the advance of loans for the acquisition of these properties. As of May 31, 1996 a total of $425.6 million has been advanced to RTFC members that had their bids for property accepted by GTE, U.S. West and other independent telecommunication companies. An additional $51.7 million was advanced for this purpose in June 1996. Loan activity to telecommunications members should continue through the next fiscal year, as the remaining telecommunication properties are acquired. CFC expects the telephone portfolio to continue to grow during fiscal year 1997, but not at the level experienced during fiscal years 1994 and 1995. As discussed previously, RUS has proposed to amend its lending requirements for power supply systems, requiring them to either increase their equity levels or obtain guarantees from their affiliated distribution systems. To the extent these systems require capital and this capital is unavailable from RUS, some might be able to enter the public debt markets without the assistance of a financial intermediary. As a result, management believes that RUS's new requirements may reduce CFC's potential lending and guarantee volume with CFC's larger, more creditworthy power supply members. The amount of loan funds available from RUS to its borrowers is dependent upon the size of the congressionally allocated subsidy for RUS's revolving loan fund and the current interest rates. As interest rates rise, a larger portion of the subsidy is required to buy down the interest rate, reducing the total amount of funding available for new loans. As the level of loan funds available decreases, borrowers will be required to seek out additional sources for loan funds. The Energy Policy Act of 1992 and the FERC 1996 orders and notices of proposed rulemaking have created the potential for increased competition in the whole- sale electric utility market. Although these actions are presently limited to the wholesale electric utility industry, many states and the Congress are considering legislation that may provide the potential for increased competition at the retail electric market level as well. Assuming legislation is passed which provides for some level of retail competition, the impact of final rules governing subsequent retail competition and provisions for stranded cost recovery, as well as the compatibility of rules and regulations from individual states, cannot be determined at this time. Therefore, the future impact of increased competition on the Company's members cannot be reasonably estimated. The Company believes that the present final form of wholesale regulations and subsequent form of retail regulations, if enacted, may ultimately result in pressures on electric prices. The time frame for such increase in competition, whether at the wholesale or retail level, cannot be determined at this time. Item 8. Financial Statements and Supplementary Data. The Combined Financial Statements, Auditors' Report and Combined Quarterly Financial Results are included on pages 48 through 75 (see Note 12 to Combined Financial Statements for a summary of the quarterly results of CFC's operations). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 40 PART III Item 10. Directors and Executive Officers of the Registrant. (a) Directors Director Date present Name Age since term expires J. Chris Cariker (President of CFC) 42 1991 1997 Harold Dycus (Vice President of CFC) 63 1991 1997 Terry Pitchford (Secretary-Treasurer of CFC) 52 1991 1997 Robert J. Bauman 51 1992 1998 Garry O. Bye 53 1991 1997 Glenn English 55 1994 1997 Alden J. Flakoll 62 1996 1999 Nadine Griffin 64 1992 1998 Benson Ham 62 1995 1998 Gordon J. Hudson 60 1991 1997 David Hutchens 57 1995 1998 George W. Kline 67 1993 1999 Paul J. Liess 58 1993 1999 Robert H. McClurg 66 1995 1998 R. Layne Morrill 56 1995 1998 Robert J. Occhi 49 1996 1999 Gerard P. Paolucci 61 1994 1997 R.B. Sloan Jr. 44 1996 1999 Robert Stroup 51 1996 1999 Henry Umscheid 63 1995 1998 Robert O. Williams 63 1994 1997 Eldwin Wixson 64 1995 1998 (b) Executive Officers
Held present Title Name Age office since President and Director J. Chris Cariker 42 1995 Vice President and Director Harold Dycus 63 1996 Secretary-Treasurer and Director Terry Pitchford 52 1996 Governor and Chief Executive Officer Sheldon C. Petersen 43 1995 Senior Vice President and General Counsel John J. List 49 1980 Senior Vice President of Member Services Richard B. Bulman 54 1984 Senior Vice President and Chief Financial Officer Steven L. Lilly 46 1994 Senior Vice President for Strategic Services David J. Hedberg 45 1995
The President, Vice President and Secretary-Treasurer are elected annually by the Board of Directors at its first meeting following CFC's annual membership meeting, each to serve a term of one year; the Governor serves at the pleasure of the Board of Directors; and the other Executive Officers serve at the pleasure of the Governor. (c) Identification of Certain Significant Employees. Inapplicable. (d) Family Relationships. No family relationship exists between any director or executive officer and any other director or executive officer of the registrant. 41 (e) (1) and (2) Business Experience and Directorships. In accordance with Article IV of CFC's Bylaws, each candidate for election to the Board of Directors must be a trustee, director or manager of a member of CFC. Mr. Cariker has been General Manager of Cookson Hills Electric Cooperative, Stigler, OK, since 1982. He is a Director of the Oklahoma Association of Electric Cooperatives and a Director of the Haskell County Development Authority. He is also an alternate trustee for KAMO Electric Cooperative. Mr. Dycus has been a partner and co-owner of Dycus, Bradley & Draves, P.C., a regional public accounting firm, since 1973. He has been a Director of Egyptian Electric Cooperative, Steeleville, IL, since 1976 and a Director of Southern Illinois Power Cooperative since 1981. Mr. Pitchford has owned and operated a farm in Columbia, AL, since 1971. He has been a Director of Pea River Electric Cooperative, Ozark, AL, since 1987. Mr. Bauman has been the General Manager of Butler County Rural Electric Cooperative, Allison, IA, since 1984. He is a member of the Iowa Association of Business and Industry's Economic Development Committee and a Board member of Cooperative Development Services, Madison, WI. Mr. Bye has been General Manager of East Central Electric Association, Braham, MN, since 1985. He has been a Director for RTFC since February 1994. He is a former member of the North Dakota House of Representatives. He is also a member, and former chairman, of the Minnesota State Board of Electricity and is presently Chairman of the Minnesota Rural Electric Association's Government Affairs Committee. Mr. English has been Executive Vice President and General Manager of NRECA, Washington, DC, since February 1994. He served in the House of Representatives from 1975 to 1994. He served on the House Agriculture Committee from 1975 to 1994, and was Chairman of the House Agricultural Subcommittee on Environment, Credit and Rural Development in 1989. Alden J. Flakoll has been Vice President of FEM Electric Association, Inc., Ipswich, SD since 1977. He has been the owner and operator of Flakoll Enterprises, a diversified farming, ranching and feedlot operation, since 1957. He has also been the Chairman of District 4 South Dakota Rural Electric Association Legislative and Resolutions Committee since 1992. He is also President of the South Dakota Outstanding Farmers of America and Secretary- Treasurer of North Central Hereford Association. Mr. Flakoll is a past President of the North Central Livestock Association and past business manager of Wachter School District. Mrs. Griffin has been a Director of D.S.& O. Rural Electric Cooperative Association, Abilene, KS, since 1987. She is a member of the National Rural Electric Women's Association, and has been a rural electric director for 19 years. She is presently serving as a member of the Board of Directors of the Kansas City Board of Trade. She served as a member of the Kansas Wheat Commission and is a member of the Kansas Association of Wheat Growers. She has been a member of the KEPCO Executive Committee and a former chair on the KEPCO Power supply Planning and Operation Committee. Mr. Ham has been a Director of Central Georgia Electric Membership Cooperative, Jackson, GA, since 1983. He has also been the managing partner in the law firm of Ham, Jenkins, Wilson & Wangerin, since 1991. He is a partner in Sleepy Creek Farms, a commercial cow-calf operation established in 1983. He also served for ten years in the Georgia Legislature. He is currently a member of the Monroe County Economic Development Authority. He has served, as President, on the Flint Judicial Circuit Bar Association from 1962 to 1963 and has served on the Board of Governors of the Georgia Bar Association. He currently serves as a member of the Board of Directors of Georgia Transmission Corporation and Georgia Electric Membership Corporation. Mr. Hudson has owned and operated the Leonard Paul Store, a general store, since 1978. He has sold real estate in the Priest Lake, ID area since 1989. He has been President of Northern Lights, Inc., Sandpoint, ID, since 1984. Mr. Hutchens has been Executive Director of Alaska Rural Electric Cooperative Association, Anchorage, AK, since January 1979. He was Chairman of Ruralite Services, Inc. from April 1993 to April 1995 and a past President of the Rural Electric Statewide Managers Association. He was an instructor at Hardin- Simmons University during 1962 and an Oklahoma State Legislator from 1964 to 1970. 42 Mr. Kline has been a Director of Trico Electric Cooperative, Tucson, AZ, since 1988. He has been Vice President of Grand Canyon State Electric Cooperative Association since 1992. He was a part-time Magistrate for the town of Marana, AZ, from 1983 to 1993. Mr. Liess has been General Manager of Twin Valleys Rural Public Power District, Cambridge, NE, since 1978. He has been an alternate Director of the Nebraska Rural Electric Association ("NREA") and the Nebraska Electric Generation and Transmission Cooperative, Inc. since 1979. He has been chairman of the Nebraska ACRE Board since 1991 and Vice-Chairman of the NREA Credit Union Board since 1989. He is a member and one of five original founders of Five District Joint Venture, developers of Rural Power Manager Software. Mr. Liess has been a member of the Board of Governors of the Central Community College since 1989. He is a member of the Board of Directors of the Central Plains Technical and Business Development Center and Chairman of the Cambridge Economic Development Board. Mr. McClurg has been a Director of NRECA, Washington, DC since, 1982 and President since 1995. He has been a Director of Wyoming Rural Electric Association since 1974 and a Director of the Tri-State G&T, Denver, CO, since 1990. He is a former Director of Central Bank and Trust. Mr. Morrill has been a Director, and is currently Secretary-Treasurer, of White River Valley Electric Cooperative, Inc., Branson, MO, since 1976. He is also a Director of KAMO Electric Cooperative. He has been President of Shepherd of the Hills Realty Co., Inc., since 1967 and President of Shepherd of the Hills Properties Inc., since 1967. He is also a Director of the Bank of Kimberling City and of Rural Missouri Cable T.V. Inc. He has been President of the Kimberling City Water Company since 1982. Mr. Occhi has been Executive Vice President and General Manager of Coast Electric Power Association, Bay St. Louis, MS since 1986. He has been a Director of the South Mississippi Electric Power Association since 1986 and second Vice President of the Electric Power Associations of Mississippi since 1995. He is also a Director of the Mississippi Council of Farmer Cooperatives and of the Greater Biloxi Economic Development Foundation, and a past Director of Mississippi Economic Council. Mr. Paolucci has been General Manager of Morrow Electric Cooperative, Inc. Mount Gilead, OH, Inc., since 1977. In 1996, Morrow Electric Cooperative merged with Deleware Rural Electric and Mr. Paolucci became President of Consolidated Electric Cooperative, Inc. He has been President of Astrostar, Inc. since it was established in 1986. In addition he is a past Chair of the United Utility Supply Cooperative Corporation and has served as its Vice Chairman. He is also a past Trustee for Buckeye Power, Inc. Mr. Sloan has been Executive Vice President and General Manager of Crescent Electric Membership Corporation, Statesville, North Carolina since 1989. He has been a member of the boards of North Carolina Electric Membership Corporation since 1989, North Carolina Association of Electric Cooperatives since 1989, Tarheel Electric Membership Association since 1989, and was Chairman of the North Carolina Rural Electrification Authority from 1987 to 1993. He is also the past Chairman of the National Association of Counties' Rural Development Committee and the past Chairman of the Greater Statesville Chamber of Commerce. Mr. Stroup owns a construction and design company and has been Vice President of Shelby County REMC, Shelbyville, IN since 1994. He has been a Director of Hoosier Energy REC since 1992 and of the Indiana Statewide Association of Rural Electric Cooperatives since 1993. He is also a member of the Marietta Volunteer Fire Department and the Shelby County Chamber of Commerce. Mr. Umscheid has been General Manager of Bluebonnet Electric Cooperative, Giddings, TX, since 1965. He has been President of Texas VI Satellite, Inc., since 1988. He has been a Director of the First National Bank of Giddings since 1981. He is also a past President of the Texas Electric Cooperative Statewide Association. Mr. Williams has been Executive Vice President and General Manager of York Electric Cooperative, York, SC, since 1974. He has been a trustee for both the Saluda River Electric Cooperative, Laurens, SC, and the Electric Cooperatives of South Carolina since 1974. He was a trustee for the South Carolina State Development Board from 1991 to 1993 and a trustee for the York Technical College Foundation Board from 1983 to 1991. 43 Mr. Wixson has been a Director of New Hampshire Electric Cooperative, Inc., Plymouth, NH, since June 1986 and President (now retitled Chair) of the Board of Directors since June 1992. Mr. Wixson has been a professor of mathematics at Plymouth State College, of the University System of New Hampshire, since 1966 and Interim Dean from July 1994 to June 1995. He also has been Chair of the Board of Directors of the Community Guaranty Savings Bank since 1988 and served as a Director of the Speare Memorial Hospital since 1986. Previously, he was the principal-controlling partner of the Plymouth Pharmacy from 1979 to 1982 and was a Maine dairy farmer from 1956 to 1963. Mr. Petersen joined CFC in August 1983 as an Area Representative. He became the Director of Policy Development and Internal Audit in January 1990, then Director of Credit Analysis in November 1990 and Corporate Secretary on June 1, 1992. He became Assistant to the Governor on May 1, 1993. He became Assistant to the Governor and Acting Administrative Officer on June 1, 1994. He became Governor and CEO on March 1, 1995. Mr. List joined CFC as a staff attorney in February 1972. He served as Corporate Counsel from June 1980 until 1991 and served as General Counsel until May 1992. He became Senior Vice President and General Counsel on June 1, 1992. Mr. Bulman joined the CFC staff as Power Supply Officer in March 1980. He has served as Loan Officer since June 1, 1984. He became Senior Vice President and Loan Officer on June 1, 1992. He became Senior Vice President of Member Services on June 1, 1995. Mr. Lilly joined CFC as a Senior Financial Consultant in October 1983. He became Director of Special Finance in June 1985 and Director of Corporate Finance in June 1986. He became Treasurer and Principal Finance Officer on June 1, 1993. He became Senior Vice President and Chief Financial Officer on January 1, 1994. Mr. Hedberg joined CFC as Director of Rates and Special Projects in 1981. He became Senior Vice President of Strategic Services on June 1, 1995. (f) Involvement in Certain Legal Proceedings. None to the knowledge of CFC. (g) Promoters and control persons. Inapplicable. Item 405. Compliance with Section 16 (a) of the Exchange Act. Inapplicable. 44 Item 11. Executive Compensation The Summary Compensation Table below sets forth the aggregate renumeration for services in all capacities to CFC, on an accrual basis, for the three years ended May 31, 1996, 1995 and 1994 to the named executive officers. The named executive officers include the CEO and the next four most highly compensated executive officers serving at May 31, 1996, with salary and bonus for fiscal year 1996 in excess of $100,000.
Summary Compensation Table Annual Compensation Long-Term Compensation Awards Payouts Other Restricted Options/ All Annual Stock SARs LTIP Other Name and Principal Position Year Salary Bonus Comp (1) Award(2) (#)(2) Payouts(2) Comp(3) Sheldon C. Petersen 1996 256,250 4,231 - - - - 17,717 Governor and Chief 1995 185,257 1,911 21,715 Executive Officer Richard B. Bulman 1996 180,101 3,357 - - - - 13,395 Senior Vice President of 1995 173,179 3,243 - - - - 18,274 Member Services 1994 167,184 3,073 - - - - 16,115 John J. List 1996 155,581 2,464 - - - - 15,742 Senior Vice President and 1995 149,621 2,574 - - - - 9,876 General Counsel 1994 144,405 2,515 - - - - 10,101 Steven L. Lilly 1996 176,154 13,284 - - - - 16,612 Senior Vice President and 1995 169,331 3,173 - - - - 12,336 Chief Financial Officer 1994 138,884 2,006 - - - - 9,460 David J. Hedberg 1996 138,230 2,458 - - - - 11,261 Senior Vice President for 1995 109,548 1,901 - - - - 9,588 Strategic Services
(1) Reportable perquisites and other personal benefits do not exceed the lesser of $50,000 or 10% of salary and bonus. All other items reportable under this column are not applicable to CFC. (2) Not applicable to CFC. (3) Amounts for fiscal years, 1996, 1995 and 1994 include; $13,192 and $19,039 related to leave accruals and $4,525 and $2,676 related to CFC contributions to a savings plan for Mr. Petersen; $9,794, $14,811 and $12,771 related to leave accruals and $3,601, $3,463 and $3,344 related to CFC contributions to a savings plan for Mr. Bulman; $12,632, $6,886 and $7,213 related to leave accruals and $3,110, $2,990 and $2,888 related to CFC contributions to a savings plan for Mr. List; $13,089, $8,949 and $6,682 related to leave accruals and $3,523, $3,387 and $2,778 related to CFC contributions to a savings plan for Mr. Lilly; $8,491 and $7,303 related to leave accruals and $2,770 and $2,285 related to CFC contributions to a savings plan for Mr. Hedberg. 45 Defined Benefit or Actuarial Plan Disclosure NRECA maintains the Retirement and Security Program entitling CFC employees to receive, under a 50% joint and surviving spouse annuity, 1.90% of the average of their five highest base salaries during their last ten years of employment, multiplied by the number of years of participation in the program. As of May 31, 1996, the number of years of service credited and the compensation covered under the program, respectively, for the officers listed above was as follows: Steven L. Lilly-11 years 3 months, $136,876; John Jay List-23 years 1 month, $143,892; Richard B. Bulman-15 years 9 months, $164,660; Sheldon C. Petersen-12 years 5 months, $123,899; and David J. Hedberg-14 years, $106,684. Pension Plan Table Years of Services Average base salary 5 10 15 20 25 30 $100,000 $ 9,500 $ 19,000 $ 28,500 $ 38,000 $ 47,500 $ 57,000 125,000 11,875 23,750 35,625 47,500 59,375 71,250 150,000 14,250 28,500 42,750 57,000 71,250 85,500 175,000 16,625 33,250 49,875 66,500 83,125 99,750 200,000 19,000 38,000 57,000 76,000 95,000 114,000 225,000 21,375 42,750 64,125 85,500 106,875 118,800* 250,000 23,750 47,500 71,250 95,000 118,750 118,800* 275,000 26,125 52,250 78,375 104,500 118,800* 118,800* * The Tax Reform Act of 1984 places a cap on maximum salary used to compute retirement benefits and maximum yearly benefit. For calendar year 1996, the salary cap is $150,000 (the cap represents the amount of salary for 1996 that may be used in the computation of the average base salary) and the benefits cap is $118,800. The Budget Reconciliation Act of 1993 has set a limit of $150,000 on the compensation to be used in the calculation of pension benefits. In order to restore potential lost benefits, CFC has set up a Pension Restoration Plan. Under the plan, the amount that NRECA invoices CFC will continue to be based on the full compensation paid to each employee. Upon the retirement of a covered employee, NRECA will calculate the retirement and security benefit to be paid with consideration of the compensation limits and will pay the maximum benefit thereunder. NRECA will also calculate the retirement and security benefit that would have been available without consideration of the compensation limits and CFC will pay the difference. NRECA will then give CFC a credit against future retirement and security contribution liabilities in the amount paid by CFC to the covered employee. CFC will pay such additional benefits to the covered employee through a Severance Pay Plan and a Deferred Pay Restoration Plan. Under the Severance Pay Plan, the employee is paid an amount equal to the lost pension benefits but not to exceed twice the employee's annual compensation for the prior year. The benefit must be paid within 24 months of termination of employment. To the extent that the Severance Pay Plan cannot pay all of the lost pension benefits, the remainder will be paid under a Deferred Compensation Plan, which will be paid out in a lump sum or in installments of up to 60 months. Compensation of Directors No director received any renumeration as an officer or director of CFC. Directors are reimbursed for travel expenses and receive a daily per diem to cover meals and lodging for their attendance at all Board of Directors functions. Employment Contracts and Termination of Employment and Change-In-Control Arrangements Pursuant to an employment agreement effective as of March 1, 1996, CFC has agreed to employ Mr. Petersen as Chief Executive Officer through February 28, 2001 (with automatic one-year extensions unless either party objects) at no less than his current compensation (March 1, 1996) plus such bonus (if any) as may be awarded him. Certain payments have been agreed to in the event of Mr. Peterson's termination other than for cause, for eample, Mr. Petersen leaving for good reason, disability or termination of his employment due to death. 46 Pursuant to a separate employment agreement effective as of the same date, RTFC has agreed to employ Mr. Petersen for the same term. As compensation, RTFC must credit to a deferred compensation account on January 1 of each year of the term $30,000. Interest will be credited to the account on December 31 of each such year at a rate equal to CFC's 20-year Medium-Term Note rate on that date. If Mr. Petersen's employment is terminated by RTFC other than for cause, or by Mr. Petersen for good reason, or by his death or disability, the account will be deemed continued for the remainder of the term of employment (but in no event less than six months nor more than a year), interest will be credited on a proportional basis for the calendar year during which the continuation ends and the balance in the account will be paid to Mr. Petersen in a lump sum. Compensation Committee Interlocks and Insider Participation During the year ended May 31, 1996 the following directors and former directors of CFC served as members on the Executive Committee of the Board of Directors (which functions as the Board's compensation committee): Robert J. Bauman Bill Bertram (Former Director of CFC) J. Chris Cariker ( President of CFC) Garry Bye (Former Vice President of CFC) Harold I. Dycus (Vice President of CFC) Ralph L. Loveless (Former Director and Secretary-Treasurer of CFC) Terry Pitchford (Secretary-Treasurer of CFC) Paul J. Liess Gordon J. Hudson Benson Ham Other than those mentioned above, there were no compensation committee interlocks or insider participation related to executive compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management. Inapplicable. Item 13. Certain Relationships and Related Transactions. (a), (b) and (c) At May 31, 1996, CFC had commitments for long- and intermediate-term loans aggregating $678 million and $29 million, respectively, and committed lines of credit aggregating $230 million, to member systems, excluding NCSC, RTFC and GFC, of which executive officers or directors of CFC are members, employees, officers or directors. At May 31, 1996, $504 million and $23 million of advances were outstanding with respect to such long- and intermediate-term loans, respectively, and $18 million was outstanding under such lines of credit. At May 31, 1996, CFC had guaranteed $477 million of contractual obligations of such members. CFC had outstanding guarantees of certain contractual obligations in the amount of $570 million at May 31, 1996, on behalf of NCSC. At May 31, 1996, advances outstanding with respect to such long-term loans were $48 million for NCSC. Such loans and guarantees were made in the ordinary course of CFC's business on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transaction with other members and did not involve more than normal risk of uncollectibility or present other unfavorable features. It is anticipated that, consistent with its loan and guarantee policies in effect from time to time, additional loans and guarantees will be made by CFC to member systems and trade and service organizations of which officers or directors of CFC are members, employees, officers or directors. In light of its cooperative nature, pursuant to which CFC was established for the very purpose of extending financing to its members (from whose ranks its directors must be drawn), CFC is of the view that no purpose would be served by including detailed information with respect to specific loans and guarantees to members with which any of its directors are affiliated. (d) Inapplicable. 47 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents filed as a part of this report. 1. Financial statements Page Report of Independent Public Accountants 48 Combined Balance Sheets 49 Combined Statements of Income, Expenses and Net Margins 51 Combined Statements of Changes in Members' Equity 52 Combined Statements of Cash Flows 53 Notes to Combined Financial Statements 54 2. Financial statement schedules Page Note 12 to Combined Financial Statements "Combined Quarterly Financial Results" 75 All other schedules are omitted because they are not required or inapplicable or the information is included in the financial statements or notes thereto. 3. Exhibits 3.1 - Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to Registration Statement No. 2-46018, filed October 12, 1972. 3.4 - Amendments to Bylaws as approved by CFC's Board of Directors and members on February 28, 1995, and a copy of the Bylaws as amended. Incorporated by reference to Exhibit 3.4 from CFC's Form 10-K filed August 29, 1995. 4.1 - Form of Capital Term Certificate. Incorporated by reference to Exhibit 4.3 Registration Statement No. 2-46018 filed October 12, 1972. 4.2 - Indenture dated as of February 15, 1994, between the Registrant and First Bank National Association, trustee. Incorporated by reference to Exhibit 4.3 from the report on Form 8-K filed by CFC on June 14, 1994. 4.3 - Revolving Credit Agreements dated February 28, 1995. Incorporated by reference to Exhibit 4.3 from CFC's quarterly report on Form 10-Q filed April 3, 1995. 4.4 - The first amendment to the February 28, 1995 revolving credit agreements dated February 27, 1996. 4.5 - Revolving Credit Agreement dated April 30, 1996. - Registrant agrees to furnish to the Commission a copy of all other instruments defining the rights of holders of its long-term debt upon request. Management Contracts and Compensatory Plans and Arrangements. 10.1 - Plan Document for CFC deferred compensation program. Incorporated by reference to Exhibit 10 to Registration Statement No. 2-70355, filed December 23, 1980. 10.2 - Employment Contract between CFC and Sheldon C. Petersen, dated as of March 1, 1996. 10.3 - Supplemental Benefit Agreement between RTFC and Sheldon C. Petersen, dated as of March 1, 1996. 12 - Computations of ratio of margins to fixed charges. 23 - Consent of Arthur Andersen LLP 27 - Financial Data Schedules (b) Reports on Form 8-K. Item 5 on March 29, 1996 - Filing of Underwriting Agreement for Bond Issue. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Fairfax, Commonwealth of Virginia, on the 27th day of August, 1996. NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION By: /s/ SHELDON C. PETERSEN Sheldon C. Petersen Governor and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date /s/ SHELDON C. PETERSEN Governor and Chief Executive Sheldon C. Petersen Officer /s/ STEVEN L. LILLY Senior Vice President and Steven L. Lilly Chief Financial Officer /s/ ANGELO M. SALERA Controller (Principal Angelo M. Salera Accounting Officer) /s/ J. CHRIS CARIKER President and Director J. Chris Cariker /s/ HAROLD DYCUS Vice President and Director Harold Dycus /s/ TERRY PITCHFORD Secretary-Treasurer and Terry Pitchford Director August 27, 1996 /s/ ROBERT J. BAUMAN Director Robert J. Bauman /s/ GARRY O. BYE Director Garry O. Bye /s/ GLENN ENGLISH Director Glenn English /s/ ALDEN J. FLAKOLL Director Alden J. Flakoll 49 Signature Title Date /s/ NADINE GRIFFIN Director Nadine Griffin /s/ BENSON HAM Director Benson Ham /s/ GORDON J. HUDSON Director Gordon J. Hudson /s/ DAVID HUTCHENS Director David Hutchens /s/ GEORGE W. KLINE Director George W. Kline /s/ PAUL J. LIESS Director August 27, 1996 Paul J. Liess /s/ ROBERT H. McCLURG Director Robert H. McClurg /s/ R. LAYNE MORRILL Director R. Layne Morrill /s/ ROBERT J. OCCHI Director Robert J. Occhi /s/ GERARD P. PAOLUCCI Director Gerard P. Paolucci /s/ RILEY SLOAN, JR Director Riley Sloan, Jr. /s/ ROBERT STROUP Director Robert Stroup /s/ HENRY UMSCHEID Director Henry Umscheid /s/ ROBERT O. WILLIAMS Director Robert O. Williams /s/ ELDWIN WIXSON Director Eldwin Wixson 50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION: We have audited the accompanying combined balance sheets of National Rural Utilities Cooperative Finance Corporation (a not-for-profit corporation under the District of Columbia Cooperative Association Act) and other related entities ("Companies") as discussed in Note 1 as of May 31, 1996 and 1995, and the related combined statements of income, expenses and net margins, changes in members' equity and cash flows for the years then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of National Rural Utilities Cooperative Finance Corporation and other related entities as of May 31, 1996 and 1995, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Washington, D. C. July 16, 1996 51 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED BALANCE SHEETS (Dollar Amounts In Thousands) May 31, 1996 and 1995 ASSETS 1996 1995 CASH $ 31,368 $ 26,309 CERTIFICATES OF DEPOSIT 25,000 30,000 DEBT SERVICE INVESTMENTS, 40,907 32,740 LOANS TO MEMBERS, net 7,728,271 6,747,124 RECEIVABLES 84,600 87,638 FIXED ASSETS, net 33,576 36,807 DEBT SERVICE RESERVE FUNDS 102,512 114,094 OTHER ASSETS 7,855 6,077 $8,054,089 $7,080,789 The accompanying notes are an integral part of these combined financial statements. 52 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED BALANCE SHEETS (Dollar Amounts In Thousands) May 31, 1996 and 1995 LIABILITIES AND MEMBERS' EQUITY 1996 1995 NOTES PAYABLE, due within one year $2,471,552 $1,812,570 ACCOUNTS PAYABLE 16,591 16,705 ACCRUED INTEREST PAYABLE 40,819 39,343 LONG-TERM DEBT 4,033,881 3,685,682 OTHER LIABILITIES 13,921 21,553 COMMITMENTS, GUARANTEES AND CONTINGENCIES MEMBERS' SUBORDINATED CERTIFICATES: Membership Subscription Certificates 638,440 637,129 Loan and Guarantee Certificates 569,244 597,586 Total Members' Subordinated Certificates 1,207,684 1,234,715 MEMBERS' EQUITY 269,641 270,221 Total Members' Subordinated Certificates and Members' Equity 1,477,325 1,504,936 $8,054,089 $7,080,789 The accompanying notes are an integral part of these combined financial statements. 53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINS (Dollar Amounts In Thousands) For the Years Ended May 31, 1996, 1995 and 1994 1996 1995 1994 OPERATING INCOME-Interest on loans to members $505,073 $440,109 $324,682 Less-Cost of funds 426,079 361,338 263,230 Gross operating margin 78,994 78,771 61,452 EXPENSES: General, administrative and loan processing 19,686 19,568 16,668 Provision for loan and guarantee losses 12,451 17,400 15,625 Total expenses 32,137 36,968 32,293 Operating margin 46,857 41,803 29,159 NONOPERATING INCOME 3,764 3,409 4,029 NET MARGINS BEFORE EXTRAORDINARY LOSS 50,621 45,212 33,188 EXTRAORDINARY LOSS (1,580) - - NET MARGINS $ 49,041 $ 45,212 $ 33,188
The accompanying notes are an integral part of these combined financial statements. 54
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (Dollar Amounts In Thousands) For the Years Ended May 31, 1996, 1995 and 1994 Patronage Capital Allocated General Education Unallocated Reserve Total Memberships Fund Margins Fund Other Balance as of May 31, 1993 $258,299 $1,247 $ 312 $ 2,289 $ 488 $ 253,963 Retirement of Patronage Capital (29,459) - - - (295) (29,164) Net Margins - Allocated 33,188 - 13 - 302 32,873 Other (1,060) 92 - - - (1,152) Balance as of May 31, 1994 260,968 1,339 325 2,289 495 256,520 Retirement of Patronage Capital (34,184) - - - (177) (34,007) Net Margins - Allocated 45,212 - 50 - 180 44,982 Other (1,775) 44 - - - (1,819) Balance as of May 31, 1995 270,221 1,383 375 2,289 498 265,676 Retirement of Patronage Capital (48,313) - - - (152) (48,161) Net Margins - Allocated 49,040 - 101 - 155 48,784 Other (1,307) 41 - - - (1,348) Balance as of May 31, 1996 $269,641 $ 1,424 $ 476 $ 2,289 $ 501 $ 264,951
The accompanying notes are an integral part of these combined financial statements. 55
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED STATEMENTS OF CASH FLOWS (Dollar Amounts In Thousands) For the Years Ended May 31, 1996, 1995 and 1994 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net margins $49,041 $ 45,212 $ 33,188 Add (deduct): Provision for loan and guarantee losses 12,450 17,400 15,625 Depreciation 1,247 2,359 1,553 Amortization (7,315) (15,940) (15,915) Add (deduct) changes in accrual accounts: Receivables 7,987 (2,880) (4,263) Accounts payable (114) (1,824) 613 Accrued interest payable 1,476 3,746 (12,225) Other (5,187) 6,002 15,975 Net cash flows provided by operating activities 59,585 54,075 34,551 CASH FLOWS FROM INVESTING ACTIVITIES: Advances made on loans (3,774,427) (3,619,998) (2,382,839) Principal collected on loans 2,780,830 2,776,496 1,558,662 Investment in fixed assets 1,984 (448) (8,494) Net cash flows used in investing activities (991,613) (843,950) (832,671) CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable, net 658,999 604,595 1,104,351 Marketable securities 5,000 (30,000) - Debt service investments, net (8,167) 928 11,944 Proceeds from issuance of long-term debt 794,836 476,233 172,293 Payments for retirement of long-term debt (446,521) (232,798) (512,849) Proceeds from issuance of Members' Subordinated Certificates 18,457 30,156 34,088 Payments for retirement of Members' Subordinated Certificates (39,365) (19,603) (15,868) Payments for retirement of patronage capital (46,152) (35,495) (29,121) Net cash flows provided by financing activities 937,087 794,016 764,838 NET CASH FLOWS 5,059 4,141 (33,282) BEGINNING CASH 26,309 22,168 55,450 ENDING CASH $ 31,368 $ 26,309 $ 22,168 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during year for interest expense $ 427,846 $ 360,308 $ 269,959
The accompanying notes are an integral part of these combined financial statements. 56 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS May 31, 1996, 1995 and 1994 (1) General Information and Accounting Policies (a) General Information National Rural Utilities Cooperative Finance Corporation (the "Company" or "CFC") was incorporated as a private, not-for-profit cooperative association under the laws of the District of Columbia in April 1969. The principal purpose of CFC is to provide its members with a source of financing to supplement the loan programs of the Rural Utilities Service ("RUS") of the United States Department of Agriculture. CFC makes loans primarily to its rural utility system members ("Utility Members") to enable them to acquire, construct and operate electric distribution, generation, transmission and related facilities. Most CFC long-term loans to Utility Members are made in conjunction with concurrent loans from RUS and are secured equally and ratably with RUS's loans by a single mortgage. CFC also provides guarantees for tax-exempt financings of pollution control facilities and other properties constructed or acquired by its members and, in addition, provides guarantees of taxable debt in connection with certain lease and other transactions of its members. CFC is exempt from payment of Federal income taxes under Section 501(c)(4) of the Internal Revenue Code. CFC's 1,051 members as of May 31, 1996, included 903 Utility Members, virtually all of which are consumer-owned cooperatives, 74 service members and 74 associate members. The Utility Members included 838 distribution systems and 65 generation and transmission ("power supply") systems operating in 46 states and U.S. territories. At December 31, 1994, CFC's member systems served approximately 12.2 million consumers, representing service to an estimated 32.0 million ultimate users of electricity, and owned approximately $66.5 billion (before depreciation of $19.4 billion) in total utility plant. Rural Telephone Finance Cooperative ("RTFC") was incorporated as a private cooperative association in the state of South Dakota in September 1987. RTFC is a controlled affiliate of CFC and was created for the purpose of providing and/or arranging financing for its rural telecommunication members and affiliates. RTFC's bylaws require that the majority of RTFC's Board of Directors be elected from individuals designated by CFC. CFC is the sole source of funding for RTFC. As of May 31, 1996, RTFC had 425 members. RTFC is a taxable entity under Subchapter T of the Internal Revenue Code and accordingly takes deductions for allocations of net margins to its patrons. Guaranty Funding Cooperative ("GFC") was incorporated as a private cooperative association in the state of South Dakota in December 1991. GFC is a controlled affiliate of CFC and was created for the purpose of providing a source of funds for its members to refinance their RUS guaranteed debt previously held by the Federal Financing Bank. All trust certificates held by GFC were transferred to GFC by CFC and are guaranteed by the RUS. CFC is the sole source of funding for GFC. GFC had four members other than CFC at May 31, 1996. GFC is a taxable entity under Subchapter T of the Internal Revenue Code and accordingly takes deductions for allocations of net margins to its patrons. (b) Principles of Combination The accompanying financial statements include the combined accounts of CFC, RTFC and GFC, after elimination of all material intercompany accounts and transactions. CFC has a $1,000 membership interest in both RTFC and GFC. CFC exercises control over RTFC and GFC through majority representation on their Boards of Directors. CFC manages the affairs of RTFC through a long-term management agreement. CFC services the loans for GFC for which it collects a servicing fee. As of May 31, 1996, CFC had committed to lend RTFC up to a total of $2.4 billion to fund loans to its members and their affiliates. As of the same date, RTFC had outstanding loans and unadvanced loan commitments totaling $1,465.5 million. RTFC's net margins are allocated to RTFC borrowers. 57 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) Summary financial information relating to RTFC included in the combined financial statements is presented below: As of May 31: 1996 1995 (Dollar Amounts In Thousands) Outstanding loans to members and their affiliates $ 975,269 $ 883,463 Total assets 1,079,920 985,381 Notes payable to CFC 966,690 883,463 Total liabilities 981,790 892,717 Members' Equity (1) and Subordinated Certificates 98,130 92,664 For the years ended May 31: 1996 1995 1994 (Dollar Amounts In Thousands) Operating income $64,674 $54,639 $28,825 Net margins 8,543 7,527 4,545 (1) The transfer of RTFC equity is governed by the South Dakota Cooperative Association Act which provides that net margins shall be distributed and paid to patrons. However, reserves may be created and credited to patrons in proportion to total patronage. CFC has been the sole funding source for RTFC's loans to its members. As CFC is not a borrower of RTFC and is not expected to be in the foreseeable future, RTFC's net margins would not be available to CFC in the form of patronage capital. As of May 31, 1996, CFC had loaned GFC $411.4 million to fund the purchase of RUS guaranteed trust certificates from CFC. Summary financial information relating to GFC included in the combined financial statements is presented below: As of May 31: 1996 1995 (Dollar Amounts In Thousands) Outstanding loans to members $411,373 $421,665 Total assets 429,177 442,878 Notes payable to CFC 415,414 427,875 Total liabilities 427,079 440,410 Members' Equity (1) 2,098 2,468 For the years ended May 31: 1996 1995 1994 (Dollar Amounts In Thousands) Operating income $28,064 $28,494 $16,667 Net margins (1) 2,701 3,235 1,831 (1) The transfer of GFC equity is governed by the South Dakota Cooperative Association Act which provides that net margins shall be distributed and paid to patrons. However, reserves may be created and credited to patrons in proportion to total patronage. CFC has been the sole funding source for GFC's loans to its members. As CFC is not a borrower of GFC and is not expected to be in the foreseeable future, GFC's net margins would not be available to CFC in the form of patronage capital. Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC on a combined basis. 58 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) (c) Amortization of Bond Discount and Bond Issuance Costs Bond discount and bond issuance costs are amortized using the effective interest method over the life of each bond issue. (d) Nonperforming Loans It is CFC's policy to classify a loan as nonperforming when it meets any of the following criteria: (i) Interest or principal payments are contractually past due 90 days or more, (ii) As a result of court proceedings, repayment in accordance with the original terms is not anticipated, or (iii) For other reasons, timely repayment of principal or interest is not expected. (e) Allowance for Loan and Guarantee Losses CFC maintains an allowance for loan and guarantee losses at a level believed to be adequate in relation to the credit quality and size of its loans and guarantees outstanding. It is CFC's policy to review periodically its loans and guarantees and to make adjustments to the allowance as necessary. The allowance is based on estimates, and accordingly, actual loan and guarantee losses may differ from the allowance amount. Activity in the allowance account is summarized as follows for the years ended May 31: 1996 1995 1994 (Dollar Amounts In Thousands) Balance at beginning of year $205,596 $188,196 $172,571 Provision for loan and guarantee losses 12,451 17,400 15,625 Balance at end of year $218,047 $205,596 $188,196 (f) Fixed Assets Buildings, aircraft, furniture and fixtures and related equipment are stated at cost less accumulated depreciation and amortization of $8.0 million and $7.7 million as of May 31, 1996 and 1995, respectively. Depreciation and amortization expenses ($1.2 million, $2.4 million and $1.6 million in fiscal years 1996, 1995 and 1994, respectively) are computed primarily on the straight-line method over estimated useful lives ranging from 2 to 40 years. (g) Recognition of Fee Income In connection with its various loan, guarantee and other financing programs, CFC may be entitled to receive certain fees. Such fees are generally designed to compensate CFC for expenses associated with the related transactions. CFC recognizes the income from such fees periodically over the term during which it incurs the related expenses. (h) Financial Instruments with Off-Balance Sheet Risk In the normal course of business, CFC is a party to financial instruments with off-balance sheet risk both to meet the financing needs of its member borrowers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, guarantees of members' obligations and interest rate exchange agreements. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the combined balance sheets. 59 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) (i) Accounting by Creditors for Impairment of a Loan In May 1993, the Financial Accounting Standards Board (the "FASB") released Statement No. 114, "Accounting by Creditors for Impairment of a Loan." The statement requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, observable market value or the fair value of the collateral. In October 1994, the FASB released Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". The statement amends FASB Statement No. 114 by eliminating the interest income recognition provisions and changing the disclosure requirements. Both statements were required to be implemented in fiscal years beginning after December 15, 1994 and apply to loans that are, or become impaired, based on the provisions of FASB Statement No. 114, or that have certain restructuring agreements executed on or after the implementation date. CFC implemented these statements as of May 31, 1996. The implementation of these statements did not have a material impact on CFC's financial statements. (j) Employers' Accounting for Postemployment Benefits CFC has implemented FASB Statement No. 112, "Employers' Accounting for Post- employment Benefits." The statement requires accrual accounting for employee benefits that are paid after the termination of active employment but prior to retirement. The implementation of this statement did not have a material impact on CFC's financial statements. (k) Accounting for Certain Investments in Debt and Equity Securities CFC has implemented FASB Statement No. 115, "Accounting for Certain Invest- ments in Debt and Equity Securities." The CFC investments covered by this statement, at May 31, 1996, include the certificates of deposit and the debt service investments. These items have been recorded at amortized cost, due to the Company's intent and ability to hold all investments to maturity. (l) Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments In October 1994, the FASB released Statement No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." This statement requires disclosure about the amounts, nature and terms of derivative financial instruments. The statement must be implemented for fiscal years ending after December 15, 1994. CFC implemented this statement as of May 31, 1995. CFC is neither a dealer nor a trader in derivative financial instruments. CFC uses interest rate exchange agreements to help manage its interest rate risk. (m) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the assets and liabilities and the revenue and expenses reported in the financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. While the Company uses its best estimates and judgements based on the known facts at the date of the financial statements, actual results could differ from these estimates as future events occur. CFC does not believe it is vulnerable to the risk of a near term severe impact as a result of any concentrations of its activities. (n) Memberships Members are charged a one-time membership fee based on member class. CFC distribution system members (Class A), power supply system members (Class B), national associations of cooperatives (Class D) and associate members (Class E) all pay a $1,000 membership fee. CFC service organization members (Class C) pay a $200 membership fee. RTFC voting members pay a $1,000 member- ship fee and non-voting members pay a $100 membership fee. All GFC members pay a $1,000 membership fee. Membership fees are accounted for a members equity. 60 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) (o) Reclassifications Certain reclassifications of prior year amounts have been made to conform with fiscal year 1996 presentation. (2) Loans and Commitments Loans to members bear interest at rates determined from time to time by the Board of Directors on the basis of CFC's cost of funds, operating expenses, provision for loan and guarantee losses and the maintenance of reasonable margin levels. In keeping with its not-for-profit, cooperative character, CFC's policy is to set interest rates at the lowest levels it considers to be consistent with sound financial management. Loans outstanding to members, weighted average interest rates thereon and unadvanced commitments are summarized by loan type as follows as of May 31:
1996 1995 Weighted Weighted (Dollar Amounts In Thousands) Average Average Loans Interest Unadvanced Loans Interest Unadvanced Outstanding Rates Commitments(A) Outstanding Rates Commitments(A) Long-term fixed rate secured loans (B): Distribution Systems $2,380,587 7.29% $ 36,117 $1,645,551 7.68% $ 10,389 Power Supply Systems 247,556 7.71% 1,214 253,208 7.68% 1,214 Telecommunication Organizations 134,497 8.66% - 141,144 8.98% - Service Organizations (C) 77,205 8.03% 3,140 81,521 9.27% 2,600 Associate Members 1,542 10.25% - 1,569 10.25% - Total long-term fixed rate secured loans 2,841,387 7.41% 40,471 2,122,993 7.83% 14,203 Long-term variable rate secured loans (D): Distribution Systems 2,717,494 6.45% 839,861 2,553,590 6.50% 730,453 Power Supply Systems 202,249 6.45% 626,926 191,967 6.50% 512,598 Telecommunication Organizations 764,911 6.55% 202,971 704,427 6.64% 130,627 Service Organizations (C) 46,376 6.45% 71,400 53,332 6.50% 67,887 Associate Members 47,541 6.19% 38,979 42,561 6.20% 39,959 Total long-term variable rate secured loans 3,778,571 6.47% 1,780,137 3,545,877 6.52% 1,481,524 Refinancing variable rate loans guaranteed by RUS: Power Supply Systems 416,637 6.47% - 429,129 7.27% - Intermediate-term secured loans: Distribution Systems 4,831 6.60% 2,300 4,176 6.85% 2,300 Power Supply Systems 53,614 6.60% 168,123 40,237 6.85% 158,759 Service Organizations 27,652 6.60% 9,384 11,429 6.85% 3,705 Total intermediate-term secured loans 86,097 6.60% 179,807 55,842 6.85% 164,764 Intermediate-term unsecured loans: Distribution Systems 16,019 6.45% 41,572 11,392 6.50% 17,693 Power Supply Systems 28,957 6.45% 67,190 47,443 6.50% 3,856 Telecommunication Organizations 12,048 6.80% 8,501 3,255 7.54% 2,370 Total intermediate-term unsecured loans 57,024 6.52% 117,263 62,090 6.56% 23,919 Short-term unsecured loans (E): Distribution Systems 409,664 6.60% 2,191,156 445,962 6.85% 2,032,220 Power Supply Systems 25,763 6.60% 930,710 10,267 6.85% 1,042,205 Telecommunication Organizations 63,813 7.15% 278,811 34,637 7.60% 198,636 Service Organizations 23,467 6.60% 77,499 25,653 6.85% 46,787 Associate Members 9,240 6.60% 15,685 7,651 6.85% 13,524 Total short-term loans 531,947 6.67% 3,493,861 524,170 6.90% 3,333,372
61 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
1996 1995 Weighted Weighted (Dollar Amounts In Thousands) Average Average Loans Interest Unadvanced Loans Interest Unadvanced Outstanding Rates Commitments(A) Outstanding Rates Commitments(A) Nonperforming loans (F): Distribution Systems $ 1,739 7.20% $ - $ 1,830 7.21% $ - Power Supply Systems 23,555 6.48% - 25,811 6.57% - Total nonperforming loans 25,294 6.53% - 27,641 6.61% - Restructured loans (G): Distribution Systems 2,576 18.37% - 2,654 18.37% - Power Supply Systems 205,074 9.13% - 180,521 9.01% 20,000 Service Organizations 1,711 6.45% - 1,803 6.50% - Total restructured loans 209,361 9.22% - 184,978 9.12% 20,000 Total loans 7,946,318 6.85% 5,611,539 6,952,720 7.01% 5,037,782 Less: Allowance for Loan and Guarantee Losses 218,047 - 205,596 - Net loans $7,728,271 $5,611,539 $6,747,124 $5,037,782
(A) Unadvanced commitments include loans approved by CFC for which loan contracts have not yet been executed and for which loan contracts have been executed but funds have not been advanced. CFC may require additional information to assure itself that all conditions for advance of funds have been fully met and that there has been no material change in the member's condition as represented in the documents supplied to CFC. Since commitments may expire without being fully drawn upon, the total amounts reported as commitments do not necessarily represent future cash requirements. Collateral and security requirements for lending on commitments are identical to those for advanced loans. Long-term un- advanced commitments that do not have an interest rate associated with the commitment have been listed under the variable rate. Rates, fixed or variable, are set at the time of the advance on the amount of the advance. (B) Generally, long-term fixed rate secured loans provide for a fixed interest rate for terms of one to 30 years. Upon expiration of the term, the borrower may select another fixed rate term of one to 30 years (but not beyond maturity of the loan) or a variable rate. The borrower may select either option or may repay to CFC the principal then out- standing together with interest due thereon and other sums, if required. Includes $198.3 million of unsecured loans at May 31, 1996. (C) CFC had loans outstanding to National Cooperative Services Corporation ("NCSC") in each of the periods shown. Long-term fixed rate loans out- standing to NCSC as of May 31, 1996 and 1995, were $31.8 million and $48.5 million, respectively. In addition, as of May 31, 1996 and 1995, CFC had unadvanced loan commitments to NCSC in the amount of $15.4 million and $12.3 million, respectively. (D) Includes $84.6 million and $41.4 million of unsecured loans at May 31, 1996 and 1995. (E) Includes $92.7 million and $30.9 million of secured loans at May 31, 1996 and 1995. (F) The rates on nonperforming loans are the weighted average of the stated rates on such loans as of the dates shown and do not necessarily relate to the interest recognized by CFC from such loans. (G) The rates on restructured loans are the weighted average of the effective rates (based on present values of scheduled future cash flows) as of the dates shown and do not necessarily relate to the interest recognized by CFC from such loans. 62 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) Loans outstanding, by state or U.S. territory, are summarized below: (Dollar Amounts In Thousands) May 31, May 31, State 1996 1995 State 1996 1995 Alabama $ 137,433 $ 136,143 Nevada $ 9,131 $ 7,495 Alaska 114,247 110,753 New Hampshire 246,332 31,576 Arizona 85,182 79,590 New Jersey 6,216 5,564 Arkansas 226,489 226,798 New Mexico 96,213 109,505 California 24,301 17,358 New York 11,260 10,843 Colorado 288,642 286,242 North Carolina 270,284 241,349 Delaware 16,888 17,201 North Dakota 44,257 13,800 District of Columbia 96,052 92,656 Ohio 97,932 87,321 Florida 348,651 320,177 Oklahoma 273,356 251,804 Georgia 631,225 515,767 Oregon 151,918 142,404 Idaho 56,535 41,856 Pennsylvania 85,352 83,100 Illinois 483,737 470,160 South Carolina 301,760 273,099 Indiana 112,134 109,180 South Dakota 48,402 42,831 Iowa 164,604 143,016 Tennessee 79,494 58,730 Kansas 237,778 240,366 Texas 871,775 727,320 Kentucky 168,449 171,736 Utah 173,323 149,752 Louisiana 144,644 125,088 Vermont 64,250 66,724 Maine 51,344 65,540 Virgin Islands 57,214 52,081 Maryland 87,992 77,588 Virginia 166,493 170,400 Michigan 85,663 74,255 Washington 77,737 77,320 Minnesota 332,664 230,301 West Virginia 1,022 1,038 Mississippi 202,363 183,239 Wisconsin 138,398 92,354 Missouri 279,058 248,846 Wyoming 105,240 102,569 Montana 169,863 146,572 Total $7,946,318 $6,952,720 Nebraska 23,021 23,313 Weighted average interest rates earned (recognized in the case of nonperforming and restructured loans) on all loans outstanding are summarized below: For the Years Ended May 31, 1996 1995 1994 Long-term fixed rate 7.92% 8.63% 8.63% Long-term variable rate 6.30% 5.90% 4.08% Telecommunication organizations 6.86% 6.70% 5.58% Refinancing loans guaranteed by RUS 6.75% 6.07% 4.01% Intermediate-term 6.57% 6.19% 4.41% Short-term 6.49% 6.29% 4.38% Associate members 6.46% 5.40% 4.21% Nonperforming 0.25% 1.56% 1.19% Restructured 1.49% 1.92% 2.33% All loans 6.77% 6.72% 5.66% 63 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) Long-term fixed rate loans outstanding at May 31, 1996 which will be subject to adjustment of their interest rates during the next five calendar years are summarized as follows (due to principal repayments, amounts subject to interest rate adjustment may be lower at the actual time of interest rate adjustment): Weighted (Dollar Amounts In Thousands) Average Interest Amounts Rate Outstanding 1997 9.07% $131,545 1998 8.14% 160,377 1999 7.44% 303,647 2000 6.67% 120,500 2001 6.95% 163,807 $879,876 During the first quarter of calendar year 1996, long-term fixed rate loans totaling $46.6 million had their interest rates adjusted. These loans will be eligible to readjust their interest rates again during the first quarter of calendar year 1996 to the lowest long-term fixed rate offered during 1996 for the term selected. At January 1 and May 31, 1996, the standard long-term fixed rates were 6.65% and 7.65%, respectively. On most long-term secured loans, level quarterly payments are required with respect to principal and interest in amounts sufficient to repay the loan principal, generally over a period ending approximately 35 years from the date of the secured promissory note. Fiscal year 1996 repayments of principal on long-term loans outstanding are expected to be a relatively minor amount of such outstanding loans. CFC evaluates each borrower's creditworthiness on a case-by-case basis. It is generally CFC's policy to require collateral for most long-term and some intermediate-term loans. Such collateral usually consists of a first mortgage lien on the borrower's total system, including plant and equipment, and a pledge of future revenues. The loan and security documents also contain various provisions with respect to the mortgaging of the borrower's property, the maintenance of certain earnings and debt service coverage ratios, maintenance of adequate insurance coverage and certain other restrictive covenants. Under common mortgages securing long-term CFC loans to distribution system members, RUS has the sole right to act within 30 days or, if RUS is not legally entitled to act on behalf of all noteholders, CFC may exercise remedies. Under common mortgages securing long-term CFC loans to, or guarantee reimbursement obligations of, power supply members, RUS retains substantial control over the exercise of mortgage remedies. As of May 31, 1996 and 1995, mortgage notes representing approximately $1,094.2 million and $789.9 million, respectively, of outstanding long-term loans to members were pledged as collateral to secure CFC's Collateral Trust Bonds. CFC has received no guarantee of its loans from RUS; however, "Refinancing loans guaranteed by RUS" represents loans made by CFC and transferred to its affiliate GFC to fund the prepayment of members' Federal Financing Bank debt, effected through grantor trusts which each hold a note from the member, the repayment of which has been guaranteed by RUS. Each trust issues Trust Certificates which represent an undivided interest in the trust assets. GFC, as holder of Trust Certificates, is financing these loans from funds provided by CFC at a variable rate until fixed rate funding is obtained through the public markets. CFC sets the variable interest rates monthly on outstanding short- and intermediate-term loans. On notification to borrowers, CFC may adjust the interest rate semimonthly. Under CFC policy, the maximum interest rate which may be charged on short-term loans is the prevailing bank prime rate plus 1% per annum; on intermediate-term loans, the prevailing bank prime rate plus 1.5% per annum; and on RTFC short-term loans, the prevailing bank prime rate plus 3% per annum. 64 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) At May 31, 1996, 1995 and 1994, nonperforming loans in the amount of $25.3 million, $27.6 million and $44.9 million, respectively, were on a nonaccrual basis with respect to recognition of interest income. The effect of not accruing interest on nonperforming loans was a decrease in interest income of $2.5 million, $2.1 million and $1.5 million for the years ended May 31, 1996, 1995 and 1994, respectively. Income recognized on these loans totaled $0.1 million, $0.7 million and $0.5 million, respectively. At May 31, 1996, 1995 and 1994, the total amount of restructured debt was $209.4 million, $185.0 million and $165.4 million, respectively. CFC elected to apply all principal and interest payments received against principal outstanding on restructured debt of $205.1 million, $131.1 million and $111.5 million, respectively. The interest income that would have been recorded under the original terms of the debt, assuming the debt had been outstanding for the period, was $15.0 million, $12.4 million and $8.4 million, for the years ended May 31, 1996, 1995 and 1994, respectively. The interest income actually recorded for restructured debt was $3.1 million, $3.5 million and $4.0 million, respectively. At May 31, 1995, CFC had committed to lend $20.0 million to borrowers performing under restructured terms. (3) Members' Subordinated Certificates Membership Subscription Certificates To join CFC and to establish eligibility to borrow, CFC members (other than associate members and service organizations) are required to execute agreements to subscribe to certain Subordinated Certificates. Such certificates are interest-bearing, unsecured, subordinated debt of CFC. CFC is authorized to issue subscription certificates without limitation as to the total principal amount. Generally, Membership Subscription Certificates mature in the years 2070 through 2095 and bear interest at 3% or 5% per annum. New members joining CFC are required to purchase Membership Subscription Certificates in an amount equal to 5% of each loan advance up to a maximum amount based on their operating results. The maturity dates and interest rates payable on such certificates vary in accordance with applicable CFC policy. In certain cases, the Board of Directors has approved alternative deferred payment arrangements for purchase of subscription certificates. These deferred payments are evidenced by noninterest-bearing, unsecured notes from the member and are shown as receivables. Loan and Guarantee Certificates Members obtaining long-term loans, certain intermediate-term loans or guarantees from CFC or RTFC are generally required to purchase additional Subordinated Certificates with each such loan or guarantee. These certificates are unsecured, subordinated debt of CFC and RTFC. Certificates currently purchased in conjunction with loans are noninterest- bearing and are generally repaid periodically over the life of the loan in relation to the loan principal balance outstanding. Such certificate purchase requirements, if any, range from 1% to 12% of the loan amount depending on the membership classification of the borrower and the borrower's leverage ratio, including the new loan, with CFC, for Utility Systems. The maturity dates and the interest rates payable on certificates purchased in conjunction with CFC's guarantee program vary in accordance with applicable CFC policy. In addition, members may also be required to purchase noninterest- bearing Subordinated Certificates in connection with CFC's guarantee of long- term tax-exempt bonds (see Note 8). These certificates have varying maturities but none is greater than the longest maturity of the guaranteed obligation. Proceeds from the sale of such certificates are pledged by CFC to the Debt Service Reserve Fund established in connection with the 65 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) bond issue, and any earnings from the investments of the fund inure solely to the benefit of the members for whose benefit the bonds are issued. Information with respect to Members' Subordinated Certificates at May 31, is as follows: (Dollar Amounts In Thousands) 1996 1995 Membership Subscription Certificates: Number of subscribing members 903 903 Issued and outstanding: 3% and 5% certificates maturing 2020 through 2095 $ 631,282 $ 630,249 Subscribed and unissued 7,158 6,880 Total Membership Subscription Certificates 638,440 637,129 Loan and Guarantee Certificates: Issued and outstanding: 3% certificates maturing through 2040 129,520 140,911 5.74% to 13.70% certificates maturing through 2018 125,139 137,905 Noninterest-bearing certificates maturing through 2029 290,352 301,354 Subscribed and unissued 24,233 17,416 Total Loan and Guarantee Certificates 569,244 597,586 Total Members' Subordinated Certificates $1,207,684 $1,234,715 CFC estimates the amount of Members' Subordinated Certificates that will be repaid during the next five fiscal years will total approximately 2.25% of certificates outstanding. The weighted average interest rate paid on all Subordinated Certificates was 4.29%, 4.36% and 4.46% as of May 31, 1996, 1995 and 1994, respectively. These rates do not include $102.5 million, $114.1 million and $107.1 million of debt service reserve certificates and $31.4 million, $24.3 million and $29.3 million of subscribed but unissued Subordinated Certificates at May 31, 1996, 1995 and 1994, respectively. 66 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continue) (4) Notes Payable and Credit Arrangements Notes payable due within one year as of May 31, and weighted average interest rates thereon, are summarized as follows:
1996 1995 Weighted Weighted Average Average Amounts Interest Amounts Interest (Dollar Amounts In Thousands) Outstanding Rates Outstanding Rates Commercial paper, sold through dealer, net of discounts of $17,540 and $23,981, respectively $3,482,133 5.43% $2,783,018 6.13% Commercial paper sold by CFC directly to members, at par 1,170,039 5.33% 1,049,474 6.06% Commercial paper sold by CFC directly to nonmembers, at par 65,898 5.33% 60,078 6.06% 4,718,070 5.41% 3,892,570 6.11% Bank bid notes 183,500 5.42% 350,000 6.11% Long-term debt maturing within one year 299,982 7.75% - - 5,201,552 5.54% 4,242,570 6.11% Notes payable supported by revolving credit agreements, classified as long-term debt (see Note 5) (2,730,000) 5.54% (2,430,000) 6.11% $2,471,552 5.54% $1,812,570 6.11%
Other information with regard to notes payable due within one year at May 31, is as follows:
(Dollar Amounts In Thousands) 1996 1995 1994 Original maturity range of notes outstanding at year-end 1 to 270 days 1 to 261 days 1 to 269 days Weighted average maturity of notes outstanding at year-end 35 days 65 days 36 days Average amount outstanding during the year $4,839,483 $3,895,274 $2,954,783 Maximum amount outstanding at any month-end during the year $5,201,552 $4,242,570 $3,637,975 Weighted average interest rate paid for the year,without effect of compensating balances and commitment fees 5.77% 5.44% 3.48% Weighted average effective interest rate paid for the year, including effect of compensating balances and commitment fees 5.83% 5.59% 3.67%
CFC issues short-term bid notes which are unsecured obligations of CFC and do not require back-up bank lines for liquidity purposes. Bid note facilities are uncommitted lines of credit for which CFC does not pay a fee. The commitments are generally subject to termination at the discretion of the individual banks. 67 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) As of May 31, 1996, CFC had three revolving credit agreements totaling $5,050.0 million which are used principally to provide liquidity support for CFC's outstanding commercial paper, CFC's guaranteed commercial paper issued by NCSC and the adjustable or floating/fixed rate bonds which CFC has guaranteed and is standby purchaser for the benefit of its members. Two of these credit agreements, which total a combined $4,550.0 million, were executed with 60 banks, with J.P. Morgan Securities, Inc. and The Bank of Nova Scotia as Co-Syndication Agents and Morgan Guaranty Trust Company of New York as Administrative Agent. Under these agreements, CFC can borrow up to $2,730.0 million until February 28, 2000 (the "five-year facility"), and $1,820.0 million until February 25, 1997 (the "364-day facility"). Any amounts outstanding under these facilities will be due on the respective maturity dates. A third revolving credit agreement for $500.0 million was executed on April 30, 1996 with ten banks, including the Bank of Nova Scotia as Administrative and Syndication Agent (the "BNS facility"). This agreement has a 364-day revolving credit period which terminates April 29, 1997 during which CFC can borrow and such borrowings may be converted to a 1-year term loan at the end of the revolving credit period. In connection with the five-year facility, CFC pays a per annum facility fee of .10 of 1% and per annum commitment fee of .025 of 1%. The per annum facility fee for both agreements with a 364-day maturity is .08 of 1% and there is no commitment fee at CFC's current credit rating level. If CFC's long-term ratings decline, these fees may be increased by no more than .1250 of 1%. Generally, pricing options are the same under all three agreements and will be at one or more rates as defined in the agreements, as selected by CFC. The revolving credit agreements require CFC among other things to maintain Members' Equity and Members' Subordinated Certificates of at least $1,346.3 million at May 31, 1996, an increase of $1.3 million compared to the $1,345.0 million required at May 31, 1995. Each year, the required amount of Members' Equity and Members' Subordinated Certificates is increased by 90% of net margins not distributed to members. CFC is also required to maintain an average fixed charge coverage ratio over the six most recent fiscal quarters of at least 1.025 and prohibit the retirement of patronage capital unless CFC has achieved a fixed charge coverage ratio of 1.05 for the preceding fiscal year. The credit agreements prohibit CFC from incurring senior debt (including guarantees but excluding indebtedness incurred to fund RUS guaranteed loans) in an amount in excess of ten times the sum of Members' Equity and subordinated debt and restrict, with certain exceptions, the creation by CFC of liens on its assets and contain certain other conditions to borrowing. The agreements also prohibit CFC from pledging collateral in excess of 150% of the principal amount of Collateral Trust Bonds outstanding. Provided that CFC is in compliance with these financial covenants (including that CFC has no material contingent or other liability or material litigation that was not disclosed by or reserved against in its most recent annual financial statements) and is not in default, CFC may borrow under the agreements until the termination date. As of May 31, 1996 CFC was in compliance with all covenants and conditions. As of May 31, 1996 there were no borrowings outstanding under the revolving credit agreements. On the basis of the five-year facility, at May 31, 1996, CFC classified $2,730.0 million of its notes payable outstanding as long-term debt. CFC expects to maintain more than $2,730.0 million of notes payable outstanding during the next 12 months. If necessary, CFC can refinance such notes payable on a long-term basis by borrowing under the five-year facility, subject to the conditions therein. 68 NATIONAL RURAL UTILTIIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) (5) Long-Term Debt The following is a summary of long-term debt as of May 31: (Dollar Amounts In Thousands) 1996 1995 Notes payable supported by revolving credit agreement (see Note 4) $2,730,000 $2,430,000 Medium-Term Notes, sold through dealer 265,275 206,975 Medium-Term Notes, sold directly to members 338,977 366,662 604,252 573,637 Collateral Trust Bonds: Floating Rate, Series 1994A, due 1996 (1)(2) - 150,000 9.50%, Series T, due 1997 (2) (3) - 150,000 8.50%, Series U, due 1998 (3) 150,000 150,000 6.45%, Bonds, due 2001 (1) 100,000 - 6.50%, Bonds, due 2002 (1) 100,000 - 5.95%, Bonds, due 2003 (1) 100,000 - 6.65%, Bonds, due 2005 (1) 50,000 - Floating Rate, Series E-2, due 2010 (3) 2,178 2,189 7.20%, Bonds, due 2015 (1) 50,000 - 9.00%, Series O, due 2016 (3) - 83,200 9.00%, Series V, due 2021 (3) 150,000 150,000 702,178 685,389 Less: Collateral Trust Bonds held in treasury 200 1,111 Unamortized bond discount 2,349 2,233 Total Collateral Trust Bonds 699,629 682,045 Total long-term debt $4,033,881 $3,685,682 (1) Issued under the 1994 indenture. (2) As of May 31, 1996, included with short term debt. (3) Issued under the 1972 indenture. The weighted average interest rate on Medium-Term Notes and Collateral Trust Bonds was 7.20%, 7.90% and 8.06% as of May 31, 1996, 1995 and 1994. These rates do not include notes payable supported by the revolving credit agreement. The principal amount of Medium-Term Notes and Collateral Trust Bonds maturing (including any sinking fund requirements) in each of the five fiscal years following May 31, 1996, is as follows: (Dollar Amounts In Thousands) 1997 $351,460 1998 222,884 1999 91,445 2000 16,436 2001 127,352 69 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) Under the 1972 Indenture for Collateral Trust Bonds, CFC is required to maintain funds in a Debt Service Investment Account equivalent to principal and interest payments due on the bonds over the next 12 months. At May 31, 1996 and 1995, CFC had $40.9 million and $32.7 million of such funds invested in bank certificates of deposit and marketable securities, respectively. The outstanding Collateral Trust Bonds are secured by the pledge of mortgage notes taken by CFC in connection with long-term secured loans made to those members fulfilling specified criteria as set forth in the indenture. Medium- Term Notes are unsecured obligations of CFC. The following table lists the notional principal amounts and the weighted average interest rates paid by CFC under interest rate exchange agreements at May 31, 1996 and 1995: (Dollar Amounts in Thousands) Maturity Interest Rate Paid Notional Principal Amount Date 1996 1995 1996 1995 August 1996 (1) 8.40% 8.40% $ 30,000 $ 30,000 September 1996 (2) 5.82% 5.90% 150,000 150,000 February 1997 (1) 9.34% 9.34% 35,000 35,000 February 1997 (1) 9.33% 9.33% 40,000 40,000 February 1997 (1) 9.36% 9.36% 25,000 25,000 February 1998 (2) 5.83% 5.57% 50,000 50,000 October 2004 (1) 6.23% - 45,600 - April 2006 (1) 6.88% - 25,000 - April 2006 (1) 6.89% - 25,000 - April 2006 (1) 6.88% - 25,000 - April 2006 (1) 6.89% - 25,000 - Total $475,600 $ 330,000 __________ (1) Under these agreements, CFC pays a fixed rate of interest and receives interest based on a variable rate. (2) Under these agreements, CFC pays a variable rate of interest and receives a variable rate of interest. CFC's objective in using interest rate exchange agreements in which it pays a fixed rate of interest and receives a variable rate of interest is to fix the interest rate on a portion of its commercial paper. CFC then uses commercial paper, in an amount equal to the notional principal value of the interest rate exchange agreements, to fund a portion of its long-term fixed rate loan portfolio. During fiscal year 1996, CFC received a weighted average rate of 5.87%, 5.46%, 5.89%, 5.91%, 5.75%, and 5.49% on the interest rate exchange agreements maturing August 1996, February 1997, February 1997, February 1997, October 2004 and all April 2006 agreements, respectively. The net difference between the rate paid by CFC and the rate received is included in the cost of funds. CFC's objective in using interest rate exchange agreements in which it pays and receives a variable rate of interest is to change the variable rate on a notional amount of debt from a LIBOR rate index to a commercial paper rate index. The variable rate Collateral Trust Bonds and Medium-Term Notes are issued based on a LIBOR rate index, while CFC sets its variable rate loan interest rates based on a commercial paper rate. During fiscal 1995, CFC received a weighted average rate of 5.84% and 5.87% on the interest rate exchange agreements maturing in September 1996 and February 1998, respectively. The net difference between the rate paid by CFC and the rate received is included in the cost of funds. CFC is exposed on these interest rate swap agreements to interest rate risk if the counterparty to the interest rate swap agreement does not perform to the agreement's terms. CFC's policy is to enter swap agreements only with financial institutions with at least a AA long-term credit rating. 70 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) (6) Employee Benefits CFC is a participant in the National Rural Electric Cooperative Association ("NRECA") Retirement and Security Program. This program is available to all qualified CFC employees. Under the program, participating employees are entitled to receive, under a 50% joint and surviving spouse annuity, 1.90% of the average of their five highest base salaries during their last ten years of employment, multiplied by the number of years of participation in the program. A moratorium on contributions had been in effect since July 1, 1987, when the plan reached the full funding limitation. CFC was not required to pay any amounts for the retirement and security plans during fiscal year 1996 due to the funding moritorium that was in effect. Funding requirements are charged to general and administrative expenses as billed on a monthly basis. This is a multi-employer plan, available to all member cooperatives of NRECA, and therefore the projected benefit obligation and plan assets are not determined or allocated separately by individual employer. The Budget Reconciliation Act of 1993 has set a limit of $150,000 on the compensation to be used in the calculation of pension benefits. In order to restore potential lost benefits, CFC has set up a Pension Restoration Plan. Under the plan, the amount that NRECA invoices CFC will continue to be based on the full compensation paid to each employee. Upon the retirement of a covered employee, NRECA will calculate the retirement and security benefit to be paid with consideration of the compensation limits and will pay the maximum benefit thereunder. NRECA will also calculate the retirement and security benefit that would have been available without consideration of the compensation limits and CFC will pay the difference. NRECA will then give CFC a credit against future retirement and security contribution liabilities in the amount paid by CFC to the covered employee. CFC will pay such additional benefits to the covered employee through a Severance Pay Plan and a Deferred Pay Restoration Plan. Under the Severance Pay Plan, the employee is paid an amount equal to the lost pension benefits but not to exceed twice the employee's annual compensation for the prior year. The benefit must be paid within 24 months of termination of employment. To the extent that the Severance Pay Plan cannot pay all of the lost pension benefits, the remainder will be paid under a Deferred Compensation Plan, which will be paid out in a lump sum or in installments of up to 60 months. CFC recognizes in current year margins any expected payouts for post retirement benefits (other than pensions) as a result of current service. Postretirement benefits include, but are not limited to, health and welfare benefits provided after retirement. While CFC allows retired employees to participate in its medical and life insurance plans, the retirees must do so at their own expense. Any liability which may be incurred by allowing retired employees to remain on CFC's medical and life insurance plans is not material to CFC's financial condition, results of operations or cashflows. CFC offers a 401(k) defined contribution savings program to all employees that have completed a minimum of 1,000 hours of service, in either the first 12 consecutive months or first full calendar year of employment. Employee contributions for calendar year 1996 are tax deductible up to $9,500, the limit set by IRS regulations. Employees may contribute additional amounts to the program on an after-tax basis subject to the limitations established by section 415 of the IRC. The Company will contribute an amount equal to 2% of an employee's salary each year for all employees participating in the program. During the year ended May 31, 1996, the Company contributed a total of $141,000 under the program. (7) Retirement of Patronage Capital Patronage capital in the amount of $48.8 million was retired during fiscal year 1996. This amount consists of $40.4 million retired to CFC Members, excluding RTFC and GFC, $5.2 million retired to RTFC Members and $3.2 million retired to GFC Members. It is anticipated that CFC will retire patronage capital totaling $50.7 million, representing one-sixth of the fiscal years 1988, 1989 and 1990 allocations and 70% of the fiscal year 1996 allocation, in August 1996. Management anticipates that 70% of RTFC's margins for fiscal year 1996 will be retired in January 1997, and that 100% of GFC's margins for fiscal year 1996 will be retired in the second quarter of fiscal year 1997. Future retirements of patronage capital will be made as determined by the Companies' respective Boards of Directors with due regard for their individual financial conditions. 71 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) (8) Guarantees As of May 31, 1996 and 1995, CFC had outstanding guarantees of the following contractual obligations of its members (see Note 1(e) for a description of CFC's allowance for loan and guarantee losses and Note 3 for a discussion of requirements to purchase Members' Subordinated Certificates in connection with these guarantees): (Dollar Amounts In Thousands) 1996 1995 Long-term tax exempt bonds (A) $1,317,655 $1,496,930 Debt portions of leveraged lease transactions (B) 432,516 568,662 Indemnifications of tax benefit transfers (C) 363,702 389,755 Other guarantees (D) 135,567 119,575 Total $2,249,440 $2,574,922 (A) CFC has unconditionally guaranteed to the holders or to trustees for the benefit of holders of these bonds the full principal, premium, if any, and interest on each bond when due. In addition, CFC has agreed to make up, at certain times, deficiencies in the debt service reserve funds for certain of these issues of bonds. In the event of a default by a system for nonpayment of debt service, CFC is obligated to pay any required amounts under its guarantee, which will prevent the acceleration of the bond issue. The system is required to repay, on demand, any amount advanced by CFC pursuant to its guarantee. This repayment obligation is secured by a common mortgage with RUS on all of the system's assets, but CFC may not exercise remedies thereunder for up to two years. However, if the debt is accelerated because of a determination that the interest thereon is not tax-exempt, the system's obligation to reimburse CFC for any guarantee payments will be treated as a long-term loan. Of the amounts shown, $1,168.9 million and $1,200.1 million as of May 31, 1996 and 1995, respectively, are adjustable or floating/fixed rate bonds. The floating interest rate on such bonds may be converted to a fixed rate as specified in the indenture for each bond offering. During the variable rate period (including at the time of conversion to a fixed rate), CFC has unconditionally agreed to purchase bonds tendered or called for redemption if such bonds have not previously been sold to other purchasers by the remarketing agents. (B) CFC has guaranteed debt issued by NCSC in connection with leveraged lease transactions. The amounts shown represent loans from NCSC to a trust for the benefit of an industrial or financial company for the purchase of a power plant or utility equipment which was subsequently leased to a CFC member. The loans are secured by the property leased and the owner's rights as lessor. NCSC borrowed the funds for these loans either under a CFC guarantee or directly from CFC. (C) CFC has unconditionally guaranteed to lessors certain indemnity payments which may be required to be made by the lessees in connection with tax benefit transfers. The amounts shown represent CFC's maximum potential liability at May 31, 1996 and 1995. However, the amounts of such guarantees vary over the lives of the leases. A member's obligation to reimburse CFC for any guarantee payments would be treated as a long- term loan, secured pari passu with the RUS by a first lien on substantially all of the member's property to the extent of any cash received by the member at the outset of the transaction. The remainder would be treated as an intermediate-term loan secured by a subordinated mortgage on substantially all of the member's property. Due to changes in Federal tax law, no further guarantees of this nature are anticipated. (D) At May 31, 1996 and 1995, CFC had unconditionally guaranteed commercial paper issued by NCSC in the amount of $34.7 million and $34.9 million, respectively. 72 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) Guarantees outstanding, by state, are summarized as follows: (Dollar Amounts In Thousands) May 31, May 31, State 1996 1995 State 1996 1995 Alabama $ 71,680 $ 74,605 Nebraska $ 3,620 $ 3,855 Arizona 59,370 61,360 North Carolina 120,050 122,350 Arkansas 137,897 262,574 Oklahoma 63,326 70,208 Colorado 114,750 115,193 Oregon 5,070 5,180 Florida 320,834 328,458 Pennsylvania 14,547 15,426 Indiana 129,561 131,904 South Carolina 47,310 48,265 Iowa 12,015 12,775 Texas 125,528 125,623 Kansas 41,841 42,528 Utah 304,482 322,840 Kentucky 197,390 183,300 Virginia 39,133 4,550 Maryland 0 34,898 Wisconsin 8,385 8,850 Minnesota 156,077 172,768 Total $2,249,440 $2,574,922 Mississippi 71,710 74,135 Missouri 204,864 353,277 CFC uses the same credit policies and monitoring procedures in providing guarantees as it does for loans and commitments. The following table details the scheduled reductions to the amount of obligations guaranteed by CFC: (Dollar Amounts In Thousands) Amount 1997 (1) $197,501 1998 8,621 1999 12,766 2000 16,781 2001 4,588 $240,257 ________ (1) Includes the refinancing of a tax-exempt bond issue guaranteed by CFC. (9) Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments is made in accordance with FASB Statement No. 107, "Disclosure about Fair Value of Financial Instruments." Whenever possible, the estimated fair value amounts have been determined using quoted market information as of May 31, 1996, along with other valuation methodologies which are summarized below. However, the estimated fair value information presented is not necessarily indicative of amounts CFC could realize currently in a market sale as such amounts have not been revalued since year end. Therefore, current estimates of fair value may differ significantly from the amounts presented. With the exception of redeeming Collateral Trust Bonds under early redemption provisions and allowing borrowers to prepay their loans, CFC has held all financial instruments to maturity. Below is a summary of significant methodologies used in estimating fair value amounts and a schedule of fair values at May 31, 1996. Cash and Cash Equivalents Includes cash and certificates of deposit with remaining maturities of less than 90 days, which are valued at cost. 73 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) Debt Service Investments The fair value of debt service investments is estimated based on published bid prices or dealer quotes or is estimated using quoted market prices for similar securities when no market quote is available. Debt service invest- ments purchased with original maturities of less than or equal to 90 days are valued at the carrying value which is a reasonable estimate of fair value. Loans to Members Fair values are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with different risk characteristics, specifically nonperforming and restructured loans, are valued using a discount rate commensurate with the risk involved. Loans with interest rate repricing maturities of less than or equal to 90 days are valued at cost which approximates fair value. Debt Service Reserve Funds Fair value of debt service reserve funds is estimated at cost as all gains and losses on the underlying securities inure directly to the benefit or detriment of the CFC member and not to CFC. Notes Payable Notes payable consist of commercial paper and bank bid notes. The fair value of commercial paper and bid notes with maturities greater than 90 days is estimated based on quoted market rates with similar maturities for commercial paper and on bid prices from the various banking institutions for bid notes. The fair value of commercial paper and bank bid notes with maturities less than or equal to 90 days are valued at carrying value which is a reasonable estimate of fair value. The fair value of Collateral Trust Bonds maturing within one year is estimated based on published bid prices or dealer quotes or is estimated using quoted market prices for similar securities when no market quote is available. Long-Term Debt Long-term debt consists of Collateral Trust Bonds and Medium-Term Notes. The fair value of long-term debt is estimated based on published bid prices or dealer quotes or is estimated using quoted market prices for similar securities when no market quote is available. Subordinated Certificates As it is impracticable to develop a discount rate that measures fair value, Subordinated Certificates have not been valued. Subordinated Certificates are extended long-term obligations to CFC; many have maturities of 70 to 100 years. These certificates are issued to CFC's members as a condition of membership or as a condition of obtaining loan funds or guarantees and are non-transferable. As these certificates were issued not only for their future payment stream but also as a condition of membership and to receiving future loan funds, there is no ready market from which to obtain fair value rates. Interest Rate Exchange Agreements The fair value is estimated as the amount CFC would receive or pay to terminate the agreement, taking into account the current market rate of interest and the current creditworthiness of the exchange counterparties. Commitments The fair value is estimated as the carrying value, or zero. Extensions of credit under these commitments, if exercised, would result in loans priced at market rates. 74 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) Guarantees CFC charges guarantee fees based on the specifics of each individual transaction. The demand for CFC guarantees has been small in the last few years. In addition, there is no other company that provides guarantees to rural electric utility companies from which to obtain market fee information. As a result, it is impracticable to supply fair value information related to guarantee fees. Carrying and fair values as of May 31, 1996 and 1995 are presented as follows:
(Dollar Amounts In Thousands) 1996 1995 Carrying Fair Carrying Fair Value Value Value Value Assets: Cash and Cash Equivalents $ 56,368 $ 56,368 $ 56,309 $ 56,309 Debt Service Investments 40,907 40,907 32,740 32,740 Loans to Members, net 7,728,271 7,661,739 6,747,124 6,810,007 Debt Service Reserve Funds 102,512 102,512 114,094 114,094 Liabilities: Notes Payable (1) 5,201,552 5,206,878 4,242,570 4,242,859 Long-Term Debt (1) 1,303,881 1,358,688 1,255,682 1,355,463 Members' Subordinated Certificates 1,207,684 1,207,684 1,234,715 1,234,715 Off-Balance Sheet Instruments: Interest Rate Exchange Agreements - (6,458) - (11,196) Commitments - - - - Guarantees - - - -
(1) Prior to reclassification of notes payable supported by the revolving credit agreements. (10) Contingencies (a) At May 31, 1996 and 1995, CFC had a total of $230.4 million and $158.8 million of loans classified as impaired with respect to the provisions of FASB Statements No. 114 and 118. At those dates, CFC had allocated $160.9 million and $40.1 million of the loan and guarantee loss allowance to such impaired loans. At May 31, 1996 and 1995, 32% and 97% of impaired loans were collateral dependent. Loans are considered to be collateral dependent when there are no reliable future payment schedules and the amount expected to be collected is directly related to the value of the assets and future revenues that represent the underlying security for the loan. CFC does not recognize interest income on loans classified as impaired. Instead, all payments received are applied as a reduction to principal outstanding. The average recorded investment in impaired loans, for the year ended May 31, 1996, was $184.8 million. (b) On May 23, 1985, Wabash Valley Power Association, Inc. ("Wabash") filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in connection with the canceled Marble Hill plant construction. On August 7, 1991, the Bankruptcy Court confirmed Wabash's reorganization plan pending approval of rates as contemplated in the plan. 75 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) On June 22, 1994, the U.S. District Court affirmed (over RUS's objection) the Wabash plan of reorganization. RUS appealed the decision to the U.S. Court of Appeals. On December 28, 1995, the U.S. Court of Appeals reaffirmed the Wabash plan of reorganization. RUS requested that the U.S. Court of Appeals rehear the case. The judges of the Court of Appeals have denied the RUS request. RUS may appeal the case to the U.S. Supreme Court. The initial time period to file an appeal to the U.S. Supreme Court has expired, but RUS has been granted an extension. Under the Wabash plan, CFC would realize an estimated total loss of approximately $12 million ($8.6 million of which has been written off to date), after the offset of subordinated capital term certificates (without taking into account interest since the petition date). CFC and RUS have agreed to distribute all proceeds from Wabash in compliance with provisions under a shared mortgage. Upon resolution of the bankruptcy, there will be a final accounting of the cashflow subsequent to the petition date. At this time, it is anticipated that this final accounting will result in CFC making a net payment to RUS to true-up the cash distribution between RUS and CFC. The estimated loss under the Wabash plan does not include any amount CFC may be obligated to pay to RUS, representing RUS's share of the debt service payments made by Wabash on the CFC guaranteed bonds, since the petition date. In May 1993, CFC advanced $24.4 million in variable interest rate secured loans to Wabash, which was used to effect an early redemption of tax-exempt bonds guaranteed by CFC. As Wabash is in bankruptcy, CFC has classified these loans as nonperforming and, therefore, does not accrue interest income on the loans. As of May 31, 1996, CFC had $18.7 million in loans outstanding to Wabash. Based on Wabash's preliminary reorganization plan, management believes that CFC has adequately reserved for any potential loss. (c) Deseret Generation & Transmission Co-operative ("Deseret") and its major creditors entered into an Agreement Restructuring Obligations ("ARO") that restructured Deseret's debt obligations to RUS, CFC and certain other creditors, including certain lease payments due on the Bonanza Power Plant. The ARO had an effective date of January 1, 1989. The agreement provided for the reduction of Deseret's debt service and rental obligations on the Bonanza Power Plant until January 1996, when large sales of power were intended to commence. Deseret failed to make the payments required under the ARO during 1995. Deseret's creditors agreed to extend the provisions of the ARO first through January 31, 1996 and then until February 29, 1996. The extensions were intended to allow the creditors to develop final terms for a long-term restructuring of the ARO. The creditors were unable to agree on the terms of a negotiated settlement and thus the ARO was terminated as of February 29, 1996. CFC filed a foreclosure action against the owner of the Bonanza Plant in State Court in Utah on March 21, 1996. In this action, CFC has not terminated the lease or sought removal of Deseret as the plant operator. One of the defendants in the action has asserted counterclaims against CFC alleging that the remedies which CFC seeks are not available to it and that CFC seeks such remedies in an improper manner. At this time, the counterclaims are very general in nature making it hard to determine any potential impact on CFC. Another party, not named in the action, has successfully intervened and joined the action. All actions are currently in the discovery process, which should be completed in August 1996. CFC continues to discuss the possibility of a workout, including a buyout of RUS claims, with Deseret creditors other than the owners of the Bonanza Plant. CFC, RUS, Deseret and the members of Deseret continue to work toward the terms of an agreement in which CFC would purchase the RUS claims against Deseret for approximately $250 million, with Deseret's members purchasing separate participations in these claims from CFC. CFC would fund the Deseret members' portion of the purchase through secured loans to the members. In addition, RUS would require the Deseret members to prepay their RUS loans totaling approximately $50 million. CFC would fund the prepayment of the RUS loans by the Deseret members through long-term secured loans to the members. The total amount lent to the Deseret members, approximately $105 million, would be secured against the assets and future revenues of the respective members and not by the assets of Deseret. In addition, CFC would provide Deseret with a $20 million secured line of credit. Deseret, RUS and CFC have entered into agreements which have since been modified but continue through September 6, 1996, regarding certain obligations and payments to be performed or made by Deseret in exchange for forebearance by RUS from pursuing certain remedies. 76 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) From January 1, 1995 through May 31, 1996, CFC has funded $139.4 million in cashflow shortfalls related to Deseret's debt service and rental obligations. As of May 31, 1996, CFC had approximately $461.6 million in current credit exposure to Deseret consisting of $157.1 million in secured loans and $304.5 million in guarantees by CFC of various direct and indirect obligations of Deseret. CFC's guarantees include $6.0 million in tax-benefit indemnifications and $26.5 million relating to mining equipment for a coal supplier of Deseret. The remainder of CFC's guarantee is for semiannual debt service payments on $272.0 million of bonds issued in a $655 million leverage lease financing of the Bonanza Plant in 1985. CFC believes that, given the underlying collateral value and its secured position under the mortgage of the Bonanza Plant, it is adequately reserved for any potential loss on its loans and guarantees to Deseret. (d) As a consequence of high costs associated with its involvement with the Clinton Nuclear Station, Soyland Power Cooperative ("Soyland") charged costs for wholesale power which resulted in its members' retail rates being uncompetitive. This situation resulted in revenues which were inadequate to service its debt. Soyland, RUS and CFC entered into a debt restructuring agreement, dated as of December 15, 1993, which restructured Soyland's indebtedness to RUS. As part of this agreement, CFC agreed to extend additional credit to Soyland in the form of a $30 million revolving credit facility and a $30 million loan for capital additions. The revolving credit loan and the capital additions loan have priority in payment over the existing RUS loans and the prior CFC loan. At May 31, 1996, CFC had $48.0 million in outstanding long-term loans to Soyland which were secured equally and ratably with the RUS on all assets and future revenues of Soyland. In addition, CFC had $14.8 million in senior-secured long-term variable rate loans and $12.7 million in senior-secured lines of credit outstanding to Soyland. These senior-secured facilities are to be paid before all other secured debt. CFC also had $274.0 million in loans to Soyland which are 100% guaranteed by RUS. As of April 1, 1996, CFC placed the $48.0 million loan on a nonaccrual status with respect to interest income. All payments received since that date were applied against principal outstanding for financial statement purposes only. Soyland was current with respect to all payments due as of May 31, 1996. Subsequent to year end Soyland's $48.0 million loan has been reclassified from restructured to nonperforming and interest income will be recognized on a cash basis as received by CFC. The long-term variable rate loan and the line of credit have not been reclassified due to their superior security position. Soyland has determined that in order to compete with other power producers, it must reduce its cost of producing power. Soyland's largest cost of producing power is the servicing of its debt. Soyland has made a proposal to RUS regarding the reduction of its debt. Soyland was considering bankruptcy, but has agreed to work with CFC to find a solution to its current problems. Soyland has negotiated a settlement of its outstanding debt with RUS. Under the settlement, Soyland will pay the government $235 million and will be released from all of its obligations to the government pursuant to RUS loans or guarantee programs. CFC has agreed to finance Soyland's buyout from RUS, contingent upon receiving guarantees from Soyland's members for a significant portion of the loan amount. CFC, Soyland and the members of Soyland are currently working to finalize the terms of this agreement. CFC believes that, given the underlying collateral value of its secured loans to Soyland, it has adequately reserved for any potential loss on its loans. (e) At May 31, 1996, two other borrowers were in payment default to CFC on secured and unsecured loans totaling $6.6 million. At May 31, 1995, the same two borrowers were in payment default to CFC on secured and unsecured loans totaling $6.7 million. 77 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued) (11) Extraordinary Loss During the year ended May 31, 1996, CFC paid a prepayment penalty of $1.6 million for the early retirement of Collateral Trust Bonds. During the years ended May 31, 1995 and 1994, CFC did not incur any prepayment penalties related to the early retirement of Collateral Trust Bonds. (12) Combined Quarterly Financial Results (Unaudited) Summarized results of operations for the four quarters of fiscal years 1996 and 1995 are as follows: Fiscal Year 1996 (Dollar Amounts In Thousands) Quarters Ended Total August 31 November 30 February 29 May 31 Year Operating income $122,048 $124,880 $126,269 $131,876 $505,073 Operating margin 11,569 11,563 11,470 12,255 46,857 Nonoperating income 819 928 1,311 706 3,764 Extraordinary loss - - - (1,580) (1,580) Net margins 12,388 12,491 12,781 11,381 49,041 Fiscal Year 1995 Quarters Ended Total August 31 November 30 February 28 May 31 Year Operating income $ 97,985 $104,513 $116,210 $121,401 $440,109 Operating margin 13,940 13,437 14,101 325 41,803 Nonoperating income 511 1,071 916 911 3,409 Net margins 14,451 14,508 15,017 1,236 45,212 NOTE: During fiscal year 1996, CFC made nine monthly provisions for loan and guarantee losses of $0.625 million and seven special provisions totaling $6.8 million. During fiscal year 1995, CFC made 12 monthly provisions for loan and guarantee losses of $0.625 million and one special provision of $9.9 million during the fourth quarter. EX-4 2 1 AMENDMENT NO. 1 AND WAIVER TO $1,620,000,000 CREDIT AGREEMENT AMENDMENT NO. 1 AND WAIVER dated as of February 27, 1996 among NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION (the "Borrower") and the BANKS listed on the signature pages hereof (the "Banks"). WITNESSETH: WHEREAS, certain of the parties hereto, J.P. Morgan Securities Inc. and The Bank of Nova Scotia, as Co- Syndication Agents, and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "Agent"), have heretofore entered into a Credit Agreement dated as of February 28, 1995 (the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement for the purposes set forth herein. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement shall have the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall from and after the date hereof refer to the Agreement as amended hereby. SECTION 2. Amendment of Section 1.01 of the Agreement. The definition of "Termination Date" in Section 1.01 of the Agreement is amended by replacing "February 27, 1996" with "February 25, 1997". 2 SECTION 3. Amendment of the Pricing Schedule to the Agreement. The schedule set forth in the Pricing Schedule attached to the Agreement is amended to read in full as follows: Level Level Level Level Status I II III IV Euro-Dollar 0.18% 0.22% 0.375% 0.45% Margin If Utiliza- tion is equal to or less than 50% If Utiliza- 0.18% 0.345% 0.5% 0.575% tion exceeds 50% CD Margin 0.305% 0.345% 0.5% 0.575% If Utiliza- tion is equal to or less than 50% If Utiliza- 0.305% 0.47% 0.625% 0.7% tion exceeds 50% Facility Fee 0.07% 0.08% 0.10% 0.175% Rate SECTION 4. Waiver of Section 2.16 of the Agreement and Amendment to Signature Pages of Agreement pursuant to Section 2.16 of the Agreement. (a) Each Bank hereby waives the Borrower's compliance with the requirement persuant to Section 2.16 of the Agreement to deliver at least 45 days' prior notice to the Agent to increase the aggregate amount of the Commitments solely to the extent necessary to permit the increase in the Commitments referred to in paragraphs (b) and (c) of this section. (b) Upon the effectiveness of this Amendment No. 1 and Waiver, pursuant to Section 2.16 of the Agreement (x) each of the institutions set forth on the signature pages hereof as a "New Bank" (each such Bank a "New Bank") shall become a party to the Agreement as a Bank by execution and delivery to the Borrower and the Agent of counterparts 3 of the Agreement and (y) the signature pages of the Agreement shall be amended as set forth on the signature pages hereof to add each such New Bank to the signature pages of the Agreement and to reflect the Commitment (as set forth on the signature pages hereof opposite such Bank's name) of such New Bank under the Agreement. (c) Upon the effectiveness of this Amendment No. 1 and Waiver, pursuant to Section 2.16 of the Agreement (x) the amount of the Commitment of each Bank set forth on the signature pages hereof as an "Increasing Bank" (each such Bank an "Increasing Bank") shall be increased to equal the amount set forth on the signature pages hereof opposite such Bank's name and (y) the amount set forth on the signature pages of the Agreement opposite the name of such Bank shall be amended as set forth on the signature pages hereof to reflect such increase. (d) Each Bank other than the New Banks and the Increasing Banks shall continue to have a Commitment in the amount set forth opposite such Bank's name on the signature pages hereof. SECTION 5. Governing Law. This Amendment No. 1 and Waiver shall be governed by and construed in accordance with the laws of the State of New York. SECTION 6. Counterparts; Effectiveness. This Amendment No. 1 and Waiver may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment No. 1 and Waiver shall become effective as of the date hereof when the Agent shall have received duly executed counterparts hereof signed by the Borrower and the Banks (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. NATIONAL RURAL UTILITES COOPERATIVE FINANCE CORPORATION By /s/ STEVEN L. LILLY Title: Chief Financial Officer Commitments $86,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ SANJEANETTA HARRIS Title: Vice President $84,000,000 THE BANK OF NOVA SCOTIA By /s/ J.R. TRIMBLE Title: Senior Relationship Manager $44,000,000 SOCIETE GENERALE By /s/ GORDON EADON Title: Vice President $34,000,000 PNC BANK, NATIONAL ASSOCIATION By /s/ THOMAS A. MAJESKI Title: Assistant Vice President 5 $30,000,000 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By /s/ SUSAN A. HODGE Title: Vice President By /s/ ROBERT GRELLA Title: Vice President $20,000,000 BANCO BILBAO VIZCAYA, S.A. By /s/ JOHN CARRERAS Title: Vice President $20,000,000 BANK OF MONTREAL By /s/ JOHN L. SMITH Title: Director $20,000,000 THE LONG-TERM CREDIT BANK OF JAPAN By /s/ M. SHOJI Title: Deputy General Manager $20,000,000 MONTE DEI PASCHI DI SIENA SPA By /s/ S.M. SONDAK Title: F.V.P. & Dep. General Manager By /s/ BRIAN R. LANDY Title: Vice President 6 $20,000,000 SIGNET BANK/VIRGINIA By /s/ LINWOOD WHITE Title: Sr. Vice President $20,000,000 WESTDEUTSCHE LANDESBANK GIROZENTRALEN NEW YORK BRANCH/CAYMAN ISLANDS BRANCH By /s/ Title: Vice President By /s/ KAREN E. HOPLOCK Title: VP $16,000,000 BANK ONE, ARIZONA, NA By /s/ CRAIG HOSKINS Title: Vice President $20,000,000 CREDIT SUISSE By /s/ DAWN E. RUBINSTEIN Title: Associate By /s/ ADRIAN GERMANN Title: Associate $16,000,000 UNITED STATES NATIONAL BANK OF OREGON By /s/ DOUGLAS A. RICH Title: Vice President 7 $14,000,000 CRESTAR BANK By /s/ WILLIAM F. LINDLAW Title: Vice President $14,000,000 DG BANK DEUTSCHE GENOSSENSCHAFTSBANK NEW YORK BRANCH By /s/ JOHN DEAN Title: By /s/ PAMELA D. INGRAM Title: Assistant Vice President $14,000,000 THE NORTHERN TRUST COMPANY By /s/ DAVID L. LOVE Commercial Banking Officer $14,000,000 SUNBANK, NATIONAL ASSOCIATION By /s/ ANDREW J. HINES Title: AVP $12,000,000 BANCO DI NAPOLI S.P.A. By /s/ CLAUDE P. MAPES Title: First Vice President By /s/ VITO SPADA Title: Executive Vice President 8 $12,000,000 LLOYDS BANK PLC By /s/ PAUL D. BRIAMONTE Title: Vice President $12,000,000 THE TOYO TRUST & BANKING CO., LTD. By /s/ HIROYUKI FUKURO Title: Vice President By /s/ NICK FIORE Title: Marketing Officer $10,000,000 BANK AUSTRIA AKTIENGESELLSCHAST By /s/ J. ANTHONY SEAY Title: Vice President By /s/ MARK NOLAN Title: Assistant Vice President Bank Austria $10,000,000 THE BANK OF CALIFORNIA, N.A. By /s/ HARRY S. MATTHEWS Title: Vice President $10,000,000 HARRIS TRUST AND SAVINGS BANK By /s/ MICHAEL W. LEWIS Title: Senior Vice President 9 $10,000,000 NATIONAL CITY BANK, COLUMBUS By /s/ JEFFREY C. HAWTHORNE Title: Vice President Commitments INCREASING BANKS $74,000,000 THE CHASE MANHATTAN BANK, N.A. By /s/ THOMAS L. CASEY Title: Vice President $74,000,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ RICHARD WALDMAN Title: Authorized Agent $72,000,000 ABN AMRO BANK N.V. NEW YORK BRANCH By /s/ GEORGE W. DUGAN Title: Vice President By /s/ DAVID STACK Title: Assistant Vice President $72,000,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ R. VERNON HOWARD Title: Managing Director 10 $72,000,000 CREDIT LYONNAIS CAYMAN ISLANDS BRANCH By /s/ MARY COLLIER Title: Authorized Signature $72,000,000 NATIONSBANK, N.A. (CAROLINAS) By /s/ PAULA A. ZELLAR Title: Vice President $72,000,000 THE TORONTO-DOMINION BANK By /s/ JORGE A. GARCIA Title: Mgr. Cr. Admin. $72,000,000 UNION BANK OF SWITZERLAND By /s/ STEPHEN A. CAYER Title: Assistant Treasurer By /s/ PETER B. YEARLEY Title: Managing Director $56,000,000 THE BANK OF TOKYO TRUST COMPANY By /s/ CATHERINE MOESER Title: Assistant Vice President 11 $54,000,000 COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK, B.A., "Rabobank Nederland", NEW YORK BRANCH By /s/ MARK LAPONTE Title: Vice President By /s/ IAN REECE Title: Vice President & Manager $44,000,000 CIBC INC. By /s/ MARGARET E. MCTIGUE Title: Director $42,000,000 MELLON BANK, N.A. By /s/ SCOTT HENNESSEE Title: Assistant Vice President $38,000,000 COMERICA BANK By /s/ TAMARA J. GURNE Title: Account Officer $34,000,000 THE INDUSTRIAL BANK OF JAPAN, LTD., NEW YORK BRANCH By /s/ YUTAKA ENDO Title: Senior Vice President 12 $28,000,000 THE SUMITOMO BANK, LIMITED NEW YORK BRANCH By /s/ YOSHINORI KAWAMURA Title: Joint General Manager $24,000,000 BARCLAYS BANK PLC By /s/ MICHAEL MURRAY Title: Associate Director $24,000,000 FIRST BANK NATIONAL ASSOCIATION By /s/ CHRISTOPHER H. PATTON Title: Commercial Banking Officer $24,000,000 FIRST INTERSTATE BANK OF WASHINGTON, N.A. By /s/ SUSAN J. HENDRIXSON Title: Vice President $24,000,000 THE FUJI BANK, LIMITED By /s/ TEIJI TERAMOTO Title: Vice President & Manager $24,000,000 KREDIETBANK N.V. By /s/ TOD R. ANGUS /s/ RAYMOND F. MURRAY Title: Vice President Vice President 13 $22,000,000 NORDDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK AND/OR CAYMAN ISLANDS BRANCH By /s/ STEPHANIE HOEVERMANN Title: VP By /s/ STEPHEN K. HUNTER Title: SVP $20,000,000 BANQUE NATIONALE DE PARIS By /s/ PHIL TRUESDALE Title: Vice President By /s/ JOHN S. MCGILL Title: Vice President $20,000,000 COMMERZBANK AG NEW YORK BRANCH AND/OR GRAND CAYMAN BRANCH By /s/ J. SCHMIEDING Title: Vice President By /s/ A. CAMPBELL Title: Assistant Cashier $16,000,000 BANCA CRT SPA By /s/ ROBERT P. DESANTES Title: Vice President Head of Corporate Banking By /s/ FRANCO MARINO Title: Deputy & First Vice President 14 $16,000,000 THE DAI-ICHI KANGYO BANK, LTD., NEW YORK BRANCH By /s/ STEPHANIE R. ROGERS Title: Vice President $16,000,000 THE SAKURA BANK, LIMITED By /s/ MASAHIRO NAKAJO Title: Senior Vice President & Manager $16,000,000 THE TOKAI BANK, LIMITED, NEW YORK BRANCH By /s/ MASAHARU MUTO Title: Deputy General Manager $14,000,000 THE SANWA BANK, LIMITED, ATLANTA AGENCY By /s/ P.J. PAWIAK Title: V.P. & Senior Manager $14,000,000 THE YASUDA TRUST & BANKING COMPANY, LTD. By /s/ RM LAUDENSCHLOGER Title: SVP $12,000,000 BAYERISCHE LANDESBANK GIROZENTRALE CAYMAN ISLANDS BRANCH By /s/ K.H. WALLNER Title: Senior Vice President By /s/ PETER OBERMANN Title: Senior Vice President Manager Lending Division 15 Commitments NEW BANKS $18,000,000 ROYAL BANK OF CANADA By /s/ T.L. GRANT Title: Manager $18,000,000 DEUTSCHE BANK AG, NEW YORK BRANCH OR CAYMAN ISLANDS BRANCH By /s/ THOMAS G. PLAGEMANN /s/ ROSEMARY R. KELLEY Title: Asst Vice President Asst Vice President $18,000,000 NATIONAL WESTMINISTER BANK PLC/ NEW YORK BRANCH By /s/ ANNE MARIE TORRE Title: Vice President NATIONAL WESTMINISTER BANK PLC/ NASSAU BRANCH By /s/ ANNE MARIE TORRE Title: Vice President $12,000,000 FLEET NATIONAL BANK OF MASSACHUSETTS By /s/ TOM ROSE Title: Vice President $14,000,000 CAISSE NATIONALE DE CREDIT AGRICOLE By /s/ DANIEL PUYO Title: Senior VP Total Commitments $1,820,000,000 EX-4 3 1 AMENDMENT NO. 1 AND WAIVER TO $2,430,000,000 CREDIT AGREEMENT AMENDMENT NO. 1 AND WAIVER dated as of February 27, 1996 among NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION (the "Borrower") and the BANKS listed on the signature pages hereof (the "Banks"). WITNESSETH: WHEREAS, certain of the parties hereto, J.P. Morgan Securities Inc. and The Bank of Nova Scotia, as Co- Syndication Agents, and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "Agent"), have heretofore entered into a Credit Agreement dated as of February 28, 1995 (the "Agreement");and WHEREAS, the parties hereto desire to amend the Agreemenent for the purposes set forth herein. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement shall have the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall from and after the date hereof refer to the Agreement as amended hereby. 2 SECTION 2. Waiver of Section 2.16 of the Agreement and Amendment to Signature Pages of Agreement pursuant to Section 2.16 of the Agreement. (a) Each Bank hereby waives the borrower's compliance with the requirement pursuant to Section 2.16 of the Agreement to deliver at least 45 days' prior notice to the Agent to increase the aggregate amount of the Commitments solely to the extent necessary to permit the increase in the Commitments referred to in paragraphs (b) and (c) of this Section. (b) Upon the effectiveness of this Amendment No. 1 and Waiver, pursuant to Section 2.16 of the Agreement (x) each of the institutions set forth on the signature pages hereof as a "New Bank" (each such Bank a "New Bank") shall become a party to the Agreement as a Bank by execution and delivery to the Borrower and the Agent of counterparts of the Agreement and (y) the signature pages of the Agreement shall be amended as set forth on the signature pages hereof to add each such New Bank to the signature pages of the Agreement and to reflect the Commitment (as set forth on the signature pages hereof opposite such Bank's name) of such New Bank under the Agreement. (c) Upon the effectiveness of this Amendment No. 1 and Waiver, pursuant to Section 2.16 of the Agreement (x) the amount of the Commitment of each Bank set forth on the signature pages hereof as an "Increasing Bank" (each such Bank an "Increasing Bank") shall be increased to equal the amount set forth on the signature pages hereof opposite such Bank's name and (y) the amount set forth on the signature pages of the Agreement opposite the name of such Bank shall be amended as set forth on the signature pages hereof to reflect such increase. (d) Each Bank other than the New Banks and the Increasing Banks shall continue to have a Commitment in the amount set forth opposite such Bank's name on the signature pages hereof. SECTION 3. Governing Law. This Amendment No. 1 and Waiver shall be governed by and construed in accordance with the laws of the State of New York. SECTION 4. Counterparts; Effectiveness. This Amendment No. 1 and Waiver may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment No. 1 and Waiver shall become effective as of the date hereof when the Agent shall have received duly executed counterparts hereof signed by the Borrower and the Banks (or, in the case of any party 3 as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. NATIONAL RURAL UTILITES COOPERATIVE FINANCE CORPORATION By /s/ STEVEN L. LILLY Title: Chief Financial Officer Commitments $129,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ SANJEANETTA HARRIS Title: Vice President $126,000,000 THE BANK OF NOVA SCOTIA By /s/ J.R. TRIMBLE Title: Senior Relationship Manager $66,000,000 SOCIETE GENERALE By /s/ GORDON EADON Title: Vice President $51,000,000 PNC BANK, NATIONAL ASSOCIATION By /s/ THOMAS A. MAJESKI Title: Assistant Vice President 5 $45,000,000 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By /s/ SUSAN A. HODGE Title: Vice President By /s/ ROBERT GRELLA Title: Vice President $30,000,000 BANCO BILBAO VIZCAYA, S.A. By /s/ JOHN CARRERAS Title: Vice President $30,000,000 THE LONG-TERM CREDIT BANK OF JAPAN By /s/ M. SHOJI Title: Deputy General Manager $30,000,000 BANCA MONTE DEI PASCHI DI SIENA SPA By /s/ S.M. SONDAK Title: F.V.P. & Dep. General Manager By /s/ BRIAN R. LANDY Title: Vice President $30,000,000 BANK OF MONTREAL By /s/ JOHN L. SMITH Title: Director 6 $30,000,000 SIGNET BANK By /s/ LINWOOD WHITE Title: Sr. Vice President $30,000,000 WESTDEUTSCHE LANDESBANK GIROZENTRALEN NEW YORK BRANCH/CAYMAN ISLANDS BRANCH By /s/ Title: Vice President By /s/ KAREN E. HOPLOCK Title: VP $24,000,000 BANK ONE, ARIZONA, NA By /s/ CRAIG HOSKINS Title: Vice President $30,000,000 CREDIT SUISSE By /s/ DAWN E. RUBINSTEIN Title: Associate By /s/ ADRIAN GERMANN Title: Associate $24,000,000 UNITED STATES NATIONAL BANK OF OREGON By /s/ DOUGLAS A. RICH Title: Vice President 7 $21,000,000 CRESTAR BANK By /s/ WILLIAM F. LINDLAW Title: Vice President $21,000,000 DG BANK DEUTSCHE GENOSSENSCHAFTSBANK NEW YORK BRANCH By /s/ JOHN DEAN Title: By /s/ PAMELA D. INGRAM Title: Assistant Vice President $21,000,000 THE NORTHERN TRUST COMPANY By /s/ DAVID L. LOVE Commercial Banking Officer $21,000,000 SUNBANK, NATIONAL ASSOCIATION By /s/ ANDREW J. HINES Title: AVP $18,000,000 BANCO DI NAPOLI S.P.A. By /s/ CLAUDE P. MAPES Title: First Vice President By /s/ VITO SPADA Title: Executive Vice President 8 $18,000,000 LLOYDS BANK PLC By /s/ PAUL D. BRIAMONTE Title: Vice President $18,000,000 THE TOYO TRUST & BANKING CO., LTD. By /s/ HIROYUKI FUKURO Title: Vice President By /s/ NICK FIORE Title: Marketing Officer $15,000,000 BANK AUSTRIA AKTIENGESELLSCHAST By /s/ J. ANTHONY SEAY Title: Vice President By /s/ MARK NOLAN Title: Assistant Vice President Bank Austria $15,000,000 THE BANK OF CALIFORNIA, N.A. By /s/ HARRY S. MATTHEWS Title: Vice President $15,000,000 HARRIS TRUST AND SAVINGS BANK By /s/ MICHAEL W. LEWIS Title: Senior Vice President 9 $15,000,000 NATIONAL CITY BANK, COLUMBUS By /s/ JEFFREY C. HAWTHORNE Title: Vice President Commitments INCREASING BANKS $111,000,000 THE CHASE MANHATTAN BANK, N.A. By /s/ THOMAS L. CASEY Title: Vice President $111,000,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ RICHARD WALDMAN Title: Authorized Agent $108,000,000 ABN AMRO BANK N.V. NEW YORK BRANCH By /s/ GEORGE W. DUGAN Title: Vice President By /s/ DAVID STACK Title: Assistant Vice President $108,000,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ R. VERNON HOWARD Title: Managing Director 10 $108,000,000 CREDIT LYONNAIS CAYMAN ISLANDS BRANCH By /s/ MARY COLLIER Title: Authorized Signature $108,000,000 NATIONSBANK, N.A. (CAROLINAS) By /s/ PAULA A. ZELLAR Title: Vice President $108,000,000 THE TORONTO-DOMINION BANK By /s/ JORGE A. GARCIA Title: Mgr. Cr. Admin. $108,000,000 UNION BANK OF SWITZERLAND By /s/ STEPHEN A. CAYER Title: Assistant Treasurer By /s/ PETER B. YEARLEY Title: Managing Director $84,000,000 THE BANK OF TOKYO TRUST COMPANY By /s/ CATHERINE MOESER Title: Assistant Vice President 11 $78,000,000 COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK, B.A., "Rabobank Nederland", NEW YORK BRANCH By /s/ MARK LAPONTE Title: Vice President By /s/ IAN REECE Title: Vice President & Manager $66,000,000 CIBC INC. By /s/ MARGARET E. MCTIGUE Title: Director $63,000,000 MELLON BANK, N.A. By /s/ SCOTT HENNESSEE Title: Assistant Vice President $57,000,000 COMERICA BANK By /s/ TAMARA J. GURNE Title: Account Officer $51,000,000 THE INDUSTRIAL BANK OF JAPAN, LTD., NEW YORK BRANCH By /s/ YUTAKA ENDO Title: Senior Vice President 12 $42,000,000 THE SUMITOMO BANK, LIMITED NEW YORK BRANCH By /s/ YOSHINORI KAWAMURA Title: Joint General Manager $36,000,000 BARCLAYS BANK PLC By /s/ MICHAEL MURRAY Title: Associate Director $36,000,000 FIRST BANK NATIONAL ASSOCIATION By /s/ CHRISTOPHER H. PATTON Title: Commercial Banking Officer $36,000,000 FIRST INTERSTATE BANK OF WASHINGTON, N.A. By /s/ SUSAN J. HENDRIXSON Title: Vice President $36,000,000 THE FUJI BANK, LIMITED By /s/ TEIJI TERAMOTO Title: Vice President & Manager 13 $36,000,000 KREDIETBANK N.V. By /s/ TOD R. ANGUS /s/ RAYMOND F. MURRAY Title: Vice President Vice President $33,000,000 NORDDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK AND/OR CAYMAN ISLANDS BRANCH By /s/ STEPHANIE HOEVERMANN Title: VP By /s/ STEPHEN K. HUNTER Title: SVP $30,000,000 BANQUE NATIONALE DE PARIS By /s/ PHIL TRUESDALE Title: Vice President By /s/ JOHN S. MCGILL Title: Vice President $27,000,000 COMMERZBANK AG NEW YORK BRANCH AND/OR GRAND CAYMAN BRANCH By /s/ J. SCHMIEDING Title: Vice President By /s/ A. CAMPBELL Title: Assistant Cashier 14 $24,000,000 BANCA CRT SPA By /s/ ROBERT P. DESANTES Title: Vice President Head of Corporate Banking By /s/ FRANCO MARINO Title: Deputy & First Vice President $24,000,000 THE DAI-ICHI KANGYO BANK, LTD., NEW YORK BRANCH By /s/ STEPHANIE R. ROGERS Title: Vice President $24,000,000 THE SAKURA BANK, LIMITED By /s/ MASAHIRO NAKAJO Title: Senior Vice President & Manager $24,000,000 THE TOKAI BANK, LIMITED, NEW YORK BRANCH By /s/ M. MUTO Title: Deputy General Manager $21,000,000 THE SANWA BANK, LIMITED, ATLANTA AGENCY By /s/ P.J. PAWIAK Title: V.P. & Senior Manager $21,000,000 THE YASUDA TRUST & BANKING COMPANY, LTD. By /s/ RM LAUDENSCHLOGER Title: SVP 15 $18,000,000 BAYERISCHE LANDESBANK GIROZENTRALE CAYMAN ISLANDS BRANCH By /s/ K.H. WALLNER Title: Senior Vice President By /s/ PETER OBERMANN Title: Senior Vice President Manager Lending Division Commitments NEW BANKS $27,000,000 DEUTSCHE BANK AG, NEW YORK BRANCH OR CAYMAN ISLANDS BRANCH By /s/ THOMAS G. PLAGEMANN /s/ ROSEMARY R. KELLEY Title: Asst Vice President Asst Vice President $27,000,000 NATIONAL WESTMINISTER BANK PLC/ NEW YORK BRANCH By /s/ ANNE MARIE TORRE Title: Vice President NATIONAL WESTMINISTER BANK PLC/ NASSAU BRANCH By /s/ ANNE MARIE TORRE Title: Vice President $27,000,000 ROYAL BANK OF CANADA By /s/ T.L. GRANT Title: Manager 16 $21,000,000 CAISSE NATIONALE DE CREDIT AGRICOLE By /s/ DANIEL PUYO Title: Senior VP $18,000,000 FLEET NATIONAL BANK OF MASSACHUSETTS By /s/ TOM ROSE Title: Vice President Total Commitments $2,730,000,000 EX-4 4 1 $500,000,000 REVOLVING CREDIT AND TERM LOAN AGREEMENT dated as of April 30, 1996 among NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, THE BANKS LISTED HEREIN, and THE BANK OF NOVA SCOTIA, as AGENT 2 TABLE OF CONTENTS1 Page ARTICLE I DEFINITIONS SECTION 1.01. Definitions 1 SECTION 1.02. Accounting Terms and Determinations 14 SECTION 1.03. Types of Borrowings 15 ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend 15 SECTION 2.02. Notice of Committed Borrowings 16 SECTION 2.03. Money Market Borrowings 17 SECTION 2.04. Notice to Banks; Funding of Loans 21 SECTION 2.05. Notes 22 SECTION 2.06. Maturity of Loans 23 SECTION 2.07. Interest Rates 23 SECTION 2.08. Fees 26 SECTION 2.09. Optional Termination or Reduction of Commitments 27 SECTION 2.10. Mandatory Termination of Commitments 27 SECTION 2.11. Optional Prepayments 27 SECTION 2.12. General Provisions as to Payments 28 SECTION 2.13. Funding Losses. 29 SECTION 2.14. Computation of Interest and Fees 29 SECTION 2.15. Withholding Tax Exemption. 29 SECTION 2.16. Increase of Commitments. 30 SECTION 2.17. Conversion to Term Loans. 31 SECTION 2.18. Replacement of Banks by Borrower. 31 3 ARTICLE III CONDITIONS SECTION 3.01. Closing 32 SECTION 3.02. Borrowings 33 1. The Table of Contents is not a part of this Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence, Power and Authority 35 SECTION 4.02. Financial Statements 35 SECTION 4.03. Litigation 36 SECTION 4.04. Governmental Authorizations 37 SECTION 4.05. Capital Term Certificates 37 SECTION 4.06. No Violation of Agreements 37 SECTION 4.07. No Event of Default under the Indentures 38 SECTION 4.08. Compliance with ERISA 38 SECTION 4.09. Compliance with Other Laws 38 SECTION 4.10. Tax Status 38 SECTION 4.11. Investment Company Act 38 SECTION 4.12. Public Utility Holding Company Act 39 SECTION 4.13. Disclosure 39 SECTION 4.14. Subsidiaries 39 SECTION 4.15. Environmental Matters 39 ARTICLE V COVENANTS SECTION 5.01. Corporate Existence 40 SECTION 5.02. Disposition of Assets; Merger; Character of Business; etc. 40 SECTION 5.03. Financial Information 40 SECTION 5.04. Default Certificates 42 SECTION 5.05. Notice of Litigation, Legislative Developments and Defaults 43 SECTION 5.06. ERISA 44 SECTION 5.07. Payment of Charges 44 SECTION 5.08. Inspection of Books and Assets 45 SECTION 5.09. Indebtedness 45 SECTION 5.10. Liens 46 SECTION 5.11. Maintenance of Insurance 47 4 SECTION 5.12. Subsidiaries and Joint Ventures 47 SECTION 5.13. Minimum Net Worth 47 SECTION 5.14. Minimum TIER 47 SECTION 5.15. Retirement of Patronage Capital 47 SECTION 5.16. Use of Proceeds 47 ARTICLE VI DEFAULTS SECTION 6.01. Events of Default 48 SECTION 6.02. Notice of Default 50 ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization 51 SECTION 7.02. Agent and Affiliates 51 SECTION 7.03. Action by Agent 51 SECTION 7.04. Consultation with Experts 51 SECTION 7.05. Liability of Agent 51 SECTION 7.06. Indemnification 52 SECTION 7.07. Credit Decision 52 SECTION 7.08. Successor Agent 52 ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair 53 SECTION 8.02. Illegality 53 SECTION 8.03. Increased Cost and Reduced Return 54 SECTION 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans 56 5 ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices 57 SECTION 9.02. No Waivers 57 SECTION 9.03. Expenses; Documentary Taxes; Indemnification 57 SECTION 9.04. Sharing of Set-Offs 58 SECTION 9.05. Amendments and Waivers 59 SECTION 9.06. Successors and Assigns 59 SECTION 9.07. Collateral 61 SECTION 9.08. Governing Law 61 SECTION 9.09. Counterparts; Integration; Effectiveness 61 SECTION 9.10. Several Obligations 61 SECTION 9.11. Severability 62 SECTION 9.12. Forum Selection and Consent to Jurisdiction. 62 SECTION 9.13. Waiver of Jury Trial 62 Pricing Schedule Exhibit A - Note Exhibit B - RUS Guarantee Exhibit C - Money Market Quote Request Exhibit D - Invitation for Money Market Quotes Exhibit E - Money Market Quote Exhibit F - Opinion of General Counsel for the Borrower Annex A to Exhibit F - Subsidiaries and Joint Ventures Exhibit G - Opinion of Special Counsel for the Borrower Exhibit H - Opinion of Special Counsel for the Agent Exhibit I - Extension Agreement Exhibit J - Assignment and Assumption Agreement Exhibit K - Notice of Conversion 6 REVOLVING CREDIT AND TERM LOAN AGREEMENT REVOLVING CREDIT AND TERM LOAN AGREEMENT dated as of April 30, 1996 among NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, a not-for-profit cooperative association incorporated under the laws of the District of Columbia, as Borrower, the BANKS listed on the signature pages hereof, and THE BANK OF NOVA SCOTIA, as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "Adjusted CD Rate" has the meaning set forth in Section 2.07(b). "Adjusted London Interbank Offered Rate" has the meaning set forth in Section 2.07(c). "Administrative Questionnaire" means, with respect to each Bank, the administrative questionnaire in the form submitted to such Bank by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Agent" means The Bank of Nova Scotia in its capacity as agent for the Banks hereunder, and its successors in such capacity. "Agreement" means this Revolving Credit and Term Loan Agreement, as the same may from time to time be amended. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. 7 "Assessment Rate" has the meaning set forth in Section 2.07(b). "Assignee" has the meaning set forth in Section 9.06(c). "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the rate of interest publicly announced for such day by The Bank of Nova Scotia in New York as its "Base Rate" and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means (i) a Committed Loan to be made by a Bank as a Base Rate Loan in accordance with the applicable Notice of Committed Borrowing or pursuant to Article VIII, or (ii) a Term Loan to be made by a Bank as a Base Rate Loan pursuant to Section 2.17. "Bonds" means any bonds issued pursuant to either Indenture or both, as the context may require. "Borrower" means the National Rural Utilities Cooperative Finance Corporation, a not-for-profit cooperative association incorporated under the laws of the District of Columbia, and its successors. "Borrowing" has the meaning set forth in Section 1.03. "Capital Term Certificate" means a note of the Borrower sub- stantially in the form of the membership subscription certifi- cates and the loan and guarantee certificates outstanding on the date of the execution and delivery of this Agreement and any other Indebtedness of the Borrower having substantially similar provisions as to subordination as those contained in said outstanding membership subscription certificates and loan and guarantee certificates. "CD Base Rate" has the meaning set forth in Section 2.07(b). "CD Loan" means (i) a Committed Loan to be made by a Bank as a CD Loan in accordance with the applicable Notice of Committed Borrowing, or (ii) a Term Loan to be made by a Bank as a CD Loan pursuant to Section 2.17. 8 "CD Margin" has the meaning set forth in the Pricing Schedule. "CD Reference Banks" means The Bank of Nova Scotia and Morgan Guaranty Trust Company of New York. "Closing Date" means the date on or after the Effective Date on which the Agent shall have received the documents specified in or pursuant to Section 3.01. "Commitment" means, with respect to each Bank, such Bank's obligation to make Committed Loans in the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Sections 2.09 and 2.10 or increased pursuant to Section 2.16. "Committed Loan" means a loan made by a Bank pursuant to Section 2.01. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be combined or consolidated with those of the Borrower in its combined or consolidated financial statements if such statements were prepared as of such date. "Conversion Date" has the meaning set forth in Section 2.17. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both (as specified in Section 6.01) would, unless cured or waived, become an Event of Default. "Default Rate" means the rate of interest accruing on overdue principal of or interest on Base Rate Loans, CD Loans, Euro-Dollar Loans or Money Market Loans, as the case may be. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. 9 "Determination Date" shall have the meaning provided in Section 5.09. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.07(b). "Effective Date" means the date this Agreement becomes effective in accordance with Section 9.09. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and govern- mental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any 10 Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Admini- strative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means (i) a Committed Loan to be made by a Bank as a Euro-Dollar Loan in accordance with the applicable Notice of Committed Borrowing, or (ii) a Term Loan to be made by a Bank as a Euro-Dollar Loan pursuant to Section 2.17. "Euro-Dollar Margin" has the meaning set forth in the Pricing Schedule. "Euro-Dollar Reference Banks" means the principal London offices of The Bank of Nova Scotia and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.07(c). "Event of Default" has the meaning set forth in Section 6.01. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds trans- actions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to The Bank of Nova Scotia on such day on such transactions as determined by the Agent. 11 "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.01(a)) or any combination of the foregoing. "Guarantee" by any Person means any obligation, contingent or other- wise, of such Person directly or indirectly guaranteeing any Indebtedness or lease payments of any other Person or otherwise in any manner assuring the holder of any Indebtedness of, or the obligee under any lease of, any other Person through an agreement, contingent or otherwise, to purchase Indebtedness or the property subject to such lease, or to purchase goods, supplies or services primarily for the purpose of enabling the debtor or obligor to make payment of the Indebtedness or under such lease or of assuring such Person against loss, or to supply funds to or in any other manner invest in the debtor or obligor, or otherwise; provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" when used as a verb has a correlative meaning. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any con- stituent elements displaying any of the foregoing characteristics. "Indebtedness" with respect to any Person means: (1) all indebtedness which would appear as indebtedness on a balance sheet of such Person prepared in accordance with generally accepted accounting principles (i) for money borrowed, (ii) which is evidenced by securities sold for money or (iii) which constitutes purchase money indebtedness; (2) all indebtedness of others Guaranteed by such Person; (3) all indebtedness secured by any Lien upon property owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness; and (4) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement (including any lease in the nature of a title retention agreement) with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to 12 repossession of such property), but only if such property is included as an asset on the balance sheet of such Person; provided that, in computing the "Indebtedness" of such Person, there shall be excluded any particular indebtedness if, upon or prior to the maturity thereof, there shall have been deposited with the proper depositary in trust money (or evidences of such indebtedness) in the amount necessary to pay, redeem or satisfy such indebtedness, and thereafter such money and evidences of indebted- ness so deposited shall not be included in any computation of the assets of such Person; and provided further that no provision of this definition shall be construed to include as "Indebtedness" of the Borrower any indebtedness by virtue of any agreement by the Borrower to advance or supply funds to Members. "Indenture" means either the 1972 Indenture or the 1994 Indenture, and "Indentures" means both such Indentures. "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of such Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall 13 be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date; (3) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 30 days thereafter; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date; (4) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending any whole number of months thereafter (but not less than one month) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date; and (5) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than 30 days) as the Borrower may elect in accordance with Section 2.03; provided that: 14 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Joint Venture" means any corporation, partnership, association, joint venture or other entity in which the Borrower, directly or indirectly through Subsidiaries or Joint Ventures, has an equity interest at the time of 10% or more but which is not a Subsidiary; provided that no Person whose only assets are RUS Guaranteed Loans and investments in- cidental thereto shall be deemed a Joint Venture. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Domestic Loan or a Euro-Dollar Loan or a Money Market Loan and "Loans" means Domestic Loans or Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.07(c). "Member" means any Person which is a member or a patron of the Borrower. "Minimum Required Net Worth" shall initially be $1,344,973,081; provided that on each date after May 31, 1995 upon which annual financial statements are required to be delivered pursuant to Section 5.03(ii), the Minimum Required Net Worth shall be permanently increased by an amount, if positive, equal to ninety percent (90%) of (i) the aggregate amount of Net Margins for the prior fiscal 15 year minus (ii) the aggregate amount of retirements of Patronage Capital Certificates made by the Borrower to Members in the prior fiscal year. In the event that in any year the amount specified in clause (ii) above is equal to or greater than the amount specified in clause (i) above, the Minimum Required Net Worth shall remain the same for that year. "Money Market Absolute Rate" has the meaning set forth in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Agent; provided that any Bank may from time to time by notice to the Borrower and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Prime Rate pursuant to Section 8.01(a)). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.03(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "Moody's" means Moody's Investors Service, Inc., and its successors. "Net Margins" means operating and non-operating income of the Borrower and its Subsidiaries determined on a combined or consolidated basis (excluding income on Guaranteed Portions of RUS Guaranteed Loans) less, without duplication, operating and non-operating costs and expenses of the Borrower and its Subsidiaries determined on a combined or consolidated basis (excluding costs and expenses relating to Guaranteed Portions of RUS Guaranteed Loans). 17 "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means any multiemployer plan or single employer plan, as defined in Section 4001 and subject to Title IV of ERISA, which is maintained, or at any time during the five calendar years preceding the date of this Agreement was maintained, for employees of the Borrower or a Subsidiary of the Borrower or any member of the ERISA Group. "Pricing Schedule" means the Schedule attached hereto identified as such. "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Refunding Borrowing" means a Committed Borrowing which, after appli- cation of the proceeds thereof, results in no net increase in the out- standing principal amount of Committed Loans made by any Bank. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Reportable Event" means an event described in Section 4043(c) of ERISA or regulations promulgated by the Department of Labor thereunder (with respect to which the 30 day notice requirement has not been waived by the PBGC). "Required Banks" means at any time Banks having at least 60% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 60% of the aggregate unpaid principal amount of the Loans. "Revolving Credit Period" means the period from and including the Effective Date to but excluding the Revolving Credit Period Termination Date. "Revolving Credit Period Termination Date" means April 29, 1997, or such later date to which the Revolving Credit Period shall have been extended pursuant to Section 2.01(b), or, if either such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. 18 "RUS" means the Rural Utilities Service of the Department of Agriculture of the United States of America (as successor to the Rural Electrification Administration of the Department of Agriculture of the United States of America) or any other regulatory body which succeeds to its functions. "RUS Guaranteed Loan" means any loan made by any Person, which loan (x) bears interest at least equal to such Person's cost of funds and (y) is guaranteed, in whole or in part, as to principal and interest by the United States of America through the RUS pursuant to a guarantee, which guarantee contains provisions no less favorable to the holder thereof than the provisions set forth in the form of Exhibit B hereto; and "Guaranteed Portion" of any RUS Guaranteed Loan means that portion of principal of, and interest on, such RUS Guaranteed Loan which is guaranteed by the United States of America through the RUS as provided in clause (y). "S&P" means Standard and Poor's Ratings Group, and its successors. "Subsidiary" of any Person means (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through its Subsidiaries, and (ii) any other Person in which such Person directly or indirectly through Subsidiaries has more than a 50% voting and equity interest, provided that no Person whose only assets are RUS Guaranteed Loans and investments incidental thereto shall be deemed a Subsidiary. Neither the Rural Telephone Finance Cooperative nor the Guaranty Funding Cooperative is on the date of this Agreement a "Subsidiary", except that the Rural Telephone Finance Cooperative and, but only so long as the Borrower maintains control of the Board of Directors of the Guaranty Funding Cooperative (including, without limitation, the ability to appoint a majority of such Board of Directors), the Guaranty Funding Cooperative shall each be considered a "Subsidiary" for purposes of the definitions of "Net Margins" and "TIER". "Superior Indebtedness" means all Indebtedness of the Borrower (other than Capital Term Certificates) and its Subsidiaries determined on a combined or consolidated basis, but excluding Indebtedness of the Borrower or any of its Subsidiaries to the extent that the proceeds of such 19 Indebtedness are used to fund Guaranteed Portions of RUS Guaranteed Loans. "Term Loans" has the meaning set forth in Section 2.17. "Termination Date" means, if the Revolving Credit Period shall have been extended pursuant to Section 2.01(b), the date to which the Revolving Credit Period shall have been extended, or, if the Borrower shall have exercised its right to convert outstanding Loans to Term Loans pursuant to Section 2.17, the day preceding the first anniversary of the Conversion Date, or, if any such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "TIER" means, for any period, the ratio of (x) Net Margins plus interest on Indebtedness of the Borrower or its Subsidiaries determined on a combined or consolidated basis (but excluding Indebtedness of the Borrower or any of its Subsidiaries to the extent that the proceeds of such Indebtedness are used to fund Guaranteed Portions of RUS Guaranteed Loans) plus amortization of bond discount and amortization of bond issuance costs of the Borrower and its Subsidiaries determined on a combined or consolidated basis for such period (but excluding such amortization of discount and issuance costs with respect to Indebted- ness referred to in the preceding parenthetical phrase) to (y) interest on Indebtedness of the Borrower or its Subsidiaries determined on a combined or consolidated basis (but excluding Indebtedness of the Borrower or any of its Subsidiaries to the extent that the proceeds of such Indebtedness are used to fund Guaranteed Portions of RUS Guaranteed Loans) plus amortization of bond discount and amortization of bond issuance costs of the Borrower and its Subsidiaries determined on a combined or consolidated basis for such period (but excluding such amortization of discount and issuance costs with respect to Indebtedness referred to in the preceding parenthetical phrase). SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited combined financial state- ments of the Borrower and its Consolidated Subsidiaries delivered to the Banks. 20 SECTION 1.03. Types of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article II on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro- Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith). ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend. (a) During the Revolving Credit Period each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time out- standing shall not exceed the amount of its Commitment. Each Borrowing shall be in an aggregate principal amount of $25,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the maximum aggregate amount available in accordance with Section 3.02(c) or (d)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay or, to the extent per- mitted by Section 2.11, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. (b) Extension of Commitments. Except as provided in Section 2.17, the Revolving Credit Period Termination Date may be extended from time to time in the manner set forth in this subsection (b), in each case for a period of up to 364 days from the date on which Banks having 100% of the Commitments shall have notified the Agent of their agreement so to extend. If the Borrower wishes to request an extension of the Revolving Credit Period Termination Date, it shall give written notice to that effect (such notice to state the date to which the Revolving Credit Period Termination Date then in effect is requested to be extended, subject to the provisions of the preceding sentence) to the Agent not less than 60 nor more than 90 21 days prior to the Revolving Credit Period Termination Date then in effect, whereupon the Agent shall promptly notify each of the Banks of such request and send a copy of the Extension Agreement referred to below to each Bank. Each Bank will use its best efforts to respond to such request, whether affirmatively or negatively, as it may elect in its discretion, within 30 days of such notice to the Agent. If less than all Banks respond affirmatively to such request within 30 days, then the Borrower may request the Banks that do not elect to extend the Revolving Credit Period Termination Date to assign their Commitments in their entirety, no later than 15 days prior to the Revolving Credit Period Termination Date then in effect, to one or more Assignees pursuant to Section 9.06(c) which Assignees will agree to extend the Revolving Credit Period Termination Date. If all Banks (including such Assignees and excluding their respective transferor Banks) respond affirmatively, then, subject to receipt by the Agent of counterparts of an Extension Agreement in substantially the form of Exhibit I hereto duly completed and signed by all of the parties thereto, the Revolving Credit Period Termination Date shall be extended for the period specified above. SECTION 2.02. Notice of Committed Borrowings. The Borrower shall give the Agent notice (a "Notice of Committed Borrowing") not later than 11:00 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Notwithstanding the foregoing, no more than 10 Fixed Rate Borrowings shall be outstanding at any one time, and any Borrowing which would exceed such limitation shall be made as a Base Rate Borrowing. 22 SECTION 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obli- gation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit C hereto so as to be received no later than 10:00 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $25,000,000 or any larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Agent may agree) of any other Money Market Quote Request. 23 (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit D hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:00 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) 1:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 8:45 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction. Subject to Articles III and VI, any Money Market Quote so made shall be irre- vocable except with the written consent of the Agent given on the in- structions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit E hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $1,000,000 or any larger multiple thereof, (y) may not 24 exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (rounded to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (rounded to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit E hereto or does not specify all of the information required by subsection (d)(ii), (B) contains qualifying, conditional or similar language, (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes, or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote sub- mitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money 25 Market Quote. The Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:00 A.M. (New York City time) on (x) the third Euro- Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the aggregate principal amount of each Money Market Borrowing must be $25,000,000 or any larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be 26 allocated by the Agent among such Banks as nearly as possible (in such multiples, not greater than $100,000, as the Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determin- ations by the Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.04. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 1:00 P.M. (New York City time) on the date of each Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (c) If any Bank makes a new Loan hereunder on a day on which the Borrower is to repay all or any part of an outstanding Loan from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the Agent as provided in subsection (b), or remitted by the Borrower to the Agent as provided in Section 2.12, as the case may be. (d) Unless the Agent shall have been notified by any Bank prior to the date of Borrowing (or prior to 1:00 P.M. (New York City time) on the date of Borrowing in the case of a Base Rate Borrowing) that such Bank does not intend to make available to the Agent such Bank's portion of the Borrowing to be made on such date, the Agent may assume that such Bank has made such amount available to the Agent on such date and the Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount, subject to the provisions of subsection (c). If such corresponding amount is not in fact made available to the Agent by such Bank, the Agent shall be entitled to recover such corresponding amount on demand from such Bank. If such Bank does not pay such corresponding amount forthwith upon the Agent's demand therefor, the Agent shall 27 promptly notify the Borrower and the Borrower shall promptly pay such corresponding amount to the Agent. The Agent shall also be entitled to recover from such Bank or the Borrower interest on such corresponding amount in re- spect of each day from the date such corresponding amount was made available by the Agent to the Borrower to the date such corresponding amount is recovered by the Agent, at a rate per annum equal to (x) in the case of a Bank, the Federal Funds Rate for each such day and (y) in the case of the Borrower, the then applicable rate for Base Rate Loans, CD Loans, Euro-Dollar Loans or Money Market Loans, as appropriate. Nothing herein shall be deemed to relieve any Bank from its obligation to fulfill its Commitment hereunder or to prejudice any rights which the Borrower may have against any Bank as a result of any default by such Bank hereunder. For purposes of this subsection (d), no amount paid to the Agent hereunder shall be considered to have been recovered by the Agent on the date of payment unless such amount shall have been received by the Agent by 2:30 P.M. (New York City time) on such date. SECTION 2.05. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(b), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a 28 part of its Note a continuation of any such schedule as and when required. SECTION 2.06. Maturity of Loans. Except as may be provided in Section 2.17, each Loan included in any Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin plus the applicable Adjusted CD Rate; provided that if any CD Loan shall, as a result of clause (2)(b) of the definition of Interest Period, have an Interest Period of less than 30 days, such Loan shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the CD Margin plus the Adjusted CD Rate applicable to such Loan and (ii) the rate applicable to Base Rate Loans for such day. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ---------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate 29 __________ * The amount in brackets being rounded upwards, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rate s per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the unpaid principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory sub- group "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. Section 327.3(e) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin plus the applicable Adjusted London Interbank Offered Rate. Such interest shall be 30 payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, three months after the first day thereof. The "Adjusted London Interbank Offered Rate" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the Euro-Dollar Margin plus the Adjusted London Interbank Offered Rate applicable to such Loan and (ii) the Euro-Dollar Margin plus the quotient obtained (rounded upwards, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains 31 unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(c) as if each Euro-Dollar Reference Bank were to participate in the related Money Market LIBOR Borrowing ratably in proportion to its Commitment) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Prime Rate for such day. (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks by telex or cable of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.08. Fees. 32 (a) Facility Fee. The Borrower shall pay to the Agent for the account of the Banks ratably in proportion to their Commit- ments (or, after the Conversion Date, ratably in proportion to their outstanding Term Loans) a facility fee at the Facility Fee Rate (determined daily in accordance with the Pricing Schedule). Such facility fee shall accrue from and including the Effective Date to but excluding the Termination Date (or such earlier date as the Commitments shall be terminated) on the aggregate amount of the outstanding Term Loans or Commitments (whether used or unused) in existence on each such day. (b) Agent's Fees. The Borrower shall pay to the Agent, for its own account, one or more fees in such amounts and at such times as has been previously agreed between the Borrower and the Agent. (c) Payments. Accrued fees under subsection (a) of this Section 2.08 shall be payable quarterly in arrears on each January 1, April 1, July 1 and October 1, commencing on the first such date after the Effective Date, and upon the date of termination of the Commitments in their entirety. SECTION 2.09. Optional Termination or Reduction of Commitments. During the Revolving Credit Period, the Borrower may, upon at least three Domestic Business Days' notice to the Agent (which notice the Agent will promptly deliver to the Banks), (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $25,000,000 or any larger multiple of $1,000,000, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. SECTION 2.10. Mandatory Termination of Commitments. The Commit- ments shall terminate on the Revolving Credit Period Termination Date and, except as provided in Section 2.17, any Loans then out- standing (together with accrued interest thereon) shall be due and payable on such date. SECTION 2.11. Optional Prepayments. (a) The Borrower may, upon at least one Domestic Business Day's notice to the Agent, prepay any Base Rate Borrowing (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.01(a)) in whole at any time, or from time to time in part in amounts aggregating $25,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment 33 shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (b) Except as provided in Section 8.02, the Borrower may not prepay all or any portion of the principal amount of any Fixed Rate Loan prior to the maturity thereof. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepay- ment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 1:00 P.M. (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro- Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any pay- ment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks here- under that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such 34 Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.13. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan (pursuant to Article VI or VIII or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the end of an applicable period fixed pursuant to Section 2.07(d), or if the Borrower fails to borrow any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. SECTION 2.14. Computation of Interest and Fees. Interest based on the Prime Rate and fees hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but ex- cluding the last day). All other interest shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. Withholding Tax Exemption. At least five Domestic Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and its Note without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or ex- tensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and its Note without deduction or 35 withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. SECTION 2.16. Increase of Commitments. During the Revolving Credit Period, upon at least 10 days' prior notice to the Agent (which notice the Agent shall promptly transmit to each of the Banks), the Borrower shall have the right, subject to the terms and conditions set forth below and with the consent of the Banks as set forth below, to increase the aggregate amount of the Commitments in multiples of $5,000,000. Any such increase shall apply, at the option of the Borrower, (x) to the Commitment of one or more Banks, provided that (i) the Required Banks (including each Bank whose Commitment is to be increased) shall consent to such increase, (ii) the amount set forth on the signature pages hereof opposite the name of each Bank the Commitment of which is being so increased shall be amended to reflect the increased Commitment of such Bank and (iii) if any Committed Loans are outstanding at the time of such an increase, the Borrower will, notwithstanding anything to the contrary contained in this Agreement, on the date of such in- crease incur and repay or prepay one or more Committed Loans from the Banks in such amounts so that after giving effect thereto, the Committed Loans shall be outstanding on a pro rata basis (based on the Commitments of the Banks after giving effect to the changes made pursuant hereto on such date) from all the Banks or (y) to the creation of a new Commitment of an institution not then a Bank hereunder, provided that (i) such institution becomes a party to this Agreement as a Bank by execution and delivery to the Borrower and the Agent of counterparts of this Agreement, (ii) the Required Banks shall consent to the creation of such Commitment of such Bank, (iii) the signature pages hereof shall be amended to reflect the Commitment of such new Bank, (iv) the Borrower shall issue a Note to such new Bank in conformity with the provisions of Section 2.05, (v) if any Committed Loans are outstanding at the time of the creation of such Commitment of such Bank, the Borrower will, not- withstanding anything to the contrary contained in this Agreement, on the date of the creation of such Commitment incur and repay or prepay one or more Committed Loans from the Banks in such amounts so that after giving effect thereto, the Committed Loans shall be outstanding on a pro rata basis (based on the Commitments of the Banks after 36 giving effect to the changes made pursuant hereto on such date) from all the Banks and (vi) if such institution is neither a banking institution nor an affiliate of a Bank, such institution must be consented to by the Agent; provided further that any such increase or creation may apply, at the option of the Borrower, as set forth in clause (x) or (y) above but without the consent of the Required Banks so long as the amount of such increase or the amount of such new Commitment so created, as the case may be, when added to the aggregate amount of all such prior increases in the Commit- ments and all such prior creations of new Commitments does not exceed $150,000,000. It is understood that any increase in the amount of the Commitments pursuant to this Section 2.16 shall not constitute an amendment of this Agreement or the Notes. SECTION 2.17. Conversion to Term Loans. By delivering notice, in substantially the form of Exhibit K hereto, to the Agent not less than 10 days prior to the Revolving Credit Period Termination Date (which notice the Agent shall promptly transmit to each of the Banks), the Borrower may irrevocably elect to convert all Committed Loans outstanding on the Conversion Date (as hereinafter defined) into term loans (each a "Term Loan" and, collectively, the "Term Loans"), provided, however, that no Event of Default has occurred and is continuing. On the date specified in such notice for such conversion (the "Conversion Date"), any then unused portion of the Commitments shall be cancelled. All Term Loans outstanding on the Conversion Date shall mature and be due and payable on the Termination Date, subject to optional prepayment by the Borrower in accordance with Section 2.11. The Term Loans shall bear interest on the outstanding principal amount thereof, for each day from the Conversion Date to the Termination Date, at the rates per annum as fixed from time to time pursuant to appropriate notice by the Borrower to the Agent (a "Notice of Term Borrowing") provided in the manner specified for Base Rate Loans, Euro-Dollar Loans and CD Loans, as the case may be, payable for each applicable Interest Period as specified in Section 2.07. Any overdue principal of and interest on any Term Loan shall bear interest, payable on demand, for each day until paid, at a rate per annum equal to the applic- able Default Rate for Base Rate Loans, Euro-Dollar Loans and CD Loans, as the case may be, set forth in Section 2.07. SECTION 2.18. Replacement of Banks by Borrower. In the event that S&P or Moody's shall downgrade the long-term senior unsecured debt of a Bank and the resulting rating by S&P shall be equivalent to or below A- or by Moody's shall be equivalent to or below A3, then the Borrower shall have the right, but not the obligation, upon 37 notice to such Bank and to the Agent, to replace such Bank with another lender (an "Assignee Bank") in accordance with and subject to the restrictions contained in this Section, and such Bank hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in this Section) all of its interests, rights and obligations in respect of its Commitment under this Agreement to such Assignee Bank; provided, however, that (i) no such assignment shall conflict with any law, rule and regu- lation or order of any governmental authority and (ii) such Assignee Bank shall pay to such Bank in immediately available funds on the date of such assignment the principal and interest and fees (if any) accrued to the date of payment on the Loans made by such Bank hereunder, and all other amounts accrued for such Bank's account or owed to it hereunder; provided, that any reasonable out-of-pocket expenses incurred by such Bank in connection with such assignment shall be paid by the Borrower. ARTICLE III CONDITIONS SECTION 3.01. Closing. The Closing hereunder shall occur upon receipt by the Agent of the following documents, each dated the Closing Date unless otherwise indicated: (a) receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Agent for the account of each Bank of a duly executed Note dated on or before the Closing Date complying with the provisions of Section 2.05; (c) receipt by the Agent of an opinion of John Jay List, Esq., General Counsel of the Borrower, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request, such opinion to be in form and sub- stance satisfactory to the Agent; (d) receipt by the Agent of an opinion of Milbank, Tweed, Hadley & McCloy, special counsel for 38 the Borrower, substantially in the form of Exhibit G hereto and covering such additional matters relating to the trans- actions contemplated hereby as the Required Banks may reasonably request, such opinion to be in form and substance satisfactory to the Agent; (e) receipt by the Agent of an opinion of Mayer, Brown & Platt, special counsel for the Agent, substantially in the form of Exhibit H hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request, such opinion to be in form and sub- stance satisfactory to the Agent; (f) receipt by the Agent of a certificate signed by the Chief Financial Officer or the Governor and an Assistant Secretary- Treasurer or the Controller of the Borrower to the effect set forth in clauses (c) through (g), inclusive, of Section 3.02 and, in the case of clauses (c), (e) and (g), setting forth in reasonable detail the calculations required to establish such compliance; (g) receipt by the Agent of all documents the Required Banks may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Agent; and (h) receipt by the Agent of all fees due and payable by the Borrower as of the Effective Date for the account of the Agent pursuant to Section 2.08(b). The Agent shall promptly notify the Borrower and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satis- faction of the following conditions: (a) the fact that the Closing Date shall have occurred prior to May 1, 1996; (b) receipt by the Agent of a Notice of Borrowing as required by Section 2.02, Section 2.03 or Section 2.17, as the case may be; (c) the fact that, immediately after such Borrowing, the Borrower is in compliance with Section 7.12(a) of the 1972 Indenture and Section 7.11 of the 39 1994 Indenture, as each Indenture is in effect as of the date hereof; (d) the fact that, immediately after such Borrowing made during the Revolving Credit Period, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (e) the fact that, immediately after such Borrowing, if such Borrowing is not a Refunding Borrowing, no Default shall have occurred and be continuing or, if such Borrowing is a Re- funding Borrowing or a Borrowing under Section 2.17, no Event of Default shall have occurred and be continuing; (f) the fact that the representations and warranties of the Borrower contained in this Agreement (except, in the case of a Refunding Borrowing, the representations and warranties set forth in Section 4.03, the second sentence of Section 4.06, and the first sentence of Section 4.07) shall be true on and as of the date of such Borrowing (it being understood and agreed that the representation and warranty set forth in Section 4.13 shall be true and correct as to all information furnished prior to the making of the respective Loan); and (g) the fact that, at the time of such Borrowing, (i) there shall be no collateral securing Bonds issued pursuant to either Indenture of a type other than the types of collateral per- mitted to secure Bonds issued pursuant to such Indenture as of the date hereof and (ii) the Allowable Amount of Eligible Collateral then pledged under either Indenture shall not exceed 150% of the aggregate principal amount of Bonds then Outstanding under such Indenture and no collateral shall secure Bonds other than the Eligible Collateral under such Indenture, the Allowable Amount of which is included within the prior computation or collateral previously so pledged which ceases to be such Eligible Collateral not as a result of any acts or omissions to act of the Borrower (other than the declaration of an "event of default" as defined in a Mortgage which results in the exercise of any right or remedy described in such Mortgage); each defined term used in this clause (g) shall have the meaning assigned thereto in the applicable Indenture. 40 Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (c), (d), (e), (f) and (g) of this Section. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower makes the following representations, warranties and agreements, which shall survive the execution and delivery of this Agreement and the Notes and the making of the Loans: SECTION 4.01. Corporate Existence, Power and Authority. The Borrower is a cooperative association duly incorporated, validly existing and in good standing under the laws of the District of Columbia and has the corporate power and authority and all material governmental licenses, authorizations, consents and approvals re- quired to own its property and assets and to transact the business in which it is engaged. The Borrower is duly qualified or licensed as a foreign corporation in good standing in every jurisdiction in which the nature of the business in which it is engaged makes such qualification or licensing necessary, except in those jurisdictions in which the failure to be so qualified or licensed would not (after qualification, assuming that the Borrower could so qualify without the payment of any fee or penalty and retain the rights as they existed prior to such qualification all to an extent so that any fees or penalties required to be so paid or any rights not so retained would not, individually or in the aggregate, have a material adverse effect on the business or financial condition of the Borrower), individually or in the aggregate, have a material adverse effect upon the business or financial condition of the Borrower. The Borrower has the corporate power and authority to execute, deliver and carry out the terms and provisions of this Agreement and the Notes. This Agreement has been, and the Notes when executed and delivered will have been, duly and validly authorized, executed and delivered by the Borrower, and this Agreement constitutes a legal, valid and binding agreement of the Borrower, and the Notes, when executed and delivered by the Borrower in accordance with this Agreement, will constitute legal, valid and binding obligations of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 41 SECTION 4.02. Financial Statements. (a) The combined balance sheets of the Borrower and its Consolidated Subsidiaries as at May 31, 1995 and the related combined statements of income, expenses and net margins, changes in Members' equity and cash flows for the fiscal year ended May 31, 1995, including the related notes, accompanied by the opinion and report thereon of Arthur Andersen LLP, certified public accountants, heretofore delivered to the Banks, present fairly in accordance with generally accepted accounting principles (i) the combined financial position of the Borrower and its Consolidated Subsidiaries as at the date of said balance sheets and (ii) the combined results of the operations of the Borrower and its Consolidated Subsidiaries for said fiscal year. The Borrower has no material liabilities (contingent or otherwise) which are not disclosed by or re- served against in the most recent audited financial statements or in the notes thereto other than (i) Indebtedness incurred and (ii) loan and guarantee commitments issued in each case by the Borrower in the ordinary course of business since the date of such financial statements. All such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior periods, except as disclosed therein. The same representations as are set forth in this Section 4.02 shall be deemed to have been made by the Borrower in respect of the most recent annual and quarterly financial statements of the Borrower and its Consolidated Subsidiaries (except that the opinion and report of Arthur Andersen LLP may be replaced by an opinion and report of another nationally recognized firm of independent certified public accountants) furnished or required to be furnished to the Banks prior to or at the time of the making of each Loan hereunder, at the time the same are furnished or required to be furnished. (b) The unaudited combined balance sheets of the Borrower and its Consolidated Subsidiaries as of November 30, 1995 and the related unaudited combined statements of income, expenses and net margins, changes in Members' equity and cash flows for the six months then ended, heretofore delivered to the Banks, present fairly in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section 4.02, the combined financial position of the Borrower and its Consolidated Subsidiaries as of such date and their combined results of operations and changes in financial position for such six-month period (subject to normal year-end adjustments). The Borrower has no material liabilities (contingent or otherwise) which are not disclosed by or reserved against in such financial statements for such six-month period other than Indebtedness incurred and loan and guarantee commitments issued by the 42 Borrower in the ordinary course of business since the date of such financial statements. SECTION 4.03. Litigation. There are no actions, suits, proceedings or investigations pending or, to the Borrower's knowledge, threatened by or before any court or any governmental authority, body or agency or any arbitration board which are reasonably likely to materially adversely affect the business, property, assets, financial position or results of operations of the Borrower or the authority or ability of the Borrower to perform its obligations under this Agreement or the Notes. SECTION 4.04. Governmental Authorizations. No authorization, consent, approval or license of, or declaration, filing or regi- stration with or exemption by, any governmental authority, body or agency is required in connection with the execution, delivery or performance by the Borrower of this Agreement or the Notes. SECTION 4.05. Capital Term Certificates. The holders of the Borrower's Capital Term Certificates are not and will not be entitled to receive any payments with respect to the principal thereof or interest thereon solely because of withdrawing or being expelled from membership in the Borrower. SECTION 4.06. No Violation of Agreements. Neither the Borrower nor any Subsidiary is in default in any material respect under any material agreement or other instrument to which it is a party or by which it is bound or its property or assets may be affected. No event or condition exists which constitutes, or with the giving of notice or lapse of time or both would constitute, such a default under any such agreement or other instrument. Neither the execution and delivery of this Agreement or the Notes, nor the consummation of any of the transactions herein or therein contemplated, nor compliance with the terms and provisions hereof or thereof, will contravene any provision of law, statute, rule or regulation to which the Borrower is subject or any judgment, decree, award, franchise, order or permit applicable to the Borrower, or will conflict or be inconsistent with, or will result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute (or with the giving of notice or lapse of time, or both, would constitute) a default under (or condition or event entitling any Person to require, whether by purchase, redemption, acceleration or otherwise, the Borrower to perform any obligations prior to the scheduled maturity thereof), or result in the creation or imposition of any Lien upon any of the property or assets of the Borrower pursuant to the terms of, any indenture, 43 mortgage, deed of trust, agreement or other instrument to which it may be subject, or violate any provision of the certificate of incorporation or by-laws of the Borrower. Without limiting the generality of the foregoing, the Borrower is not a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Borrower, any agreement or indenture relating thereto or any other contract or agreement (including its certificate of incorporation and by-laws), which would be violated by the incurring of the Indebtedness to be evidenced by the Notes. SECTION 4.07. No Event of Default under the Indentures. The Borrower has complied fully with all of the material provisions of each Indenture. No Event of Default (within the meaning of such term as defined in each Indenture) and no event, act or condition (except for possible non-compliance by the Borrower with any immaterial provision of such Indenture which in itself is not such an Event of Default under such Indenture) which with notice or lapse of time, or both, would constitute such an Event of Default has occurred and is continuing under such Indenture. The Borrowings by the Borrower contemplated by this Agreement will not cause such an Event of Default under, or the violation of any covenant con- tained in, either Indenture. SECTION 4.08. Compliance with ERISA. The Plans are in substantial compliance with ERISA, no Plan is insolvent or in reorganization, no Plan has an accumulated or waived funding deficiency within the meaning of Section 412 of the Internal Revenue Code, neither the Borrower nor a Subsidiary of the Borrower nor any member of the ERISA Group has incurred any material liability (including any material contingent liability) to or on account of a Plan pursuant to Section 4062, 4063, 4064, 4201 or 4204 of ERISA, no proceedings have been instituted to terminate any Plan, and no condition exists which presents a material risk to the Borrower or a Subsidiary of the Borrower of incurring a liability to or on account of a Plan pursuant to any of the foregoing Sections of ERISA. SECTION 4.09. Compliance with Other Laws. The Borrower and each Subsidiary is in compliance, in all material respects, with all applicable requirements of law and all applicable rules and regu- lations of each Federal, State, municipal or other governmental department, agency or authority, domestic or foreign. SECTION 4.10. Tax Status. The Borrower is exempt from payment of Federal income tax under Section 501(c)(4) of the Internal Revenue Code. 44 SECTION 4.11. Investment Company Act. The Borrower is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.12. Public Utility Holding Company Act. The Borrower is not a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. SECTION 4.13. Disclosure. To the best of the Borrower's knowledge, information and belief, neither this Agreement nor any document, certificate or financial statement furnished to any Bank by or on behalf of the Borrower in connection herewith (all such documents, certificates and financial statements, taken as a whole) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact (other than facts of a general economic or political nature) known to the Borrower which in its judgment materially adversely affects or in the future is likely to (so far as is now known to the Borrower) have a material adverse effect upon the business, operations, prospects, property, assets or financial condition of the Borrower which has not been set forth in this Agreement or in other documents, certificates or financial statements furnished to the Banks by or on behalf of the Borrower in connection with the transactions contemplated hereby. SECTION 4.14. Subsidiaries. Each of the Borrower's corporate Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.15. Environmental Matters. In the ordinary course of its business, the Borrower conducts reviews, to the extent appropriate given the nature of its business operations, of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating ex- penditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a 45 condition of any license, permit or contract, any related con- straints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with offsite disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees, and any related costs and ex- penses). On the basis of this review, the Borrower has reasonably concluded that such associated liabilities and costs, including the cost of compliance with Environmental Laws, are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Con- solidated Subsidiaries, considered as a whole. ARTICLE V COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note or any fee payable pursuant to Section 2.08 or any other amount then due and payable hereunder remains unpaid: SECTION 5.01. Corporate Existence. The Borrower, at its own cost and expense, will, and will cause each Subsidiary to, do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, material rights and franchises; provided, however, that neither the Borrower nor any Subsidiary shall be required to preserve any right or franchise or, in the case of a Subsidiary, its corporate existence, if its Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower or such Subsidiary (provided that the termination of the corporate existence of a Subsidiary shall be permitted if the Board of Directors of the Borrower shall determine that its existence is not desirable in the conduct of the business of the Borrower) and that the loss thereof is not disadvantageous in any material respect to the Banks. SECTION 5.02. Disposition of Assets; Merger; Character of Business; etc. The Borrower will not wind up or liquidate its business or sell, lease, transfer or otherwise dispose of all or substantially all of its assets as an entirety or in a series of related transactions and will not consolidate with or merge with or into any other Person other than a merger with a Subsidiary in which the Borrower is the surviving Person. The Borrower will not engage in any business other than the business contemplated 46 by its certificate of incorporation and by-laws, each as in effect on the Effective Date. SECTION 5.03. Financial Information. The Borrower will, and will cause each Subsidiary to, keep its books of account in accordance with generally accepted accounting principles and the Borrower will furnish to the Banks (i) as soon as available and in any event within 60 days after the close of each of the first three quarters of each fiscal year of the Borrower, as at the end of, and for the period commencing at the end of the previous fiscal year and ending with, such quarter, unaudited combined balance sheets of the Borrower and its Consolidated Subsidiaries and the related unaudited combined statements of income, expenses and net margins, changes in Members' equity and cash flow of the Borrower and its Consolidated Subsidiaries for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all in reasonable detail and certified (subject to normal year-end adjustments) as to fairness of presentation in accordance with generally accepted accounting principles and consistency (except for changes concurred in by the Borrower's independent certified public accountants) by the Chief Financial Officer, the Governor, an Assistant Secretary-Treasurer or the Controller of the Borrower; (ii) as soon as practicable and in any event within 90 days after the close of each fiscal year of the Borrower, as at the end of and for the fiscal year just closed, combined balance sheets of the Borrower and its Consolidated Subsidiaries and the related combined statements of income, expenses and net margins, changes in Members' equity and cash flow for such fiscal year for the Borrower and its Consolidated Subsidiaries, all in reasonable detail and fully certified (without any qualification as to the scope of the audit) by Arthur Andersen LLP or other independent certified public accountants of nationally recognized standing selected by the Borrower, who shall have audited the books and accounts of the Borrower for such fiscal year; (iii) together with the financial statements referred to in clauses (i) and (ii) above, a certificate signed by the Governor, the Chief Financial Officer, an Assistant Secretary-Treasurer or the Controller of the Borrower, in such detail as shall be reasonably satisfactory to the Required Banks, (x) identifying (A) all Indebtedness outstanding as at the end of the fiscal period covered by such financial statements extended by the Borrower or by any other Person and Guaranteed by the Borrower to any of the forty Members with the largest amount of Indebtedness to (or Guaranteed by) the Borrower outstanding as at the end of the fiscal period 47 covered by such financial statements (the "Largest Members") as to which, to the knowledge and information of the Borrower, the Member is in default (whether in the payment of the principal thereof or interest thereon or with respect to any material covenant or agreement contained in any instrument, mortgage or agreement evidencing or relating to such Indebtedness) and specifying whether such default has been waived by the Borrower or such other Person and the nature and status of each such default not so waived and (B) the aggregate amount of all Indebtedness outstanding as of the end of the fiscal period covered by such financial statements as to which, to the knowledge and information of the Borrower, Members other than the Largest Members are in default (whether in the payment of the principal thereof or interest thereon or with respect to any material covenant or agreement contained in any instrument, mortgage or agreement evidencing or relating to such Indebtedness), (y) identifying the ten Members with the largest amount of Indebtedness to (or Guaranteed by) the Borrower out- standing as of the end of the fiscal period covered by such financial statements, together with the principal amount of such Indebtedness outstanding with respect to each such Member as of the end of such fiscal period and (z) identifying all loans which are RUS Guaranteed Loans and are outstanding as of the end of the fiscal period covered by such financial statements, together with (a) the principal amount of each such RUS Guaranteed Loan as of the end of such fiscal period, (b) the total amount of Indebtedness incurred by the Borrower and Subsidiaries of the Borrower in order to fund such RUS Guaranteed Loan, (c) the total interest expense incurred during such fiscal period by the Borrower and Subsidiaries of the Borrower in connection with the Indebtedness referred to in preceding clause (b) and (d) the amount of the Guaranteed Portion of such RUS Guaranteed Loan; (iv) with reasonable promptness, copies of all regular and periodical financial statements or other financial reports and documents which the Borrower may make available to its Members or bondholders or file with the Securities and Exchange Commission; (v) promptly after obtaining knowledge or receiving notice of a change (whether an increase or decrease) in any rating issued by S&P or Moody's pertaining to any securities of, or guaranteed by, the Borrower or any of its Subsidiaries or affiliates, a notice setting forth such change; and (vi) with reasonable promptness, such other information respecting the business, operations, prospects and financial condition of the Borrower or any of its Subsidiaries or any Joint Venture as any Bank may, from time to time, reasonably request, including, without limitation, with respect to the performance and observance by the Borrower of the covenants and conditions contained in this Agreement. 48 SECTION 5.04. Default Certificates. Concurrently with each financial statement delivered to the Banks pursuant to clauses (i) and (ii) of Section 5.03, the Borrower will furnish to the Banks a certificate signed by the Governor, the Chief Financial Officer, an Assistant Secretary-Treasurer or the Controller of the Borrower to the effect that the review of the activities of the Borrower during such year or the portion thereof covered by such financial statement and of the performance of the Borrower under this Agreement has been made under his supervision and that to the best of his knowledge, based on such review, there exists no event which constitutes a Default or an Event of Default under this Agreement or, if any such event exists, specifying the nature thereof, the period of its existence and what action the Borrower has taken and proposes to take with respect thereto, which certifi- cate shall set forth the calculations or other data required to establish compliance with the provisions of Section 5.09 and Sections 5.12 through 5.15, inclusive, at the end of such fiscal quarter or fiscal year, as the case may be. The Borrower further covenants that upon any such officer of the Borrower obtaining knowledge of any Default or Event of Default under this Agreement, it will forthwith, and in no event later than the close of business on the Business Day immediately after the day such knowledge is obtained, deliver to the Banks a statement of any officer referred to above specifying the nature and the period of existence thereof and what action the Borrower has taken and proposes to take with respect thereto. SECTION 5.05. Notice of Litigation, Legislative Developments and Defaults. The Borrower will promptly give written notice to each of the Banks of (i) any action, proceeding or claim of which the Borrower may have notice, which may be commenced or asserted against the Borrower or any Subsidiary in which the amount involved is $1,000,000 or more and is not covered in full by insurance or as to which any insurer has disclaimed liability; (ii) any dispute which may exist between the Borrower or any Subsidiary and any governmental body, which is likely to materially and adversely affect the normal business operation of the Borrower or the Borrower and its Subsidiaries taken as a whole or any of the material properties and assets of the Borrower or the Borrower and its Subsidiaries taken as a whole; (iii) any legislation enacted by any governmental body and any rulings and regulations promulgated by any governmental or regulatory bodies, known or which should be known to the Borrower, affecting the Borrower or any Subsidiary or generally affecting the Borrower's Members which is likely to materially and adversely affect the present or future operations of the Borrower, the Borrower and its Subsidiaries taken as a whole or the Borrower's Members; 49 and (iv) any default by the Borrower or any Subsidiary or event or condition known or which should be known to the Borrower which with the giving of notice or lapse of time, or both, would constitute a default, with respect to any payment or payments in respect of Indebtedness of the Borrower or such Subsidiary aggregating in excess of $15,000,000 (whether in payment of principal thereof or interest thereon or with respect to any material covenant or agreement contained in any instrument, mort- gage, deed of trust or agreement evidencing or relating to such Indebtedness or otherwise). SECTION 5.06. ERISA. As soon as possible and, in any event, within 10 days after the Borrower or a Subsidiary of the Borrower knows or has reason to know that a Reportable Event has occurred, that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code with respect to a Plan, that a Plan has been or may be terminated, that proceedings may be or have been instituted to terminate a Plan, or that the Borrower, a Subsidiary of the Borrower or any member of the ERISA Group will or may incur any liability to or on account of a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA, the Borrower will deliver to each of the Banks a certificate of the Chief Financial Officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or such Subsidiary is required or proposes to take, together with any notices required to be filed with or by the Borrower, such Subsidiary, such member of the ERISA Group, the PBGC or the plan administrator with respect thereto. Upon the request of any Bank, the Borrower will furnish to such Bank a copy of the annual report of each Plan (Form 5500) required to be filed with the Internal Revenue Service. Copies of annual reports or any notices required to be delivered to the Banks here- under shall be delivered no later than 10 days after the later of the date such report or notice has been filed with the Internal Revenue Service or the PBGC or received by the Borrower or a Subsidiary of the Borrower. SECTION 5.07. Payment of Charges. The Borrower will, and will cause each Subsidiary to, duly pay and discharge (i) all taxes, assessments and governmental charges or levies imposed upon or against it or its property or assets, prior to the date on which penalties attach thereto, unless and to the extent only that such taxes, assessments and governmental charges or levies are being contested in good faith by appropriate proceedings; and (ii) all lawful claims, including, without limitation, claims for labor, materials, supplies or services, which might or 50 could, if unpaid, become a Lien upon such property or assets, unless and to the extent only that the validity of the amount thereof is being contested in good faith by appropriate proceedings. SECTION 5.08. Inspection of Books and Assets. The Borrower will, and will cause each Subsidiary to, permit any representative of any Bank (or any agent or nominee of such Bank) to visit and inspect any of the property of the Borrower or such Subsidiary, to examine the books of record and account of the Borrower or such Subsidiary and to discuss the affairs, finances and accounts of the Borrower or such Subsidiary with the officers and independent public accountants of the Borrower or such Subsidiary, all at such reasonable times and as often as such Bank may reasonably request. SECTION 5.09. Indebtedness. (a) The Borrower will not, and will not permit any of its Subsidiaries to, incur, assume or Guarantee any Superior Indebtedness, or make any optional prepayment on any Capital Term Certificate, provided that (i) subject to the provisions of Section 5.12, any Subsidiary may incur Superior Indebtedness owing to the Borrower or assume or Guarantee Indebtedness of any Person (other than the Borrower or any of its Subsidiaries) owing to the Borrower and (ii) the Borrower may incur, assume or Guarantee Superior Indebtedness or make optional prepayments on Capital Term Certificates if, after giving effect to any such action specified above in this clause (ii), (x) on the date of such incurrence, assumption or Guarantee or making of such optional prepayment (the "Determination Date") the aggregate principal amount of Superior Indebtedness then out- standing would not exceed ten times the sum of (a) the aggregate principal amount of Capital Term Certificates out- standing on the Determination Date and (b) the aggregate amount of Members' equity in the Borrower, other than Capital Term Certificates, on the Determination Date and (y) on no given future date would the aggregate principal amount of Superior Indebtedness outstanding on the Determination Date which will remain outstanding on such given future date exceed ten times the sum of (a) the aggregate principal amount of Capital Term Certificates outstanding on the Determination Date which will remain outstanding on such given future date and (b) the aggregate amount of Members' equity in the Borrower, other than Capital Term Certificates, on the Determination Date. The respective principal amounts of Superior Indebtedness and Capital Term Certificates to be outstanding on such given future date shall be determined after giving effect to mandatory sinking fund payments, other mandatory prepayments and serial and other maturity payments required to be made on or prior to said given future date by the 51 terms of such Superior Indebtedness and Capital Term Certifi- cates or any indenture or other instrument pursuant to which they are respectively issued. (b) If any Loan is outstanding hereunder, the Borrower will not take any action which would prevent it from then complying, or fail to take any action which would enable it then to comply, with the provisions of Section 3.02(g), assuming for this purpose only that the Borrower then intended to borrow from one or more of the Banks hereunder. SECTION 5.10. Liens. The Borrower will not create or permit to exist any Lien on or with respect to any Indebtedness of any Member which is an asset of the Borrower, now existing or here- after created, or any collateral securing any such Indebtedness, and the Borrower will not permit any Subsidiary to create or permit to exist any Lien on or with respect to any of such Subsidiary's assets, except Liens (i) granted by the Borrower to the trustee pursuant to either Indenture, (ii) on any such Indebtedness granted by the Borrower to secure any borrowing for the purpose of making loans to Member power supply systems or loans to Members for bulk power supply projects or loans to Members for the purpose of providing financing to telephone and related systems eligible to borrow from the RUS, which borrowing or borrowings are on terms (except as to terms of interest, premium, if any, and amortization) not materially more dis- advantageous to the Borrower's unsecured creditors than the borrowings under either Indenture (it being understood that the Borrower cannot pledge such assets to an extent greater than 150% of the aggregate principal amount of such Indebtedness) and which Liens secure amounts not exceeding $500,000,000 in the aggregate at any one time outstanding, (iii) of current taxes not delinquent or a security for taxes being contested in good faith, (iv) other than in favor of the PBGC, created by or resulting from any legal proceedings (including legal proceedings instituted by the Borrower or any Subsidiary) which are being contested in good faith by appropriate proceedings, including appeals of judgments as to which a stay of execution shall have been issued, and adequate reserves shall have been established, (v) created by the Borrower to secure Guarantees by the Borrower of Indebtedness, the interest on which is excludable from the gross income of the recipient thereof for Federal income tax purposes as provided in Section 103(a) of the Internal Revenue Code or Section 103(a) of the Internal Revenue Code of 1954, as amended, (x) of a Member which is a state or political subdivision thereof or (y) of a state or political subdivision thereof incurred to benefit a Member for one of the purposes provided in Section 142(a)(2), (4), (5), (6), (8), (9), (10) or (12) of the 52 Internal Revenue Code or Section 103(b)(4)(D), (E), (F), (G), (H) or (J) of the Internal Revenue Code of 1954, as amended, and (vi) granted by any Subsidiary to the Borrower. SECTION 5.11. Maintenance of Insurance. The Borrower will main- tain, and will cause each Subsidiary to maintain, insurance in such amounts, on such forms and with such companies as is necessary or appropriate for its business. SECTION 5.12. Subsidiaries and Joint Ventures. The sum of the amount of Indebtedness owing to the Borrower by all of its Subsidiaries and Joint Ventures plus the amount paid by the Borrower in respect of the stock, obligations or securities of or any other interest in such Subsidiaries and Joint Ventures plus any capital contributions by the Borrower to such Subsidiaries and Joint Ventures plus the amount of assets otherwise sold or trans- ferred by the Borrower to such Subsidiaries and Joint Ventures (other than sales at fair market value) shall not exceed at any time 10% of the sum of (i) all accounts which, in accordance with generally accepted accounting principles, constitute Members' equity in the Borrower at such time and (ii) all Indebtedness of the Borrower shown in its balance sheet dated as of May 31, 1995 as "Members' Subordinated Certificates" as such Indebtedness shall be reduced from time to time and any other Indebtedness of the Borrower incurred after May 31, 1995 having substantially similar provisions as to subordination as those contained in said out- standing certificates as such other Indebtedness shall be reduced from time to time, in each case at such time. SECTION 5.13. Minimum Net Worth. The Borrower will not at any time permit its Net Worth to be less than the Minimum Required Net Worth as in effect from time to time. SECTION 5.14. Minimum TIER. The Borrower shall at no time permit the average of the TIERs for the six (6) immediately preceding fiscal quarters of the Borrower to be less than 1.025:1.00. SECTION 5.15. Retirement of Patronage Capital. The Borrower shall not make, or permit any Subsidiaries of the Borrower to make, any payments to Members in respect of Patronage Capital Certificates unless (i) the TIER for the immediately preceding fiscal year equals or exceeds 1.05:1.00 and (ii) there exists (and would exist after giving effect to any such payment) no Default or Event of Default under this Agreement. 53 SECTION 5.16. Use of Proceeds. The proceeds of the Loans made hereunder may be used by the Borrower for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock", within the meaning of Regulation U. Neither the Borrower nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation U or Regulation X. ARTICLE VI DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) Principal and Interest. The Borrower shall (i) fail to pay when due (whether upon stated maturity, by acceleration or otherwise) any principal of the Notes or (ii) fail, and such failure shall continue uncured for one or more Business Days, to pay when due (whether upon stated maturity, by acceleration or otherwise) any interest on the Notes; (b) Other Amounts. The Borrower shall fail to pay when due any fee or other amount payable under this Agreement and such failure remains uncured for five (5) days after the due date thereof; (c) Covenants Without Notice. The Borrower shall fail to observe or perform any covenant or agreement on its part to be observed or performed which is set forth in Section 5.01, 5.02, 5.09, 5.10, 5.12, 5.13, 5.14, 5.15 or 5.16; (d) Covenants With 10 Days Grace. The Borrower shall fail to observe or perform any covenant or agreement on its part to be observed or performed, which is set forth in Section 5.05, 5.06, 5.07 or 5.08, and such non-observance or non-performance shall continue unremedied for a period of more than 10 days; (e) Other Covenants. The Borrower shall fail to observe or perform any covenant, condition or agreement on its part to be observed or performed, other than as referred to in sub- sections (a), (b), (c) and (d) above, for a period of 30 days after written notice specifying such failure and requesting that it be remedied is given by any Bank to the Borrower and the other Banks; provided that, if the failure 54 be such that it cannot be corrected within the applicable period, but can be corrected within a reasonable period of time thereafter, it shall not constitute a default if corrective action is instituted by the Borrower within the applicable period and diligently pursued until the failure is corrected; (f) Representations. Any representation, warranty, certification or statement made or deemed to be made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made or deemed to be made; (g) Non-Payments of Indebtedness and/or Derivatives Obligations. The Borrower or any Subsidiary of the Borrower shall fail to make any payment or payments aggregating for the Borrower and its Subsidiaries in excess of $15,000,000 in respect of Indebtedness and/or Derivatives Obligations of the Borrower or any Subsidiary (other than the Notes or any Indebtedness under this Agreement) when due (whether upon stated maturity, by acceleration or otherwise) or within any applicable grace period; (h) Defaults Under Other Agreements. The Borrower or any Subsidiary shall fail to observe or perform within any applicable grace period any covenant or agreement contained in any agreement or instrument relating to any Indebtedness of the Borrower or any Subsidiary, aggregating for the Borrower and its Subsidiaries in excess of $15,000,000 if the effect of such failure is to accelerate, or to permit the holder of such Indebtedness or any other Person to accelerate, the maturity of such Indebtedness; (i) Bankruptcy. The Borrower or any Subsidiary shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Subsidiary seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, conservation or pro- ceeding in the nature thereof, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors, or seeking the entry of an order for relief or the appointment of a receiver (including state regulatory authorities acting in a similar capacity), trustee, custodian or other similar official for it or for any substantial part of its property, and, in the case of any such proceeding instituted against it (but not 55 instituted by it) shall remain undismissed or unstayed for a period of 60 days; or the Borrower or any Subsidiary shall take any action to authorize any of the actions set forth above in this subsection (i); (j) ERISA. A Plan shall fail to maintain the minimum funding standard required by Section 412 of the Internal Revenue Code for any plan year or a waiver of such standard is sought or granted under Section 412(d), or a Plan is, shall have been or is likely to be terminated or the subject of termination proceedings under ERISA, or the Borrower or a Subsidiary of the Borrower or any member of the ERISA Group has incurred or is likely to incur a liability to or on account of a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA, and there shall result from any such event or events either a liability or a material risk of incurring a liability to the PBGC or a Plan, which in the opinion of the Required Banks, will have a material adverse effect upon the business, operations or the financial condition of the Borrower or a Subsidiary of the Borrower; or (k) Money Judgment. A final judgment or order for the pay- ment of money in excess of $15,000,000 shall be rendered against the Borrower or any Subsidiary and such judgment or order shall continue unsatisfied and in effect for a period of 45 days during which execution shall not be effectively stayed or deferred (whether by action of a court, by agreement or otherwise); then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Agent, upon the request of the Required Banks, shall by notice to the Borrower, take any or all of the following actions, with- out prejudice to the rights of the Agent, any Bank or the holder of any Note to enforce its claims against the Borrower: (a) declare the Commitments terminated, whereupon the Commitment of each Bank shall forthwith terminate immediately and any fee payable pursuant to Section 2.08(a) shall forthwith become due and payable without any other notice of any kind; or (b) declare the principal of and accrued interest on the Loans, and all other obligations owing hereunder, to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that, if an Event of Default specified in sub- section (i) shall occur, the result which would occur upon the giving of written notice by the Agent to the Borrower, as specified in clauses (a) and (b) above, shall occur automatically without the giving of any such notice. SECTION 6.02. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(e) promptly 56 upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agent and Affiliates. The Bank of Nova Scotia shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and The Bank of Nova Scotia and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent hereunder. SECTION 7.03. Action by Agent. The obligations of the Agent here- under are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. SECTION 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Agent. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents, or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or 57 agreements of the Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) reasonably believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment (or, if the Commitments shall have been terminated, in accordance with its ratable share of out- standing Loans), indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitee's gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 15 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the 58 rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) in the case of a Committed Borrowing or an outstanding Term Loan, Banks having 50% or more of the aggregate amount of the Commitments or Term Loans outstanding, as the case may be, advise the Agent that the Adjusted CD Rate or the Adjusted London Interbank Offered Rate, as the case may be, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the 59 interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after (x) the date hereof, in the case of any Committed Loan or Term Loan or any obligation to make Committed Loans or Term Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Bank (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Fixed Rate Loans, its Notes or its obligation to make Fixed Rate Loans, or shall change the basis of taxation of payments to any Bank (or its Applicable Lending Office) of the principal of or 60 interest on its Fixed Rate Loans or any other amounts due under this Agreement in respect of its Fixed Rate Loans or its obligation to make Fixed Rate Loans (except for changes in the rate of tax on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank's principal executive office or Applicable Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (A) with respect to any CD Loan, any such require- ment included in an applicable Domestic Reserve Percentage and (B) with respect to any Euro-Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applic- able Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Notes or its obligation to make Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction (including any amount or amounts equal to any taxes on the overall net income of such Bank payable by such Bank with respect to the amount of payments required to be made pursuant to this Section 8.03(a)). (b) If any Bank determines that the adoption of any applicable law, rule, regulation, guideline or request concerning capital adequacy, or any change therein, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency (including, with- out limitation, any such adoption or change the effect of which would be, for purposes of capital adequacy requirements, to treat the Commitments hereunder 60 as not constituting commitments with an original maturity of one year or less), occurring after the date hereof, will have the effect of increasing the amount of capital required or expected to be maintained by such Bank based on the existence of such Bank's Commitment hereunder or its obligations here- under, it will notify the Borrower. This determination will be made on a Bank by Bank basis. The Borrower will pay to each Bank on demand such additional amounts as are necessary to compensate for the increased cost to such Bank as a result of the event described in the first sentence of this Section 8.03(b). In determining such amount, such Bank will act reasonably and in good faith and will use averaging and attribution methods which are reasonable, and such Bank will pass such costs on to the Borrower only if such costs are passed on in a similar manner by such Bank to similarly situated borrowers (which are parties to credit or loan docu- mentation containing a provision similar to this Section 8.03(b)), as determined by such Bank in its reasonable discretion. Each Bank's determination of compensation shall be conclusive if made in accordance with this provision. Each Bank, upon determining that any increased costs will be payable pursuant to this Section 8.03(b), will give prompt written notice thereof to the Borrower, which notice shall show the basis for calculation of such increased costs, although the failure to give any such notice shall not release or diminish any of the Borrower's obligations to pay increased costs pursuant to this Section 8.03(b). (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A Bank claiming compensation under this Section shall furnish a certificate to the Borrower setting forth the additional amount or amounts to be paid to it hereunder, which shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until 61 such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as CD Loans or Euro-Dollar Loans, as the case may be, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid, all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. All notices, requests, directions, consents, approvals and other communications to any party here- under shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Agent, at its address or telex or telecopier number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telex or telecopier number set forth in its Administrative Questionnaire or (z) in the case of any other party, such other address or telex or telecopier number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request, direction, consent, approval or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received or (ii) if given by any other means, when delivered or received at the address specified in this Section; provided that notices to the Agent under Article II or Article VIII shall not be effective until received. SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 62 SECTION 9.03. Expenses; Documentary Taxes; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of- pocket expenses incurred by the Agent or any Bank, including reasonable fees and disbursements incurred by counsel or in-house counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. The Borrower shall indemnify each Bank against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement or the Notes and any and all liabilities with respect to or resulting from any delay or omission (unless solely attributable to such Bank) to pay such taxes. (b) The Borrower agrees to indemnify each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by any Indemnitee (or by the Agent in connection with its actions as Agent hereunder) in connection with any in- vestigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for its own gross negligence, willful misconduct or unlawful conduct as determined by a court of competent jurisdiction. SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or other- wise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section 63 shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under the Notes. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. SECTION 9.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment or Term Loans of any Bank (except for a ratable decrease in the Commitments or Term Loans of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment or Term Loan or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 9.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall 65 retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. Subject to the provisions of subsection (e), the Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits, and be bound by the obligations, of Article VIII with respect to its participating interest. An assignment or other transfer which is not per- mitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this sub- section (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (but not in any case in an amount less than $10,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit J hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower and the Agent, such consents not to be unreasonably withheld; provided that if an Assignee is another Bank or an affiliate of such transferor Bank, no such consent shall be required; and provided further that such assignment may, but need not, include the rights of the transferor Bank in respect of out- standing Money Market Loans. Upon execution and delivery of such an instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commit- ment or a Term Loan outstanding as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first 66 date on which interest or fees are payable hereunder for its account, deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 2.15. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circum- stances giving rise to such greater payment did not exist. SECTION 9.07. Collateral. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.08. Governing Law. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. SECTION 9.09. Counterparts; Integration; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agree- ments and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). SECTION 9.10. Several Obligations. The obligations of the Banks hereunder are several. Neither the failure of any Bank to carry out its obligations hereunder nor of this Agreement to be duly authorized, executed and 67 delivery by any Bank shall relieve any other Bank of its obligations hereunder (or affect the rights hereunder of such other Bank). No Bank shall be responsible for the obligations of, or any action taken or omitted by, any other Bank hereunder. SECTION 9.11. Severability. In case any provision in or obli- gation under this Agreement shall be invalid, illegal or unenforce- able in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 9.12. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE BANKS OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. THE BANKS, THE AGENT AND THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREE TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BANKS, THE AGENT AND THE BORROWER IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BANKS, THE AGENT AND THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH THEY MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT ANY BANK, THE AGENT OR THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURIS- DICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, IT HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLI- GATIONS UNDER THIS AGREEMENT. SECTION 9.13. Waiver of Jury Trial. THE AGENT, THE BANKS AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, OR ANY 68 COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE BANKS OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND THE BANKS ENTERING INTO THIS AGREEMENT. 69 PRICING SCHEDULE The "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day: LEVEL LEVEL LEVEL LEVEL STATUS I II III IV Euro-Dollar 0.18% 0.22% 0.375% 0.45% Margin If Utiliza- tion is equal to or less than 50% If Utiliza- 0.18% 0.345% 0.5% 0.575% tion exceeds 50% CD Margin 0.305% 0.345% 0.5% 0.575% If Utiliza- tion is equal to or less than 50% If Utiliza- 0.305% 0.47% 0.625% 0.7% tion exceeds 50% Facility Fee 0.07% 0.08% 0.1% 0.175% Rate For purposes of this Schedule, the following terms have the following meanings: "Level I Status" exists at any date if, at such date, the Borrower has out- standing senior unsecured long-term debt and such debt, without third party enhancement, is rated (or, if on such date the Borrower has no outstanding senior unsecured long-term debt, evidence satisfactory to the Agent is provided to the effect that the rating of senior unsecured long-term debt of the Borrower, assuming that it had outstanding senior unsecured long-term debt, would be rated) at least AA (or any equivalent rating which is used in lieu thereof) by S&P and Aa2 (or any equivalent rating which is used in lieu thereof) by Moody's. 70 "Level II Status" exists at any date, if at such date, the Borrower has out- standing senior unsecured long-term debt and such debt, without third party enhancement, is rated (or, if on such date the Borrower has no outstanding senior unsecured long-term debt, evidence satisfactory to the Agent is provided to the effect that the rating of senior unsecured long-term debt of the Borrower, assuming that it had outstanding senior unsecured long-term debt, would be rated) at least AA- (or any equivalent rating which is used in lieu thereof) or higher by Moody's and Level I Status does not exist at such date. "Level III Status" exists at any date if, at such date, the Borrower has outstanding senior unsecured long-term debt and such debt, without third party enhancement, is rated (or, if on such date the Borrower has no outstanding senior unsecured long-term debt, evidence satisfactory to the Agent is provided to the effect that the rating of senior unsecured long-term debt of the Borrower, assuming that is had outstanding senior unsecured long-term debt, would be rated) at least A+ (or any equivalent rating which is used in lieu thereof) or higher by S&P or A1 (or any equivalent rating which is used in lieu thereof) or higher by Moody's and neither Level I Status nor Level II Status exists. "Level IV Status" exists at any date if, at such date, none of Level I Status, Level II Status or Level III Status exists. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status or Level IV Status exists at any date. "Utilization" means at any date the percentage equivalent of a fraction (i) the numerator of which is the aggregate outstanding principal amount of the Loans at such date, after giving effect to any borrowing or payment on such date, and (ii) the denominator of which is the aggregate amount of the Commitments at such date, after giving effect to any reduction of the Commitments on such date. For purposes of this Schedule, if for any reason any Loans remain outstanding after termination of the Commitments, the Utilization for each date on or after the date of such termination shall be deemed greater than 50%. The credit ratings to be utilized for purposes of this Pricing Schedule shall be, so long as the Borrower's unsecured Medium Term Notes are rated by either S&P or Moody's, those assigned to the Borrower's unsecured Medium Term Notes. The rating in effect at any date is that in effect at the close of business on such date. 71 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION By /S/ Steven L. Lilly Title: Chief Financial Officer Address: Woodland Park 2201 Cooperative Way Herndon, Virginia 22071-3025 Attention: Kimberly Armstrong Telephone No.: (703) 709-6700 Telecopier No.: (703) 709-6779 Commitments $50,000,000 ABN AMRO BANK N.V. NEW YORK BRANCH By /s/ George W. Dugan Title: Vice President By /s/ Title: $50,000,000 BANK OF AMERICA ILLINOIS By /s/ Felipe Gomez Title: Vice President 72 $50,000,000 CREDIT LYONNAIS NEW YORK BRANCH By /s/ Mary E. Collier Title: Vice President $50,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Sanjeanetta Harris Title: Vice President $50,000,000 NATIONSBANK, N.A. By /s/ Paula A. Zellmer Title: Vice President $50,000,000 RABOBANK NEDERLAND, NEW YORK BRANCH By /s/ Mark Laponte Title: Vice President By /s/ Ian Reece Title: Vice President and Manager $50,000,000 THE BANK OF NOVA SCOTIA By /s/ J.R. Trimble Title: Senior Relationship Manager 73 $50,000,000 THE CHASE MANHATTAN BANK, N.A. By /s/ Thomas L. Casey Title: Vice President $50,000,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ Richard H. Waldman Title: Managing Director $50,000,000 THE TORONTO-DOMINION BANK By /s/ Jorge A. Garcia Title: Manager - Credit Administration Total Commitments $ 500,000,000 74 THE BANK OF NOVA SCOTIA, as Agent By /s/ J.R. Trimble Title: Senior Relationship Manager Address: One Liberty Plaza New York, New York 10006 Attention: Telex number: 75 EXHIBIT A NOTE New York, New York April 30, 1996 For value received, National Rural Utilities Cooperative Finance Corporation a not-for-profit cooperative association incorporated under the laws of the District of Columbia (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the last day of the Interest Period relating to such Loan. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of The Bank of Nova Scotia, One Liberty Plaza, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, appropriate notations to evidence the fore- going information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the $500,000,000 Revolving Credit and Term Loan Agreement dated as of April 30, 1996 among the Borrower, the banks listed on the signature pages thereof, and The Bank of Nova Scotia, as Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION By Title: 76 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By 77 EXHIBIT B Form of RUS Guarantee The United States of America acting through the Administrator of the Rural Utilities Service ("RUS") hereby unconditionally guarantees to [name of Payee] the making of [ %] of the payments of principal and interest when and as due on this Note of (the "Cooperative") in accordance with the terms hereof and of the Loan Agreement referred to in this Note, until such principal and interest shall be indefeasibly paid in full (which includes interest accruing on such principal between the date of default under this Note and the payment in full of this Guarantee), irrespective of receipt by RUS of any sums or property from its enforcement of its remedies for the Cooperative default. This Guarantee shall be incontestable except for fraud or misrepresentation of which the holder had actual knowledge at the time it became a holder. RUS hereby waives diligence, presentment, demand, protest and notice of any kind, as well as any requirement that [name of Payee] exhaust any right or take any action against the Cooperative. This Guarantee is issued pursuant to Title III of the Rural Electrification Act of 1936, as amended (7 U.S.C. {{901, et seq.), and the Loan Guarantee and Servicing Agreement among RUS, the Cooperative, The First National Bank of Chicago and National Rural Utilities Cooperative Finance Corporation dated , 19 . UNITED STATES OF AMERICA Date , 19 By Administrator of Rural Electrification Administration 78 EXHIBIT C Form of Money Market Quote Request [Date] To: The Bank of Nove Scotia (the "Agent") From: National Rural Utilities Cooperative Finance Corporation (the "Borrower") Re: $500,000,000 Revolving Credit and Term Loan Agreement (the "Credit Agreement") dated as of April 30, 1996 among the Borrower, the Banks listed on the signature pages thereof, and The Bank of Nova Scotia, as Agent. We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: Principal Amount 1/ Interest Period 2/ $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Terms used herein have the meanings assigned to them in the Credit Agreement. NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION By Title _________________ 1/ Amount must be $25,000,000 or a larger multiple of $1,000,000. 2/ Any number of whole months (but not less than one month) (LIBOR Auction) or not less than 30 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. 79 EXHIBIT D Form of Invitation for Money Market Quotes To: [Name of Bank] Re: Invitation for Money Market Quotes to the National Rural Utilities Cooperative Finance Corporation (the "Borrower") Pursuant to Section 2.03 of the $500,000,000 Revolving Credit and Term Loan Agreement dated as of April 30, 1996 among the Borrower, the Banks party thereto, and the undersigned, as Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: Principal Amount Interest Period $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:00 A.M.] (New York City time) on [date]. THE BANK OF NOVA SCOTIA By Authorized Officer 80 Form of Money Market Quote THE BANK OF NOVA SCOTIA as Agent One Liberty Plaza New York, New York 10006 Attention: Re: Money Market Quote to National Rural Utilities Cooperative Finance Corporation (the "Borrower") In response to your invitation on behalf of the Borrower dated , 19 , we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: 2. Person to contact at Quoting Bank: 3. Date of Borrowing: 4. We hereby offer to make Money Market Loan(s) in the following Interest Periods and at the following rates: Principal Interest Money Market Amount Period [Margin****] [Absolute Rate*****] $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $ .]** _________ * As specified in the related Invitation. ** Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is Willing to lend. Bids must be made for $1,000,000 or a larger multiple thereof. (notes continued on following page) 81 We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the $500,000,000 Revolving Credit and Term Loan Agreement dated as of April 30, 1996 among the Borrower, the Banks listed on the signature pages thereof, and yourselves, as Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated:________________________ By: ____________________________ Authorized Officer _______________ *** Any number of whole months (but not less than one month) or not less than 30 days, as specfied in the related Invitation. No more than five bids are permitted for each Interest Period. **** Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". ***** Specify rate of interest per annum (rounded to the nearest 1/10,000th of 1%). 82 EXHIBIT F OPINION OF JOHN JAY LIST, ESQ. GENERAL COUNSEL OF THE BORROWER April 30, 1996 I am General Counsel of the National Rural Utilities Cooperative Finance Corporation (the "Borrower") and am delivering this opinion pursuant to the $500,000,000 Revolving Credit and Term Loan Agreement (the "Agreement") dated as of April 30, 1996 among the Borrower, the banks listed on the signature pages thereof, and The Bank of Nova Scotia, as agent. Terms defined in the Agreement are used herein as therein defined. This opinion is being rendered to you at the request of my client, the Borrower, pursuant to Section 3.01(c) of the Agreement. I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower is a cooperative association duly incorporated, validly existing and in good standing under the laws of the District of Columbia and has the corporate power and authority and all material governmental licenses, authorizations, consents and approvals required to own its property and assets and to transact the business in which it is engaged. The Borrower is duly qualified or licensed as a foreign corporation in good standing in every jurisdiction in which the nature of the business in which it is engaged makes such qualification of licensing necessary, except in those jurisdictions in which the failure to be so qualified or licensed would not (after qualification, assuming that the Borrower could so qualify without the payment of any fee or penalty and retain its rights as they existed prior to such qualification all to an extent so that any fees or penalties required to be so paid or any rights not so retained would not, individually or in the aggregate, have a material adverse effect on the business or financial condition of the Borrower), individually or in the aggregate, have a material adverse effect upon the business or financial condition of the Borrower. The Borrower has 83 the corporate power and authority to execute, deliver and carry out the terms and provisions of the Agreement and the Notes. The Agreement and the Notes have been duly and validly authorized, executed and delivered by the Borrower, and the Agreement constitutes a legal, valid and binding agreement of the Borrower, and the Notes constitute legal, valid and binding obligations of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 2. There are no actions, suits, proceedings or investigations pending or, to my knowledge, threatened against or affecting the Borrower by or before any court or any governmental authority, body or agency or any arbitration board which are reasonably likely to materially adversely affect the business, property, assets, financial position or results of operations of the Borrower or the authority or ability of the Borrower to perform its obligation under the Agreement or the Notes. 3. No authorization, consent, approval or license of, or declaration, filing or registration with or exemption by, any governmental authority, body or agency is required in connection with the execution, delivery or performance by the Borrower of the Agreement or the Notes. 4. The holders of the Borrower's Capital Term Certificates are not and will not be entitled to receive any payments with respect to the principal thereof or interest thereon solely because of withdrawing or being expelled from membership in the Borrower. 5. Neither the Borrower nor any Subsidiary is in default in any material respect under any material agreement or other instrument to which it is a party or by which it is bound or its property or assets may be affected. No event or condition exists which constitutes, or with the giving of such notice or lapse of time or both would constitute, such a default under any such agreement or other instrument. Neither the execution and delivery of the Agreement or the Notes, nor the consummation of any of the transactions therein contemplated, nor compliance with the terms and provisions thereof, will contravene any provision of law, statute, rule or regulation to which the Borrower is subject or any judgment, decree, award, franchise, order or permit applicable to the Borrower, or will conflict or be inconsistent with, or will result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute (or with the giving of notice or lapse of time, or both, would constitute) a default under (or condition or 84 event entitling any Person to require, whether by purchase, redemption, acceleration or otherwise, the Borrower to perform any obligations prior to the scheduled maturity thereof), or result in the creation or imposition of any Lien upon any of the property or assets of the Borrower pursuant to the terms of, any indenture, mortgage, deed of trust, agreement or other instrument to which it may be subject, or violate any provision of the certificate of incorporation or by-laws of the Borrower. Without limiting the generality of the foregoing, the Borrower is not a party to, or otherwise subject to any provision contained in, any agreement or indenture relating thereto or any other contract or agreement (including its certificate of incorporation and by-laws), which would be violated by the incurring of the Indebtedness to be evidenced by the Notes. 6. The Borrower has complied fully with all of the material provisions of each Indenture. No Event of Default (within the meaning of such term as defined in either Indenture) and no event, act or condition (except for possible non-compliance by the Borrower with any immaterial provision of such Indenture which in itself is not such an Event of Default under such Indenture) which with notice or lapse of time, or both, would constitute such an Event of Default has occurred and is continuing under such Indenture. The borrowings by the Borrower contemplated by the Agreement will not cause such an Event of Default under, or the violation of any covenant contained in, either Indenture. 7. Set forth on Annex A attached hereto is a true, correct and complete list of all of the Borrower's Subsidiaries and Joint Ventures, the jurisdiction of incorporation or organization of each such Subsidiary and Joint Venture and the nature and percentage of the Borrower's ownership of each Subsidiary and Joint Venture. 85 EXHIBIT G OPINION OF MILBANK, TWEED, HADLEY & MCCLOY SPECIAL COUNSEL FOR THE BORROWER April 30, 1996 We have acted as a special counsel to National Rural Utilities Cooperative Finance Corporation (the "Borrower") in connection with the $500,000,000 Revolving Credit and Term Loan Agreement dated as of April 30, 1996 (the "Agreement") among the Borrower, the Banks party thereto, and the Bank of Nova Scotia, in its capacity as Agent (the "Agent"). All capitalized terms used but not defined herein have the respective meanings given to such terms in the Agreement. In rendering the opinions expressed below, we have examined: (i) the Agreement; (ii) the Notes; and (iii) such corporate records of the Borrower and such other documents as we have deemed necessary as a basis for the opinions expressed below. In our examination, we have assumed the genuineness of all signatures (other than the Borrower's), the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon statements of governmental officials and upon representations made in or pursuant to the Agreement and certificates of appropriate representatives of the Borrower. In rendering the opinions expressed below, we have assumed, with respect to all of the documents referred to in this opinion letter (except as provided below), that: 86 (i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all of the parties (except the Borrower) to such documents; (ii) all signatures (except signatures of officers of the Borrower) to such documents have been duly authorized; and (iii) all of the parties to such documents (except the Borrower) are duly organized and validly existing and have the power and authority (corporate and other) to execute, deliver and perform such documents. Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as we have deemed necessary as a basis for the opinions expressed below, we are of the opinion that: 1. The Borower is a cooperative association duly incorporated, validly existing and in good standing under the laws of the District of Columbia and has the corporate power and authority and all material governmental licenses, authorizations, consents and approvals required to own its property and assets and to transact the business in which it is engaged. The Borrower has the corporate power and authority to execute, deliver and carry out the terms and provisions of the Agreement and the Notes. The Agreement and the Notes have been duly and validly authorized, executed and delivered by the Borrower, and the Agreement constitutes a legal, valid and binding agreement of the Borrower, and the Notes constitute legal, valid and binding obligations of the Borrower, in each case enforceable against the Borrower in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Agreement and the Notes is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible un- availability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. 87 2. To our best knowledge, there are no actions, suits, proceedings or in- vestigations pending or threatened against the Borrower by or before any court or any governmental authority, body or agency or any arbitration board which in our view are reasonably likely to materially adversely affect the business, property, assets, financial position or results of operations of the Borrower or the authority or ability of the Borrower to perform its obligations under the Agreement or the Notes. 3. No authorization, consent, approval or license of, or declaration, filing or registration with or exemption by, any governmental authority, body or agency is required in connection with the execution, delivery or performance by the Borrower of the Agreement or the Notes. 4. The holders of the Borrower's Capital Term Certificates are not and will not be entitled to receive any payments with respect to the principal thereof or interest thereon solely because of withdrawing or being expelled from membership in the Borrower. 5. Neither the execution and delivery of the Agreement or the Notes, nor the consummation of any of the transactions therein contemplated, nor compliance with the terms and provisions thereof, will contravene any provision of law, statute, rule or regulation to which the Borrower is subject to any judgment, decree, award, franchise, order or permit known to us applicable to the Borrower, or will conflict or be inconsistent with, or will result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute (or with the giving of notice or lapse of time, or both, would constitute) a default under (or condition or event entitling any Person to require, whether by purchase, redemption, acceleration or otherwise, the Borrower to perform any obligations prior to the schedule maturity thereof), or result in the creation or imposition of any Lien upon any of the property or assets of the Borrower pursuant to the terms of, any indenture, mortgage, deed of trust, agreement or other instrument known to us to which it may be subject, or violate any provision of the certificate of incorporation or by-laws of the Borrower. Without limiting the generality of the foregoing, to our best knowledge the Borrower is not a party to, or otherwise suject to any provision contained in, any instrument evidencing Indebtedness of the Borrower, any agreement or indenture relating thereto or any other contract or agreement (including its certificate of incorporation and by-laws), which would be violated by the incurring of the Indebtedness to be evidenced by the Notes. 88 6. The Borrower has received a ruling from the Internal Revenue Service to the effect that it is exempt from payment of Federal income tax under Section 501(c)(4) of the Internal Revenue Code of 1986, and nothing has come to our attention that leads us to believe that the Borrower is not so exempt. 7. The Borrower is not an "investment company" or a company "controlled" by "investment company", within the meaning of the Investment Company Act of 1940, as amended. 8. The Borrower is not a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. The foregoing opinions are subject to the following qualifications: We express no opinion as to the enforceability of Section 9.12 of the Agreement or the effect of the laws of any jurisdiction in which any Bank is located (other than New York) that limit the interest, fees or other charges such Bank may impose. We express no opinion concerning any law other than the law of New York, the District of Columbia and the federal law of the United States. Insofar as this opinion pertains to matters of District of Columbia law, we have relied on the opinion of John Jay List, Esq. being delivered to you comtempor- aneously herewith. This opinion letter is, pursuant to Section 3.01(d) of the Agreement, provided to you by us in our capacity as special counsel to the Borrower and at its request and may not be relied upon by any Person or for any purpose other than in connection with the transactions contemplated by the Agreement without, in each instance, our prior written consent. Very truly yours, 89 EXHIBIT H OPINION OF MAYER, BROWN & PLATT, SPECIAL COUNSEL FOR THE AGENT April 30, 1996 To the Banks of the Agent Referred to Below c/o The Bank of Nova Scotia, as Agent One Liberty Plaza New York, New York 10006 Dear Sirs: We have participated in the preparation of the $500,000,000 Revolving Credit and Term Loan Agreement dated as of April 30, 1996 (the "Credit Agreement") among the National Rural Utilities Cooperative Finance Corporation, a not-for-profit cooperative association incorporated under the laws of the District of Columbia (the "Borrower"), the banks listed on the signature pages thereof (the "Banks"), and The Bank of Nova Scotia, as Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.01(e) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes constitute 90 valid and binding obligations of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bank- ruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. In giving the foregoing opinion, (i) we express no opinion to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect and (ii) we have relied, without independent investigation, as to all matters governed by the laws of the District of Columbia, upon the opinion of John Jay List, Esq., General Counsel of the Borrower, dated the date hereof, a copy of which has been delivered to you. Very truly yours, 91 EXHIBIT I EXTENSION AGREEMENT [Date] National Rural Utilities Cooperative Finance Corporation Woodland Park 2201 Cooperative Way Herndon, VA 22071-3025 The Bank of Nova Scotia as Agent under the Credit Agreement referred to below One Liberty Plaza New York, NY 10006 Gentlemen: Effective as of [effective date], the undersigned hereby agree to extend the Revolving Credit Period Termination Date as now in effect under the $500,000,000 Revolving Credit and Term Loan Agreement dated as of April 30, 1996 as amended and supplemented from time to time (the "Credit Agreement"), among National Rural Utilities Cooperative Finance Corporation, the Banks listed therein, and The Bank of Nova Scotia, as Agent, to [Date]. Terms defined in the Credit Agreement are used herein as therein defined. This Extension Agreement shall be construed in accordance with and governed by the law of the State of New York. [NAME OF BANK] By___________________ Title: [NAME OF BANK] By___________________ Title: 92 THE BANK OF NOVA SCOTIA, as Agent By ______________________ Title: Agreed and accepted: NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION By _____________________ Title: 93 EXHIBIT J ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of ___________, 19___ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION (the "Borrower") and THE BANK OF NOVA SCOTIA, as Agent (the "Agent"). W I T N E S S E T H WHERAS, this Assignment and Assumption Agreement (the "Agreement") relates to the $500,000,000 Revolving Credit and Term Loan Agreement dated as of April 30, 1996 (the "Credit Agreement") among the Borrower, the Assignor and the other Banks party thereto, as Banks, and The Bank of Nova Scotia, as agent (the "Agent"); WHEREAS, as provided under the Credit Agreement, the Assignor has [had] a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $___________; WHEREAS, Committed Loans [Term Loans] made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $_________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement [in respect of a portion of its Commitment thereunder in an amount equal to $_________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans] [in respect of a portion of its outstanding Term Loans thereunder (the "Assigned Amount")], and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. 94 SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Commited Loans [Term Loans] made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Borrower and the Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment or an outstanding Loan in an amount equal to the Assigned Amount, and (ii) the Commitment, if any, of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Federal funds the amount heretofore agreed between them. It is understood that commitment and/or facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrower and the Agent. This agreement is conditioned upon the consent of the Borrower and the Agent pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Agent is evidence of this consent. Pursuant to Section 9.06(c) of the Credit Agreement the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency 95 financial condition, or statements of the Borrower, or the validity and en- forceability of the obligations of the Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By __________________ Title: [ASSIGNEE] By __________________ Title: NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION By __________________ Title: 96 THE BANK OF NOVA SCOTIA, as Agent By __________________ Title: 97 EXHIBIT K Form of Notice of Conversion [Date] To: The Bank of Nova Scotia (the "Agent") From: National Rural Utilities Cooperative Finance Corporation (the "Borrower") Re: $500,000,000 Revolving Credit and Term Loan Agreement (the "Credit Agreement") dated as of April 30, 1996 among the Borrower, the Banks listed on the signature pages thereof, and The Bank of Nova Scotia, as Agent. We hereby give notice pursuant to Section 2.17 of the Credit Agreement that we wish to convert all outstanding Loans on ________, 19 ___ (the "Conversion Date") to Term Loans, as follows: [$________ of the presently outstanding [Base Rate Loans, CD Rate Loans, Euro-Dollar Loans and/or Money Market Loans] be [converted into] [continued as] [Base Rate Loans, CD Rate Loans, Euro-Dollar Loans and/or Money Market Loans] [having an Interest Period _______]]. The Borrower hereby (i) certified and warrants that no Event of Default has occurred and is continuing, and (ii) agrees that if prior to the Conversion Date any matter certified to herein by it will not be true and correct at such date as if then made, it will immediately so notify the Agent. Terms used herein have the meanings assigned to them in the Credit Agreement. NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION By _______________________ Title: EX-10 5 1 EMPLOYMENT AGREEMENT This Agreement is made and entered into, effective as of March 1, 1996, by and between National Rural Utilities Cooperative Finance Corporation, a District of Columbia cooperative corporation ("CFC") and Sheldon C. Petersen (the "Executive"). WHEREAS, CFC desires to retain the Executive as its Governor and Chief Executive Officer under this Agreement for the period provided for in this Agreement, and the Executive is willing to serve in the employ of CFC on a full-time basis for such period, upon such terms and conditions as are provided herein; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the parties hereby agree as follows: 1. Employment. Subject to and upon the terms and conditions herein provided, CFC hereby agrees to employ the Executive and the Executive hereby agrees to be employed by CFC for the Term of Employment, as defined in Section 3 hereof. 2. Position and Responsibilities. During the Term of Employment hereunder, the Executive shall be employed as the Chief Executive Officer of CFC, and/or in such other senior executive capacity or capacities as may be mutually satisfactory to the Executive and CFC. The Executive will be the senior executive officer of CFC, reporting only to the Board of Directors of CFC (the "Board"), and all other officers of CFC shall report to the Executive or to other officers designated by the Executive. The Executive shall, at the request of the Board, serve as an officer or director of any subsidiary or affiliated entity of CFC. During the Term of Employment, except as hereinafter provided and except for vacation, holidays observed by CFC and periods of illness, the Executive agrees to devote substantially all of his business time and attention to carrying out his duties and responsibilities under this Agreement and shall use his best efforts, skills and abilities to further the interests of CFC. The Executive shall be permitted, to the extent such activities do not substantially interfere with the performance of the Executive's responsibilities and duties hereunder, (i) to manage his personal, financial and legal affairs and (ii) to serve on civic, charitable, religious or educational boards or committees. However, the Executive may not serve on the board of directors of any other business entities without the prior express written consent of the Board and subject to such reasonable limitations as may be imposed by the Board in grating such consent. 3. Term of Employment. The Term of Employment under this Agreement shall commence as of March 1, 1996, and shall terminate on February 2 28, 2001 unless earlier terminated as provided in Section 6 below or extended as provided in the following sentence (the "Term of Employment"). The Term of Employment shall automatically be extended on March 1, 2001 and each subsequent March 1 for an additional year unless, not later than 6 months prior to any such date, either party to this Agreement shall have given written notice to the other party that he or it does not wish to extend or further extend the Term of Employment. 4. Compensation. For all services rendered by the Executive during the Term of Employment, CFC shall pay the Executive as compensation (i) a base salary, in periodic installments in accordance with CFC's usual payroll practice for its senior executives, at an annual rate of no less than $245,000 (the "Base Salary"), and (ii) such bonus, if any, as may be awarded to the Executive under any incentive bonus compensation plan or plans that may be maintained by CFC from time to time. During the Term of Employment, the Executive's Base Salary shall be reviewed for possible increase at least annually, and the term "Base Salary" shall thereafter refer to the Base Salary as so increased. 5. Executive Benefits, Perquisites and Expenses. 5.1 CFC Plans. The Executive shall be entitled to participate in all CFC health, accident, life insurance, savings, retirement, disability and other benefit plans, programs or practices from time to time in effect for senior executives of CFC at least to the same extent as other senior executives (or, where applicable, retired senior executives) of CFC, including, without limitation, CFC's Pension Restoration Deferred Compensation Plan and Pension Restoration Severance Pay Plan. 5.2 Vacations. The Executive shall be entitled to an amount of paid vacation during each twelve-month period during the Term of Employment equal to the maximum amount of vacation allowed for any full-time employee of CFC (but not less than five weeks of paid vacation earned uniformly during each such period), plus such holidays, sick leave and other time off as are established by the policies of CFC. Unused days of vacation may be settled in cash or carried over to subsequent years. The Executive shall receive within thirty (30) days after his employment terminates, a payment (based on the Executive's Base Salary in effect on the date the Executive terminated employment with CFC) for any accrued but unused vacation at the termination but not in excess of 12 weeks regardless of the reason for such termination of employment of the Executive. 5.3 Perquisites; Expenses. During the Term of Employment, the Executive shall be entitled to receive such perquisites as CFC may determine to provide to its senior executive officers, and CFC shall reimburse the Executive for all reasonable and documented expenses incurred by the Executive in connection with the performance of the Executive's duties hereunder, including, without 3 limitation, expenses incurred as a result of the attendance by the Executive's wife at a function or meeting where the Executive determines that her attendance is appropriate for business purpose. 5.4 Automobile. During the period the Executive is employed by CFC, CFC shall provide the Executive with, and shall pay all reasonable expense (including, without limitation, insurance, repairs, maintenance, fuel and oil) for, an automobile. The monthly lease payment or allowance for such automobile shall be determined by and in the sole discretion of the Board. 6. Payments to the Executive Upon Termination of Employment. 6.1 Termination by CFC. (a) CFC shall have the right to terminate the Executive's employment at any time with or without "Cause", as defined in Section 6.5(a). If, during the Term of Employment, CFC terminates the employment of the Executive under this Section 6 without Cause the Term of Employment shall terminate immediately thereafter, and (i) CFC shall pay the Executive such Base Salary provided herein as he may be entitled to receive for services rendered prior to the date of such termination; (ii) CFC shall pay the Executive for any accrued but unused vacation as set forth in Section 5.2 and for any properly-documented unreimbursed expenses; (iii) CFC shall pay the Executive the benefits which the Executive is entitled to receive under the terms and conditions of such CFC plans as are in effect from time to time; and (iv) CFC shall continue to pay the Executive, in periodic installments as set forth in Section 4, his Base Salary at the rate in effect on the date of such termination for the remaining period of the Term of Employment prior to such termination (but in no case less than 6 months). (b) If, during the Term of Employment, CFC terminates the employment of the Executive for "Cause", as defined below, the Term of 4 Employment shall terminate immediately thereafter, and CFC shall pay the Executive such compensation as is set forth in Section 6.1(a)(i), (ii) and (iii) herein. 6.2 Termination by the Executive. (a) The Executive has the right to terminate his employment hereunder at any time during the Term of Employment upon not less than 90 days prior written notice to CFC, provided, however, that if the Executive wishes to terminate his employment for "Good Reason" as defined in Section 6.5(b), the Executive must notify CFC in writing of such intent within 30 days of the event or events that he believes constitute Good Reason and such notice must specify such events in reasonable detail. If during the Term of Employment the Executive's employment is terminated for "Good Reason", as defined below, the Term of Employment shall terminate immediately thereafter, and CFC shall pay the Executive such compensation as is set forth in Section 6.1 (a)(i)-(iv). (b) If during the Term of Employment the Executive terminates his employment for other than "Good Reason", as defined below, the Term of Employment shall terminate immediately thereafter, and CFC shall pay the Executive such compensation as is set forth in Section 6.1(b). 6.3 Disability. Upon the "Disability", as defined in Section 6.5(c), of the Executive during the Term of Employment, and for the period of Disability, in addition to any other benefits to which he may be entitled pursuant to this Agreement, but in lieu of his Base Salary and any bonus, the Executive shall receive through the end of the Term of Employment or, if earlier, the Executive's date of recovery, actual termination of employment (in which case the applicable provisions of Section 6.1 or 6.2 shall apply and this Section 6.3 shall cease to apply) or death (in which case Section 6.4 and any other relevant provisions shall apply) an annual Disability Benefit equal to 60% of the Base Salary the Executive was receiving a the commencement of the Disability and 60% of his target annual bonus, if any, for the year in which the Executive became disabled. Payment of the Disability Benefit shall be in equal monthly installments, and such payments shall be reduced by the monthly payments received by the Executive under any other CFC-sponsored disability plan or program and the monthly disability benefits received by the Executive pursuant to the applicable provisions of the Social Security Act. During the period that Disability Benefits are payable to the Executive, he shall continue to participate in CFC's plans described in Section 5.1 as if he had continued to be an active CFC employee and as if he had received 60% of the Base Salary then in effect under Section 4 (and, if applicable, 60% of his target annual bonus). 6.4 Death. In the event of the termination of the Executive's employment by reason of death during the Term of Employment, the Executive's "Designated Beneficiary", as defined below, shall be entitled to receive: (i) payment of the Executive's unpaid Base Salary through the date of death; 5 (ii) payment of a pro-rated annual bonus, if any, for the year of the Executive's death (at 100% of the target award); (iii) the lesser of (a) a lump sum payment equal to one year's Base Salary at the rate in effect on the date of death or (b) the Base Salary that would have been paid to the Executive in the remaining period of the Term of Employment prior to death (but in no case less than the Base Salary that would have been paid to the Executive for a 6 month period); (iv) reimbursement for expenses paid but not yet reimbursed; and (v) such survivor benefits and payments for the Executive's family or with respect to the Executive that are provided under CFC's plans described in Section 5.1 determined in accordance with the then applicable provisions of such plans, programs or arrangements. 6.5 Definitions. (a) "Cause". For purposes of this Agreement, Cause shall mean (i) of the willful and continued failure by the Executive, as determined in good faith by two-thirds of the members of the Board (after notice to the Executive and providing the Executive an opportunity to meet with the Board), to perform his duties under this Agreement or comply with written policies of CFC, or (ii) willful conduct materially injurious to CFC or (iii) conviction of a felony involving moral turpitude; provided, however, that any act or omission by the Executive shall not fall within the scope of this Section 6.5(a)(i) and (ii) if it was done or omitted to be done by the Executive in good faith and with a reasonable belief that such action or omission was in the best interest of CFC. (b) "Good Reason". For purposes of this Agreement, Good Reasons shall mean, without the prior written consent of the Executive, (i) a reduction in the rate of the Executive's Base Salary, (ii) a decrease in the Executive's titles, duties or responsibilities hereunder or the assignment of new responsibilities hereunder which, in either case, is materially less favorable to the Executive when compared to the Executive's titles, duties and responsibilities which were in effect immediately prior to such assignment, or (iii) the relocation of CFC's principal office or the relocation of the Executive to a location more than 50 miles from the principal office of CFC on the date of this Agreement; provided, however, that the term "Good Reason" shall not include the occurrence of any of the above if such occurrence is remedied by CFC within 20 business days after receipt by CFC of the Executive's written notice of resignation of Good Reason under Section 6.2(a) setting forth in specific detail the facts and circumstances resulting in the Good Reason upon which his resignation is based. 6 (c) "Disability". For purposes of this Agreement, Disability shall mean that the Executive has not performed his full-time duties with CFC for three consecutive months as a result of his incapacity due to physical or mental illness and within thirty (30) days after written notice of such incapacity is given to the Executive he shall not have returned to the full-time performance of his duties hereunder. (d) "Designated Beneficiary". For purposes of this Agreement the Designated Beneficiary shall be any person designated by the Executive in a written instrument signed by the Executive and delivered to CFC to be the beneficiary of payments to be made by CFC hereunder upon the death of the Executive if such person survives the Executive. Any Designated Beneficiary may be changed by the Executive at any time and from time to time by a written instrument signed by the Executive and delivered to CFC. If no Designated Beneficiary survives the Executive, the Designated Beneficiary shall be the estate of the Executive. 7. No Mitigation. CFC agrees that if the Executive's employment is terminated during the Term of Employment, the Executive is not required to seek other employment or to attempt in any way to reduce the amounts payable and the benefits to be provided to the Executive by CFC under this Agreement. Further, the amount or nature of any such payment or benefit to be paid to or with respect to the Executive shall not be reduced by any compensation earned by the Executive as a result of employment by another employer, by retirement benefits, or offset against any amount claimed to be owed by the Executive to CFC or any of its subsidiaries or otherwise. 8. Confidential Information. The Executive shall not at any time during his employment with CFC or following termination or expiration of this Agreement, directly or indirectly, disclose, publish or divulge to any person (except in the regular course of CFC's business or as required by law or regulations), or appropriate, use or cause, permit or induce any person to appropriate or use, any proprietary, secret or confidential information of CFC including, without limitation, knowledge or information relating to its copyrights, trade secrets, business methods, the names or requirements of its customers, vendors, contractors, agents, dealers and distributors or the prices, credit or other terms extended or granted to any of such persons, all of which the Executive agrees are and will be of great value to CFC and shall at all times be kept confidential. Upon the termination of the Term of Employment hereunder, the Executive shall promptly deliver or return to CFC all materials of a proprietary, secret or confidential nature relating to CFC together with any other property of CFC which may have theretofore been delivered to or may then be in the possession or control of the Executive. CFC and the Executive agree that the provisions of this Section shall survive the termination of the Executive's employment hereunder. 7 9. Indemnification. CFC agrees that if the Executive is made, or is threatened to be made, a party to any action or proceeding, whether civil or criminal, by reason of the fact that he is or was a director or officer of CFC or any of its subsidiaries or, at the request of CFC, serves or served any other corporation, partnership, joint venture, trust or other enterprise in any capacity, CFC shall indemnify him to the fullest extent permitted by the Charter and By-Laws of CFC or, if greater, by the applicable laws of the State of Virginia, against all costs, expenses, liabilities and losses reasonably incurred or suffered by the Executive in connection therewith. CFC shall advance to the Executive all reasonable costs and expenses incurred by him in connection with any such proceeding upon receipt of itemized list of such costs and expenses. 10. Legal Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, the Executive shall be reimbursed for all reasonable attorney fees and expenses incurred by the Executive in pursuing such claim, provided that the Executive is successful as to at least part of the disputed claim by reason of litigation, arbitration or settlement. 11. Amendment; Waiver. This Agreement contains the entire agreement of the parties with respect to the matters set forth herein, and may only be amended by subsequent written agreement of the parties hereto. All prior agreements between the Executive and CFC, whether in writing or not, relating to terms and conditions of employment are hereby canceled. No waiver by CFC of any breach by the Executive of any term, condition or provision of this Agreement to be performed by the Executive shall be deemed a waiver of a similar or dissimilar condition or provision at the same or prior or subsequent time. 12. Binding Effect. The Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of the Executive's creditors, and any attempt to do any of the foregoing shall be null and void. The provisions of this Agreement shall be binding upon and inure to be benefit of the Executive and his heirs, beneficiaries and personal representatives, and shall be binding upon and inure to the benefit of CFC and its successors or assigns. 13. Governing Law; Severability. Except as otherwise set forth herein, this Agreement is governed by and is to be construed and enforced in accordance with the laws of the State of Virginia without regard to principles of conflicts of law. If any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 14. Withholding of Taxes. CFC may withhold from any compensation payable under this Agreement all federal, state, city, or other taxes as shall be required pursuant to any law, regulation or ruling. 8 15. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. Headings. The headings contained in this Agreement are for reference purposes only and shall not be deemed to be part of the Agreement or to affect the meaning or interpretation of this Agreement. 17. Notices. Any notice given to either party hereto shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly and properly addressed to the party concerned at the address indicated below or to such changed address as party may subsequently give notice of: 9 If to CFC: National Rural Utilities Cooperative Finance Corporation Woodland Park 2201 Cooperative Way Herndon, Virginia 20171 Attn: President If to the Executive: Mr. Sheldon C. Petersen 510 Fortress Circle S.E. Leesburg, Virginia 22075 18. Enforcement of Agreement. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement or the Term of Employment for any reason to the extent necessary to obtain the intended provision of such rights and the intended performance of such obligations. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION By: /s/ J. Chris Cariker President /s/ Sheldon C. Petersen Sheldon C. Petersen EX-10 6 1 SUPPLEMENTAL BENEFIT AGREEMENT This Agreement is made and entered into effective as of March 1, 1996, by and between Rural Telephone Finance Cooperative, a District of Columbia cooperative corporation ("RTFC") and Sheldon C. Petersen (the "Executive"). WHEREAS, RTFC desires to retain the Executive as its Chief Executive Officer under this Agreement for the period provided for this Agreement, and the Executive is willing to serve in the employ of RTFC for such period, upon such terms and conditions as are provided herein; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the parties hereby agree as follows: 1. Employment. Subject to and upon the terms and conditions herein provided, RTFC hereby agrees to employ the Executive and the Executive hereby agrees to be employed by RTFC for the Term of Employment, as defined in Section 3 hereof. 2. Position and Responsibilities. During the Term of Employment hereunder, the Executive shall be employed as the Chief Executive Officer of RTFC, or in such other senior executive capacity or capacities as may be mutually satisfactory to the Executive and RTFC. The Executive will be the senior executive officer of RTFC, reporting only to the Board of Directors of RTFC (the "Board"). 3. Term of Employment. The Term of Employment under this Agreement shall commence as of March 1, 1996, and shall terminate on February 28, 2001 unless earlier terminated as provided in Section 5 below or extended as provided in the following sentence (the "Term of Employment"). The Term of Employment shall automatically be extended on March 1, 2001 and each subsequent March 1 for an additional year unless, not later than 6 months prior to any such date, either party to this Agreement shall have given written notice to the other party that he or it does not wish to extend or further extend the Term of Employment. 4. Compensation. RTFC has created, on its books of account, a deferred compensation account with respect to the Executive (the "Account"). As of March 1, 1995 RTFC has credited the Account in the amount of $30,000 and on January 1 of each year thereafter during the Term of Employment, RTFC shall make a similar credit of $30,000. Except as provided in Section 5 below, the balance in the Account shall be deemed to be credited with interest annually on December 31st of each year during the Term of Employment at a rate equal to the effective cost to RTFC's parent corporation, the National Rural Utilities Cooperative Finance Corporation, for 20 year Medium Term Notes computed at the time of each annual 2 deposit. RTFC shall not be required to create a separate account or any reserve of cash or investments in connectionwith its obligations with respect to this Account and the Executive will have the status of a general creditor of RTFC with respect to any benefits to be provided under this Agreement. 5. Payments to the Executive Upon Termination of Employment. 5.1 Termination by RTFC. (a) RTFC shall have the right to terminate the Executive's employment at any time with or without "Cause" as defined in Section 5.6. If, during the Term of Employment, RTFC terminates the employment of the Executive under the Section 5 without Cause, the Term of Employment shall terminate immediately thereafter; provided, however, that: (i) the Account will be deemed to be continued in effect for a period of 12 months or, if less the remaining period of the Term of Employment prior to such termination (but in no case less than 6 months) (the "Extended Period") and all credits described in Section 4 shall continue to be made; (ii) if the end of the Extended Period occurs on other than a December 31st, RTFC shall further credit the Account with simple interest for the period from January 1 to the end of the Extended Period at the same rate that was used to credit interest on the prior December 31st; and (iii) within 15 days after the end of the Extended Period, RTFC will pay to the Executive in a single lump sum an amount equal to the balance in the Account at the end of the Extended Period after the additional credit described in (b) above has been made. (b) If during the Term of Employment, RTFC terminates the employment of the Executive for "Cause", as defined below, the Term of Employment shall terminate immediately thereafter, and the Executive shall not be entitled to any payment with respect to the Account. 5.2 Termination by the Executive. (a) The Executive has the right to terminate his employment hereunder at any time during the Term of Employment upon not less than 90 days prior written notice to RTFC; provided, however, that if the Executive wishes to terminate his employment for "Good Reason" as defined in Section 5.6(b), the Executive must provide written notice to RTFC of such intent within 30 days of the event or events that he believes constitute Good Reason and such notice must specify such events in reasonable detail. If during the Term of Employment the Executive terminates his 3 employment for "Good Reason", as defined in Section 5.6(b), RTFC shall pay the Executive such compensation as is set forth in Section 5.1(a) above. (b) If during the Term of Employment the Executive terminates his employment for other than "Good Reason", as defined below, the Term of Employment shall terminate immediately, and RTFC shall pay the Executive such compensation as is set forth in Section 5.1(b). 5.3 Disability. In the event of the termination of the Executive's employment by reason of "Disability", as defined below, during the Term of Employment, RTFC shall pay the Executive the amount described in Section 5.1(a). 5.4 Death. In the event of the termination of the Executive's employment by reason of death during the Term of Employment, RTFC shall pay the Executive's Designated Beneficiary the amount described in Section 5.1 (a). 5.5 Expiration of Term. In the event of the termination of the Executive's employment by reason of the completion of the Term of Employment without further extension as described in Section 3, within 15 days from the expiration of the Term of Employment RTFC shall pay to the Executive an amount equal to the Account balance, after the additional credit described in Section 5.1(a) above as if the February 28th date were the end if the Extended Period. 5.6 Definitions. (a) "Cause". For purposes of this Agreement, Cause shall mean (i) the willful and continued failure by the Executive, as determined in good faith by two-thirds of the members of the Board (after notice to the Executive and providing the Executive an opportunity to meet with the Board), to perform his duties under this Agreement or comply with written policies of RTFC, or (ii) willful conduct materially injurious to RTFC or to an affiliate of RTFC or (iii) conviction of a felony involving moral turpitude provided, however, that any act or omission by the Executive shall not fall within the scope of this Section 5.6(a)(i) and (ii) if it was done or omitted to be done by the Executive in good faith and with a reasonable belief that such action or omission was in the best interest of RTFC. (b) "Good Reason". For purposes of this Agreement, Good Reason shall mean without the prior written consent of the Executive (i) any reduction in the amount of credits made to the Account as described in Section 4, (ii) a decrease in the Executive's titles, duties or responsibilities hereunder or the assignment of new responsibilities hereunder which, in either case, is materially less favorable when compared to the Executive's titles, duties and responsibilities which were in effect immediately prior to such assignment, or (iii) the relocation or RTFC's principal office or the relocation of the Executive to a location more than 50 miles from the principal office of RTFC on the date of this Agreement; provide, however, 4 that the term "Good Reason" shall not include the occurrence of any of the above if such occurrence is remedied by RTFC within 10 business days after receipt by RTFC of the Executive's written notice of resignation for Good Reason under Section 5.2 setting forth in specific detail the facts and circumstances resulting in the Good Reason upon which his resignation is based. (c) "Disability". For purposes of this Agreement, Disability shall mean that the Executive has not performed his full-time duties with RTFC for three consecutive months as a result of his incapacity due to physical or mental illness and within thirty (30) days after written notice of termination is given to the Executive he shall not have returned to the full-time performance of his duties hereunder. (d) "Designated Beneficiary". For purposes of this Agreement the Designated Beneficiary shall be any person designated by the Executive in a written instrument signed by the Executive and delivered to RTFC to be the beneficiary of payments to be made by RTFC hereunder upon the death of the Executive if such person survives the Executive. Any Designated Beneficiary may be changed by the Executive at any time or times by a written instrument signed by the Governor and delivered to RTFC. If no Designated Beneficiary survives the Executive, the Designated Beneficiary shall be the estate of the Executive. 6. No Mitigation. RTFC agrees that if the Executive's employment is terminated during the Term of Employment, the Executive is not required to seek other employment or to attempt in any way to reduce the amounts payable and the benefits to be provided to the Executive by RTFC under this Agreement. Further, the amount or nature of any such payment or benefit to be paid to or with respect to the Executive shall not be reduced by any compensation earned by the Executive as a result of employment by another employer, by retirement benefits, or offset against any amount claimed to be owned by the Executive to RTFC or any of its subsidiaries or otherwise. 7. Confidential Information. The Executive shall not at any time during his employment with RTFC or following termination or expiration of this Agreement, directly or indirectly, disclose, publish or divulge to any person (except in the regular course of RTFC's business or as required by law or regulations), or appropriate, use of cause, permit or induce any person to appropriate or use, any proprietary, secret or confidential information of RTFC including, without limitation, knowledge or information relating to its copyrights, trade secrets, business methods, the names or requirements of its customers, vendors, contractors, agents, dealers and distributors or the prices, credit or other terms extended or granted to any of such persons, all of which the Executive agrees are and will be of great value to RTFC and shall at all times be kept confidential. Upon the termination of the Term of Employment hereunder, the Executive shall promptly deliver or return to RTFC all materials of a proprietary, secret or confidential nature relating to RTFC together with may other property of RTFC which may have 5 theretofore been delivered to or may then be in the possession or control of the Executive. RTFC and the Executive agree that the provisions of this Section shall survive the termination of the Executive's employment hereunder. 8. Legal Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, the Executive shall be reimbursed for all reasonable attorney fees and expenses incurred by the Executive in pursuing such claim, provided that the Executive is successful as to at least part of the disputed claim by reason of litigation, arbitration or settlement. 9. Amendment; Waiver. This Agreement contains the entire agreement of the parties with respect to the matters set forth herein, and may only be amended by subsequent written agreement of the parties hereto. All prior agreements between the Executive and RTFC, whether in writing or not, relating to terms and conditions of employment are hereby canceled. No waiver by RTFC of any breach by the Executive of any term, condition or provision of this Agreement to be performed by the Executive shall be deemed a waiver of a similar or dissimilar condition or provision at the same or prior or subsequent time. 10. Binding Effect. The Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of the Executive's creditors, and any attempt to do any of the foregoing shall be null and void. The provisions of this Agreement shall be binding upon and inure to the benefit of the Executive and his heirs, beneficiaries and personal representatives, and shall be binding upon and inure to the benefit of RTFC and its successors or assigns. 11. Governing Law; Severability. Except as otherwise set forth herein, this Agreement is governed by and is to be construed and enforced in accordance with the laws of the Sate of Virginia without regard to principles of conflicts of law. If any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 12. Withholding to Taxes. RTFC may withhold from any compensation payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law, regulation or ruling. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Headings. The headings contained in this Agreement are for reference purposes only and shall not be deemed to be part of the Agreement or to affect the meaning or interpretation of this Agreement. 5 15. Notices. Any notice given to either party hereto shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly and properly addressed to the party concerned at the address indicated below or to such changed address as party may subsequently give notice of: If to RTFC: The Rural Telephone Finance Cooperative Woodland Park 2201 Cooperative Way Herndon, Virginia 20171 Attn: President If to the Executive: Mr. Sheldon C. Petersen 510 Fortress Circle S.E. Leesburg, Virginia 22075 16. Enforcement of Agreement. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement or the Term of Employment for any reason to the extent necessary to obtain the intended provision of such rights and the intended performance of such obligations. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. RURAL TELEPHONE FINANCE COOPERATIVE By: /s/ William P. Bagley President /s/ Sheldon C. Petersen Sheldon C. Petersen 1B 76 EX-12 7 1
EXHIBIT 12 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION Computation of Ratio of Margins to Fixed Charges (Dollar Amounts In Thousands) For the Years Ended May 31, 1996, 1995, 1994, 1993 and 1992 1996 1995 1994 1993 1992 Net margins before extraordinary loss $ 50,621 $ 45,212 $ 33,188 $ 41,648 $ 45,553 Add: Fixed charges 426,079 361,338 263,230 265,412 314,863 Margins available for fixed charges $476,700 $406,550 $296,418 $307,060 $360,416 Fixed charges: Interest on all debt (including amortization of discount and issuance costs) $426,079 $361,338 $263,230 $265,412 $314,863 Total fixed charges $426,079 $361,338 $263,230 $265,412 $314,863 Ratio of margins to fixed charges 1.12 1.13 1.13 1.16 1.14
EX-23 8 EXHIBIT 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statement No. 333-05689, Registration Statement No. 33-56065, Registration Statement No. 333-05687, Registration Statement 33-64231, Registration Statement No. 33-79326 and Registration Statement No. 33-77784. ARTHUR ANDERSEN LLP Washington, D.C. August 16, 1996 EX-27 9
5 This schedule contains summary financial information extracted from the May 31, 1996, Form 10-K and is qualified in its entirety by reference to such financial statements. 12-MOS MAY-31-1996 MAY-31-1996 31,368 25,000 84,600 0 0 7,910,146 41,543 7,967 8,054,089 2,542,883 4,033,881 0 0 0 1,477,325 8,054,089 505,073 508,837 426,079 426,079 19,686 12,451 0 50,621 0 50,621 0 1,580 0 49,041 0 0
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