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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
For the fiscal year ended December 31, 1998
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 333-25029
_________________
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
36-7233686
(I.R.S. Employer Identification Number)
2201 Cooperative Way, Herndon, VA 20171-3025
(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: None.
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
The Registrant has no common or voting stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
Part I
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
a) There is no established trading market for the certificates
representing ownership of the beneficial interest in the Trust.
b) As of December 31, 1998 there was one record holder of
certificates representing ownership of the beneficial interest
in the Trust.
Item 8. Financial Statements and Supplementary Data
See attached audited financial statements.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
Part III
Item 13. Certain Relationships and Related Transactions
None.
Part IV
Item 14. Exhibits and Financial Statement Schedules and Reports on Form 8-K
a) The following documents are filed as part of this report:
1. Financial Statements
Report of Independent Public Accountants
Statements of Assets and Liabilities as of
December 31, 1998 and 1997
Statement of Income and Expenses for the Years Ended
December 31, 1998 and 1997
Statement of Cash Flows for the Years Ended
December 31, 1998 and 1997
Notes to Financial Statements
2. Financial Statement Schedules are omitted because they
are inapplicable.
3. Exhibits
Exhibit
Number Description of Exhibit
4.1 Form of Trust Agreement, including the form
of Rural Electric Cooperative Grantor Trust
Certificate (incorporated by reference to
Exhibit 4.1 to Registration Statement on
Form S-1 [No. 333-25029]).
4.2 First Amendment to Trust Agreement
(incorporated by reference to Exhibit 4.2 to
Registration Statement on Form S-1 [No. 333-
25029]).
10.1 Loan Agreement dated as of February 15, 1988
between CFC and the Cooperative (including
form of Note and Guarantee) (incorporated by
reference to Exhibit 10.1 to Registration
Statement on Form S-1 [No. 33-16789 filed on
August 27, 1987]).
10.2 First Amendment to Loan Agreement (incorporated
by reference to Exhibit 10.2 to Registration
Statement on Form S-1 [No. 333-25029]).
10.3 Loan Guarantee and Servicing Agreement, dated
as of February 15, 1988, among the
Administrator of the RUS, the Cooperative, the
Servicer, the Lender and the Trustee
(incorporated by reference to Exhibit 10.2
to Registration Statement on Form S-1
[No. 33-16789 filed on August 27, 1987]).
10.4 First Amendment to Loan Guarantee and
Servicing Agreement (incorporated by
reference to Exhibit 10.4 to Registration
Statement on Form S-1 [No. 333-25029]).
10.5 Remarketing Agreement (incorporated by
reference to Exhibit to Registration Statement
on Form S-1 [No. 333-25029]).
10.6 Swap Agreement (incorporated by reference to
Exhibit 10.6 Registration Statement on Form S-1
[No. 333-25029]).
10.7 Liquidity Protection (incorporated by reference
to Exhibit 10.7 to Registration Statement on
Form S-1 [No. 333-25029]).
10.8 Form of Standby Certificate Purchase Agreement
(incorporated by reference to Exhibit 10.8 to
Registration Statement on Form S-1
[No. 333-25029]).
27 Financial Data Schedule.
99 Morgan Guaranty Trust Company of New York (Swap
Counterparty) Financial Information.
b) Forms 8-K dated December 20, 1998 and June 20, 1998.
Semi-annual Reports to Certificate holders dated December 20,
1998 and June 20, 1998.
Supplemental information to be furnished with reports filed pursuant to
Section 15(d) of the Act by Registrants which have not registered securities
pursuant to Section 12 of the Act.
No annual report, proxy statement, form of proxy or other proxy
soliciting material has been sent to Certificate holders, and the
Registrant does not presently contemplate sending any such material
subsequent to the filing of this report.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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 31st day of
March, 1999.
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
By: NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION as Servicer
By: /s/ Sheldon C. Petersen, Governor and
Chief Executive Officer
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
Exhibit Index
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
99 Morgan Guaranty Trust Company of New York
(Swap Counterparty) Financial Information.
RURAL ELECTRIC COOPERATIVE GRANTOR
TRUST (KEPCO) SERIES 1997
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
AND FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE PERIOD ENDED DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
Report of Independent Public Accountants
To the Trustee of
Rural Electric Cooperative Grantor Trust
(KEPCO) SERIES 1997, and
To the Board of Directors of
National Rural Utilities Cooperative
Finance Corporation
We have audited the accompanying statement of assets and liabilities of Rural
Electric Cooperative Grantor Trust (KEPCO) SERIES 1997 as of December 31,
1998 and 1997, and the related statement of income and expenses and cash flows
for the year ended December 31, 1998 and the period ended December 31, 1997.
These financial statements are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audit 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 audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rural Electric Cooperative
Grantor Trust (KEPCO) SERIES 1997 as of December 31, 1998 and 1997, and its
operations and its cash flows for the year ended December 31, 1998 and for
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
March 19, 1999
Washington, D. C.
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1998 AND 1997
1998 1997
ASSETS
Interest receivable - KEPCO $ 345,096 $ 170,668
Interest receivable - Swap provider 261,092 135,026
Notes receivable 56,390,000 57,390,000
Total Assets $ 56,996,188 $ 57,695,694
LIABILITIES
Interest payable-Grantor Trust
Certificates $ 261,092 $ 135,026
Servicer fees payable 4,225 2,075
Swap provider interest payable 340,871 168,593
Rural Electric Cooperative Grantor
Trust Certificates 56,390,000 57,390,000
Total Liabilities $ 56,996,188 $ 57,695,694
The accompanying notes are an integral part of these financial statements.
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
STATEMENTS OF INCOME AND EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD ENDED DECEMBER 31, 1997
1998 1997
INCOME:
Interest - Cooperative $ 4,364,794 $ 170,668
Interest on swap agreement 3,264,892 135,026
Total income $ 7,629,686 $ 305,694
EXPENSES:
Interest to certificate holders $ 3,264,892 $ 135,026
Interest to swap provider 4,311,347 168,593
Servicer fees 53,447 2,075
Total expenses $ 7,629,686 $ 305,694
Net income $ - $ -
The accompanying notes are an integral part of these financial statements.
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD ENDED DECEMBER 31, 1997
1998 1997
CASH FLOWS
FROM OPERATING ACTIVITIES:
Interest received on note receivable $ 4,190,366 $ -
Interest received on swap agreement 3,138,826 -
Interest paid to certificate holders (3,138,826) -
Interest paid to swap provider (4,139,069) -
Fees paid to servicer (51,297) -
Net cash provided by operating activities - -
CASH FLOWS
FROM INVESTING ACTIVITIES:
Principal payment to
certificate holders $ (1,000,000) -
Principal payment on note receivable 1,000,000 -
Net cash provided by investing activities - -
NET CHANGE IN CASH - -
CASH, beginning of year - -
CASH, end of year $ - $ -
ACCRUAL TO CASH BASIS
RECONCILIATION:
Accrual basis income $ - $ -
Change in accrual accounts:
Increase in interest receivable (300,494) (305,694)
Increase in interest payable 126,066 135,026
Increase in swap provider
interest payable 172,278 168,593
Increase in servicer fees payable 2,150 2,075
Total change in accrual accounts - -
Net cash provided by
operating activities $ - $ -
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for
interest expense $ 4,139,069 $ -
The accompanying notes are an integral part of these financial statements.
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
1. ORGANIZATION AND OPERATIONS
Rural Electric Cooperative Grantor Trust (KEPCO) SERIES 1997 (the "Trust")
was formed under a Trust Agreement dated December 20, 1996 among National
Rural Utilities Cooperative Finance Corporation ("CFC"), Kansas Electric
Power Cooperative, Inc. (the "Cooperative") and The First National Bank of
Chicago (the "Trustee"). The assets of the Trust consist of lender loan
notes (the "1997 Note") bearing interest at 7.597% and maturing in 2017.
In addition the Trust also holds certain rights under an interest rate swap
agreement (the "Swap Agreement").
Rural Electric Cooperative Grantor Trust (KEPCO) Trusts K-1 and K-2 were
created on February 15, 1988 resulting from a refinancing of loans from the
Federal Financing Bank ("FFB") which were guaranteed by the Rural
Electrification Administration, as predecessor in intent to the Rural Utilities
Service ("RUS"). The FFB loans were refinanced through CFC, and in exchange
the Cooperative executed lender loan notes (the "Notes") to CFC. CFC then
deposited the Notes into separate Trusts. In turn, the Trusts issued to CFC,
as depositor of the Trusts, two certificates: Rural Electric Cooperative
Grantor Trust (KEPCO) 9.23% Certificates, due 2002 and Rural Electric
Cooperative Grantor Trust (KEPCO) 9.73% Certificates, due 2017 (the
"Certificates") in the amounts of $11,075,000 and $51,340,000, respectively.
The Certificates were not subject to full redemption prior to December 15,
1997. On December 18, 1997, the Notes were refinanced, the outstanding
Certificates were redeemed, and Trusts K-1 and K-2 were terminated. The
Notes in the outstanding principal amount of $57,390,000 were then deposited
into the Trust. The Trust issued Certificates of beneficial interest (the
"Series 1997 Certificates") which bear interest at a variable rate, and
which mature in 2017.
In order to mitigate the interest rate risk inherent in the Trust, which held
a fixed rate asset (the 1997 Note) and a variable rate obligation, the
Cooperative assigned to the Trust certain rights under an interest rate swap
agreement (the "Swap Agreement"). The counterparty to the Swap Agreement is
Morgan Guaranty Trust Company of New York ("Morgan"). Pursuant to the Swap
Agreement, the Trust pays to Morgan a fixed rate of interest on the outstanding
notional amount, and Morgan pays the Trust a variable rate of interest on the
outstanding notional amount. The structure is designed such that the interest
amounts paid by the Cooperative to the Trust are the same amounts paid to
Morgan, pursuant to the Swap Agreement, plus the amounts payable to CFC, as
servicer. The amounts Morgan pays to the Trust under the Swap Agreement are
the same amounts as the interest payable by the Trust to the Certificate
holders.
The notional amount of the Swap Agreement (which is not included on the
Trust's Statement of Assets and Liabilities) was established at $57,390,000
and declines in amount over time such that the outstanding notional amount
is always equal to the outstanding balance of the 1997 Notes and the 1997
Certificates. The Swap Agreement terminates in 2017, but is subject to early
termination upon the early redemption of the Certificates.
Payments of principal on the Certificates began in 1998 and will extend over
a period of twenty years. The principal payments over the next 5 years and
thereafter are as follows:
1999 $ 1,100,000
2000 1,200,000
2001 1,400,000
2002 1,350,000
2003 1,700,000
Thereafter 49,640,000
Total $ 56,390,000
The Certificates are subject to redemption at any time at the remaining
principal amount plus accrued interest. The principal payments received on
the note receivable from the Cooperative coincide with the payments due to
the certificate holders.
Each Certificate represents an undivided fractional interest in the Trust.
CFC is the depositor of the Trust and acts as servicer of the Note.
Because of the structure of the refinancing, the credit behind the Series 1997
Certificates will be bifurcated. First, Series 1997 certificate holders will
look to the guarantee provided by the United States of America for payment of
principal, which will continue to be distributed to Series 1997 certificate
holders each December 15. Second, Series 1997 certificate holders will look
to the credit of Morgan with regard to the variable rate payments of interest
to be made monthly on the Series 1997 Certificates. If Morgan fails to make
any variable rate payments when due and the Swap Agreement terminates without
replacement of an alternate swap agreement, amounts received by the Trustee
representing fixed interest rate payments under the note receivable, will
become payable to the Series 1997 certificate holders. CFC's servicer fee
will continue to be paid by the cooperative.
2. TAX STATUS OF THE TRUST
Vinson & Elkins, Counsel to the Cooperative, has advised CFC with respect to
the Trust that, in its opinion, (i) the Trust will not be classified as an
association taxable as a corporation, but will beclassified as a grantor
trust and (ii) each certificate holder will be treated for Federal income
tax purposes as the owner of an undivided fractional interest in each of
the assets held by the Trust.
It is expected that the Trust will not have any liability for federal or
state income taxes for the current or future years.
3. INTEREST AND SERVICER FEE ACCOUNTING
The Trust records interest income as it is earned and accrues interest
expense and servicer fees as they are incurred. Servicer fees represent
9.3 basis points of the outstanding principal balance of the Certificates
and the Note and recognition of conversion fees over the life of the loan.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
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 reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reported period. The estimates involve judgments with respect to, among other
things, various future factors which are difficult to predict and are beyond
the control of the Trust. With regards to the fair values below, actual
amounts could differ from these estimates.
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 December
31, 1998 and 1997 along with other valuation methodologies which are
summarized below. Below is a summary of significant methodologies used in
estimating fair value amounts and a schedule of fair values at December 31,
1998 and 1997.
The carrying amounts reported for interest receivable, interest payable, and
servicer fees payable approximate fair values due to the short-term maturity
of these instruments.
Note Receivable
Fair value is 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.
Rural Electric Cooperative Grantor Trust Certificates
The trust certificates pay a variable rate of interest that is reset weekly,
and as such are considered to be carried at fair value.
The carrying and estimated fair values of the Trust's financial instruments
as of December 31, 1998 and 1997 are as follows:
Swap Agreement
The fair market value is estimated as the amount the Trust would pay to
terminate the agreement, taking into account the current market rate of
interest.
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Interest receivable $ 606,188 $ 606,188 $ 305,694 $ 305,694
Note receivable $ 56,390,000 $ 64,323,332 $ 57,390,000 $ 64,524,167
Liabilities:
Interest payable - Grantor
Trust Certificates $ 261,092 $ 261,092 $ 135,026 $ 135,026
Servicer fees payable 4,225 4,225 2,075 2,075
Swap provider interest payable 340,871 340,871 168,593 168,593
Rural Electric Cooperative
Grantor Trust Certificates $ 56,390,000 $ 56,390,000 $ 57,390,000 $ 57,390,000
Off-Balance Sheet Instruments:
Swap Agreements - (7,932,544) - (4,579,001)