Rule 424(b)(5)
                                                       Registration No. 33-59559

PROSPECTUS SUPPLEMENT
(To Prospectus Dated June 26, 1995)
                               U.S. $500,000,000
                        COUNTRYWIDE FUNDING CORPORATION
                          MEDIUM-TERM NOTES, SERIES D
                  DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
                  PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND
                    INTEREST UNCONDITIONALLY GUARANTEED BY

                            [LOGO] COUNTRYWIDE (SM)
                            -----------------------
                            CREDIT INDUSTRIES, INC.

                                 ------------

  Countrywide Funding Corporation ("CFC") may offer from time to time its
Medium-Term Notes, Series D (the "Notes"), each of which will be
unconditionally guaranteed as to payment of principal, premium, if any, and
interest by Countrywide Credit Industries, Inc. (the "Guarantor" or "CCI").
Each Note will mature nine months or more from the date of issue, as selected
by the purchaser and agreed to by CFC and may be subject to redemption or
repayment prior to maturity. The aggregate initial offering price of the Notes
to be offered will not exceed U.S. $500,000,000 or its equivalent in foreign
currencies or currency units. The Notes may be denominated in U.S. dollars or
in such foreign currencies or currency units (the "Specified Currency") as may
be designated by CFC.
  Unless otherwise specified in the applicable Pricing Supplement, each Note
will bear interest at a fixed rate (a "Fixed Rate Note"), which may be zero in
the case of certain Notes issued at a price representing a substantial
discount from the principal amount payable upon maturity, or at a floating
rate (a "Floating Rate Note"). Unless otherwise specified in the applicable
Pricing Supplement, the Interest Payment Dates for each Fixed Rate Note will
be January 15 and July 15 of each year and at maturity or such date of earlier
redemption or repayment. The Interest Payment Dates for each Floating Rate
Note will be established on the date of issue of such Note and will be set
forth in the applicable Pricing Supplement. Interest rates and interest rate
formulas are subject to change by CFC, but no change will affect any Note
already issued or as to which an offer to purchase has been accepted by CFC.
  Each Note will be represented by either a global security registered in the
name of a nominee of The Depository Trust Company, as depositary (a "Book-
Entry Note"), or a certificate issued in definitive form (a "Certificated
Note"), as set forth in the applicable Pricing Supplement. Beneficial
interests in Book-Entry Notes will be shown on, and transfers thereof will be
effected only through, records maintained by the Depositary (with respect to
interests of its participants) and by its participants (with respect to
beneficial owners' interests). Book-Entry Notes will not be issuable as
Certificated Notes, except under the limited circumstances described herein.
  The Specified Currency, any applicable interest rate or interest rate
formula, the Stated Maturity Date, the Interest Payment Dates, if any, and any
redemption or repayment provisions for each Note and whether such Note will be
a Book-Entry Note or a Certificated Note will be established at the time of
issuance of such Note and set forth therein and in the applicable Pricing
Supplement.
  The indenture pursuant to which the Notes will be issued does not contain
any restrictions on the ability of the Company, CFC or any of their respective
affiliates to incur additional indebtedness (secured or unsecured). As of May
31, 1995, the Guarantor did not have any secured indebtedness outstanding, and
CFC had $872,009,662 aggregate principal amount of secured indebtedness
outstanding, all of which was short-term indebtedness. As of such date, CFC
had $3,886,820,000 aggregate principal amount of unsecured and unsubordinated
indebtedness outstanding, which indebtedness ranked pari passu in right of
payment with CFC's other unsecured and unsubordinated indebtedness and will
rank pari passu in right of payment with the Notes. See "Description of Debt
Securities and Guarantees--General" and Note D to CCI's Consolidated Financial
Statements included in the accompanying Prospectus.
  FOR A DESCRIPTION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE
NOTES, SEE "RISK FACTORS" ON PAGE S-2 OF THIS PROSPECTUS SUPPLEMENT.
                                --------------
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
  EXCHANGE  COMMISSION  OR  ANY  STATE SECURITIES  COMMISSION  NOR  HAS  THE
   SECURITIES AND  EXCHANGE COMMISSION  OR ANY STATE  SECURITIES COMMISSION
    PASSED  UPON THE ACCURACY OR  ADEQUACY OF THIS  PROSPECTUS SUPPLEMENT,
      THE PROSPECTUS, OR ANY SUPPLEMENT HERETO. ANY REPRESENTATION TO THE
       CONTRARY IS A CRIMINAL OFFENSE.
 
      THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
       ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
                            CONTRARY IS UNLAWFUL.
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                                Price to         Agents' Commission or             Proceeds to
                              Public(1)(2)           Discount(2)(3)             Company(2)(3)(4)
-------------------------------------------------------------------------------------------------------
                                                                
Per Note................          100%                .125%-.750%                99.875%-99.250%
-------------------------------------------------------------------------------------------------------
Total...................   U.S. $500,000,000    U.S. $625,000-$3,750,000 U.S. $499,375,000-$496,250,000
-------------------------------------------------------------------------------------------------------

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(1) Unless otherwise specified in the applicable Pricing Supplement, the Price
    to Public will be 100% of the principal amount of the Notes being issued.
(2) Or the equivalent thereof in a Specified Currency other than U.S. dollars.
(3) CFC will pay to Lehman Brothers, Lehman Brothers Inc. (including its
    affiliate, Lehman Government Securities Inc.), Goldman, Sachs & Co.,
    Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
    and Salomon Brothers Inc (each, an "Agent," and collectively, the
    "Agents") a commission, which may be in the form of a discount, ranging
    from .125% to .750% of the principal amount of any Note (or, in the case
    of any Original Issue Discount Security (as defined herein), the price to
    public), depending on its maturity, sold through such Agent, except that
    the commission payable by CFC to the Agents with respect to Notes with
    maturities of greater than 30 years will be negotiated at the time of the
    sale thereof. Unless otherwise specified in the applicable Pricing
    Supplement, any Note sold to an Agent as principal will be purchased by
    such Agent at a price equal to 100% of the principal amount thereof less a
    percentage of the principal amount equal to the commission applicable to
    an agency sale of a Note of identical maturity and may be resold by such
    Agent to one or more investors or other purchasers at varying prices
    related to prevailing market prices at the time of such resale, as
    determined by such Agent, or if so agreed, at a fixed public offering
    price. CFC has agreed to indemnify the Agents against certain liabilities,
    including liabilities under the Securities Act of 1933, as amended.
(4) Before deducting other expenses payable by CFC estimated at U.S. $675,000.
                                --------------
  The Notes are being offered on a continuous basis by CFC through the Agents,
each of which has agreed to use its reasonable best efforts to solicit
purchases of the Notes. CFC also may sell Notes to any Agent acting as
principal for resale to one or more investors or other purchasers or may sell
Notes directly to investors on its own behalf. Unless otherwise specified in
the applicable Pricing Supplement, the Notes will not be listed on any
securities exchange, and there can be no assurance that the Notes offered by
this Prospectus Supplement and the accompanying Prospectus will be sold or
that there will be a secondary market for the Notes. CFC reserves the right to
withdraw, cancel or modify the offer made hereby without notice. CFC and the
Agents may reject any offer to purchase Notes in whole or in part. See "Plan
of Distribution of Notes."
 
                                --------------
LEHMAN BROTHERS
               GOLDMAN, SACHS & CO.
                               MERRILL LYNCH & CO.
                                                           SALOMON BROTHERS INC
August 16, 1995

 
  IN CONNECTION WITH THE DISTRIBUTION OF NOTES UNDERWRITTEN BY AN AGENT ACTING
AS PRINCIPAL ON A FIXED PRICE BASIS, SUCH AGENT MAY OVER-ALLOT OR EFFECT
TRANSACTIONS IN THE NOTES WITH A VIEW TO STABILIZING OR MAINTAINING THE MARKET
PRICE OF THE NOTES AT LEVELS OTHER THAN THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
 
                                  RISK FACTORS
 
INDEX RISK
 
  An investment in the Notes indexed, as to principal, premium, if any, or
interest, to one or more currencies or currency units (including exchange rates
and swap indices between currencies or currency units), commodities, interest
rates or other indices entails significant risks that are not associated with
similar investments in a conventional fixed rate or floating rate debt
security. Such risks include, without limitation, the possibility that such
index or indices may be subject to significant changes, that the resulting
interest rate will be less than that payable on a conventional fixed rate or
floating rate debt security issued at the same time, that the repayment of
principal or premium, if any, can occur at a time other than that expected by
the investor, and that the investor could lose all or a substantial portion of
principal or premium, if any, payable on the Maturity Date (as defined below).
Such risks depend on a number of interrelated factors, including economic,
financial and political events, over which CFC and the Guarantor have no
control. Additionally, if the formula used to determine the amount of
principal, premium, if any, or interest payable with respect to such Notes
contains a multiple or leverage factor, the effect of any change in the
applicable index or indices will be magnified. In recent years, values of
certain indices have been highly volatile and such volatility may be expected
to continue in the future. Fluctuations in the value of any particular index
that have occurred in the past are not necessarily indicative, however, of
fluctuations in such value that may occur in the future. The secondary market
for such Notes will be affected by a number of factors independent of the
creditworthiness of CFC and the value of the applicable index or indices,
including the complexity and volatility of such index or indices, the method of
calculating the principal, premium, if any, and interest in respect of such
Notes, the time remaining to the maturity of such Notes, the outstanding amount
of such Notes and market interest rates generally. The credit ratings assigned
to CFC's medium-term note program may not reflect the potential impact of all
risks related to structure and other factors on the market value of the Notes.
Accordingly, prospective investors should consult their own financial and legal
advisors as to the risks entailed by an investment in the Notes and the
suitability of such Notes in light of their particular circumstances.
 
FOREIGN CURRENCY RISKS
 
  Governing Laws and Judgments. The Notes will be governed by and construed in
accordance with the laws of the State of New York. Courts in the United States
have not customarily rendered judgments for money damages denominated in any
currency or currency unit other than U.S. dollars. The Judiciary Law of the
State of New York provides, however, that an action based upon an obligation
denominated in a currency
or currency unit other than U.S. dollars will be rendered in the foreign
currency or currency unit of the underlying obligation and converted into U.S.
dollars at a rate of exchange prevailing on the date of the entry of the
judgment or decree.
 
  Exchange Rates and Exchange Controls. An investment in Notes that are
denominated in a foreign currency or currency unit entails significant risks
that are not associated with a similar investment in a security denominated in
U.S. dollars. Such risks include, without limitation, the possibility of
significant changes in rates of exchange between the U.S. dollar and the
various foreign currencies or currency units and the possibility of the
imposition or modification of exchange controls by either the United States or
foreign governments. Such risks generally depend on economic and political
events and on the supply of and demand for the relevant currencies, factors
over which CFC and the Guarantor have no control. In recent
 
                                      S-2

 
years, rates of exchange between the U.S. dollar and foreign currencies and
currency units have been highly volatile and such volatility may be expected
in the future. Fluctuations in any particular exchange rate that have occurred
in the past are not necessarily indicative, however, of fluctuations in such
rate that may occur during the term of any Note. Depreciation of the
applicable foreign currency or currency unit against the U.S. dollar would
result in a decrease in the effective yield of such Note, in the value of the
principal and premium, if any, payable on the Maturity Date of such Note and,
generally, in the market value of such Note.
 
  THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT DESCRIBE
ALL OF THE RISKS OF AN INVESTMENT IN NOTES DENOMINATED AND/OR PAYABLE IN A
FOREIGN CURRENCY OR CURRENCY UNIT, AND CFC AND THE GUARANTOR DISCLAIM ANY
RESPONSIBILITY TO ADVISE PROSPECTIVE INVESTORS OF SUCH RISKS AS THEY EXIST AT
THE DATE OF THIS PROSPECTUS SUPPLEMENT OR AS SUCH RISKS MAY CHANGE FROM TIME
TO TIME. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN FINANCIAL AND LEGAL
ADVISORS AS TO THE RISKS ENTAILED BY AN INVESTMENT IN NOTES DENOMINATED AND/OR
PAYABLE IN CURRENCIES OR CURRENCY UNITS OTHER THAN U.S. DOLLARS. SUCH NOTES
ARE NOT AN APPROPRIATE INVESTMENT FOR INVESTORS WHO ARE UNSOPHISTICATED WITH
RESPECT TO FOREIGN CURRENCY TRANSACTIONS.
 
  Unless otherwise specified in the applicable Pricing Supplement, Notes
denominated in a Specified Currency other than U.S. dollars or ECU (as defined
below) will not be sold in, or to residents of, the country of the Specified
Currency in which particular Notes are denominated.
 
  The information set forth in this Prospectus Supplement is directed to
prospective investors who are United States residents, and CFC and the
Guarantor disclaim any responsibility to advise prospective investors who are
residents of countries other than the United States with respect to any
matters that may affect the purchase, holding or receipt of payments of
principal of, or premium, if any, or interest on, the Notes. Such persons
should consult their own advisors with regard to such matters.
 
  Governments or monetary authorities have imposed from time to time, and may
in the future impose, exchange controls which could affect exchange rates as
well as the availability of the Specified Currency on the applicable Interest
Payment Date or Maturity Date of a Note. Even if there are no actual exchange
controls, it is possible that on such Interest Payment Date or Maturity Date
the Specified Currency for such Note would not be available to CFC due to
circumstances beyond the control of CFC. In that event, CFC will make the
required payments in U.S. dollars on the basis of the Exchange Rate (as
defined below) two Business Days (as defined below) prior to the Interest
Payment Date or the Maturity Date, as the case may be (or, if no rate is
quoted for such Specified Currency on such date, the last date such rate is
quoted). See "Description of Notes--Payment Currency."
 
  Currency Exchange. Purchasers are required to pay for the Notes in the
currency or currency unit in which such Notes are denominated (the "Specified
Currency"), unless otherwise provided in the applicable Pricing Supplement.
Currently, there are limited facilities in the United States for conversion of
U.S. dollars into foreign currencies or currency units and vice versa, and
many banks do not offer non-U.S. dollar denominated checking or savings
account facilities in the United States. Upon request, the Agents will arrange
for the conversion of U.S. dollars into a Specified Currency other than U.S.
dollars to enable purchasers to pay for the Notes. Such request must be made
on the trade date. Each such conversion will be made by the Agents on such
terms and subject to such conditions, limitations and charges as the Agents
may from time to time establish in accordance with their regular foreign
exchange practice. All costs of exchange will be borne by the investors in the
Notes.
 
  References herein to "U.S. dollars," "dollar," "U.S. $" or "$" are to the
currency of the United States of America.
 
                                      S-3

 
                              DESCRIPTION OF NOTES
 
  The following description of the particular terms of the Notes offered hereby
supplements, and to the extent inconsistent therewith, replaces, the
description of the general terms and provisions of the Debt Securities set
forth in the accompanying Prospectus, to which description reference is hereby
made. Unless otherwise specified in a Pricing Supplement, the terms of the
Notes will be as set forth below.
 
GENERAL
 
  The Notes are to be issued as a series of Debt Securities limited to U.S.
$500,000,000, or its equivalent in one or more foreign currencies or currency
units, aggregate initial offering price under an Indenture dated as of January
1, 1992, as amended, supplemented or modified from time to time, including
Supplemental Indenture No. l thereto dated as of June 15, 1995 (collectively,
the "Indenture"), among CFC, Countrywide Credit Industries, Inc. (the
"Guarantor" or "CCI") and The Bank of New York, as trustee (the "Trustee"),
which is described more fully under "Description of Debt Securities and
Guarantees" in the accompanying Prospectus. The statements herein concerning
the Notes and the Indenture do not purport to be complete and are qualified in
their entirety by reference to the provisions of the Indenture, including the
definitions of certain terms used herein without definition.
 
  The Notes will be offered on a continuous basis and will mature on any day
nine months or more from their dates of issue, as specified in the applicable
Pricing Supplement. Unless otherwise specified in the applicable Pricing
Supplement, interest-bearing Notes will be either Fixed Rate Notes or Floating
Rate Notes, as specified in the applicable Pricing Supplement. Notes also may
be issued that do not bear any interest currently or that bear interest at a
below market rate.
 
  Each Note will be represented by either a global security registered in the
name of a nominee of The Depository Trust Company, New York, New York ("DTC"),
as depositary (a "Book-Entry Note"), or a certificate issued in definitive form
(a "Certificated Note"), as set forth in the applicable Pricing Supplement.
Beneficial interests in Book-Entry Notes will be shown on, and transfers
thereof will be effected only through, records maintained by DTC (with respect
to interests of its Participants (as defined below)) and by its Participants
(with respect to interests of beneficial owners (as defined below)). Book-Entry
Notes will not be issuable as Certificated Notes, except under the limited
circumstances described herein.
 
  Unless otherwise specified in the applicable Pricing Supplement, the minimum
denomination of Notes will be $100,000, or the equivalent thereof in the
Specified Currency (if other than U.S. dollars), and integral multiples of
$1,000 in excess thereof or the equivalent thereof in such Specified Currency.
 
  Interest rates offered by the Company with respect to the Notes may differ
depending upon, among other things, the aggregate principal amount of the Notes
purchased in any single transaction.
 
  Unless otherwise specified herein or in the applicable Pricing Supplement,
"Exchange Rate" means, with respect to a Specified Currency (other than
European Currency Units ("ECU")), the noon Dollar buying rate for such
Specified Currency for cable transfers quoted by the Exchange Rate Agent (as
specified in the applicable Pricing Supplement) in The City of New York on the
Record Date or Special Record Date (each as defined below) or the fifteenth day
immediately preceding the Maturity Date or on such other date provided in the
applicable Note or in the Indenture, as the case may be, as certified for
customs purposes by the Federal Reserve Bank of New York. With respect to ECU,
"Exchange Rate" means the exchange rate between U.S. dollars and ECU reported
by the Council of the European Communities on the applicable Record Date or
Special Record Date with respect to an Interest Payment Date or the fifteenth
day immediately preceding the Maturity Date or on such other date as provided
in the applicable Note or in the Indenture, as the case may be.
 
 
                                      S-4

 
  Certificated Notes may be presented for registration of transfer or exchange
at the Corporate Trust Office of the Trustee in the Borough of Manhattan, The
City of New York. Registration of transfers or exchanges of Book-Entry Notes
may be effected only through a participating member of the Depositary (as
defined below).
 
  The Notes will constitute unsecured and unsubordinated indebtedness of CFC
and will rank pari passu in right of payment with CFC's other unsecured and
unsubordinated indebtedness. As of May 31, 1995, the Guarantor did not have any
secured indebtedness outstanding, and CFC had $872,009,662 aggregate principal
amount of secured indebtedness outstanding, all of which was short-term
indebtedness. As of such date, CFC had $3,886,820,000 aggregate principal
amount of unsecured and unsubordinated indebtedness outstanding, which
indebtedness ranked pari passu in right of payment with CFC's other unsecured
and unsubordinated indebtedness and will rank pari passu in right of payment
with the Notes. See "Description of Debt Securities and Guarantees--General"
and "--Guarantees" in the accompanying Prospectus. A substantial portion of the
assets of CFC may be pledged under various credit agreements among CFC and
various lending institutions. See Note D to CCI's Financial Statements included
in the accompanying Prospectus.
 
  The Indenture does not contain any provisions that would limit the ability of
the Company, CFC or any of their respective affiliates to incur indebtedness
(secured or unsecured) or that would afford Holders of the Notes protection in
the event of a highly leveraged transaction, restructuring, change in control,
merger or similar transaction involving the Company or CFC that may adversely
affect Holders of the Notes.
 
  If so specified in the applicable Pricing Supplement, the Notes will be
redeemable at the option of CFC or repayable at the option of the Holder prior
to maturity. See "--Redemption and Repayment" below. The Notes will not be
subject to any sinking fund.
 
  "Business Day" means (A) any day, other than a Saturday or Sunday, that is
neither a legal holiday nor a day on which banking institutions are authorized
or required by law, regulation or executive order to close in (i) New York, New
York or Los Angeles, California, or (ii) if the Specified Currency specified in
the applicable Pricing Supplement is other than U.S. dollars, the Principal
Financial Center (as defined below), and (B) with respect to Floating Rate
Notes as to which LIBOR is an applicable Base Rate, a London Banking Day (as
defined below). "Principal Financial Center" means the capital city of the
country issuing the related Specified Currency, except that with respect to
Australian dollars, Deutsche marks, Dutch guilders, Italian lire, Swiss francs
and ECU, the "Principal Financial Center" shall be Sydney, Frankfurt,
Amsterdam, Milan, Zurich and Luxembourg, respectively. "London Banking Day"
means any day on which dealings in deposits in U.S. dollars are transacted in
the London interbank market.
 
  The "Maturity Date" means the earlier of the date on which the principal of a
Note is redeemed (the "Redemption Date") or repaid (the "Repayment Date") or
the date on which the Note will mature (the "Stated Maturity Date").
 
  Unless otherwise specified in the applicable Pricing Supplement, all
percentages resulting from any calculation of the rate of interest on Floating
Rate Notes will be rounded, if necessary, to the nearest one hundred-thousandth
of a percentage point, with five one-millionths of a percentage point rounded
upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or
 .0987655)), and all dollar amounts used in or resulting from such calculation
on Floating Rate Notes will be rounded to the nearest cent (with one-half cent
being rounded upward).
 
  The Pricing Supplement relating to each Note will describe the following
terms: (1) the Specified Currency; (2) whether such Note is a Fixed Rate Note,
a Floating Rate Note or such other Note as is specified in such Pricing
Supplement; (3) if other than 100%, the price (expressed as a percentage of the
aggregate principal amount thereof) at which such Note will be issued to the
public (the "Issue Price"); (4) the trade date; (5) the date on which such Note
will be issued (the "Issue Date"); (6) the Stated Maturity Date and whether the
Stated Maturity Date may be extended by CFC, and if so, the Extension Periods
and Final
 
                                      S-5

 
Maturity Date (each as defined below); (7) if such Note is a Fixed Rate Note,
the rate per annum at which such Note will bear interest, if any, and the
Interest Payment Dates (as defined below) and whether such rate may be reset by
CFC prior to the Stated Maturity Date and, if so, the date(s) and basis or
formula therefor; (8) if such Note is a Floating Rate Note, whether it is a
"Floating Rate/Fixed Rate Note" and, if so, the Fixed Rate Commencement Date
and Fixed Interest Rate (each as defined below), as well as the Base Rate, the
Initial Interest Rate, the Interest Determination Dates, the Interest Reset
Dates, the Interest Payment Dates, the Index Maturity, the Maximum Interest
Rate and/or the Minimum Interest Rate, if any, and the Spread and/or Spread
Multiplier, if any (each as defined below), and any other terms relating to the
particular method of calculating the interest rate for such Note, and whether
the Spread and/or Spread Multiplier may be reset by CFC prior to the Stated
Maturity Date and, if so, the date(s) and basis or formula therefor; (9)
whether such Note may be redeemed at the option of CFC, or repaid at the option
of the Holder, prior to maturity, and if so, the earliest date of redemption
(the "Initial Redemption Date") and optional date(s) of repayment (each, an
"Optional Repayment Date") and the other provisions relating to such redemption
or repayment; (10) whether such Note will be issued initially as a Book-Entry
Note or a Certificated Note; and (11) any other terms of such Note not
inconsistent with the provisions of the Indenture.
 
PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST
 
  Principal, premium, if any, and interest will be paid by CFC in the Specified
Currency. If and as so specified in the applicable Pricing Supplement, at the
request of a Holder of a Note payable in a Specified Currency other than U.S.
dollars, payments of principal, premium, if any, and interest in respect of
such Note will be paid in U.S. dollars. Under such circumstances, CFC will be
required to tender payment in U.S. dollars at the Exchange Rate, and any costs
associated with such conversion would be borne by such Holder through deduction
from such payments. Such Holder may elect to receive payments in U.S. dollars
by delivering a written request to the Trustee not later than the close of
business on the Record Date immediately preceding the Interest Payment Date or
the fifteenth day immediately preceding the Maturity Date, as the case may be.
Such election will remain in effect until revoked by written notice from such
Holder to the Trustee, but written notice of any such revocation must be
received by the Trustee not later than the close of business on the Record Date
immediately preceding the Interest Payment Date or the fifteenth day
immediately preceding the Maturity Date, as the case may be. Upon request, the
Trustee will mail a copy of a form of request to any Holder.
 
  Unless otherwise specified in the applicable Pricing Supplement, interest on
the certificated Notes due on any Interest Payment Date other than the Maturity
Date will be paid, except as provided below, by mailing a check in the
Specified Currency (from an account at a bank located outside of the United
States if such check is payable in a Specified Currency other than U.S.
dollars) to the Holder at the address of such Holder appearing on the Security
Register on the applicable Record Date. Unless otherwise specified in the
applicable Pricing Supplement, the first payment of interest on any Note
originally issued between a Record Date and an Interest Payment Date will be
made on the Interest Payment Date following the next Record Date to the Holder
on such next Record Date. Notwithstanding the foregoing, on any Interest
Payment Date other than the Maturity Date, a Holder of U.S. $10,000,000 (or the
equivalent thereof in a Specified Currency other than U.S. dollars) or more in
aggregate principal amount of Notes (whether or not having identical terms and
provisions) shall be entitled: (i) if the Specified Currency is U.S. dollars,
to receive such payment by wire transfer of immediately available funds to an
account maintained by the payee with a bank located in the United States, but
only if appropriate wire transfer instructions have been received in writing by
the Trustee not later than the Record Date immediately preceding such Interest
Payment Date, and (ii) if the Specified Currency is other than U.S. dollars, to
receive such payment by wire transfer of immediately available funds to an
account maintained by the payee with a bank located in a jurisdiction in which
payment in such Specified Currency is then lawful. CFC will pay any
administrative costs imposed by banks in connection with making payments by
wire transfer, but any tax, assessment or other governmental charge imposed
upon payments will be borne by the Holders of the Notes in respect of which
payments are made. Beneficial owners of Global Notes (as defined below) will be
paid in accordance with the procedures of the Depositary and its Participants
in effect from time to time as described under "--Book-Entry Notes" below.
 
                                      S-6

 
  Unless otherwise specified in the applicable Pricing Supplement, payments of
principal, premium, if any, and interest on the Maturity Date will be made in
immediately available funds in the Specified Currency upon presentation and
surrender of Notes at the Corporate Trust Office of the Trustee. In the case of
such payments in a Specified Currency other than U.S. dollars, Notes shall be
presented and surrendered to the Trustee in time for the Trustee to make such
payments in accordance with its normal procedures.
 
  If any Interest Payment Date other than the Maturity Date for any Floating
Rate Note would otherwise fall on a day that is not a Business Day, such
Interest Payment Date shall be postponed to the next Business Day, except that
if interest thereon is determined by reference to LIBOR and such next Business
Day falls in the next calendar month, such Interest Payment Date shall be the
immediately preceding Business Day. If the Maturity Date for any Fixed Rate
Note or Floating Rate Note or the Interest Payment Date for any Fixed Rate Note
falls on a day which is not a Business Day, payment of principal, premium, if
any, and interest with respect to such Note will be made on the next Business
Day with the same force and effect as if made on such date, and no interest on
such payment will accrue to such next Business Day.
 
  Any interest not punctually paid or duly provided for with respect to a Note
("Defaulted Interest") will forthwith cease to be payable to the Holder thereof
on the applicable Record Date and may either be paid to the person in whose
name such Note is registered at the close of business on a special record date
(the "Special Record Date") for the payment of such Defaulted Interest to be
fixed by the Trustee, notice whereof shall be given to the Holder of such Note
not less than ten days prior to such Special Record Date, or may be paid at any
time in any other lawful manner, all as more completely provided in the
Indenture.
 
  Unless otherwise specified in the applicable Pricing Supplement, the "Record
Date" with respect to any Interest Payment Date for Floating Rate Notes shall
be the fifteenth day immediately preceding such Interest Payment Date, and for
Fixed Rate Notes shall be the December 31 or June 30 immediately preceding such
Interest Payment Date, in each case whether or not such date shall be a
Business Day.
 
PAYMENT CURRENCY
 
  If any payment of principal, premium, if any, or interest in respect of any
Note is to be made in a Specified Currency other than U.S. dollars and such
Specified Currency is not available to CFC for making such payment due to the
imposition of exchange controls or other circumstances beyond the control of
CFC, CFC will be entitled to satisfy its obligations to the Holder of such Note
by making such payment in U.S. dollars on the basis of the Exchange Rate (as
defined below) two Business Days prior to the Interest Payment Date or the
Maturity Date, as the case may be (or, if no rate is quoted for such Specified
Currency on such date, the last date such Exchange Rate is quoted). Any payment
made under such circumstances in U.S. dollars where the required payment is in
a Specified Currency other than U.S. dollars will not constitute an Event of
Default under the Indenture. For purposes of this section, the "Exchange Rate"
for a foreign currency or ECU will be the noon Dollar selling rate for such
foreign currency or ECU for cable transfers quoted by the Exchange Rate Agent
in The City of New York, as certified for customs purposes by the Federal
Reserve Bank of New York.
 
  If payment on any Note is required to be made in ECU and ECU is unavailable
due to the imposition of exchange controls or other circumstances beyond the
control of CFC, or is no longer used in the European Monetary System, all
payments due on that Interest Payment Date or Maturity Date with respect to
such Note shall be made in U.S. dollars. The amount so payable on any date in
ECU shall be converted into U.S. dollars, at a rate determined by the Exchange
Rate Agent as of the second Business Day prior to the date on which such
payment is due on the following basis. The component currencies of the ECU for
this purpose (the "Components") shall be the currency amounts which were
components of the ECU as of the last date on which the ECU was used in the
European Monetary System. The equivalent of the ECU in U.S. dollars shall be
calculated by aggregating the U.S. dollar equivalents of the Components. The
U.S. dollar equivalent of each of the Components shall be determined by the
Exchange Rate Agent on the basis of the most recently available Exchange Rate.
 
                                      S-7

 
  If the official unit of any component currency is altered by way of
combination or subdivision, the number of units of that currency as a Component
shall be divided or multiplied in the same proportion. If two or more component
currencies are consolidated into a single currency, the amounts of those
currencies as Components shall be replaced by an amount in such single currency
equal to the sum of the amounts of the consolidated component currencies
expressed in such single currency. If any component currency is divided into
two or more currencies, the amount of that currency as a Component shall be
replaced by amounts of such two or more currencies (in appropriate
proportions), the sum of which shall be equal to the amount of the former
component currency.
 
  All determinations referred to above made by an Exchange Rate Agent shall be
at its sole discretion (except to the extent expressly provided that any
determination is subject to approval) and, in the absence of manifest error,
shall be conclusive for all purposes and binding on the Holder of such Note and
such Exchange Rate Agent shall have no liability therefor.
 
FIXED RATE NOTES
 
  Each Fixed Rate Note will bear interest from its Issue Date at the rate per
annum stated on the face thereof until the principal amount thereof is paid or
made available for payment. Unless otherwise specified in the applicable
Pricing Supplement, interest on each Fixed Rate Note will be payable semi-
annually in arrears on each January 15 and July 15 (each, an "Interest Payment
Date") and on the Maturity Date. Each payment of interest shall include
interest accrued from and including the Issue Date or the most recent Interest
Payment Date to which interest has been paid or duly provided for, as the case
may be, to, but excluding, the applicable Interest Payment Date or the Maturity
Date, as the case may be (each, an "Interest Period"). Unless otherwise
specified in the applicable Pricing Supplement, interest on the Fixed Rate
Notes will be computed on the basis of a 360-day year of twelve 30-day months.
 
FLOATING RATE NOTES
 
  Each Floating Rate Note will bear interest at a rate determined by reference
to an interest rate basis (each, a "Base Rate"), which may be adjusted by a
Spread and/or Spread Multiplier. The applicable Pricing Supplement will
designate one or more of the following Base Rates as applicable to each
Floating Rate Note: (a) the Commercial Paper Rate (as defined below), (b) LIBOR
(as defined below), (c) the Certificate of Deposit Rate (as defined below), (d)
the Federal Funds Rate (as defined below), (e) the Prime Rate (as defined
below), (f) the Treasury Rate (as defined below), (g) the CMT Rate (as defined
below), (h) the 11th District Cost of Funds Rate (as defined below) or (i) such
other interest rate basis or formula as is set forth in such Pricing Supplement
and in such Floating Rate Note. The "Index Maturity" for any Floating Rate Note
is the period of maturity of the instrument or obligation from which the Base
Rate is calculated.
 
  Unless otherwise specified in the applicable Pricing Supplement, the interest
rate on each Floating Rate Note will be calculated by reference to the
specified Base Rate, or the lowest, highest or average of two or more specified
Base Rates, (a) plus or minus the Spread, if any, and/or (b) multiplied by the
Spread Multiplier, if any. The "Spread" is the number of basis points (one
basis point equals one-hundredth of a percentage point) specified in the
applicable Pricing Supplement as being applicable to the interest rate for such
Floating Rate Note, and the "Spread Multiplier" is the percentage specified in
the applicable Pricing Supplement as being applicable to the interest rate for
such Floating Rate Note.
 
  If a Floating Rate Note is designated as a "Floating Rate/Fixed Rate Note,"
unless otherwise specified in the applicable Pricing Supplement, the interest
rate will be calculated in the same manner as any other Floating Rate Note
until a designated date when the interest rate will become fixed (the "Fixed
Rate Commencement Date"). The interest rate in effect for the period commencing
on the Fixed Rate Commencement Date and continuing until the Maturity Date will
be the rate per annum specified in the applicable Pricing Supplement as the
"Fixed Interest Rate" or, if no Fixed Interest Rate is specified, the interest
rate in effect on the day immediately preceding the Fixed Rate Commencement
Date. Unless
 
                                      S-8

 
otherwise specified herein or in the applicable Pricing Supplement, the Fixed
Rate Commencement Date shall also constitute an Interest Payment Date for
purposes of calculating and paying interest. Unless otherwise specified herein
or in the applicable Pricing Supplement, the Floating Rate/Fixed Rate Note
shall be treated as a Floating Rate Note until the Fixed Rate Commencement Date
and as a Fixed Rate Note from the Fixed Rate Commencement Date and thereafter.
 
  As specified in the applicable Pricing Supplement, a Floating Rate Note may
also have either or both of the following: (i) a maximum limitation, or
ceiling, on the rate of interest which may accrue during any Interest Period
("Maximum Interest Rate"); and (ii) a minimum limitation, or floor, on the rate
of interest which may accrue during any Interest Period ("Minimum Interest
Rate"). In addition to any Maximum Interest Rate which may be applicable to any
Floating Rate Note pursuant to the above provisions, the interest rate on a
Floating Rate Note will in no event be higher than the maximum rate permitted
by New York law, as the same may be modified by United States law of general
application.
 
  Except as provided below, the rate of interest on each Floating Rate Note
will be reset daily, weekly, monthly, quarterly, semi-annually or annually, as
specified in the applicable Pricing Supplement. Unless otherwise specified in
the applicable Pricing Supplement, the "Interest Reset Date" will be, in the
case of Floating Rate Notes which reset (a) daily, each Business Day; (b)
weekly, the Wednesday of each week (with the exception of weekly reset Floating
Rate Notes as to which the Treasury Rate is an applicable Base Rate, which will
reset the Tuesday of each week, except as specified below); (c) monthly, the
third Wednesday of each month (with the exception of monthly reset Floating
Rate Notes as to which the 11th District Cost of Funds Rate is an applicable
Base Rate, which will reset on the first calendar day of each month); (d)
quarterly, the third Wednesday of March, June, September and December; (e)
semi-annually, the third Wednesday of the two months specified in the
applicable Pricing Supplement; and (f) annually, the third Wednesday of the
month specified in the applicable Pricing Supplement. If an Interest Reset Date
for any Floating Rate Note would otherwise be a day that is not a Business Day,
such Interest Reset Date shall be postponed to the next Business Day, except
that if interest thereon is determined by reference to LIBOR and such next
Business Day falls in the next calendar month, such Interest Reset Date shall
be the immediately preceding Business Day.
 
  The interest rate in effect on each day will be (i) if such day is an
Interest Reset Date, the interest rate determined as of the Interest
Determination Date (as defined below) immediately preceding such Interest Reset
Date or (ii) if such day is not an Interest Reset Date, the interest rate
determined as of the Interest Determination Date immediately preceding the most
recent Interest Reset Date. The "Interest Determination Date" means the
Commercial Paper Rate Determination Date, the LIBOR Determination Date, the CD
Rate Determination Date, the Federal Funds Rate Determination Date, the Prime
Rate Determination Date, the Treasury Rate Determination Date, the CMT Rate
Determination Date or the 11th District Rate Determination Date (each as
defined below), as the case may be. If interest on a Floating Rate Note is
determined by reference to two or more Base Rates, the "Interest Determination
Date" means the most recent Business Day which is at least two Business Days
prior to the applicable Interest Reset Date on which each Base Rate shall be
determinable. Each Base Rate shall be determined and compared as of such date,
and the applicable interest rate shall take effect on the related Interest
Reset Date.
 
  Interest on Floating Rate Notes will be payable on the Interest Payment Dates
specified in the applicable Pricing Supplement (each, an "Interest Payment
Date") and on the Maturity Date. Unless otherwise specified in the applicable
Pricing Supplement, interest payments shall be the amount of interest accrued
from and including the most recent Interest Payment Date to which interest has
been paid or duly provided for, or, if no interest has been paid or duly
provided for, from and including the Issue Date to but excluding the applicable
Interest Payment Date or the Maturity Date, as the case may be (each, an
"Interest Period").
 
  With respect to a Floating Rate Note, accrued interest shall be calculated by
multiplying the principal amount of such Floating Rate Note by an accrued
interest factor. Such accrued interest factor will be computed by adding the
interest factor calculated for each day in the Interest Period for which
accrued interest is being calculated. The interest factor for each such day is
computed by dividing the interest rate
 
                                      S-9

 
applicable to such day by 360, if an applicable Base Rate is the Commercial
Paper Rate, Certificate of Deposit Rate, Federal Funds Rate, Prime Rate, 11th
District Cost of Funds Rate or LIBOR, or by the actual number of days in the
year, if an applicable Base Rate is the Treasury Rate or CMT Rate. If more than
one Base Rate is applicable to a Floating Rate Note, the interest factor will
be calculated in the same manner as if only the Base Rate specified for such
purpose in the applicable Pricing Supplement applied.
 
  Unless otherwise specified in the applicable Pricing Supplement, The Bank of
New York will be the calculation agent (the "Calculation Agent") with respect
to the Floating Rate Notes. Upon the request of the Holder of any Floating Rate
Note, the Calculation Agent will provide the interest rate then in effect and,
if determined, the interest rate which will become effective on the next
Interest Reset Date with respect to such Floating Rate Note. The "Calculation
Date," if applicable, pertaining to a Floating Rate Note will be the earlier of
(i) the 10th day after the Interest Determination Date pertaining to a Base
Rate or, if such day is not a Business Day, the next Business Day or (ii) the
Business Day immediately preceding the applicable Interest Payment Date or the
Maturity Date, as the case may be.
 
  The interest rate in effect with respect to a Floating Rate Note from the
Issue Date to the first Interest Reset Date (the "Initial Interest Rate") will
be specified in the applicable Pricing Supplement. The interest rate for each
subsequent Interest Reset Date, except in the case of a Floating Rate/Fixed
Rate Note for the period subsequent to the Fixed Rate Commencement Date, will
be determined by the Calculation Agent as follows.
 
 COMMERCIAL PAPER RATE
 
  Unless otherwise specified in the applicable Pricing Supplement, the
"Commercial Paper Rate" for each applicable Interest Reset Date will be
determined by the Calculation Agent as of the second Business Day prior to such
Interest Reset Date (a "Commercial Paper Rate Determination Date") and will be
the Money Market Yield (as defined below) on such date of the rate for
commercial paper having the Index Maturity specified in the applicable Pricing
Supplement as published by the Board of Governors of the Federal Reserve System
in "Statistical Release H.15(519), Selected Interest Rates," or any successor
publication ("H.15(519)"), under the heading "Commercial Paper." In the event
that such rate is not published prior to 3:00 P.M., New York City time, on the
Calculation Date, then the Commercial Paper Rate will be the Money Market Yield
on such Commercial Paper Rate Determination Date of the rate for commercial
paper of the specified Index Maturity as published by the Federal Reserve Bank
of New York in its daily statistical release "Composite 3:30 P.M. Quotations
for U.S. Governmental Securities" ("Composite Quotations") under the heading
"Commercial Paper." If by 3:00 P.M., New York City time, on such Calculation
Date such rate is not yet published in either H.15(519) or Composite
Quotations, then the Commercial Paper Rate will be the Money Market Yield of
the arithmetic mean of the offered rates as of 11:00 A.M., New York City time,
on such Commercial Paper Rate Determination Date of three leading dealers of
commercial paper in The City of New York selected by the Calculation Agent for
commercial paper of the specified Index Maturity, placed for an industrial
issuer whose bond rating is "AA," or the equivalent, from a nationally
recognized statistical rating agency; provided, however, that if the dealers
selected as aforesaid by the Calculation Agent are not quoting offered rates as
mentioned in this sentence, the Commercial Paper Rate for such Interest Reset
Date will be the Commercial Paper Rate in effect on such Commercial Paper Rate
Determination Date.
 
  "Money Market Yield" will be a yield (expressed as a percentage) calculated
in accordance with the following formula:
 
                                           D X 360
                  Money Market Yield =  -------------  X 100
                                        360 - (D X M)

where "D" refers to the applicable per annum rate for commercial paper quoted
on a bank discount basis and expressed as a decimal and "M" refers to the
actual number of days in the Interest Period for which interest is being
calculated corresponding to the Index Maturity specified in the applicable
Pricing Supplement.
 
                                      S-10

 
 LIBOR
 
  Unless otherwise specified in the applicable Pricing Supplement, "LIBOR" for
each applicable Interest Reset Date will be determined by the Calculation Agent
as follows:
 
    (i) If "LIBOR Reuters" is specified in the applicable Pricing Supplement,
  on the second London Banking Day prior to the applicable Interest Reset
  Date (a "LIBOR Determination Date"), the Calculation Agent will determine
  LIBOR as the arithmetic mean of the offered rates for deposits in U.S.
  dollars for the period of the Index Maturity which appear on the "Reuters
  Screen LIBO Page" at approximately 11:00 A.M., London time, on such LIBOR
  Determination Date. "Reuters Screen LIBO Page" means the display designated
  as page "LIBO" on the Reuter Monitor Money Rates Service (or such other
  page as may replace the LIBO page on that service for the purpose of
  displaying London interbank offered rates of major banks).
 
    If "LIBOR Telerate" is specified in the applicable Pricing Supplement or
  if no other method is specified in such Pricing Supplement as the method
  for determining LIBOR, on the LIBOR Determination Date, the Calculation
  Agent will determine LIBOR as the rate for deposits in U.S. dollars for the
  period of the Index Maturity which appears on "Telerate Page 3750" at
  approximately 11:00 A.M., London time, on such LIBOR Determination Date.
  "Telerate Page 3750" means the display page so designated on the Dow Jones
  Telerate Service (or such other page as may replace such page on that
  service for the purpose of displaying London interbank offered rates of
  major banks).
 
    (ii) If LIBOR Reuters is specified in the applicable Pricing Supplement
  and fewer than two offered rates for the applicable Index Maturity appear
  on the Reuters Screen LIBO Page or if LIBOR Telerate is applicable for
  determining LIBOR and no rate appears on Telerate Page 3750, as applicable,
  the Calculation Agent will request the principal London offices of each of
  four major banks in the London interbank market, as selected by the
  Calculation Agent, to provide the Calculation Agent with its offered
  quotation for deposits in U.S. dollars for the period of the Index Maturity
  commencing on the second London Banking Day following such LIBOR
  Determination Date to prime banks in the London interbank market at
  approximately 11:00 A.M., London time, on such LIBOR Determination Date and
  in a principal amount equal to an amount of not less than U.S. $1,000,000
  that is representative of a single transaction in such market at such time.
  If at least two such quotations are provided, LIBOR will be the arithmetic
  mean of such quotations. If fewer than two quotations are provided, LIBOR
  in respect of that LIBOR Determination Date will be the arithmetic mean of
  rates quoted by three major banks in The City of New York selected by the
  Calculation Agent at approximately 11:00 A.M., New York City time, on such
  LIBOR Determination Date for loans in U.S. dollars to leading European
  banks, for the period of the Index Maturity designated in the applicable
  Pricing Supplement and in the principal amount equal to an amount of not
  less than U.S. $1,000,000 that is representative for a single transaction
  in such market at such time; provided, however, that if fewer than three
  banks selected as aforesaid by the Calculation Agent are quoting rates as
  mentioned in this sentence, LIBOR in effect for such Interest Reset Date
  will be LIBOR in effect on such LIBOR Determination Date.
 
 CERTIFICATE OF DEPOSIT RATE
 
  Unless otherwise specified in the applicable Pricing Supplement, the
"Certificate of Deposit Rate" for each applicable Interest Reset Date will be
determined by the Calculation Agent as of the second Business Day prior to the
Interest Reset Date (a "CD Rate Determination Date") and will be the rate for
negotiable certificates of deposit having the Index Maturity designated in the
applicable Pricing Supplement as published in H.15(519) under the heading "CDs
(Secondary Market)." In the event that such rate is not published prior to 3:00
P.M., New York City time, on the Calculation Date pertaining to such CD Rate
Determination Date, then the Certificate of Deposit Rate will be the rate on
such CD Rate Determination Date for negotiable certificates of deposit of the
Index Maturity designated in the applicable Pricing Supplement as published in
Composite Quotations under the heading "Certificates of Deposit." If by 3:00
P.M., New York City time, on such Calculation Date such rate is not yet
published in either H.15(519) or Composite Quotations, then the
 
                                      S-11

 
Certificate of Deposit Rate will be calculated by the Calculation Agent and
will be the arithmetic mean of the secondary market offered rates as of 10:00
A.M., New York City time, on such CD Rate Determination Date of three leading
non-bank dealers (which may include one or more of the Agents or their
affiliates) in negotiable U.S. dollar certificates of deposit in The City of
New York selected by the Calculation Agent for negotiable certificates of
deposit of major United States money center banks (in the market for negotiable
certificates of deposit) with a remaining maturity closest to the Index
Maturity designated in the applicable Pricing Supplement in a denomination of
U.S. $5,000,000; provided, however, that if the dealers selected as aforesaid
by such Calculation Agent are not quoting offered rates as mentioned in this
sentence, the Certificate of Deposit Rate for such Interest Reset Date will be
the Certificate of Deposit Rate in effect on such CD Rate Determination Date.
 
 FEDERAL FUNDS RATE
 
  Unless otherwise specified in the applicable Pricing Supplement, the "Federal
Funds Rate" for each applicable Interest Reset Date will be determined by the
Calculation Agent as of the second Business Day prior to such Interest Reset
Date (a "Federal Funds Rate Determination Date") and will be the rate on such
Federal Funds Rate Determination Date for Federal Funds as published in
H.15(519) under the heading "Federal Funds (Effective)." In the event that such
rate is not published prior to 3:00 P.M., New York City time, on the
Calculation Date pertaining to such Federal Funds Rate Determination Date, the
Federal Funds Rate will be the rate on such Federal Funds Rate Determination
Date as published in Composite Quotations under the heading "Federal
Funds/Effective Rate." If by 3:00 P.M., New York City time, on such Calculation
Date such rate is not yet published in either H.15(519) or Composite
Quotations, then the Federal Funds Rate will be calculated by the Calculation
Agent and will be the arithmetic mean of the rates for transactions in
overnight Federal Funds arranged by three leading brokers of Federal Funds
transactions in The City of New York selected by the Calculation Agent as of
9:00 A.M., New York City time, on such Federal Funds Rate Determination Date;
provided, however, that if the three brokers selected as aforesaid by the
Calculation Agent are not quoting rates as mentioned in this sentence, the
Federal Funds Rate for such Interest Reset Date will be the Federal Funds Rate
in effect on such Federal Funds Rate Determination Date.
 
 PRIME RATE
 
  Unless otherwise specified in the applicable Pricing Supplement, the "Prime
Rate" for each applicable Interest Reset Date will be determined by the
Calculation Agent as of the second Business Day prior to such Interest Reset
Date (a "Prime Rate Determination Date") and will be the rate on such date as
such rate is published in H.15(519) under the heading "Bank Prime Loan." If
such rate is not published prior to 3:00 P.M., New York City time, on the
Calculation Date pertaining to such Prime Rate Determination Date, then the
Calculation Agent shall determine the Prime Rate as the arithmetic mean of the
rates of interest publicly announced by each bank that appears on the "Reuters
Screen NYMF Page" as such bank's prime rate or base lending rate as in effect
for such Prime Rate Determination Date. "Reuters Screen NYMF Page" means the
display designated as page "NYMF" on the Reuter Monitor Money Rates Service (or
such other page as may replace the NYMF Page on that service for the purpose of
displaying prime rates or base lending rates of major United States banks). If
fewer than four such rates but more than one such rate appear on the Reuters
Screen NYMF Page for such Prime Rate Determination Date, the Calculation Agent
shall determine the Prime Rate as the arithmetic mean of the prime rates quoted
on the basis of the actual number of days in the year divided by a 360-day year
as of the close of business in The City of New York on such Prime Rate
Determination Date by three major money center banks in The City of New York
selected by the Calculation Agent. If fewer than two such rates appear on the
Reuters Screen NYMF Page, the Calculation Agent shall determine the Prime Rate
as the arithmetic mean on the basis of the prime rates quoted as of the close
of business in The City of New York on such Prime Rate Determination Date by
three substitute banks or trust companies that are organized and doing business
under the laws of the United States or any state thereof, have total equity
capital of at least U.S. $500,000,000 and are subject to supervision or
examination by Federal or state authorities; provided, however, that if fewer
than three such substitute banks or trust companies are
 
                                      S-12

 
quoting prime rates as mentioned in this sentence, the Prime Rate for such
Interest Reset Date will be the Prime Rate in effect on such Prime Rate
Determination Date.
 
 TREASURY RATE
 
  Unless otherwise specified in the applicable Pricing Supplement, the
"Treasury Rate" means, with respect to any Treasury Rate Determination Date (as
defined below), the rate for the auction held on such Treasury Rate
Determination Date of direct obligations of the United States ("Treasury
bills") having the Index Maturity designated in the applicable Pricing
Supplement as published in H.15(519) under the heading "Treasury bills--auction
average (investment)" or, if not so published by 9:00 A.M., New York City time,
on the Calculation Date pertaining to such Treasury Rate Determination Date,
the auction average rate (expressed as a bond equivalent, on the basis of a
year of 365 or 366 days, as applicable, and applied on a daily basis) as
otherwise announced by the United States Department of the Treasury. In the
event that the results of the auction of Treasury bills having the Index
Maturity designated in the applicable Pricing Supplement are not published or
reported as provided above by 3:00 P.M., New York City time, on such
Calculation Date or if no such auction is held on such Treasury Rate
Determination Date, then the Treasury Rate will be calculated by the
Calculation Agent and shall be a yield to maturity (expressed as a bond
equivalent on the basis of a year of 365 or 366 days, as applicable, and
applied on a daily basis) of the arithmetic mean of the secondary market bid
rates, as of approximately 3:30 P.M., New York City time, on such Treasury Rate
Determination Date, of three leading primary United States government
securities dealers selected by the Calculation Agent for the issue of Treasury
bills with a remaining maturity closest to the Index Maturity designated in the
applicable Pricing Supplement; provided, however, that if the dealers selected
as aforesaid by the Calculation Agent are not quoting bid rates as mentioned in
this sentence, the Treasury Rate for such Interest Reset Date will be the
Treasury Rate in effect on such Treasury Rate Determination Date.
 
  The "Treasury Rate Determination Date" will be the day of the week in which
the applicable Interest Reset Date falls on which Treasury bills would normally
be auctioned. Treasury bills are normally sold at auction on Monday of each
week, unless that day is a legal holiday, in which case the auction is normally
held on the following Tuesday; provided, however, that if such auction is held
on the preceding Friday, such Friday will be the Treasury Rate Determination
Date pertaining to the Interest Reset Date occurring in the next week; and,
provided, further that if an auction falls on an Interest Reset Date, then such
Interest Reset Date will be the first Business Day following such auction.
 
  Treasury Rate Notes, like other Notes, are not obligations of the United
States government and are not guaranteed by the United States government.
 
 CMT RATE
 
  Unless otherwise specified in the applicable Pricing Supplement, the "CMT
Rate" for each applicable Interest Reset Date will be determined by the
Calculation Agent as of the second Business Day prior to such Interest Reset
Date (the "CMT Rate Determination Date"), and will be the rate displayed on the
Designated CMT Telerate Page (as defined below) under the caption ". . .
Treasury Constant Maturities . . . Federal Reserve Board Release H.15 . . .
Mondays Approximately 3:45 P.M.," under the column for the Designated CMT
Maturity Index (as defined below) for (i) if the Designated CMT Telerate Page
is 7055, the rate on such CMT Rate Determination Date and (ii) if the
Designated CMT Telerate Page is 7052, the week, or the month, as applicable,
ended immediately preceding the week in which the applicable CMT Rate
Determination Date occurs. If such rate is no longer displayed on the relevant
page, or if not displayed by 3:00 P.M., New York City time, on the Calculation
Date pertaining to such CMT Rate Determination Date, then the CMT Rate for such
CMT Rate Determination Date will be such treasury constant maturity rate for
the Designated CMT Maturity Index as published in the relevant H.15(519). If
such rate is no longer published in the relevant H.15(519), or if not published
by 3:00 P.M., New York City time, on the Calculation Date pertaining to such
CMT Rate Determination Date, then the CMT Rate for such CMT Rate Determination
Date will be such treasury constant maturity rate for the Designated CMT
Maturity Index
 
                                      S-13

 
(or other United States Treasury rate for the Designated CMT Maturity Index)
for the CMT Rate Determination Date with respect to such Interest Reset Date as
may then be published by either the Board of Governors of the Federal Reserve
System or the United States Department of the Treasury that the Calculation
Agent determines to be comparable to the rate formerly displayed on the
Designated CMT Telerate Page and published in the relevant H.15(519). If such
information is not provided by 3:00 P.M., New York City time, on the
Calculation Date pertaining to such CMT Rate Determination Date, then the CMT
Rate for such CMT Rate Determination Date will be calculated by the Calculation
Agent and will be a yield to maturity, based on the arithmetic mean of the
secondary market closing offer side prices as of approximately 3:30 P.M., New
York City time, on such CMT Rate Determination Date reported, according to
their written records, by three leading primary United States government
securities dealers (each, a "Reference Dealer") in The City of New York
selected by the Calculation Agent (from five such Reference Dealers selected by
the Calculation Agent and eliminating the highest quotation (or, in the event
of equality, one of the highest) and the lowest quotation (or, in the event of
equality, one of the lowest)), for the most recently issued direct noncallable
fixed rate obligations of the United States ("Treasury Notes") with an original
maturity of approximately the Designated CMT Maturity Index and a remaining
term to maturity of not less than such Designated CMT Maturity Index minus one
year. If the Calculation Agent cannot obtain three such Treasury Note
quotations, the CMT Rate for such CMT Rate Determination Date will be
calculated by the Calculation Agent and will be a yield to maturity based on
the arithmetic mean of the secondary market offer side prices as of
approximately 3:30 P.M., New York City time, on such CMT Rate Determination
Date of three Reference Dealers in The City of New York (from five such
Reference Dealers selected by the Calculation Agent and eliminating the highest
quotation (or, in the event of equality, one of the highest) and the lowest
quotation (or, in the event of equality, one of the lowest)), for Treasury
Notes with an original maturity of the number of years that is the next highest
to the Designated CMT Maturity Index and a remaining term to maturity closest
to the Designated CMT Maturity Index and in an amount of at least U.S.
$100,000,000. If three or four (and not five) of such Reference Dealers are
quoting as described above, then the CMT Rate will be based on the arithmetic
mean of the offer prices obtained and neither the highest nor the lowest of
such quotes will be eliminated; provided, however, that if fewer than three
Reference Dealers selected by the Calculation Agent are quoting as described
herein, the CMT Rate for such Interest Reset Date will be the CMT Rate in
effect on such CMT Rate Determination Date. If two Treasury Notes with an
original maturity as described in the second preceding sentence have remaining
terms to maturity equally close to the Designated CMT Maturity Index, the
quotes for the Treasury Note with the shorter remaining term to maturity will
be used.
 
  "Designated CMT Telerate Page" means the display on the Dow Jones Telerate
Service on the page specified in the applicable Pricing Supplement (or any
other page as may replace such page on that service for the purpose of
displaying Treasury Constant Maturities as published in H.15(519)), for the
purpose of displaying Treasury Constant Maturities as published in H.15(519).
If no such page is specified in the applicable Pricing Supplement, the
Designated CMT Telerate Page shall be 7052, for the most recent week.
 
  "Designated CMT Maturity Index" means the original period to maturity of the
Treasury Notes (either one, two, three, five, seven, ten, twenty or thirty
years) specified in the applicable Pricing Supplement with respect to which the
CMT Rate will be calculated. If no such maturity is specified in the applicable
Pricing Supplement, the Designated CMT Maturity Index shall be two years.
 
 11TH DISTRICT COST OF FUNDS RATE
 
  Unless otherwise specified in the applicable Pricing Supplement, the "11th
District Cost of Funds Rate" for each applicable Interest Reset Date will be
determined by the Calculation Agent as of the last Business Day of the month
prior to such Interest Reset Date (the "11th District Rate Determination
Date"), and will be the rate equal to the monthly weighted average cost of
funds for the calendar month preceding such 11th District Rate Determination
Date as set forth under the caption "11th District" on Telerate Page 7058 as of
11:00 A.M., San Francisco time, on such 11th District Rate Determination Date.
If such rate does not appear
 
                                      S-14

 
on Telerate Page 7058 on any related 11th District Rate Determination Date, the
11th District Cost of Funds Rate for such 11th District Rate Determination Date
shall be the monthly weighted average cost of funds paid by member institutions
of the Eleventh Federal Home Loan Bank District that was most recently
announced by the Federal Home Loan Bank ("FHLB") of San Francisco as such cost
of funds for the calendar month preceding the date of such announcement. If the
FHLB of San Francisco fails to announce such rate for the calendar month next
preceding such 11th District Rate Determination Date, then the 11th District
Cost of Funds Rate for such Interest Reset Date will be the 11th District Cost
of Funds Rate then in effect on such 11th District Rate Determination Date.
 
RESET NOTES
 
  The Pricing Supplement relating to each Note will indicate whether CFC has
the option with respect to such Note to reset the interest rate, in the case of
a Fixed Rate Note, or to reset the Spread and/or Spread Multiplier, in the case
of a Floating Rate Note (in each case, a "Reset Note"), and, if so, (i) the
date or dates on which such interest rate or such Spread and/or Spread
Multiplier, as the case may be, may be reset (each an "Optional Interest Reset
Date") and (ii) the basis or formula, if any, for such resetting.
 
  CFC may exercise such option with respect to a Note by notifying the Trustee
of such exercise at least 45 but not more than 60 calendar days prior to an
Optional Interest Reset Date for such Note. If the Company so notifies the
Trustee of such exercise, not later than 40 calendar days prior to such
Optional Interest Reset Date the Trustee will send by telegram, telex,
facsimile transmission or letter (first class, postage prepaid) to the Holder
of such Note a notice (the "Reset Notice") indicating (i) that CFC has elected
to reset the interest rate, in the case of a Fixed Rate Note, or the Spread
and/or Spread Multiplier, in the case of a Floating Rate Note, (ii) such new
interest rate or such new Spread and/or Spread Multiplier, as the case may be,
and (iii) the provisions, if any, for redemption by CFC during the period from
such Optional Interest Reset Date to the next Optional Interest Reset Date or,
if there is no such next Optional Interest Reset Date, to the Stated Maturity
Date of such Note (each such period, a "Subsequent Interest Period"), including
the date or dates on which, or the period or periods during which, and the
price or prices at which such redemption may occur during such Subsequent
Interest Period.
 
  Notwithstanding the foregoing, not later than 20 calendar days prior to an
Optional Interest Reset Date for a Note, CFC may, at its option, revoke the
interest rate, in the case of a Fixed Rate Note, or the Spread and/or Spread
Multiplier, in the case of a Floating Rate Note, provided for in the Reset
Notice and establish a higher interest rate, in the case of a Fixed Rate Note,
or a higher Spread and/or Spread Multiplier, in the case of a Floating Rate
Note, for the Subsequent Interest Period commencing on such Optional Interest
Reset Date by causing the Trustee to send by telegram, telex, facsimile
transmission or letter (first class, postage prepaid) notice of such higher
interest rate or higher Spread and/or Spread Multiplier, as the case may be, to
the Holder of such Note. Such notice shall be irrevocable. All Notes with
respect to which the interest rate or Spread and/or Spread Multiplier is reset
on an Optional Interest Reset Date, and with respect to which Holders of such
Notes have not surrendered such Notes for repayment (or have validly revoked
any such surrender) pursuant to the next paragraph, will bear such higher
interest rate, in the case of a Fixed Rate Note, or higher Spread and/or Spread
Multiplier, in the case of a Floating Rate Note.
 
  If CFC elects prior to an Optional Interest Reset Date to reset the interest
rate or the Spread and/or Spread Multiplier of a Note, the Holder of such Note
will have the option to elect repayment of such Note by CFC on such Optional
Interest Reset Date at a price equal to the principal amount thereof plus any
accrued interest to such Optional Interest Reset Date. In order to obtain
repayment of such Note to be so repaid on such Optional Interest Reset Date,
the Holder thereof must follow the procedures set forth below under "Redemption
and Repayment" for optional repayment, except that the period for delivery of
such Note or notification to the Trustee shall be at least 25 but not more than
35 calendar days prior to such Optional Interest Reset Date. A Holder who has
tendered a Note for repayment following receipt of a Reset Notice may revoke
such tender for repayment by written notice to the Trustee received prior to
5:00 P.M., New York City time, on the 10th calendar day prior to such Optional
Interest Reset Date.
 
                                      S-15

 
EXTENSION OF MATURITY
 
  The Pricing Supplement relating to each Note will indicate whether the
Company has the option to extend the Stated Maturity Date of such Note for one
or more periods of one to five whole years (each such period, an "Extension
Period") up to but not beyond the date (the "Final Stated Maturity Date") set
forth in such Pricing Supplement.
 
  CFC may exercise such option with respect to a Note by notifying the Trustee
of such exercise at least 45 but not more than 60 calendar days prior to the
Stated Maturity Date of such Note in effect prior to the exercise of such
option (the "Current Stated Maturity Date"). If CFC so notifies the Trustee of
such exercise, not later than 40 calendar days prior to the Current Stated
Maturity Date the Trustee will send by telegram, telex, facsimile transmission
or letter (first class, postage prepaid) to the Holder of such Note a notice
(the "Extension Notice") relating to such Extension Period, indicating (i) that
CFC has elected to extend the Current Stated Maturity Date of such Note, (ii)
the new Stated Maturity Date and the Final Stated Maturity Date, (iii) in the
case of a Fixed Rate Note, the interest rate applicable to the Extension Period
or, in the case of a Floating Rate Note, the Spread and/or Spread Multiplier
applicable to the Extension Period, and (iv) the provisions, if any, for
redemption by CFC during the Extension Period, including the date or dates on
which, or the period or periods during which, and the price or prices at which
such redemption may occur during the Extension Period. Upon the sending by the
Trustee of an Extension Notice to the Holder of a Note, the Current Stated
Maturity Date of such Note shall be extended automatically, and, except as
modified by the Extension Notice and as described in the next two paragraphs,
such Note will have the same terms as prior to the sending of such Extension
Notice.
 
  Notwithstanding the foregoing, not later than 20 calendar days prior to the
Current Stated Maturity Date of a Note, CFC may, at its option, revoke the
interest rate, in the case of a Fixed Rate Note, or the Spread and/or Spread
Multiplier, in the case of a Floating Rate Note, provided for in the Extension
Notice and establish a higher interest rate, in the case of a Fixed Rate Note,
or a higher Spread and/or Spread Multiplier, in the case of a Floating Rate
Note, for the Extension Period by causing the Trustee to send by telegram,
telex, facsimile transmission or letter (first class, postage prepaid) notice
of such higher interest rate or higher Spread and/or Spread Multiplier, as the
case may be, to the Holder of such Note. Such notice shall be irrevocable. All
Notes with respect to which the Current Stated Maturity Date is extended, and
with respect to which the Holders of such Notes have not surrendered such Notes
for repayment (or have validly revoked any such surrender) pursuant to the next
paragraph, will bear such higher interest rate, in the case of a Fixed Rate
Note, or higher Spread and/or Spread Multiplier, in the case of a Floating Rate
Note, for the Extension Period.
 
  If CFC elects to extend the Current Stated Maturity Date of a Note, the
Holder of such Note will have the option to elect repayment of such Note by CFC
on the Current Stated Maturity Date at a price equal to the principal amount
thereof plus any accrued interest to the Current Stated Maturity Date. In order
for a Note to be so repaid on the Current Stated Maturity Date, the Holder
thereof must follow the procedures set forth below under "Redemption and
Repayment" for optional repayment, except that the period for delivery of such
Note or notification to the Trustee shall be at least 25 but not more than 35
calendar days prior to the Current Stated Maturity Date. A Holder who has
tendered a Note for repayment following receipt of an Extension Notice may
revoke such tender for repayment by written notice to the Trustee received
prior to 5:00 P.M., New York City time on the 10th calendar day prior to the
Current Stated Maturity Date.
 
RENEWABLE NOTES
 
  If so indicated in the applicable Pricing Supplement, the term of all or any
portion of a Note may be renewed beyond the Stated Maturity Date by the Holder
in accordance with the procedures described in such Pricing Supplement.
 
                                      S-16

 
COMBINATION OF PROVISIONS
 
  If so specified in the applicable Pricing Supplement, any Note may be
subject to all of the provisions, or any combination of the provisions,
described above under "--Reset Notes," "--Extension of Maturity" and "--
Renewable Notes."
 
BOOK-ENTRY NOTES
 
  Upon issuance, all Book-Entry Notes having the same Specified Currency,
Issue Date, Stated Maturity Date, redemption and/or repayment provisions, if
any, reset and/or extension provisions, if any, Interest Payment Dates, if
any, and, in the case of Fixed Rate Notes, interest rate or, in the case of
Floating Rate Notes, Base Rate or Rates, Initial Interest Rate, Index
Maturity, Interest Reset Dates, Spread and/or Spread Multiplier, if any,
Minimum Interest Rate, if any, and/or Maximum Interest Rate, if any, will be
represented by one or more global securities (each, a "Global Note"). Each
Global Note representing Book-Entry Notes will be deposited with, or on behalf
of, DTC, or such other depositary as is specified in the Pricing Supplement
(the "Depositary"), and registered in the name of a nominee of such
Depositary. Global Notes may not be transferred except as a whole by the
applicable Depositary to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by such
Depositary or any nominee to a successor of such Depositary or a nominee of
such successor.
 
  Book-Entry Notes will not be exchangeable for Certificated Notes and, except
under the limited circumstances described below, will not otherwise be
issuable in definitive form.
 
  DTC has advised CFC and the Agents as follows:
 
    DTC will initially act as securities depository for the Global Notes. The
  Global Notes will be issued as fully registered securities registered in
  the name of Cede & Co. (DTC's partnership nominee). One fully registered
  Global Note will be issued with respect to each $200,000,000 of principal
  amount of Notes.
 
    DTC is a limited-purpose trust company organized under the New York
  Banking Law, a "banking organization" within the meaning of the New York
  Banking Law, a member of the Federal Reserve System, a "clearing
  corporation" within the meaning of the New York Uniform Commercial Code,
  and a "clearing agency" registered pursuant to the provisions of Section
  17A of the Securities Exchange Act of 1934, as amended. DTC holds
  securities that its participants ("Participants") deposit with it. DTC also
  facilitates the settlement among Participants of securities transactions,
  such as transfers and pledges, in deposited securities through electronic
  computerized book-entry changes in Participants' accounts, thereby
  eliminating the need for physical movement of securities certificates.
  Direct Participants include securities brokers and dealers, banks, trust
  companies, clearing corporations, and certain other organizations ("Direct
  Participants"). DTC is owned by a number of its Direct Participants and by
  the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and
  the National Association of Securities Dealers, Inc. Access to DTC's system
  is also available to others such as securities brokers and dealers, banks,
  and trust companies that clear through or maintain a custodial relationship
  with a Direct Participant, either directly or indirectly ("Indirect
  Participants"). The Rules applicable to DTC and its Participants are on
  file with the Securities and Exchange Commission.
 
    Purchases of securities under DTC's system must be made by or through
  Direct Participants, which will receive a credit for the securities on
  DTC's records. The ownership interest of each actual purchaser of each
  security (a "beneficial owner") is in turn recorded on the Direct
  Participant's and Indirect Participant's records. Beneficial owners will
  not receive written confirmation from DTC of their purchase, but such
  beneficial owners are expected to receive written confirmations providing
  details of the transaction, as well as periodic statements of their
  holdings, from the Direct Participant or Indirect Participant through which
  the beneficial owner entered into the transaction. Transfers of ownership
  interests in the securities are to be accomplished by entries made on the
  books of Participants acting on behalf of beneficial owners. Beneficial
  owners will not receive certificates representing their ownership
 
                                     S-17

 
  interests in securities, except in the event that use of the book-entry
  system for the securities is discontinued.
 
    To facilitate subsequent transfers, all securities deposited by
  Participants with DTC are registered in the name of DTC's partnership
  nominee, Cede & Co. The deposit of securities with DTC and their
  registration in the name of Cede & Co. effect no change in beneficial
  ownership. DTC has no knowledge of the actual beneficial owners of the
  securities; DTC's records reflect only the identity of the Direct
  Participants to whose accounts such securities are credited, which may or
  may not be the beneficial owners. The Participants will remain responsible
  for keeping account of their holdings on behalf of their customers.
 
    Conveyance of notices and other communications by DTC to Direct
  Participants, by Direct Participants to Indirect Participants, and by
  Direct Participants and Indirect Participants to beneficial owners is
  governed by arrangements among them, subject to any statutory or regulatory
  requirements as may be in effect from time to time.
 
    Redemption notices shall be sent to Cede & Co. If less than all of the
  securities within an issue are being redeemed, DTC's practice is to
  determine by lot the amount of the interest of each Direct Participant in
  such issue to be redeemed.
 
    Neither DTC nor Cede & Co. will consent or vote with respect to
  securities. Under its usual procedures, DTC mails an Omnibus Proxy to the
  issuer as soon as possible after the record date. The Omnibus Proxy assigns
  Cede & Co.'s consenting or voting rights to those Direct Participants to
  whose accounts the securities are credited on the record date (identified
  in a listing attached to the Omnibus Proxy).
 
    Principal, premium, if any, and interest payments on the securities will
  be made to DTC. DTC's practice is to credit Direct Participants' accounts
  on the payable date in accordance with their respective holdings shown on
  DTC's records unless DTC has reason to believe that it will not receive
  payment on the payable date. Payments by Participants to beneficial owners
  will be governed by standing instructions and customary practices, as is
  the case with securities held for the accounts of customers in bearer form
  or registered in "street name," and will be the responsibility of such
  Participant and not of DTC, the applicable Paying Agent, or CFC, subject to
  any statutory or regulatory requirements as may be in effect from time to
  time. Payment of principal and interest to DTC is the responsibility of CFC
  or the applicable Paying Agent, disbursement of such payments to Direct
  Participants shall be the responsibility of DTC, and disbursement of such
  payments to the beneficial owners shall be the responsibility of Direct
  Participants and Indirect Participants.
 
    DTC may discontinue providing its services as securities depositary with
  respect to the Global Notes at any time by giving reasonable notice to CFC,
  the Trustee or the applicable Paying Agent. Under such circumstances, in
  the event that a successor securities depositary is not obtained, the
  Global Notes are required to be printed and delivered.
 
    CFC may decide to discontinue use of the system of book-entry transfers
  through DTC (or a successor securities depositary). In that event, the
  Global Notes will be printed and delivered.
 
  The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that CFC believes to be reliable, but CFC takes
no responsibility for the accuracy thereof.
 
  So long as the Depositary for a Global Note, or its nominee, is the
registered owner of such Global Note, such Depositary or such nominee, as the
case may be, will be considered the sole owner or Holder of the Book-Entry
Notes represented by such Global Note for all purposes under the Indenture
governing such Book-Entry Notes. Except as set forth below, owners of
beneficial interests in such Global Notes will not be entitled to have Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Notes and will not be
considered the owners or Holders thereof under the Indenture. Accordingly, each
person owning a beneficial interest in a Global Note must rely on the
procedures of the Depositary and, if such person is not a Participant, those of
the Participant
 
                                      S-18

 
through which such person owns its interests, in order to exercise any rights
of a Holder under the Indenture or such Note. The laws of some jurisdictions
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the ability
to transfer beneficial interests in a Global Note.
 
  Principal, premium, if any, and interest payments on Notes registered in the
name of or held by the Depositary or its nominee will be made to the Depositary
or its nominee, as the case may be, as the registered owner or the Holder of
the Global Note representing such Book-Entry Notes. None of CFC, the Guarantor,
the Trustee, the Calculation Agent, any Paying Agent or the Security Registrar
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in a
Global Note for such Book-Entry Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
 
  If the Depositary is at any time unwilling, unable or ineligible to continue
as Depositary and a successor Depositary is not appointed by CFC within 60 days
or if an Event of Default under the Indenture has occurred and is continuing,
CFC will issue Certificated Notes in exchange for the Global Note or Notes
representing such Book-Entry Notes. In addition, CFC may at any time and in its
sole discretion determine not to have any Notes in registered form represented
by one or more Global Notes and, in such event, will issue Certificated Notes
in exchange for all Global Notes representing such Notes. In any such instance,
an owner of a beneficial interest in a Global Note will be entitled to physical
delivery of Certificated Notes represented by such Global Note equal in
principal amount to such beneficial interest and to have such Notes registered
in its name.
 
REDEMPTION AND REPAYMENT
 
  If so specified in the applicable Pricing Supplement, CFC may at its option
on and after the Initial Redemption Date, if any, set forth in a Note redeem
such Note in whole or, from time to time, in part in increments of $1,000
(provided that any remaining principal amount thereof shall not be less than
$100,000 (or such other amount in a foreign currency or currency unit as is
specified in the applicable Pricing Supplement), or, if another minimum
denomination is set forth in the applicable Pricing Supplement, then such
minimum denomination) at the sum of (i) 100% of the unpaid principal amount
thereof or the portion thereof redeemed (or, if such Note is an Original Issue
Discount Security (as defined below), the Amortized Face Amount (as defined
below) determined as of the Redemption Date as provided below), plus (ii) the
Initial Redemption Percentage specified in the applicable Pricing Supplement
(as adjusted by the Annual Redemption Percentage Reduction, if applicable)
multiplied by the unpaid principal amount or the portion thereof redeemed (or,
if such Note is an Original Issue Discount Security, the Issue Price thereof,
net of any portion of such Issue Price which has been deemed paid prior to
redemption (by reason of any payments, other than a payment of qualified stated
interest, in excess of the original issue discount accrued to the date of such
payment), or the portion of such Issue Price (or such net amount) proportionate
to the portion of the unpaid principal amount of the Note redeemed), plus (iii)
accrued interest to the Redemption Date (or, if such Note is an Original Issue
Discount Security, any accrued interest to the Redemption Date the payment of
which would constitute qualified stated interest payments within the meaning of
Treasury Regulation Section 1.1273-1(c) under the Internal Revenue Code of
1986, as amended (the "Code"), as in effect on the date hereof). Such Initial
Redemption Percentage shall decline at each anniversary of the Initial
Redemption Date by an amount equal to the Annual Redemption Percentage
Reduction, if any, specified in the applicable Pricing Supplement, until the
Initial Redemption Percentage equals zero percent. CFC may exercise such option
by causing the Trustee to mail a notice of such redemption to the Holder of
such Note not less than 30 but not more than 60 days prior to the Redemption
Date. In the event of redemption of such Note in part only, a new Note or Notes
for the unredeemed portion thereof shall be issued in the name of the Holder
thereof upon the cancellation thereof. If less than all of the Notes with like
tenor and terms to such Note are to be redeemed, the Notes to be redeemed shall
be selected by the Trustee by such method as the Trustee shall deem fair and
appropriate.
 
                                      S-19

 
  An "Original Issue Discount Security" means any Note that has been issued at
an Issue Price lower, by an amount that equals or exceeds a de minimis amount
(as determined under United States Federal income tax rules applicable to
original issue discount instruments), than the principal amount thereof. The
"Amortized Face Amount" of such Note shall be the amount equal to the sum of
(a) the Issue Price plus (b) the aggregate of the portions of the original
issue discount (the excess of the amounts considered as part of the "stated
redemption price at maturity" of such Note within the meaning of Section
1273(a)(2) of the Code, whether denominated as principal or interest, over the
Issue Price of such Note) which shall theretofore have accrued pursuant to
Section 1272 of the Code (without regard to Section 1272(a)(7) of the Code)
from the Issue Date of such Note to the date of determination, minus (c) any
amount considered as part of the "stated redemption price at maturity" of such
Note which has been paid on such Note from the Issue Date to the date of
determination. If a Note is an Original Issue Discount Security, the amount
payable in the event of acceleration of the maturity thereof shall be the
Amortized Face Amount, plus accrued but unpaid qualified stated interest as
defined in clause (iii) of the first sentence of the preceding paragraph.
 
  If so specified in the applicable Pricing Supplement, the Notes will be
repayable by CFC in whole or in part at the option of Holders thereof on their
respective Optional Repayment Dates specified in such Pricing Supplement. If no
Optional Repayment Date is specified with respect to a Note, such Note will not
be repayable at the option of the Holder thereof prior to the Stated Maturity
Date. Any repayment in part will be in increments of $1,000 (provided that any
remaining principal amount thereof shall be at least the minimum denomination).
Unless otherwise specified in the applicable Pricing Supplement, the repayment
price for any Note to be repaid means an amount equal to the sum of (i) 100% of
the unpaid principal amount thereof or the portion to be repaid thereof plus
(ii) accrued interest to the Repayment Date. For any Note to be repaid, such
Note must be received, together with the form thereon entitled "Option to Elect
Repayment" duly completed, by the Trustee at its Corporate Trust Office (or
such other address of which CFC shall from time to time notify the Holders) not
more than 60 nor less than 30 days prior to the Repayment Date. Exercise of
such repayment option by the Holder will be irrevocable, except as otherwise
provided above under "--Reset Notes" and "--Extension of Maturity."
 
  While the Book-Entry Notes are represented by the Global Notes held by or on
behalf of the Depositary, and registered in the name of the Depositary or the
Depositary's nominee, the option for repayment may be exercised by the
Depositary, acting on behalf of each applicable Participant who is, in turn,
acting on behalf of the beneficial owners of the Global Note or Notes
representing such Book-Entry Notes, by delivering a written notice
substantially similar to the above mentioned form to the Trustee at its
Corporate Trust Office (or such other address of which CFC shall from time to
time notify the Holders), not more than 60 nor less than 30 days prior to the
Repayment Date. Notices of elections from the Depositary must be received by
the Trustee by 5:00 P.M., New York City time, on the last day for giving such
notice. In order to ensure that a notice is received by the Trustee on a
particular day, the beneficial owner of the Global Note or Notes representing
such Book-Entry Notes must so direct the applicable Participant before such
Participant's deadline for accepting instructions for that day. Different firms
may have different deadlines for accepting instructions from their customers.
Accordingly, beneficial owners of the Global Note or Notes representing Book-
Entry Notes should consult the Participants through which they own their
interest therein for the respective deadlines for such Participants. All
instructions given to Participants from beneficial owners of Global Notes
relating to the option to elect repayment shall be irrevocable, except as
otherwise provided above under "--Reset Notes" and "--Extension of Maturity."
In addition, at the time such instructions are given, such beneficial owners
shall cause the applicable Participant to transfer such beneficial owner's
interest in the Global Note or Notes representing the related Book-Entry Notes,
on the Depositary's records, to the Trustee. See "--Book-Entry Notes" above.
 
  CFC or CCI may purchase Notes in the open market by tender or contract. Notes
so purchased may be held, resold or surrendered to the Trustee for
cancellation.
 
  If applicable, CFC will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act of 1934, as amended, and any other securities laws or
regulations in connection with any such repayment.
 
                                      S-20

 
GUARANTEES
 
  The Notes will be unconditionally guaranteed by CCI as to payment of
principal, premium, if any, and interest, when and as the same shall become due
and payable, whether at maturity or upon redemption or repayment or otherwise.
See "Description of Debt Securities and Guarantees" in the accompanying
Prospectus.
 
                   CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
 
  The following is a general summary of certain of the anticipated United
States Federal income tax consequences of the purchase, ownership and
disposition of Notes.
 
  The summary is for general information only and is based on the Code, the
Treasury Regulations promulgated or proposed thereunder, and judicial and
administrative interpretations thereof, all as in effect on the date hereof and
all of which are subject to change, possibly with retroactive effect, or to
different interpretations. Holders of Notes should be aware that on December
15, 1994, the Internal Revenue Service released proposed amendments to the
Treasury Regulations. If adopted, these amendments would generally be effective
for debt instruments issued 60 days or more after the date on which such
proposed amendments are finalized.
 
  The tax treatment of a holder of the Notes may vary depending upon the
particular situation of the holder. The summary is limited to investors who
will hold the Notes as "capital assets" within the meaning of Section 1221 of
the Code and does not deal with holders in special tax situations (including,
but not limited to, insurance companies, tax-exempt organizations, financial
institutions, dealers in securities or currencies, holders whose functional
currency is not the U.S. dollar, or holders who will hold Notes as a hedge
against currency risks or as a position in a "straddle" for tax purposes), who
may be subject to special rules not discussed below. The summary does not apply
to holders that are not United States Holders (defined below). The summary is
applicable to initial purchasers of Notes only and does not address subsequent
purchasers. The discussion below also does not address the effect of any United
States, state, local or foreign tax law on a holder of Notes. As used herein,
the term "United States Holder" means an individual who is a citizen or
resident of the United States, a partnership, corporation or other entity
organized in or under the laws of the United States or any state thereof, or an
estate or trust that is subject to United States Federal income taxation
without regard to the source of its income.
 
  The summary does not constitute, and should not be considered as, legal or
tax advice to prospective holders of Notes. Each prospective holder of Notes
should consult a tax advisor as to the particular tax consequences of holding
Notes to such holder, including the applicability and effect of any state,
local or foreign tax laws.
 
PAYMENTS OF INTEREST
 
  Interest on a Note, other than interest on a Discount Note (defined below
under "Original Issue Discount") that is not a "qualified stated interest"
payment (also as defined under "Original Issue Discount"), will be taxable to a
holder as ordinary interest income at the time it is accrued or is received in
accordance with the holder's method of accounting for tax purposes. If interest
is paid in a Specified Currency other than U.S. dollars ("Foreign Currency"),
the amount of interest income realized by a holder will be the U.S. dollar
value of (a) in the case of a cash basis holder, the Foreign Currency received
(based on the spot rate in effect on the date of receipt), or (b) in the case
of an accrual basis holder, the Foreign Currency accrued during an interest
accrual period, or partial interest accrual period (based on (i) the average
exchange rate in effect during the accrual period, (ii) the spot rate on the
last day of the accrual period or (iii) the spot rate on the payment date, if
such date is within five business days of the last day of the accrual period),
in each case, regardless of whether the payment is in fact converted into U.S.
dollars. In the case of an accrual basis holder,
 
                                      S-21

 
at the time the interest accrued is received, the holder will realize exchange
gain or loss, taxable as ordinary income or loss, equal to the difference, if
any, between the amount of Foreign Currency received with respect to such
accrual period (translated into U.S. dollars at the spot rate in effect on the
date the interest is received) and the amount of interest on the Note included
in income. The Federal income tax consequences of the disposition of Foreign
Currency received as interest are described below under "--Exchange of Amounts
in Foreign Currency."
 
ORIGINAL ISSUE DISCOUNT
 
  General. A Note will be treated as issued at an original issue discount (a
"Discount Note") if the excess of the "stated redemption price at maturity" of
the Note over its issue price (defined as the first price at which a
substantial amount of Notes of the same issue is sold to the public) equals or
exceeds a de minimis amount (generally 1/4 of 1 percent of the Note's stated
redemption price at maturity multiplied by the number of complete years from
the issue date to maturity). "Stated redemption price at maturity" is the total
of all payments provided by the Note that are not payments of "qualified stated
interest." A "qualified stated interest" payment is a payment of stated
interest that is unconditionally payable in cash or property (other than debt
instruments of CFC) at least annually during the entire term of the Note,
including short periods, with respect to a Floating Rate Note, at certain
specified types of variable rates (as discussed below) or, with respect to a
Fixed Rate Note, at a single fixed rate. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
intervals between payments. Stated interest that exceeds qualified stated
interest is included in the Note's stated redemption price at maturity.
 
  Holders of Discount Notes having a maturity of more than one year from their
date of issue will be required to include original issue discount in income as
it accrues, which can result in recognition of income before the receipt of
cash attributable to such income. The amount of original issue discount
includable in income by the holder of such a Discount Note is the sum of the
daily portions of original issue discount with respect to the Discount Note for
each day during the taxable year or portion of the taxable year in which it
holds such Discount Note ("accrued original issue discount"). The daily portion
is determined by allocating to each day in any "accrual period" a pro rata
portion of the original issue discount that accrued in such period (the excess
of (a) the product of the Discount Note's adjusted issue price at the beginning
of the accrual period and its yield to maturity, appropriately adjusted for the
length of the period, over (b) the sum of the qualified stated interest
payments, if any, payable during the accrual period). The "accrual period" for
a Discount Note may be of any length and may vary in length over the term of a
Note, provided that each accrual period is no longer than one year and each
scheduled payment of principal or interest occurs either on the first day or
the last day of an accrual period. The "adjusted issue price" of a Discount
Note at the start of any accrual period is the sum of the issue price of the
Note plus the accrued original issue discount for each prior accrual period
minus any prior payments on the Note that were not qualified stated interest
payments. Holders of Notes with a de minimis amount of original issue discount
must include a proportionate amount of each payment of stated principal
received in respect of the Notes in income as capital gain.
 
  Floating Rate Notes. If a Floating Rate Note that otherwise qualifies as a
"variable rate debt instrument" under the applicable Treasury Regulations
provides for stated interest at a single "qualified floating rate" or a single
"objective rate" (each as defined in the Treasury Regulations) that is
unconditionally payable in cash or property (other than debt instruments of
CFC), or that will be constructively received, at least annually, then all
payments of stated interest with respect to such Note will be "qualified stated
interest." The amount of original issue discount (if any) with which such a
Note is issued will be determined under the rules discussed above by assuming
that the Floating Rate Note pays stated interest at the appropriate fixed rate
substitute (generally, the value, as of the Issue Date, of the floating rate,
or in the case of certain Floating Rate Notes, a fixed rate that reflects the
yield that is reasonably expected for such Notes).
 
  The Treasury Regulations provide additional rules for Floating Rate Notes
that qualify as variable rate debt instruments and that provide for stated
interest at more than one floating rate or at a fixed rate for a portion of its
term. In certain cases, such Floating Rate Notes that are not issued at a
discount may be deemed
 
                                      S-22

 
to bear original issue discount for Federal income tax purposes, with the
result that inclusion of original issue discount in gross income for Federal
income tax purposes may vary from the cash payments of interest received on
such Notes, generally accelerating income for cash method taxpayers. For
example, under the Treasury Regulations, a Floating Rate Note may be a Discount
Note where (a) it bears interest at a floating rate followed by another
floating rate and, as of the Issue Date, the values of the two floating rates
differ, or (b) it bears interest at a fixed rate followed by a floating rate
(or vice versa) and, as of the Issue Date, the value of the floating rate
differs from the fixed rate. The tax treatment of a United States Holder of a
Floating Rate Note ultimately will depend upon the precise terms of the Notes
offered; consequently, the proper tax treatment of such Notes will be more
fully described in the applicable Pricing Supplement.
 
  A Floating Rate Note that does not qualify as a variable rate debt instrument
under the Treasury Regulations will be treated as a contingent payment
obligation. For example, a Floating Rate Note will not qualify as a variable
rate debt instrument under the Treasury Regulations if, among other things, it
provides for either a minimum rate of interest or a maximum rate of interest
that, in either case, is not fixed throughout its term and is reasonably
expected, as of the Issue Date, to cause the yield on the Note to be
significantly more or less than the yield determined without regard to the
minimum or maximum rate of interest. The Treasury Regulations governing the
treatment of contingent payment obligations currently are only in proposed
form. The tax treatment of a Floating Rate Note that is treated as a contingent
payment obligation will be more fully described in the applicable Pricing
Supplement.
 
  Any determination of the type described above made by CFC when a Note is
issued may be subject to subsequent changes and clarifications of applicable
law or to challenge by the Internal Revenue Service.
 
  Optional Redemption. An unconditional option of CFC or a Holder to redeem a
Note prior to the Maturity Date will be presumed to be exercised if, by
utilizing any date on which the Note may be redeemed as its maturity date and
the amount payable on that date in accordance with the terms of the Note (the
"redemption price") as its stated redemption price at maturity, the yield on
the Note is lower than its yield to maturity in the case of an option
exercisable by CFC (or, in the case of an option exercisable by a Holder, is
greater than its yield to maturity). If such an option is not in fact exercised
when presumed to be, solely for purposes of accruing original issue discount,
the Note will be treated as if it were redeemed, and a new Note issued, on the
presumed exercise date for an amount equal to its adjusted issue price on that
date.
 
  Short-Term Notes. A Note that matures one year or less from the date of its
issuance (a "Short-Term Note") will be treated as having been issued at an
original issue discount equal to the excess of the total principal and interest
payments on the Note over its issue price. In general, an individual or other
cash basis holder of a Short-Term Note is not required to currently include in
income accrued original issue discount for United States Federal income tax
purposes unless it elects to do so. Accrual basis holders and certain other
holders are required to include in income accrued original issue discount on
Short-Term Notes on a straight-line basis unless an irrevocable election is
made to include in income accrued original issue discount under the constant
yield method (based on daily compounding). In the case of a holder not required
and not electing to include accrued original issue discount in income
currently, any gain realized on the sale or retirement of the Short-Term Note
will be ordinary income to the extent of the original issue discount accrued on
a straight-line basis (or, at the holder's irrevocable election, under a
constant yield method, based on daily compounding) through the date of sale or
retirement. A holder who is not required and does not elect to include in
income accrued original issue discount on a Short-Term Note will be required to
defer deduction of a portion of the holder's interest expense with respect to
any indebtedness incurred or maintained to purchase or carry the Note.
 
  Foreign Currency Denominated Discount Notes. In the case of a Discount Note
denominated in a Foreign Currency, for purposes of calculating original issue
discount, a holder should: (i) calculate the amount and accrual of original
issue discount in respect of the Note in the Foreign Currency; (ii) determine
the U.S. dollar amount of original issue discount includable in income for each
accrual period by translating the Foreign Currency amounts into U.S. dollars
based on the average exchange rate in effect during that accrual period
 
                                      S-23

 
or based on the spot rate (A) on the last day of the relevant accrual period
(or partial accrual period) or (B) on the payment date, if such date is within
five business days of the last day of the accrual period; and (iii) recognize
any Foreign Currency gain or loss when the original issue discount is received
to the extent of the difference between the amount determined pursuant to
clause (ii) above and the U.S. dollar value of such payment determined by
translating the Foreign Currency at the spot rate in effect on the date of
payment. The Federal income tax consequences of the disposition of any Foreign
Currency received are described below under "--Exchange of Amounts in Foreign
Currency." For these purposes, all receipts with respect to a Note will be
treated first as the receipt of periodic interest (determined under Section
1273 of the Code and the Treasury Regulations), second as payments of
previously accrued original issue discount (to the extent thereof, with
payments treated as made for the earliest accrual periods first), and
thereafter as the receipt of principal.
 
NOTES PURCHASED AT A PREMIUM
 
  A holder that purchases a Note for an amount in excess of its principal
amount may elect to treat that excess as "amortizable bond premium," in which
case the amount required to be included in the holder's income each year with
respect to interest on the Note will be reduced by the amount of amortizable
bond premium allocable (based on the Note's yield to maturity) to that year.
Any such election would apply to all bonds (other than bonds the interest on
which is excludable from gross income) held by the holder at the beginning of
the first taxable year to which the election applies or thereafter acquired by
the holder, and is irrevocable without the consent of the Internal Revenue
Service. Amortizable bond premium on a Note denominated in a Foreign Currency
will, if a holder so elects, reduce the amount of Foreign Currency interest
income on the Note. An electing holder will recognize exchange gain or loss at
the time it offsets the portion of the premium amortized with respect to any
period against the interest income for such period, by treating such portion
as a return of principal.
 
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
 
  A holder may elect to treat all interest on any Note as original issue
discount and calculate the amount includible in gross income under the
constant yield method described above. For the purposes of this election,
interest includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis
market discount and unstated interest, as adjusted by any amortizable bond
premium or acquisition premium. The election is made for the year in which the
holder acquired the Note, and may not be revoked without the consent of the
Internal Revenue Service.
 
PURCHASE, SALE AND RETIREMENT OF THE NOTES
 
  A holder's tax basis in a Note will be its cost, increased by the amount of
any original issue discount included in the holder's income with respect to
the Note and reduced by the amount of any cash payments on the Note that are
not qualified stated interest payments and by the amount of any amortizable
bond premium applied to reduce interest on the Note. In the case of a Note
denominated, and purchased, in a Foreign Currency, the holder's initial tax
basis will be the U.S. dollar value of the Foreign Currency on the date of
purchase of the Note.
 
  A holder will recognize gain or loss on the sale or retirement of a Note
equal to the difference between the amount realized on the sale or retirement
and the holder's tax basis in the Note. The amount realized on a sale or
retirement for an amount in a Foreign Currency will be the U.S. dollar value
of that currency on the date, determined in accordance with the holder's
method of accounting, that such Foreign Currency is deemed received.
 
  As a general rule (with the exception of amounts attributable to accrued but
unpaid interest, amounts attributable to changes in exchange rates, and
amounts received with respect to certain Short-Term Notes), gain or loss
recognized on the sale or retirement of a Note will be capital gain or loss
and will be long-term
 
                                     S-24

 
capital gain or loss if the Note was held for more than one year. Gain or loss
recognized by a holder on the sale or retirement of a Note denominated in a
Foreign Currency will be treated as ordinary income or loss to the extent such
gain or loss is attributable to changes in exchange rates. Gain or loss
attributable to changes in exchange rates will be calculated by multiplying the
holder's tax basis in a Note by the change in exchange rates between the date
that the holder acquired the Note and the date on which the amount realized on
its sale or retirement is due or received, in accordance with the holder's
method of accounting. However, exchange gain or loss is taken into account only
to the extent of total gain or loss realized on the transaction.
 
  If Treasury Regulations proposed on March 17, 1992 are finalized in their
current form, certain United States Holders will be able to elect to apply
mark-to-market treatment to all foreign currency denominated financial
transactions they enter into, including the Notes, for purposes of determining
the amount and timing of foreign currency gain or loss to be recognized on the
Notes. Under these proposed regulations, similar non-elective rules will apply
with respect to the determination of foreign currency gain or loss on Notes
denominated in certain hyperinflationary currencies.
 
EXCHANGE OF AMOUNTS IN FOREIGN CURRENCY
 
  Foreign Currency received on the sale or retirement of a Note will have a tax
basis equal to the U.S. dollar value of that currency on the date received. An
accrual basis holder may realize exchange gain or loss upon receipt of such
Foreign Currency, if the date of receipt differs from the date such Foreign
Currency is deemed received. Foreign Currency received as interest on a Note
will have a tax basis equal to its U.S. dollar value on the date such interest
was received. Foreign Currency which is purchased generally will have a tax
basis equal to the U.S. dollar cost of acquisition. Any gain or loss recognized
on a sale or other disposition of Foreign Currency (including its use to
purchase Notes or upon exchange for U.S. dollars) will be ordinary income or
loss. Accordingly, a holder that converts U.S. dollars to a Foreign Currency
and immediately uses that Foreign Currency to purchase a Note denominated in
the same currency normally will not recognize gain or loss in connection with
such conversion and purchase. However, a holder that purchases a Note with
previously owned Foreign Currency may recognize ordinary income or loss in an
amount equal to the difference between the holder's tax basis in the Foreign
Currency and the U.S. dollar value of the Note on the date of purchase.
 
BACKUP WITHHOLDING
 
  A holder of a Note may be subject to backup withholding at a rate of 31% with
respect to payments of principal and any premium or interest (including
original issue discount) made on the Note or the proceeds of a sale or exchange
of the Note before maturity unless such holder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (b) provides a taxpayer identification number, certifies that the
holder is not subject to backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A holder of a Note
that does not provide CFC, or its agent, with a correct taxpayer identification
number or an adequate basis for exemption may be subject to penalties imposed
by the Internal Revenue Service. The backup withholding tax is not an
additional tax and will be credited against a holder's United States Federal
income tax liability provided the required information is furnished to the
Internal Revenue Service.
 
                         PLAN OF DISTRIBUTION OF NOTES
 
  Under the terms of a Selling Agency Agreement (the "Agency Agreement"), the
Notes are offered on a continuous basis by CFC through Lehman Brothers, Lehman
Brothers Inc. (including its affiliate, Lehman Government Securities Inc.),
Goldman, Sachs & Co., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Salomon Brothers Inc (the "Agents"), each of which has
agreed to use its reasonable best efforts to solicit purchases of the Notes.
CFC will pay to each Agent a commission, in the form of a discount, ranging
from .125% to .750% of the principal amount of any Note (or in the case of any
Original
 
                                      S-25

 
Issue Discount Security, the price to the public), depending on its maturity,
sold through such Agent, except that the commission payable by CFC to the
Agents with respect to Notes with maturities of greater than 30 years will be
negotiated at the time CFC issues such Notes. Each Agent will have the right,
in its discretion reasonably exercised, to reject in whole or in part any offer
to purchase Notes received by such Agent.
 
  CFC will have the sole right to accept offers to purchase Notes and may
reject any such offer in whole or in part. CFC also may sell Notes to an Agent,
acting as principal, at a discount to be agreed upon at the time of sale, for
resale to one or more investors or other purchasers at varying prices related
to prevailing market prices at the time of such resale, as determined by such
Agent or, if so specified in the applicable Pricing Supplement, for resale at a
fixed public offering price. CFC reserves the right to sell Notes from time to
time directly on its own behalf to investors or through other agents, dealers
or underwriters; if CFC grants any discount or pays any commission to such
persons, such discount or commission will be disclosed in the applicable
Pricing Supplement.
 
  In addition, the Agents may offer the Notes they have purchased as principal
to other dealers. The Agents may sell Notes to any dealer at a discount and
such discount allowed to any dealer may be all or part of the discount to be
received by such Agent from CFC. Unless otherwise indicated in the applicable
Pricing Supplement, any Note sold to an Agent as principal will be purchased by
such Agent at a price equal to 100% of the principal amount thereof less a
percentage equal to the commission applicable to an agency sale of a Note of
identical maturity, and may be resold by the Agent to investors and other
purchasers from time to time in one or more transactions, including negotiated
transactions, at fixed prices or at varying prices as described above. After
the initial public offering of Notes to be resold to investors and other
purchasers, the public offering price (in the case of Notes to be resold on a
fixed price basis), concession and discount may be changed.
 
  Payment of the purchase price of the Notes will be required to be made in
immediately available funds in The City of New York.
 
  The Agents may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). CFC has agreed to
indemnify each Agent against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments an Agent may be required to
make in respect thereof. CFC has agreed to reimburse the Agents for certain
expenses, including fees and disbursements of counsel to the Agents.
 
  CFC has been advised by the Agents that they may from time to time purchase
and sell Notes in the secondary market, but that they are not obligated to do
so. No assurance can be given that there will be a secondary market for the
Notes or liquidity in the secondary market if one develops.
 
                               VALIDITY OF NOTES
 
  The validity of the Notes will be passed upon for CFC and CCI by Fried,
Frank, Harris, Shriver & Jacobson, a partnership including professional
corporations, New York, New York. The statements under "Certain Federal Income
Tax Considerations," to the extent they constitute statements of law, are set
forth herein in reliance upon the opinion of Fried, Frank, Harris, Shriver &
Jacobson. Edwin Heller, whose professional corporation is a member of Fried,
Frank, Harris, Shriver & Jacobson, is a director of CCI. Brown & Wood, New
York, New York will serve as counsel to the Agents. Brown & Wood also serves as
counsel for CWMBS, Inc., a wholly owned subsidiary of CCI, in connection with
offerings of mortgage pass-through certificates, and as counsel to CWM Mortgage
Holdings, Inc.
 
                                      S-26

 
PROSPECTUS
 
               [LOGO - COUNTRYWIDE(SM) CREDIT INDUSTRIES, INC.]
 
               COMMON STOCK, PREFERRED STOCK AND DEBT SECURITIES
 
                        COUNTRYWIDE FUNDING CORPORATION
                                 DEBT SECURITIES
              PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST
                         UNCONDITIONALLY GUARANTEED BY
                      COUNTRYWIDE CREDIT INDUSTRIES, INC.
 
                                ---------------
 
  Countrywide Credit Industries, Inc. (the "Company" or "CCI") may offer, from
time to time, together or separately, (i) shares of its common stock, $.05 par
value per share (the "Common Stock"), (ii) shares of its preferred stock, $.05
par value per share (the "Preferred Stock") and (iii) debt securities (the
"Company Debt Securities"), in each case, in amounts, at prices and on the
terms to be determined at the time of the offering. In addition, Countrywide
Funding Corporation, a wholly owned subsidiary of the Company ("CFC"), may
offer, from time to time, its debt securities (the "CFC Debt Securities", and
together with the Company Debt Securities, the "Debt Securities"), which will
be unconditionally guaranteed (the "Guarantees") as to payment of principal,
premium, if any, and interest by the Company (in its capacity as guarantor,
the "Guarantor"), in the amounts, at prices and on the terms to be determined
at the time of the offering. The Common Stock, Preferred Stock and Debt
Securities are collectively called the "Securities."
 
  The Securities offered pursuant to this Prospectus may be issued in one or
more series or issuances and will have an aggregate public offering price of
up to $750,000,000 (or the equivalent thereof, based on the applicable
exchange rate at the time of sale, in one or more foreign currencies, currency
units or composite currencies as shall be designated by the Company or CFC, as
the case may be). Certain specific terms of the particular Securities in
respect of which this Prospectus is being delivered are set forth in the
accompanying Prospectus Supplement (the "Prospectus Supplement"), including,
where applicable, (i) in the case of Common Stock, the aggregate number of
shares offered, the public offering price and other terms of the offering and
sale thereof, (ii) in the case of Preferred Stock, the specific title, the
aggregate number of shares offered, any dividend (including the method of
calculating payment of dividends), liquidation, redemption, voting and other
rights, any terms for any conversion or exchange into other securities, and
the public offering price and other terms of the offering and sale thereof and
(iii) in the case of Debt Securities, the specific title, the aggregate
principal amount, aggregate offering price, the denomination, the maturity,
the premium, if any, the interest rate (which may be fixed, floating or
adjustable), if any, the time and method of calculating payment of interest,
if any, the place or places where principal of, premium, if any, and interest,
if any, on such Debt Securities will be payable, the currency in which
principal of, premium, if any, and interest, if any, on such Debt Securities
will be payable, any terms of redemption at the option of the Company or CFC,
as the case may be, or repayment at the option of the holder, any sinking fund
provisions, the terms (in the case of Company Debt Securities) for any
conversion or exchange into other securities, any other special terms, and the
public offering price and other terms of the offering and sale thereof. If so
specified in the applicable Prospectus Supplement, Debt Securities of a series
may be issued in whole or in part in the form of one or more temporary or
permanent global securities.
 
  The Common Stock is listed on the New York Stock Exchange and the Pacific
Stock Exchange under the trading symbol "CCR." Any Common Stock sold pursuant
to a Prospectus Supplement will be listed on such exchanges, subject to
official notice of issuance.
 
  Unless otherwise specified in a Prospectus Supplement, the Debt Securities
and any Guarantees, when issued, will be unsecured and unsubordinated
obligations of the Company or CFC, as the case may be, and will rank pari
passu in right of payment with all other unsecured and unsubordinated
indebtedness of the Company or CFC, as the case may be.
 
  This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
 
                                ---------------
 
THESE  SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES  AND
 EXCHANGE COMMISSION OR ANY  STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
  TIES  AND EXCHANGE COMMISSION  OR ANY  STATE SECURITIES COMMISSION  PASSED
   UPON THE ACCURACY OR  ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
    THE CONTRARY IS A CRIMINAL OFFENSE.
 
      THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
            ENDORSED   THE   MERITS    OF   THIS   OFFERING.   ANY
                   REPRESENTATION   TO   THE  CONTRARY   IS
                         UNLAWFUL.
 
                                ---------------
 
  The Securities may be sold directly, through agents, underwriters or dealers
as designated from time to time, or through a combination of such methods. If
agents of the Company or any dealers or underwriters are involved in the sale
of the Securities in respect of which this Prospectus is being delivered, the
names of such agents, dealers or underwriters and any applicable commissions
or discounts will be set forth in or may be calculated from the Prospectus
Supplement with respect to such Securities.
 
                                ---------------
                 The date of this Prospectus is June 26, 1995.

 
  IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF ANY CLASS OR
SERIES OF SECURITIES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE, THE PACIFIC STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
 
                               ----------------
 
                             AVAILABLE INFORMATION
 
  The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Information as of particular dates concerning
its directors and officers and any material interest of such persons in
transactions with the Company is disclosed in proxy statements distributed to
stockholders and filed with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the offices of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at its regional offices located at Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center,
New York, New York 10048. Copies of such materials can also be obtained from
the Public Reference Section of the Commission at its principal office in
Washington, D.C. at prescribed rates. The Common Stock is listed on the New
York and Pacific Stock Exchanges. Reports, proxy material and other
information concerning securities of the Company can also be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York; and the Pacific Stock Exchange, Inc., 115 Sansome Street, San Francisco,
California.
 
  This Prospectus constitutes a part of the Registration Statement on Form S-3
(together with all amendments, schedules and exhibits thereto, the
"Registration Statement") filed by the Company and CFC with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"). This
Prospectus and the accompanying Prospectus Supplement omit certain of the
information contained in the Registration Statement in accordance with the
rules and regulations of the Commission. For further information with respect
to the Company, CFC and the Securities, reference is made to the Registration
Statement, including the schedules and exhibits filed therewith. Statements
contained in this Prospectus as to the contents of certain documents are not
necessarily complete, and, with respect to each such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission,
reference is made to the copy of the document so filed. Each such statement is
qualified in its entirety by such reference.
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
  There is incorporated herein by reference the following documents of the
Company heretofore filed by it with the Commission: (1) Annual Report on Form
10-K for the year ended February 28, 1995; and (2) Current Report on Form 8-K
dated June 12, 1995.
 
  All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus or any
Prospectus Supplement and prior to the termination of the offering of the
Securities are incorporated herein by reference and such documents shall be
deemed to be a part hereof from the date of filing of such documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus or any Prospectus Supplement to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus or any Prospectus Supplement.
 
  The Company will provide without charge to each person to whom this
Prospectus or any Prospectus Supplement is delivered, on the request of any
such person, a copy of any or all of the foregoing documents incorporated
herein by reference (not including exhibits to the information that is
incorporated by reference unless such exhibits are specifically incorporated
by reference into the information that this Prospectus or any Prospectus
Supplement incorporates). Requests for copies of such documents should be
directed to Countrywide Credit Industries, Inc., 155 North Lake Avenue, P. O.
Box 7137, Pasadena, California 91109-7137, telephone (818) 304-8400,
Attention: Investor Relations.
 
                                       2

 
                              THE COMPANY AND CFC
 
COUNTRYWIDE CREDIT INDUSTRIES, INC.
 
  Countrywide Credit Industries, Inc. (the "Company", "CCI" or, in its capacity
as guarantor of the CFC Debt Securities (as defined below), the "Guarantor") is
a holding company which through its principal subsidiary, Countrywide Funding
Corporation ("CFC"), is engaged primarily in the mortgage banking business.
CCI, through its other wholly owned subsidiaries, offers products and services
complementary to its mortgage banking business. A subsidiary of CCI sells
mortgage-backed securities, primarily on an odd-lot basis (i.e., in
denominations between $25,000 and $1,000,000), to broker-dealers and also sells
subordinate interests in mortgage-backed securities evidencing interests in
whole mortgage loans to institutional investors. In addition, a subsidiary of
CCI receives fee income for managing the operations of CWM Mortgage Holdings,
Inc. ("CWM"), a real estate investment trust whose shares are traded on the New
York Stock Exchange. CWM conducts real estate lending activities and has an
affiliate engaged in the operation of a jumbo and non-conforming mortgage loan
conduit. CCI also has a subsidiary which acts as an agent in the sale of
homeowners, fire, flood, earthquake, mortgage life and disability insurance to
CFC's mortgagors in connection with CFC's mortgage banking operations. Another
subsidiary of CCI earns fee income by brokering servicing contracts owned by
other mortgage lenders and loan servicers. CCI has recently begun operating a
title agent business through newly formed subsidiaries. Unless the context
otherwise requires, references to the "Company" herein shall be deemed to refer
to the Company and its consolidated subsidiaries.
 
  CCI is a Delaware corporation, and was originally incorporated in New York
under the name of OLM Credit Industries, Inc. in 1969. Its principal executive
offices are located at 155 North Lake Avenue, P. O. Box 7137, Pasadena,
California 91109-7137, and its telephone number is (818) 304-8400.
 
COUNTRYWIDE FUNDING CORPORATION
 
  CFC is engaged primarily in the mortgage banking business and as such
originates, purchases, sells and services mortgage loans. CFC's mortgage loans
are principally first-lien mortgage loans secured by single-(one to four)
family residences. CFC also offers home equity loans both in conjunction with
newly produced first- lien mortgages and as a separate product. The principal
sources of revenue of CFC are (i) loan origination fees; (ii) gains from the
sale of loans, if any; (iii) interest earned on mortgage loans during the
period that they are held by CFC pending sale, net of interest paid on funds
borrowed to finance such mortgage loans; (iv) loan servicing fees; and (v)
interest benefit derived from the custodial balances associated with CFC's
servicing portfolio.
 
  CFC produces mortgage loans through three separate divisions. The Consumer
Markets Division originates loans through a nationwide network of retail branch
offices and direct contact with consumers. Through the Wholesale Division, CFC
originates and purchases loans through mortgage loan brokers. Through the
Correspondent Division, CFC purchases loans primarily from other mortgage
bankers, savings and loan associations, commercial banks, credit unions and
other financial intermediaries. CFC customarily sells all loans that it
originates or purchases. Substantially all loans sold by CFC are sold without
recourse, subject, in the case of loan guaranties by the Veterans
Administration ("VA"), to the limits of such guaranties.
 
  CFC services on a non-recourse basis substantially all of the mortgage loans
that it originates or purchases. In addition, CFC purchases bulk servicing
contracts, also on a non-recourse basis, to service single-family residential
mortgage loans originated by other lenders. Servicing mortgage loans includes
collecting and remitting loan payments, making advances when required,
accounting for principal and interest, holding custodial (impound) funds for
payment of property taxes and hazard insurance, making any physical inspections
of the property, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults and generally
administering the loans. CFC receives fee income for servicing mortgage loans
ranging generally from 1/4% to 1/2% per annum on the declining principal
balances of the loans. CFC has in the past and may in the future sell to other
mortgage servicers a portion of its portfolio of loan servicing rights.
 
                                       3

 
  CFC's principal financing needs are the financing of loan funding activities
and the investment in servicing rights. To meet these needs, CFC currently
relies on commercial paper backed by its revolving credit facility, medium-term
note issuances, pre-sale funding facilities, mortgage-backed securities, whole
loan reverse-repurchase agreements, subordinated notes and cash flows from
operations. In addition, in the past, CFC has relied on direct borrowings under
its revolving credit facility, servicing-secured bank facilities, privately-
placed financings and contributions from CCI of the proceeds of public
offerings of Common Stock and Preferred Stock.
 
  CFC is a New York corporation, originally incorporated in 1969. Its principal
executive offices are located at 155 North Lake Avenue, P. O. Box 7137,
Pasadena, California 91109-7137, and its telephone number is (818) 304-8400.
 
                                USE OF PROCEEDS
 
  Except as may be otherwise stated in any Prospectus Supplement, the Company
and/or CFC intend to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include retirement of indebtedness of the
Company or CFC and investment in servicing rights through the current
production of loans and the bulk acquisition of contracts to service loans.
 
                                       4

 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
  The consolidated financial data with respect to CCI set forth below for each
of the five fiscal years in the period ended February 28, 1995 has been derived
from, and should be read in conjunction with, the related audited financial
statements and accompanying notes included elsewhere herein.
 


                                       YEARS ENDED FEBRUARY 28(29),
                          ----------------------------------------------------------
                             1995        1994        1993        1992        1991
                          ----------  ----------  ----------  ----------  ----------
                               (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT OPERATING DATA)
                                                           
SELECTED STATEMENT OF
 EARNINGS DATA:
Revenues:
 Loan origination fees..  $  203,426  $  379,533  $  241,584  $   91,933  $   38,317
 Gain (loss) on sale of
  loans.................     (41,342)     88,212      67,537      38,847      24,236
                          ----------  ----------  ----------  ----------  ----------
 Loan production reve-
  nue...................     162,084     467,745     309,121     130,780      62,553
 Interest earned........     343,138     376,225     211,542     115,213      83,617
 Interest charges.......    (267,685)   (275,906)   (148,765)    (81,959)    (73,428)
                          ----------  ----------  ----------  ----------  ----------
 Net interest income....      75,453     100,319      62,777      33,254      10,189
 Loan servicing income..     428,994     307,477     177,291      94,830      66,486
 Less amortization of
  servicing assets......     (95,768)   (242,177)   (151,362)    (53,768)    (24,871)
 Add (less) servicing
  hedge benefit (ex-
  pense)................     (40,030)     73,400      74,075      17,000         --
 Less write-off of ser-
  vicing hedge..........     (25,600)        --          --          --          --
                          ----------  ----------  ----------  ----------  ----------
 Net loan administration
  income................     267,596     138,700     100,004      58,062      41,615
 Gain on sale of servic-
  ing...................      56,880         --          --        4,302       6,258
 Commissions, fees and
  other income..........      40,650      48,816      33,656      19,714      14,396
                          ----------  ----------  ----------  ----------  ----------
  Total revenues........     602,663     755,580     505,558     246,112     135,011
                          ----------  ----------  ----------  ----------  ----------
Expenses:
 Salaries and related
  expenses..............     199,061     227,702     140,063      72,654      48,961
 Occupancy and other of-
  fice expenses.........     102,193     101,691      64,762      36,645      24,577
 Guarantee fees.........      85,831      57,576      29,410      13,622       9,529
 Marketing expenses.....      23,217      26,030      12,974       5,015       3,117
 Branch and administra-
  tive office consolida-
  tion costs............       8,000         --          --          --          --
 Other operating
  expenses..............      37,016      43,481      24,894      17,849      11,642
                          ----------  ----------  ----------  ----------  ----------
  Total expenses........     455,318     456,480     272,103     145,785      97,826
                          ----------  ----------  ----------  ----------  ----------
Earnings before income
 taxes..................     147,345     299,100     233,455     100,327      37,185
Provision for income
 taxes..................      58,938     119,640      93,382      40,131      14,874
                          ----------  ----------  ----------  ----------  ----------
Net earnings............  $   88,407  $  179,460  $  140,073  $   60,196  $   22,311
                          ==========  ==========  ==========  ==========  ==========
SELECTED BALANCE SHEET
 DATA AT END OF PERIOD:
Mortgage loans shipped
 and held for sale......  $2,898,825  $3,714,261  $2,316,297  $1,585,392  $  509,008
Total assets............   5,579,662   5,585,521   3,299,133   2,409,974   1,121,999
Short-term debt.........   2,664,006   3,111,945   1,579,689   1,046,289     459,470
Long-term debt..........   1,499,306   1,197,096     734,762     383,065     153,811
7% convertible subordi-
 nated debentures.......         --          --          --          --       20,918
Convertible preferred
 stock..................         --          --       25,800      37,531      38,098
Common shareholders' eq-
 uity...................     942,558     880,137     693,105     558,617     133,460
OPERATING DATA (DOLLAR
 AMOUNTS IN MILLIONS):
Volume of loans origi-
 nated..................  $   27,866  $   52,459  $   32,388  $   12,156  $    4,577
Loan servicing portfolio
 (at period end)(1).....     113,111      84,678      54,484      27,546      15,684
Ratio of earnings to
 fixed charges(2).......        1.54        2.06        2.52        2.18        1.49

--------
(1) Includes warehoused loans and loans under subservicing agreements.
(2) For purposes of calculating the ratio of earnings to fixed charges,
    earnings consist of income before Federal income taxes, plus fixed charges.
    Fixed charges include interest expense on debt and the portion of rental
    expenses which is considered to be representative of the interest factor
    (one-third of operating leases). Since the major portion of CCI's interest
    costs is incurred to finance mortgage loans which generate interest income,
    and since interest income and interest expense are generated
    simultaneously, management of CCI believes that a more meaningful measure
    of its debt service requirements is the ratio of earnings to net fixed
    charges. Under this alternative formula, net fixed charges are defined as
    interest expense on debt, other than debt incurred to finance CCI's
    mortgage loan inventory, plus the interest element (one-third of operating
    leases). Under such alternative formula, these ratios for each of the five
    fiscal years in the period ended February 28, 1995, commencing with the
    fiscal year ended February 28, 1995, were 3.36, 4.26, 5.18, 3.06 and 2.43,
    respectively.
 
                                       5

 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
GENERAL
 
  The Company's strategy is concentrated on three components of its business:
loan production, loan servicing and businesses ancillary to mortgage lending.
See "The Company and CFC." The Company intends to continue its efforts to
increase its market share of, and realize increased income from, its loan
production. In addition, the Company is engaged in building its loan servicing
portfolio because of the returns it can earn from such investment. A strong
loan production capability and a growing servicing portfolio are the primary
means used by the Company to reduce the sensitivity of its earnings to changes
in interest rates because loan production income characteristics are
countercyclical to the effect of interest rate changes on servicing income.
Finally, the Company is involved in business activities complementary to its
mortgage banking business, such as acting as agent in the sale of homeowners,
fire, flood, earthquake, mortgage life and disability insurance to its
mortgagors, brokering servicing rights and selling odd-lot and other mortgage-
backed securities ("MBS").
 
  The Company's results of operations historically have been primarily
influenced by: (i) the level of demand for mortgage credit, which is affected
by such external factors as the level of interest rates, the strength of the
various segments of the economy and the demographics of the Company's lending
markets; (ii) the direction of interest rates; and (iii) the relationship
between mortgage interest rates and the cost of funds.
 
  The fiscal year ended February 28, 1993 ("Fiscal 1993") was a then-record
performance year for the Company. The Company became the nation's leader in
single-family mortgage loan originations in calendar year 1992. This
performance was due to: (i) the development of a stronger capital base that
supported increased production; (ii) the implementation of an expansion
strategy for the production divisions designed to penetrate new markets and
expand in existing markets, particularly outside California, and to further
increase market share in both the purchase and refinance market segments; (iii)
the development of state-of-the-art technologies that expanded the Company's
production and servicing capabilities and capacity; and (iv) a decline in
average mortgage interest rates. In Fiscal 1993, the Company's market share
increased to approximately 4% of the single-family mortgage origination market.
During the year ended February 28, 1993, the Company' servicing portfolio
nearly doubled to $54.5 billion.
 
  The Company's performance during the fiscal year ended February 28, 1994
("Fiscal 1994") set new operating records. In calendar year 1993, the Company
became the nation's largest servicer of single-family mortgages and at February
28, 1994 had a servicing portfolio of $84.7 billion, an increase of 55% over
the portfolio at the end of Fiscal 1993. This servicing portfolio growth was
accomplished through increased loan production volume of low-coupon mortgages.
In addition, the Company acquired bulk servicing rights with an aggregate
principal balance of $3.4 billion. The Company also maintained its position as
the nation's leader in originations of single-family mortgages for the second
consecutive year. This performance was due to: (i) continued implementation of
the Company's production expansion strategy designed to penetrate new markets
and expand in existing markets, particularly outside California, and to further
increase market share; (ii) a continued decline in average mortgage interest
rates that prevailed during most of 1993; and (iii) the introduction of new
technologies that improved productivity. In Fiscal 1994, the Company's market
share increased to approximately 5.1% of the estimated $1.0 trillion single-
family mortgage origination market, up from approximately 4% of the estimated
$825 billion market in Fiscal 1993.
 
  The fiscal year ended February 28, 1995 ("Fiscal 1995") was a period of
transition from a mortgage market dominated by refinances resulting from
historically low interest rates to an extremely competitive and smaller
mortgage market in which refinances declined to a relatively small percentage
of total fundings and customer preference for adjustable-rate mortgages
increased. In this transition, which resulted from the increase in interest
rates during the year, intense price competition developed that resulted in the
Company experiencing negative production margins in Fiscal 1995. At the same
time, the increase in interest rates caused a decline in the prepayment rate in
the servicing portfolio which, combined with a decline in the rate
 
                                       6

 
of expected future prepayments, caused a reduction in amortization of the
capitalized servicing fees receivable and purchased servicing rights
("Servicing Assets"). This decrease in amortization contributed to improved
earnings from the Company's servicing activities. The Company addressed the
challenges of the year by: (i) expanding its share of the home purchase market;
(ii) reducing costs to maintain its production infrastructure in line with
reduced production levels; and (iii) accelerating the growth of its servicing
portfolio by aggressively acquiring servicing contracts through bulk purchases.
These strategies produced the following results: (i) home purchase production
increased from $13.3 billion, or 25% of total fundings, in Fiscal 1994 to $19.5
billion, or 70% of total fundings, in Fiscal 1995, helping the Company maintain
its position as the nation's leader in originations of single-family mortgages
for the third consecutive year; (ii) the number of staff engaged in production
activities declined from approximately 3,900 at the end of Fiscal 1994 to
approximately 2,400 at the end of Fiscal 1995; (iii) production-related and
overhead costs declined from $328 million in Fiscal 1994 to $270 million in
Fiscal 1995; and (iv) bulk servicing purchases increased to $17.6 billion in
Fiscal 1995 from $3.4 billion in Fiscal 1994. These bulk servicing
acquisitions, combined with slower prepayments caused by increased mortgage
interest rates, helped the Company maintain its position as the nation's
largest servicer of single-family mortgages for the second consecutive year. In
Fiscal 1995, the Company's market share decreased to approximately 4% of the
estimated $660 billion single-family mortgage origination market.
 
RESULTS OF OPERATIONS
 
 Fiscal 1995 Compared with Fiscal 1994
 
  Revenues for Fiscal 1995 decreased 20% to $602.7 million from $755.6 million
for Fiscal 1994. Net earnings decreased 51% to $88.4 million in Fiscal 1995
from $179.5 million in Fiscal 1994. The decrease in revenues was due to
decreased loan production resulting from increased mortgage interest rates in
Fiscal 1995. In addition, intense price competition during Fiscal 1995 resulted
in the Company's recording a loss on the sale of loans. The Company had a gain
on sale of loans in Fiscal 1994. In Fiscal 1995, the Company did not realize
any servicing hedge gains; in addition, amortization of option and interest
rate floor premiums related to the servicing hedge amounted to $40.0 million
and the write-off of the remaining unamortized costs of the Company's prior
servicing hedge amounted to $25.6 million. During Fiscal 1994, the Company
realized $73.4 million in net servicing hedge gains. These negative effects
experienced in Fiscal 1995 were somewhat offset by the favorable impact of a
larger and more slowly prepaying loan servicing portfolio and of a gain
recognized on the sale of servicing. The decrease in net earnings for Fiscal
1995 was primarily the result of the decrease in revenues, a smaller decline in
expenses than revenues from Fiscal 1994 to Fiscal 1995, higher guarantee fees
caused by the larger servicing portfolio and a charge due to the Company's
downsizing and office consolidation process.
 
  The total volume of loans produced decreased 47% to $27.9 billion for Fiscal
1995 from $52.5 billion for Fiscal 1994. Refinancings totaled $8.4 billion, or
30% of total fundings, for Fiscal 1995, as compared to $39.2 billion, or 75% of
total fundings, for Fiscal 1994. Adjustable-rate mortgage loan ("ARM")
production totaled $9.5 billion, or 34% of total fundings, for Fiscal 1995, as
compared to $10.1 billion, or 19% of total fundings, for Fiscal 1994.
Production in the Company's Consumer Markets Division decreased to $7.1 billion
for Fiscal 1995 compared to combined production of $11.6 billion for the Retail
and Consumer Divisions for Fiscal 1994. Production in the Company's Wholesale
Division decreased to $8.5 billion (which included approximately $3.3 billion
of originated loans and $5.2 billion of purchased loans) for Fiscal 1995 from
$21.5 billion (which included approximately $10.9 billion of originated loans
and $10.6 billion of purchased loans) for Fiscal 1994. The Company's
Correspondent Division purchased $12.3 billion in mortgage loans for Fiscal
1995 compared to $19.4 billion for Fiscal 1994. The factors which affect the
relative volume of production among the Company's three divisions include
pricing decisions and the relative competitiveness of such pricing, the level
of real estate and mortgage lending activity in each division's markets, and
the success of each division's sales and marketing efforts.
 
  At February 28, 1995 and 1994, the Company's pipeline of loans in process was
$3.6 billion and $7.6 billion, respectively. In addition, at February 28, 1995,
the Company had committed to make loans in the
 
                                       7

 
amount of $2.7 billion, subject to property identification and approval of the
loans ("Lock N' Shop SM Pipeline"). At February 28, 1994, the Lock N' Shop
Pipeline was $1.6 billion. Historically, approximately 43% to 75% of the
pipeline of loans in process has funded. In Fiscal 1995 and Fiscal 1994, the
Company received 315,632 and 515,104 new loan applications, respectively, at
an average daily rate of $141 million and $282 million, respectively. The
following actions were taken during Fiscal 1995 on the total applications
received during that year: 220,715 loans (70% of total applications received)
were funded and 66,725 applications (21% of total applications received) were
either rejected by the Company or withdrawn by the applicant. The following
actions were taken during Fiscal 1994 on the total applications received
during that year: 358,257 loans (70% of total applications received) were
funded and 98,809 applications (19% of total applications received) were
either rejected by the Company or withdrawn by the applicant. The factors that
affect the percentage of applications received and funded during a given time
period include the movement and direction of interest rates, the average
length of loan commitments issued, the creditworthiness of applicants, the
production divisions' loan processing efficiency and loan pricing decisions.
 
  Loan origination fees decreased in Fiscal 1995 as compared to Fiscal 1994
and a loss was recorded in Fiscal 1995 on the sale of loans due to lower loan
production that resulted from the increase in the level of mortgage interest
rates. Reduced margins due to increased price competition caused by lower
demand for mortgage loans during Fiscal 1995 than Fiscal 1994 also contributed
to the loss on the sale of loans. In general, loan origination fees and gain
or loss on sale of loans are affected by numerous factors, including loan
pricing decisions, volatility of and the general direction of interest rates
and the volume of loans produced.
 
  Net interest income (interest earned net of interest charges) decreased to
$75.5 million for Fiscal 1995 from $100.3 million for Fiscal 1994.
Consolidated net interest income is principally a function of: (i) net
interest income earned from the Company's mortgage loan warehouse ($35.7
million and $110.1 million for Fiscal 1995 and Fiscal 1994, respectively);
(ii) interest expense related to the Company's investment in servicing rights
($20.0 million and $68.0 million for Fiscal 1995 and Fiscal 1994,
respectively); and (iii) interest income earned from the custodial balances
associated with the Company's servicing portfolio ($59.8 million and $58.2
million for Fiscal 1995 and Fiscal 1994, respectively). The Company earns
interest on, and incurs interest expense to carry, mortgage loans held in its
warehouse. The decrease in net interest income from the mortgage loan
warehouse was attributable to a decrease in the average amount of the mortgage
loan warehouse due to the decline in production and to a decrease in the net
earnings rate. The decrease in interest expense on the investment in servicing
rights resulted primarily from a decline in the payments of interest to
certain investors pursuant to customary servicing arrangements with regard to
paid-off loans which payments exceeded the interest earned on these loans
through their respective payoff dates ("Interest Costs Incurred on Payoffs").
The increase in net interest income earned from the custodial balances was
related to an increase in the earnings rate, offset somewhat by a decline in
the average custodial balances from Fiscal 1994 to Fiscal 1995.
 
  During Fiscal 1995, loan administration income was positively affected by
the continued growth of the Company's loan servicing portfolio. At February
28, 1995, the Company serviced $113.1 billion of loans (including $0.7 billion
of loans subserviced for others) compared to $84.7 billion (including $0.6
billion of loans subserviced for others) at February 28, 1994, a 34% increase.
The growth in the Company's servicing portfolio during Fiscal 1995 was the
result of loan production volume and the acquisition of bulk servicing rights,
partially offset by prepayments, partial prepayments, scheduled amortization
of mortgage loans and a sale of servicing rights of loans with principal
balances aggregating $5.9 billion. The weighted average interest rate of the
mortgage loans in the Company's servicing portfolio at February 28, 1995 was
7.6% compared to 7.2% at February 28, 1994. It is the Company's strategy to
build and retain its servicing portfolio because of the returns the Company
can earn from such investment and because the Company believes that servicing
income is countercyclical to loan origination income. See "--Prospective
Trends--Market Factors."
 
  During Fiscal 1995, the prepayment rate of the Company's servicing portfolio
was 9%, as compared to 35% for Fiscal 1994. In general, the prepayment rate is
affected by the relative level of mortgage interest rates, activity in the
home purchase market and the relative level of home prices in a particular
market. The decrease in the prepayment rate is primarily attributable to
decreased refinance activity caused by increased
 
                                       8

 
mortgage interest rates in Fiscal 1995 from Fiscal 1994. The primary means used
by the Company to reduce the sensitivity of its earnings to changes in interest
rates is through a strong loan production capability and a growing servicing
portfolio. To mitigate the effect on earnings of higher amortization (which is
deducted from loan servicing income) resulting from increased prepayment
activity, the Company acquires financial instruments, including derivative
contracts, that increase in value when interest rates decline (the "Servicing
Hedge"). These financial instruments include call options on U.S. treasury
futures and MBS, interest rate floors and certain tranches of collateralized
mortgage obligations ("CMOs").
 
  The CMOs, which consist primarily of principal-only ("P/O") securities, have
been purchased at deep discounts to their par values. As interest rates
decline, prepayments on the collateral underlying the CMOs should increase.
These changes should result in a decline in the average lives of P/O securities
and an increase in the present values of their cash flows.
 
  The Servicing Hedge instruments utilized by the Company partially protect the
value of the investment in servicing rights from the effects of increased
prepayment activity that generally results from declining interest rates. To
the extent that interest rates increase, as they did in Fiscal 1995, the value
of the servicing rights increases while the value of the hedge instruments
declines. However, the Company is not exposed to loss beyond its initial outlay
to acquire the hedge instruments. At February 28, 1995, the carrying value of
interest rate floor contracts and P/O securities included in the Servicing
Hedge was approximately $16 million and $42 million, respectively. There can be
no assurance the Company's Servicing Hedge will generate gains in the future.
See Note F to the Company's Consolidated Financial Statements included
elsewhere herein.
 
  For Fiscal 1995, total amortization amounted to $95.8 million, representing
an annual rate of 7% of average Servicing Assets. During Fiscal 1995, the
Company did not realize any Servicing Hedge gains; in addition, amortization of
option and interest rate floor premiums related to the Servicing Hedge amounted
to $40.0 million. Also during Fiscal 1995, the Company decided to replace its
prior Servicing Hedge with a new hedge resulting in a write-down of the
remaining unamortized costs of the prior hedge of $25.6 million. For Fiscal
1994, total amortization was $242.2 million, or an annual rate of 28% of the
average Servicing Assets. Amortization for Fiscal 1994 was offset by Servicing
Hedge gains which aggregated $73.4 million. The decline in the rate of
amortization from Fiscal 1994 to Fiscal 1995 resulted primarily from a decline
in the current and projected future prepayment rates caused by an increase in
mortgage interest rates. The factors affecting the rate of amortization
recorded in an accounting period include the level of prepayments during the
period, the change in prepayment expectations and the amount of Servicing Hedge
gains in excess of amortization due to impairment.
 
  During Fiscal 1995, the Company acquired bulk servicing rights for loans with
principal balances aggregating $17.6 billion at a price of $261.9 million or
1.49% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1994, the Company acquired bulk servicing
rights for loans with principal balances aggregating $3.4 billion at a price of
$46.6 million or 1.36% of the aggregate outstanding principal balances of the
servicing portfolios acquired.
 
  During Fiscal 1995, the Company sold servicing rights for loans with
principal balances aggregating $5.9 billion and recognized a gain of $56.9
million. No servicing rights were sold during Fiscal 1994.
 
  Salaries and related expenses are summarized below for Fiscal 1995 and Fiscal
1994.
 


                                                   FISCAL 1995
                                  ---------------------------------------------
                                  PRODUCTION      LOAN        OTHER
                                  ACTIVITIES ADMINISTRATION ACTIVITIES  TOTAL
                                  ---------- -------------- ---------- --------
                                          (DOLLAR AMOUNTS IN THOUSANDS)
                                                           
Base Salaries....................  $109,276     $23,929      $ 6,811   $140,016
Incentive Bonus..................    29,815         463        4,204     34,482
Payroll Taxes and Benefits.......    19,695       4,020          848     24,563
                                   --------     -------      -------   --------
Total Salaries and Related Ex-
 penses..........................  $158,786     $28,412      $11,863   $199,061
                                   ========     =======      =======   ========
Average Number of Employees......     2,631         850          246      3,727

 
 
                                       9

 


                                                   FISCAL 1994
                                  ---------------------------------------------
                                  PRODUCTION      LOAN        OTHER
                                  ACTIVITIES ADMINISTRATION ACTIVITIES  TOTAL
                                  ---------- -------------- ---------- --------
                                          (DOLLAR AMOUNTS IN THOUSANDS)
                                                           
Base Salaries....................  $123,454     $18,974       $4,730   $147,158
Incentive Bonus..................    54,460         323        2,663     57,446
Payroll Taxes and Benefits.......    18,896       3,544          658     23,098
                                   --------     -------       ------   --------
Total Salaries and Related Ex-
 penses..........................  $196,810     $22,841       $8,051   $227,702
                                   ========     =======       ======   ========
Average Number of Employees......     3,351         680          145      4,176

 
  The amount of salaries decreased during Fiscal 1995 primarily due to the
decreased number of employees resulting from reduced loan production, offset
somewhat by an increased number of employees due to a larger servicing
portfolio. Incentive bonuses earned during Fiscal 1995 decreased primarily due
to decreased loan production and decreased loan production personnel.
 
  Occupancy and other office expenses for Fiscal 1995 slightly increased to
$102.2 million from $101.7 million for Fiscal 1994. This was due to increased
office and equipment rental expenses resulting from the opening of 59 Consumer
Markets Division branch offices in Fiscal 1995, partially offset by a decline
in expenses resulting from the closure of 86 Consumer Markets Division
satellite offices and 13 Wholesale Division branch offices.
 
  Guarantee fees (fees paid to guarantee timely and full payment of principal
and interest on mortgage-backed securities and whole loans sold to permanent
investors and to transfer the credit risk of the loans in the servicing
portfolio) for Fiscal 1995 increased 49% to $85.8 million from $57.6 million
for Fiscal 1994. This increase resulted primarily from an increase in the
servicing portfolio.
 
  Marketing expenses for Fiscal 1995 decreased 11% to $23.2 million from $26.0
million for Fiscal 1994. The decrease in marketing expenses reflected the
Company's strategy to centralize and streamline its marketing functions.
 
  In Fiscal 1995, the Company incurred an $8.0 million charge related to the
consolidation and relocation of branch and administrative offices that occurred
as a result of the reduction in staff caused by declining production.
 
  Other operating expenses for Fiscal 1995 decreased from Fiscal 1994 by $6.5
million, or 15%. This decrease was due primarily to decreased loan production.
 
  Profitability of Loan Production and Servicing Activities. In Fiscal 1995,
the Company's pre-tax loss from its loan production activities (which include
loan origination and purchases, warehousing and sales) was $94.8 million. In
Fiscal 1994, the Company's comparable pre-tax earnings were $250.1 million. The
decrease of $344.9 million is primarily attributed to lower loan production and
increased price competition caused by lower demand for mortgage loans. In
Fiscal 1995, the Company's pre-tax earnings from its loan servicing activities
(which include administering the loans in the servicing portfolio, selling
homeowners and other insurance and acting as tax payment agent) was $229.6
million as compared to $46.6 million in Fiscal 1994. This increase was
primarily due to an increase in the servicing portfolio, a reduction in
amortization due to lower prepayment activity and reduced prepayment
expectations and a sale of servicing during Fiscal 1995 which resulted in a
gain of $56.9 million. The increase was partially offset by an increase in
Servicing Hedge expense and a write-off of the remaining costs of the prior
Servicing Hedge.
 
 
                                       10

 
 Fiscal 1994 Compared to Fiscal 1993
 
  Revenues for Fiscal 1994 increased 49% to $755.6 million from $505.6 million
for Fiscal 1993. Net earnings increased 28% to $179.5 million in Fiscal 1994
from $140.1 million in Fiscal 1993. The increase in revenues and net earnings
for Fiscal 1994 reflected increased loan production and continued growth of the
loan servicing portfolio. The increase in revenues was partially offset by an
increase in expenses.
 
  The total volume of loans produced increased 62% to $52.5 billion for Fiscal
1994 from $32.4 billion for Fiscal 1993. Refinancings totaled $39.2 billion, or
75% of total fundings, for Fiscal 1994, as compared to $23.6 billion, or 73% of
total fundings, for Fiscal 1993. ARM loan production totaled $10.1 billion, or
19% of total fundings, for Fiscal 1994, as compared to $9.2 billion, or 28% of
total fundings, for Fiscal 1993. Production in the Company's Retail Division
(which in Fiscal 1995 became part of the Consumer Markets Division) increased
to $7.7 billion for Fiscal 1994 compared to $4.6 billion for Fiscal 1993.
Production in the Company's Wholesale Division increased to $21.5 billion
(which included approximately $10.9 billion of originated loans and $10.6
billion of purchased loans) for Fiscal 1994 compared to $15.5 billion (which
included approximately $8.7 billion of originated loans and $6.8 billion of
purchased loans) for Fiscal 1993. The Company's Correspondent Division
purchased $19.4 billion in mortgage loans for Fiscal 1994 compared to $10.8
billion for Fiscal 1993. Production in the Company's Consumer Division (which
in Fiscal 1995 became part of the Consumer Markets Division) increased to $3.9
billion for Fiscal 1994 compared to $1.5 billion for Fiscal 1993.
 
  At February 28, 1994 and 1993, the Company's pipeline of loans in process was
$7.6 billion and $5.9 billion, respectively. In addition, at February 28, 1994,
the Company had committed to make loans in the amount of $1.6 billion, subject
to property identification and borrower qualification. At February 28, 1993,
the amount of loan commitments subject to property identification and borrower
qualification was not material. Historically, approximately 43% to 75% of the
pipeline of loans in process has funded. In Fiscal 1994 and Fiscal 1993, the
Company received 515,104 and 340,242 new loan applications, respectively, at an
average daily rate of $282 million and $191 million, respectively. The
following actions were taken during Fiscal 1994 on the total applications
received during that year: 358,257 loans (70% of total applications received)
were funded and 98,809 applications (19% of total applications received) were
either rejected by the Company or withdrawn by the applicant. The following
actions were taken during Fiscal 1993 on the total applications received during
that year: 212,765 loans (63% of total applications received) were funded and
79,991 applications (24% of total applications received) were either rejected
by the Company or withdrawn by the applicant.
 
  Loan origination fees and gain on sale of loans benefited from the increase
in loan production. The percentage increase in loan origination fees was less
than the percentage increase in total production primarily because of an
increase in the percentage of production attributable to products that
contained lower origination fees in their pricing structure.
 
  Net interest income (interest earned net of interest charges) increased to
$100.3 million for Fiscal 1994 from $62.8 million for Fiscal 1993. Consolidated
net interest income is principally a function of: (i) net interest income
earned from the Company's mortgage loan warehouse ($110.1 million and $59.4
million for Fiscal 1994 and Fiscal 1993, respectively); (ii) interest expense
related to the Company's investment in servicing rights ($68.0 million and
$21.3 million for Fiscal 1994 and Fiscal 1993, respectively); and (iii)
interest income earned from the custodial balances associated with the
Company's servicing portfolio ($58.2 million and $21.8 million for Fiscal 1994
and Fiscal 1993, respectively). The increase in net interest income from the
mortgage loan warehouse was attributable to an increase in loan production. The
increase in interest expense on the investment in servicing rights resulted
primarily from an increase in Interest Costs Incurred on Payoffs. The increase
in net interest income earned from the custodial balances was related to larger
custodial account balances (caused by a larger servicing portfolio and an
increase in the prepayment rate of the Company's servicing portfolio), offset
somewhat by a decline in the earnings rate from Fiscal 1993 to Fiscal 1994.
 
 
                                       11

 
  During Fiscal 1994, loan administration income was positively affected by the
continued growth of the loan servicing portfolio. At February 28, 1994, the
Company serviced $84.7 billion of loans (including $0.6 billion of loans
subserviced for others) compared to $54.5 billion (including $0.6 billion of
loans subserviced for others) at February 28, 1993, a 55% increase. The growth
in the Company's servicing portfolio during Fiscal 1994 was the result of loan
production volume and the acquisition of bulk servicing rights, partially
offset by prepayments, partial prepayments and scheduled amortization of
mortgage loans. The weighted average interest rate of the mortgage loans in the
Company's servicing portfolio at February 28, 1994 was 7.2% compared to 8.0% at
February 28, 1993.
 
  During Fiscal 1994, the prepayment rate of the Company's servicing portfolio
was 35%, as compared to 20% for Fiscal 1993. The increase in the prepayment
rate was primarily attributable to increased refinance activity caused by
generally declining mortgage interest rates. During most of Fiscal 1994,
interest rates continued their decline to historically low levels although they
began to rise toward the end of the year.
 
  For Fiscal 1994, total amortization amounted to $242.2 million, representing
an annual rate of 28% of average Servicing Assets. Amortization for Fiscal 1994
was partially offset by net Servicing Hedge gains which aggregated $73.4
million. For Fiscal 1993, total amortization was $151.4 million, or an annual
rate of 29% of the average Servicing Assets. This amortization amount was
comprised of $101.4 million related to current and projected prepayment rates
and $50.0 million resulting from Servicing Hedge gains, in accordance with the
Company's accounting policies. Amortization for Fiscal 1993 was offset by
Servicing Hedge gains which aggregated $74.1 million.
 
  The following summarizes the notional amounts of Servicing Hedge
transactions.
 


                                                      LONG     LONG CALL OPTIONS
                                                  CALL OPTIONS ON U.S. TREASURY
                                                     ON MBS         FUTURES
                                                  ------------ -----------------
                                                   (DOLLAR AMOUNTS IN MILLIONS)
                                                         
Balance, March 1, 1991...........................    $  --          $  --
  Additions......................................       560            --
                                                     ------         ------
Balance, February 29, 1992.......................       560            --
  Additions......................................     2,287            700
  Dispositions...................................     2,847            700
                                                     ------         ------
Balance, February 28, 1993.......................       --             --
  Additions......................................     4,700          2,520
  Dispositions...................................     2,700            750
                                                     ------         ------
Balance, February 28, 1994.......................    $2,000         $1,770
                                                     ======         ======

 
  The long call options purchased by the Company partially protect the value of
the investment in servicing rights from the effects of increased prepayment
activity that generally results from declining interest rates. To the extent
that interest rates increase, as they did toward the end of Fiscal 1994, the
value of the servicing rights increases while the value of the options
declines. The value (i.e., replacement cost) of the options can decline below
the remaining unamortized cost of such options, but the options cannot expose
the Company to loss beyond its initial outlay to acquire them. Although the
replacement cost of the call options tends to decline when interest rates rise,
the options continue to provide protection over their remaining term against a
decline in interest rates below the level implied at purchase by their exercise
price. Accordingly, the Company amortizes option premiums over the lives of the
respective options. Any unamortized premium remaining when an option gain is
realized (through exercise or sale) is deducted from such gain. At February 28,
1994, the call options on MBS, which expired from March through September 1994,
had an unamortized cost of approximately $19 million and a replacement value of
approximately $1 million. At February 28, 1994, the call options on U.S.
treasury futures, which expired in September 1994, had an unamortized cost of
approximately $21 million and a replacement value of approximately $7 million.
 
                                       12

 
  During Fiscal 1994, the Company acquired bulk servicing rights for loans with
principal balances aggregating $3.4 billion at a price of $46.6 million or
1.36% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1993, the Company acquired bulk servicing
rights for loans with principal balances aggregating $2.7 billion at a price of
$34.3 million or 1.29% of the aggregate outstanding principal balances of the
servicing portfolios acquired.
 
  Salaries and related expenses are summarized below for Fiscal 1994 and Fiscal
1993.
 


                                                   FISCAL 1994
                                  ---------------------------------------------
                                  PRODUCTION      LOAN        OTHER
                                  ACTIVITIES ADMINISTRATION ACTIVITIES  TOTAL
                                  ---------- -------------- ---------- --------
                                          (DOLLAR AMOUNTS IN THOUSANDS)
                                                           
Base Salaries....................  $123,454     $18,974       $4,730   $147,158
Incentive Bonus..................    54,460         323        2,663     57,446
Payroll Taxes and Benefits.......    18,896       3,544          658     23,098
                                   --------     -------       ------   --------
Total Salaries and Related Ex-
 penses..........................  $196,810     $22,841       $8,051   $227,702
                                   ========     =======       ======   ========
Average Number of Employees......     3,351         680          145      4,176

                                                   FISCAL 1993
                                  ---------------------------------------------
                                  PRODUCTION      LOAN        OTHER
                                  ACTIVITIES ADMINISTRATION ACTIVITIES  TOTAL
                                  ---------- -------------- ---------- --------
                                          (DOLLAR AMOUNTS IN THOUSANDS)
                                                           
Base Salaries....................  $ 73,114     $13,801       $4,666   $ 91,581
Incentive Bonus..................    32,455         145        2,502     35,102
Payroll Taxes and Benefits.......    10,253       2,470          657     13,380
                                   --------     -------       ------   --------
Total Salaries and Related Ex-
 penses..........................  $115,822     $16,416       $7,825   $140,063
                                   ========     =======       ======   ========
Average Number of Employees......     2,024         490          118      2,632

 
  The amount of salaries increased during Fiscal 1994 primarily due to the
increased number of employees resulting from increased loan production and an
increased servicing portfolio. Incentive bonuses earned during Fiscal 1994
increased primarily due to increased loan production and increases in loan
production personnel.
 
  Occupancy and other office expenses for Fiscal 1994 increased 57% to $101.7
million from $64.8 million for Fiscal 1993. This increase was attributable
primarily to the expansion of the Retail and Wholesale Divisions' branch
networks. As of February 28, 1994, there were 295 Retail Division branch
offices (including 110 satellite offices and nine regional support centers) and
80 Wholesale Division branch offices (including 11 regional support centers).
As of February 28, 1993, there were 167 Retail Division branch offices
(including 45 satellite offices and two regional support centers) and 55
Wholesale Division branch offices (including nine regional support centers). In
addition, the increase in the Company's loan production and loan servicing
portfolio resulted in an increase in occupancy and other office expenses
related to the Company's central office.
 
  Guarantee fees for Fiscal 1994 increased 96% to $57.6 million from $29.4
million for Fiscal 1993. This increase resulted primarily from an increase in
the servicing portfolio.
 
  Marketing expenses for Fiscal 1994 increased 101% to $26.0 million from $13.0
million for Fiscal 1993. The increase in marketing expenses reflected the
Company's strategy to expand its market share, particularly in the home
purchase lending market.
 
  Other operating expenses for Fiscal 1994 increased over Fiscal 1993 by $18.6
million, or 75%. This increase was due primarily to several factors, including
loan production, a larger servicing portfolio and expansion of loan production
capabilities.
 
                                       13

 
  Profitability of Loan Production and Servicing Activities. In Fiscal 1994,
the Company's pre-tax earnings from its loan production activities (which
include loan origination and purchases, warehousing and sales) was $250.1
million. In Fiscal 1993, the Company's comparable pre-tax earnings were $175.8
million. The increase of $74.3 million was primarily attributed to higher loan
production. In Fiscal 1994, the Company's pre-tax earnings from its loan
servicing activities was $46.6 million as compared to $53.0 million in Fiscal
1993. The additional loan administration revenues derived from a larger
portfolio during Fiscal 1994 were more than offset by an increase in
amortization of the Servicing Assets, net of gains from the Servicing Hedge,
and an increase in Interest Costs Incurred on Payoffs.
 
INFLATION
 
  Inflation affects the Company in the areas of loan production and servicing.
Interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. Historically, as interest rates increase, loan
production, particularly from loan refinancings, decreases, although in an
environment of gradual interest rate increases, purchase activity may actually
be stimulated by an improving economy or the anticipation of increasing real
estate values. In such periods of reduced loan production, production margins
may decline due to increased competition resulting from overcapacity in the
market. In a higher interest rate environment, servicing-related earnings are
enhanced because prepayment rates tend to slow down, thereby extending the
average life of the Company's servicing portfolio and reducing amortization of
the Servicing Assets and Interest Costs Incurred on Payoffs, and because the
rate of interest earned from the custodial balances tends to increase.
Conversely, as interest rates decline, loan production, particularly from loan
refinancings, increases. However, during such periods, prepayment rates tend to
accelerate (principally on the portion of the portfolio having a note rate
higher than the then-current interest rates), thereby decreasing the average
life of the Company's servicing portfolio and adversely impacting its
servicing-related earnings primarily due to increased amortization of the
Servicing Assets, a decreased rate of interest earned from the custodial
balances, and increased Interest Costs Incurred on Payoffs.
 
SEASONALITY
 
  The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently relies on commercial paper supported by its revolving credit
facility, medium-term note issuances, pre-sale funding facilities, MBS and
whole loan reverse-repurchase agreements, subordinated notes and cash flow from
operations. In addition, in the past the Company has relied on direct
borrowings from its revolving credit facility, servicing-secured bank
facilities, privately-placed financings and public offerings of preferred and
common stock. See Note D to the Company's Consolidated Financial Statements
included elsewhere herein for more information on the Company's financings.
 
  Certain of the debt obligations of the Company and CFC contain various
provisions that may affect the ability of the Company and CFC to pay dividends
and remain in compliance with such obligations. These provisions include
requirements concerning net worth, current ratio and other financial covenants.
These provisions have not had, and are not expected to have, an adverse impact
on the ability of the Company and CFC to pay dividends.
 
  On September 23, 1994, CFC entered into a new three-year revolving credit
agreement with a group of forty commercial banks, replacing the existing
mortgage warehouse credit facility. The agreement permits
 
                                       14

 
CFC to borrow an aggregate maximum amount of $2.5 billion, less commercial
paper backed by the agreement. The amount available under the facility is
subject to a borrowing base, which consists of mortgage loans held for sale,
receivables for mortgage loans shipped and mortgage servicing rights. The
agreement expires on May 31, 1998.
 
  The Company continues to investigate and pursue alternative and supplementary
methods to finance its growing operations through the public and private
capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows.
 
  At times, the Company must meet margin requirements to cover changes in the
market value of its commitments to sell MBS and of its interest rate swaps. To
the extent that aggregate commitment prices are less than the current market
prices, the Company must deposit cash or certain government securities or
obtain letters of credit. The Company's credit facility provides a means of
obtaining such letters of credit to meet these margin requirements. With
respect to the interest rate swap agreements, the margin requirements are
negotiated with the various counterparties and are generally tied to the credit
ratings of CFC and each counterparty.
 
  In the course of the Company's mortgage banking operations, the Company sells
to investors the mortgage loans it originates and purchases but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investment vehicle. Significant
unanticipated prepayments in the Company's servicing portfolio could have a
material adverse effect on the Company's future operating results and
liquidity.
 
 Cash Flows
 
  Operating Activities. In Fiscal 1995, the Company's operating activities
provided cash primarily from the decline in its warehouse of mortgage loans of
approximately $815 million, offset by increases in other assets and working
capital of $125 million. The Company's operating activities also generated $212
million of positive cash flow. Cash provided by operating activities was
principally allocated to the long-term investment in servicing as discussed
below under "--Investing Activities."
 
  Investing Activities. The primary investing activity for which cash was used
in Fiscal 1995 was the investment in servicing. Net cash used by investing
activities decreased to $717 million for Fiscal 1995 from $765 million for
Fiscal 1994. This decrease was primarily from the cash provided by the sale of
servicing rights during Fiscal 1995 and lower cash outlay for purchases of
property, equipment and leasehold improvements during Fiscal 1995 than in
Fiscal 1994, offset somewhat by an increase in purchased servicing rights and
capitalized servicing fees receivable of $97 million during Fiscal 1995.
 
  Financing Activities. Net cash used by financing activities amounted to $0.2
billion for Fiscal 1995. Net cash provided by financing activities amounted to
$2.0 billion for Fiscal 1994. This change was primarily attributable to the
Company's net reduction in borrowings in Fiscal 1995 and net additions to
borrowings in Fiscal 1994.
 
 
PROSPECTIVE TRENDS
 
  Applications and Pipeline of Loans in Process. During Fiscal 1995, the
Company received new loan applications at an average daily rate of $141 million
and at February 28, 1995, the Company's pipeline of loans in process was $3.6
billion. This compares to a daily application rate in Fiscal 1994 of $282
million and a pipeline of loans in process at February 28, 1994 of $7.6
billion. The decline in the pipeline of loans in process from Fiscal 1994 to
Fiscal 1995 was primarily due to a decrease in demand for mortgage loans caused
by an increase in mortgage interest rates. The size of the pipeline is
generally an indication of the level of future fundings, as historically 43% to
75% of the pipeline loans in process has funded. In addition, the
 
                                       15

 
Company's Lock N' Shop Pipeline at February 28, 1995 was $2.7 billion and at
February 28, 1994 was $1.6 billion. Future application levels and loan fundings
are dependent on numerous factors, including the level of demand for mortgage
credit, the extent of price competition in the market, the direction of
interest rates, seasonal factors and general economic conditions. For the month
ended March 31, 1995, the average daily amount of applications received was
$153 million, and at March 31, 1995, the pipeline of loans in process was $3.9
billion and the Lock N' Shop Pipeline was $1.9 billion.
 
  Market Factors. Since late 1993, mortgage interest rates have increased. An
environment of rising interest rates has resulted in lower production
(particularly from refinancings) and greater price competition, which has
adversely impacted earnings from loan origination activities and may continue
to do so in the future. The Company has taken steps to maintain its
productivity and efficiency, particularly in the loan production area, by
reducing staff and embarking on a program to reduce production-related and
overhead costs. However, there was a time lag between the reduction in income
caused by declining production and the reduction in expenses. The Company's
production staff declined from approximately 3,900 at February 28, 1994 to
approximately 2,400 at February 28, 1995. The Company has reduced its total
staffing levels from approximately 4,900 at February 28, 1994 to approximately
3,600 at February 28, 1995. However, the rising interest rates enhanced
earnings from the Company's loan servicing portfolio as amortization of the
Servicing Assets and Interest Costs Incurred on Payoffs decreased from levels
experienced during the prior periods of declining interest rates, and the rate
of interest earned from the custodial balances associated with the Company's
servicing portfolio increased. The Company has further increased the size of
its servicing portfolio, thereby increasing its servicing revenue base, by
acquiring servicing contracts through bulk purchases. During Fiscal 1995, the
Company purchased such servicing contracts with principal balances amounting to
$17.6 billion.
 
  The Company's primary competitors are commercial banks and savings and loans
and mortgage banking subsidiaries of diversified companies, as well as other
mortgage bankers. Particularly in California, savings and loans and other
portfolio lenders are competing with the Company by offering aggressively
priced adjustable-rate mortgage products which have grown in popularity with
the rise in interest rates. Generally, the Company has experienced significant
price competition among mortgage lenders which has resulted in downward
pressure on loan production earnings.
 
  Some regions in which the Company operates, particularly some regions of
California, have been experiencing slower economic growth, and real estate
financing activity in these regions has been negatively impacted. As a result,
home lending activity for single-(one to four) family residences in these
regions may also have experienced slower growth. There can be no assurance that
the Company's operations and results will not continue to be negatively
impacted by such adverse economic conditions. The Company's California mortgage
loan production (measured by principal balance) constituted 31% of its total
production during Fiscal 1995, down from 46% for Fiscal 1994. The decline in
the percentage of California loan production was due to the Company's
continuing effort to expand its production capacity outside of California and
the aggressively priced adjustable-rate mortgage products offered by the
Company's competitors in the state. Since California's mortgage loan production
constituted a significant portion of the Company's production during Fiscal
1995, there can be no assurance that the Company's operations will not continue
to be adversely affected to the extent California continues to experience a
slower or negative economic growth resulting in decreased residential real
estate lending activity or market factors further impact the Company's
competitive position in the state.
 
  Because the Company services substantially all conventional loans on a non-
recourse basis, foreclosure losses are generally the responsibility of the
investor or insurer and not the Company. Accordingly, any increase in
foreclosure activity should not result in significant foreclosure losses to the
Company. However, the Company's expenses may be increased somewhat as a result
of the additional staff efforts required to foreclose on a loan. Similarly,
government loans serviced by the Company (22% of the Company's servicing
portfolio at February 28, 1995) are insured or partially guaranteed against
loss by the Federal Housing
 
                                       16

 
Administration or the Veterans Administration. In the Company's view, the
limited unreimbursed costs that may be incurred by the Company on government
foreclosed loans are not material to the Company's consolidated financial
statements.
 
  Servicing Hedge.  As previously discussed, the Company realized no gains and
recorded amortization of Servicing Hedge option premiums amounting to $40.0
million during Fiscal 1995. In addition, the Company decided to replace its
prior Servicing Hedge with a new hedge, which the Company believed would be
more cost effective. As a result, the Company recorded an additional write-down
of $25.6 million during Fiscal 1995, representing the unamortized costs of the
prior Servicing Hedge. At February 28, 1995, the carrying value of interest
rate floor contracts and P/O securities included in the Servicing Hedge was
approximately $16 million and $42 million, respectively. There can be no
assurance the Company's Servicing Hedge will generate gains in the future.
 
  Federal Legislation. In August 1993, a one percent increase in the corporate
federal tax rate was enacted. However, the Company has been diversifying its
business activities outside California, a state which has a corporate tax rate
that is higher than the average tax rate among the states in which the Company
does business. This diversification serves to reduce the Company's average tax
rate which offsets the enacted increase in the federal tax rate.
 
  Implementation of New Accounting Standards. Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, was issued
in May 1993. Implementation of this standard, which is required for the
Company's fiscal year beginning March 1, 1995, is not expected to have a
material effect on the Company's financial statements.
 
  In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights. This Statement, among other provisions, requires the
recognition of originated mortgage servicing rights ("OMSRs"), as well as
purchased mortgage servicing rights ("PMSRs"), as assets by allocating total
costs incurred between the loan and the servicing rights based on their
relative fair values. Presently, the cost of OMSRs is included with the cost of
the related loans and written off against income when the loans are sold, while
the cost of PMSRs is recorded as an asset. Also under the new Statement, all
capitalized mortgage servicing rights are evaluated for impairment based on the
excess of the carrying amount of the mortgage servicing rights over their fair
value. In measuring impairment, the carrying amount must be stratified based on
one or more predominant risk characteristics of the underlying loans.
Impairment is recognized through a valuation allowance for an individual
stratum. Under current accounting requirements, the impairment evaluation may
be made using either discounted or undiscounted cash flows. No uniform required
level of disaggregation is specified. The Company uses a disaggregated,
undiscounted method.
 
  The Statement is effective prospectively in fiscal years beginning after
December 15, 1995, with earlier application encouraged. The Company adopted the
Statement in the quarter ended May 31, 1995. The actual effect of implementing
this new Statement on the Company's financial position and results of
operations will depend on factors determined as of the end of a reporting
period, including the amount and mix of originated and purchased production,
the level of interest rates and market estimates of future prepayment rates.
Accordingly, the Company will have to determine as of the end of each reporting
period the impact on its earnings of applying the new methodologies of
recording all mortgage servicing rights as assets, of calculating impairment
and of applying the other provisions of the Statement.
 
 
                                       17

 
                          DESCRIPTION OF CAPITAL STOCK
 
GENERAL
 
  The authorized capital stock of the Company consists of 240,000,000 shares of
Common Stock, par value $.05 per share, and 1,500,000 shares of Preferred
Stock, par value $.05 per share. The following summary description of the
capital stock of the Company does not purport to be complete and is qualified
in its entirety by reference to the Company's Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), a copy of which
is filed as an exhibit to the Registration Statement of which this Prospectus
is part and the certificate of designations which will be filed with the
Commission in connection with any offering of Preferred Stock.
 
COMMON STOCK
 
  As of June 14, 1995, 91,574,247 shares of Common Stock were issued and
outstanding and there were 2,572 holders of record of the Common Stock. Each
holder of record of Common Stock is entitled to one vote per share on all
matters submitted to a vote of holders. Dividends may be paid to the record
holders of Common Stock when, as and if declared by the Board of Directors of
the Company (the "Board of Directors"), out of funds legally available
therefor, and each share of Common Stock is entitled to share equally therein
and in other distributions to holders of Common Stock, including distributions
upon liquidation, dissolution or winding up of the Company. The Common Stock
carries no preemptive rights, conversion or subscription rights, redemption
provisions, sinking fund provisions or cumulative voting rights.
 
PREFERRED STOCK PURCHASE RIGHTS
 
  In February 1988, the Board of Directors declared a dividend distribution of
one preferred stock purchase right ("Right") for each outstanding share of the
Common Stock. As the result of stock splits and stock dividends, 0.399 of a
Right is presently associated with each outstanding share of Common Stock and
the same fraction of a Right will be associated with each share of Common Stock
issued prior to the Distribution Date (as defined below). Each Right, when
exercisable, entitles the holder to purchase from the Company one one-hundredth
of a share of Series A Participating Preferred Stock, par value $0.05 per
share, of the Company (the "Series A Preferred Stock"), at a price of $145,
subject to adjustments in certain cases to prevent dilution.
 
  The Rights are evidenced by the Common Stock certificates and are not
exercisable or transferable, apart from the Common Stock, until the date (the
"Distribution Date") of the earlier of a public announcement that a person or
group, without prior consent of the Company, has acquired 20% or more of the
Common Stock (an "Acquiring Person"), or ten days (subject to extension by the
Board of Directors) after the commencement of a tender offer made without the
prior consent of the Company.
 
  In the event a person becomes an Acquiring Person, then each Right (other
than those owned by the Acquiring Person) will entitle its holder to purchase,
at the then current exercise price of the Right, that number of shares of
Common Stock, or the equivalent thereof, which, at the time of such
transaction, would have a market value of two times the exercise price of the
Right. The Board of Directors may delay the exercisability of the Rights during
the period in which they are exercisable only for Series A Preferred Stock (and
not Common Stock).
 
  In the event that, after a person has become an Acquiring Person, the Company
is acquired in a merger or other business combination, as defined for the
purposes of the Rights, each Right (other than those held by the Acquiring
Person) will entitle its holder to purchase, at the then current exercise price
of the Right, that number of shares of Common Stock, or the equivalent thereof,
of the other party (or publicly traded parent thereof) to such merger or
business combination which at the time of such transaction would have a market
value of two times the exercise price of the Right. The Rights expire on the
earlier of February 28, 2002, the consummation of certain merger transactions
or the optional redemption by the Company prior to any person becoming an
Acquiring Person.
 
                                       18

 
PREFERRED STOCK
 
  Certain terms of any series of Preferred Stock offered by any Prospectus
Supplement will be described in the Prospectus Supplement relating to such
series of Preferred Stock. The Board of Directors is authorized to provide for
the issuance of Preferred Stock in one or more series with such distinctive
designations as may be stated in the resolution or resolutions providing for
the issue of such Preferred Stock. At the time that any series of Preferred
Stock is authorized, the Board of Directors will fix the dividend rights, any
conversion rights, any voting rights, redemption provisions, liquidation
preferences and any other rights, preferences, privileges and restrictions of
such series, as well as the number of shares constituting such series and the
designation thereof.
 
  The only series of Preferred Stock currently authorized by the Board of
Directors for issuance is the Series A Preferred Stock in connection with the
exercise of Rights. See "--Preferred Stock Purchase Rights."
 
  The Board of Directors could, without stockholder approval, cause the Company
to issue Preferred Stock which has voting, conversion and other rights which
could adversely affect the holders of Common Stock or make it more difficult to
effect a change in control of the Company. The Preferred Stock could be used to
dilute the stock ownership of persons seeking to obtain control of the Company
and thereby hinder a possible takeover attempt which, if stockholders were
offered a premium over the market value of their shares, might be viewed as
being beneficial to the stockholders of the Company. In addition, the Preferred
Stock could be issued with voting, conversion and other rights and preferences
which would adversely affect the voting power and other rights of holders of
Common Stock.
 
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS OF THE
COMPANY
 
  In addition to the Rights described above under "--Preferred Stock Purchase
Rights" and the terms of any Preferred Stock that the Company may determine to
issue as described above under "--Preferred Stock," certain other provisions of
the Certificate of Incorporation and the Company's Bylaws may have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. The Certificate
of Incorporation (i) provides for a three-year staggered Board of Directors,
vacancies on which shall be filled by the Board of Directors and whose members
may be removed only for cause and only by the vote of the holders of two-thirds
of the outstanding shares of Common Stock, (ii) limits the Company's power to
purchase shares of voting stock of the Company (capital stock having the right
to vote generally on matters relating to the Company and any security which is
convertible into such stock) from a five percent holder at a price in excess of
its fair market value, unless such purchase is approved by a majority of these
shares (unless a greater vote is required by law), excluding the vote of such
five percent holder, (iii) prohibits action by written consent of the
stockholders and (iv) provides that the Company's Bylaws may be amended by the
Board of Directors or, with certain exceptions, a vote of two-thirds of the
voting shares and further provides that a two-thirds vote of all voting shares
of the Company is required to amend the provisions of the Certificate of
Incorporation referred to in this sentence, unless such amendment has been
approved by two-thirds of the Board of Directors and a majority of the
continuing directors (directors who became members of the Board of Directors
prior to the time when any stockholder who beneficially owns ten percent of the
outstanding shares first became a ten percent stockholder). The Company's
Bylaws provide that special meetings of the stockholders may be called only by
the directors and limits the business which may be transacted at such meetings
to those matters set forth in the request of the proposed meeting.
 
TRANSFER AGENT AND REGISTRAR
 
  The transfer agent and registrar for the Common Stock is The Bank of New
York.
 
                                       19

 
                 DESCRIPTION OF DEBT SECURITIES AND GUARANTEES
 
  The following description of the terms of the Company Debt Securities and the
terms of the CFC Debt Securities sets forth certain general terms and
provisions of such Debt Securities. To the extent any terms described below
apply specifically to the Company Debt Securities or the CFC Debt Securities,
specific references to "Company Debt Securities" or "CFC Debt Securities" will
be made; otherwise, references to "Debt Securities" shall be deemed to apply to
both the Company Debt Securities and the CFC Debt Securities. The extent, if
any, to which such general provisions do not apply to the Debt Securities
offered by any Prospectus Supplement will be described in such Prospectus
Supplement.
 
  The Company Debt Securities are to be issued under an Indenture, as amended,
supplemented or modified from time to time (the "Company Indenture"), between
the Company and The Bank of New York, as trustee (in such capacity, the
"Company Trustee"), the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. Each series of
Company Debt Securities issued pursuant to the Company Indenture will be issued
pursuant to an amendment or supplement thereto in the form of a supplemental
indenture or pursuant to an Officers' Certificate, in each case delivered
pursuant to resolutions of the Board of Directors of the Company and in
accordance with the provisions of Section 301 or Article Ten of the Company
Indenture, as the case may be. The terms of the Company Debt Securities include
those stated in the Company Indenture and those made a part of the Company
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"). The Company Debt Securities are subject to all such terms and the
holders of Company Debt Securities are referred to the Company Indenture and
the TIA for a statement of such terms.
 
  The CFC Debt Securities are to be issued under the Indenture dated as of
January 1, 1992, as amended, supplemented or modified from time to time (the
"CFC Indenture", and together with the Company Indenture, the "Indentures")
among CFC, the Guarantor and The Bank of New York, as Trustee (in such
capacity, the "CFC Trustee," and together with the Company Trustee, the
"Trustees"), which is incorporated by reference in the Registration Statement
of which this Prospectus forms a part. Each series of CFC Debt Securities
issued pursuant to the CFC Indenture will be issued pursuant to an amendment or
supplement thereto in the form of a supplemental indenture or pursuant to an
Officers' Certificate, in each case delivered pursuant to resolutions of the
Board of Directors of CFC and in accordance with the provisions of Section 301
or Article Ten of the CFC Indenture, as the case may be. The CFC Indenture is
expected to be amended by Supplemental Indenture No. 1 thereto, among CFC, the
Guarantor and the CFC Trustee, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The terms of the
CFC Debt Securities include those stated in the CFC Indenture and those made
part of the CFC Indenture by reference to the TIA. The CFC Debt Securities are
subject to all such terms and the holders of CFC Debt Securities are referred
to the CFC Indenture and the TIA for a statement of such terms.
 
  The following summaries of certain provisions of each Indenture and the Debt
Securities are not complete and are qualified in their entirety by reference to
the provisions of each Indenture, including the definitions of capitalized
terms used herein without definition. Numerical references in parentheses are
to sections in the applicable Indenture and unless otherwise indicated
capitalized terms have the meanings given them in the applicable Indenture.
 
GENERAL
 
  Neither Indenture limits the aggregate principal amount of Debt Securities
that may be issued from time to time in series. (Section 301)
 
  The Company Debt Securities will constitute unsecured and unsubordinated
indebtedness of the Company and will rank pari passu in right of payment with
the Company's other unsecured and unsubordinated indebtedness.
 
  Substantially all the Company's operations are conducted through
subsidiaries, and any right of the Company to receive assets of any of its
subsidiaries upon the liquidation or recapitalization of any such subsidiary
(and the consequent right of holders of the Company Debt Securities, or the
holders of the CFC
 
                                       20

 
Debt Securities looking to the Guarantees for repayment thereof, to participate
in those assets) will be subject to the claims of such subsidiary's creditors,
except to the extent that the Company itself is recognized as a creditor of
such subsidiary. Even if the Company is recognized as a creditor of a
subsidiary, the Company's claims would still be subject to any security
interests in the assets of such subsidiary and any indebtedness or other
liability of such subsidiary that is senior to the Company's claims.
Accordingly, by operation of the foregoing principles, the Company Debt
Securities and the Guarantees will effectively be subordinated to all
indebtedness and other liabilities, including trade accounts payable, of the
Company's subsidiaries. "Holder" means a person in whose name a Debt Security
is registered in the related Security Register.
 
  The CFC Debt Securities will constitute unsecured and unsubordinated
indebtedness of CFC and will rank pari passu in right of payment with CFC's
other unsecured and unsubordinated indebtedness. A substantial portion of the
assets of CFC may be pledged under various credit agreements among CFC and
various lending institutions. See Note D to the Company's Consolidated
Financial Statements included elsewhere herein.
 
  Reference is made to the Prospectus Supplement and pricing supplement, if
any, relating to the particular series of Debt Securities offered thereby for a
description of the terms of such Debt Securities in respect of which this
Prospectus is being delivered, including, where applicable: (i) the title of
such Debt Securities; (ii) any limit on the aggregate principal amount of such
Debt Securities; (iii) the date or dates, or the method or methods, if any, by
which such date or dates shall be determined or extended, on which the
principal of such Debt Securities is payable; (iv) any places other than the
issuer's office or agency in The City of New York where such Debt Securities
shall be payable or surrendered for registration of transfer or exchange; (v)
the denominations in which such Debt Securities shall be issuable; (vi) the
currency of denomination of such Debt Securities, which may be in U.S. dollars,
any foreign currency or currency unit, including European Currency Units
("ECU"), and, if applicable, certain other information relating to such foreign
currency or currency unit; (vii) the designation of the currency or currencies
in which payment of the principal of and premium, if any, and interest on such
Debt Securities will be made and whether payment of the principal of and
premium, if any, or the interest on Debt Securities designated in a foreign
currency or currency unit, at the election of a holder thereof, may instead be
payable in U.S. dollars and the terms and conditions upon which such election
may be made; (viii) the rate or rates (which may be fixed or floating), if any,
at which such Debt Securities will bear interest, or the method or methods, if
any, by which such rate or rates are to be determined or reset, the date or
dates, if any, from which such interest will accrue, or the method or methods,
if any, by which such date or dates shall be determined or reset, the dates on
which such interest will be payable, the record date for the interest payable
on any interest payment date, and the basis upon which interest shall be
calculated if other than that of a 360-day year of twelve 30-day months; (ix)
the terms and conditions, if any, on which such Debt Securities may be redeemed
at the option of the Company or CFC, as the case may be, or repaid at the
option of the Holders thereof; (x) the obligation, if any, of the Company or
CFC, as the case may be, to redeem, repay or purchase such Debt Securities
pursuant to any sinking fund or analogous provisions, and the terms and
conditions on which such Debt Securities shall be redeemed, repaid or
purchased, in whole or in part, pursuant to such obligation; (xi) if other than
the principal amount thereof, the portion of the principal amount of such Debt
Securities which will be payable upon declaration of acceleration of the
maturity thereof; (xii) provisions, if any, for the defeasance of such Debt
Securities; (xiii) the ability, if any, of the Holder of a Debt Security to
renew all or any portion of a Debt Security; (xiv) any additional Events of
Default or restrictive covenants provided for with respect to such Debt
Securities; (xv) the obligation, if any, of the Company to permit the
conversion or exchange of any Company Debt Securities into or for other
securities and the terms and conditions upon which such conversion or exchange
shall be effected (including, without limitation, the initial conversion or
exchange price or rate, the conversion or exchange period, any adjustment of
the applicable conversion or exchange price and any requirements relative to
the reservation of such other securities for purposes of conversion or
exchange); (xvi) any other terms not inconsistent with the applicable
Indenture, including any terms which may be required by or advisable under
United States laws or regulations; (xvii) if such Debt Securities are
denominated or payable in a currency or currency unit other than U.S. dollars,
the designation of the initial Exchange Rate Agent and, if other than as set
forth in the applicable Indenture, the definition of the
 
                                       21

 
"Exchange Rate"; and (xviii) the form of such Debt Securities and, if in global
form, the name of the depositary with respect thereto and the terms upon which
and the circumstances under which such Debt Securities may be exchanged.
(Section 301)
 
  Unless otherwise indicated in the Prospectus Supplement relating thereto, the
Debt Securities will be issued only in fully registered form without coupons.
Debt Securities denominated in U.S. dollars will be issued in denominations of
$1,000 or any integral multiple thereof unless otherwise provided in the
Prospectus Supplement relating thereto. (Section 302)  The Prospectus
Supplement relating to a series of Debt Securities denominated in a foreign
currency or currency unit will specify the denominations thereof.
 
  The Indentures do not contain any provisions that would limit the ability of
the Company, CFC or any of their respective affiliates to incur indebtedness
(secured or unsecured) or that would afford Holders of Debt Securities
protection in the event of a highly leveraged transaction, restructuring,
change in control, merger or similar transaction involving the Company or CFC
that may adversely affect Holders of the Debt Securities.
 
  One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
which at the time of issuance is below market rates. One or more series of Debt
Securities may be floating rate debt securities, and may be exchangeable for
fixed rate debt securities. Federal income tax consequences and special
considerations applicable to any such series will be described in the
Prospectus Supplement relating thereto.
 
  Unless otherwise indicated in the Prospectus Supplement relating thereto, the
principal of, and any premium or interest on, any series of Company Debt
Securities will be payable, and such Company Debt Securities will be
exchangeable and transfers thereof will be registerable, at the Corporate Trust
Office of the Company Trustee, initially at 101 Barclay Street, New York, New
York 10286, provided that, at the option of the Company, payment of interest
may be made by check mailed to the address of the Person entitled thereto as it
appears in the related Security Register. (Sections 301, 305, 306, 307 and
1102)
 
  Unless otherwise indicated in the Prospectus Supplement relating thereto, the
principal of, and any premium or interest on, any series of CFC Debt Securities
will be payable, and such CFC Debt Securities will be exchangeable and
transfers thereof will be registerable, at the Corporate Trust Office of the
CFC Trustee, initially at 101 Barclay Street, New York, New York 10286,
provided that, at the option of CFC, payment of interest may be made by check
mailed to the address of the Person entitled thereto as it appears in the
related Security Register. (Sections 301, 305, 306, 307 and 1102)
 
  No Debt Security shall be entitled to any benefit under the applicable
Indenture or be valid or obligatory for any purpose unless there appears on
such Debt Security a certificate of authentication substantially in the form
provided for in such Indenture duly executed by the applicable Trustee by
manual signature of one of its authorized officers, and such certificate upon
any Debt Security shall be conclusive evidence, and the only evidence, that
such Debt Security has been duly authenticated and delivered under such
Indenture and is entitled to the benefits of such Indenture. (Section 203)
 
EVENTS OF DEFAULT
 
  The Company Indenture provides that the following shall constitute "Events of
Default" with respect to any series of Company Debt Securities thereunder: (i)
default in payment of principal of (or premium, if any, on) any Company Debt
Security of such series at Maturity; (ii) default for 30 days in payment of
interest on any Company Debt Security of such series when due; (iii) default in
the deposit of any sinking fund payment on any Company Debt Security of such
series when due; (iv) default in the performance or breach of any other
covenant or warranty of the Company in the Company Indenture or the Company
Debt Securities, continued for 60 days after written notice thereof by the
Company Trustee or the Holders of at least 25% in aggregate principal amount of
the Company Debt Securities of such series at the time outstanding; (v) default
 
                                       22

 
resulting in acceleration of maturity of any other indebtedness for borrowed
money of the Company or any direct or indirect subsidiary of the Company in an
amount in excess of $10,000,000 and such acceleration shall not be rescinded or
annulled for a period of 10 days after written notice thereof by the Company
Trustee or the Holders of at least 25% in aggregate principal amount of the
Company Debt Securities of such series at the time outstanding; (vi) certain
events of bankruptcy, insolvency or reorganization; and (vii) any other Event
of Default provided with respect to such series of Company Debt Securities.
(Section 601)  No Event of Default with respect to a particular series of
Company Debt Securities issued under the Company Indenture necessarily
constitutes an Event of Default with respect to any other series of Company
Debt Securities issued thereunder. "Maturity," when used with respect to any
Debt Security, means the date on which the principal of such Debt Security
becomes due and payable as provided in such Debt Security or in the applicable
Indenture, whether at the Stated Maturity or by declaration of acceleration,
notice of redemption, notice of option to elect repayment or otherwise. "Stated
Maturity," when used with respect to any Debt Security or any installment of
principal thereof or interest thereon, means the date specified in such Debt
Security as the fixed date on which the principal of such Debt Security or such
installment of principal or interest is due and payable.
 
  The CFC Indenture provides that the following shall constitute "Events of
Default" with respect to any series of CFC Debt Securities thereunder: (i)
default in payment of principal of (or premium, if any, on) any CFC Debt
Security of such series at Maturity; (ii) default for 30 days in payment of
interest on any CFC Debt Security of such series when due; (iii) default in the
deposit of any sinking fund payment on any CFC Debt Security of such series
when due; (iv) default in the performance or breach of any other covenant or
warranty of CFC or the Guarantor in the CFC Indenture, the CFC Debt Securities
or the related Guarantees, continued for 60 days after written notice thereof
by the CFC Trustee or the Holders of at least 25% in aggregate principal amount
of the CFC Debt Securities of such series at the time outstanding; (v) default
resulting in acceleration of maturity of any other indebtedness for borrowed
money of CFC, the Guarantor or any direct or indirect subsidiary of the
Guarantor in an amount in excess of $10,000,000 and such acceleration shall not
be rescinded or annulled for a period of 10 days after written notice thereof
by the CFC Trustee or the Holders of at least 25% in aggregate principal amount
of the CFC Debt Securities of such series at the time outstanding; (vi) certain
events of bankruptcy, insolvency or reorganization; and (vii) any other Event
of Default provided with respect to such series of CFC Debt Securities.
(Section 601) No Event of Default with respect to a particular series of CFC
Debt Securities issued under the CFC Indenture necessarily constitutes an Event
of Default with respect to any other series of CFC Debt Securities issued
thereunder.
 
  Each Indenture provides that if an Event of Default specified therein shall
occur and be continuing, either the applicable Trustee or the Holders of at
least 25% in aggregate principal amount of the Debt Securities of such series
then outstanding may declare the principal amount of the Debt Securities of
such series (or, in the case of Original Issue Discount Securities, such other
amount, if any, as provided for in the terms of such Original Issue Discount
Securities) to be due and payable immediately upon written notice thereof to
the Company, and, in the case of the CFC Indenture, CFC. In certain cases, the
Holders of a majority in aggregate principal amount of the outstanding Debt
Securities of any such series may, on behalf of the Holders of all such Debt
Securities, rescind and annul such declaration of acceleration. (Section 602)
"Original Issue Discount Security" means, except as otherwise defined in a Debt
Security, any Debt Security which is issued with original issue discount within
the meaning of Section 1273(a) of the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
 
  The agreements governing certain of the Company's and CFC's outstanding
indebtedness, including CFC's Subordinated Notes due July 15, 2002 and CFC's
revolving credit agreement described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources", contain provisions to the effect that certain Events of
Default under the Company Indenture or the CFC Indenture would constitute an
event of default under such agreements which, among other things, could cause
an acceleration of the indebtedness thereunder.
 
                                       23

 
  Each Indenture contains a provision entitling the applicable Trustee, subject
to the duty of such Trustee during default under any series of Debt Securities
to act with the required standard of care, to be indemnified by the Holders of
the Debt Securities of such series before proceeding to exercise any right or
power under such Indenture with respect to such series at the request of such
Holders. (Sections 701, 703) Each Indenture provides that no Holders of Debt
Securities of any series issued thereunder may institute any proceedings,
judicial or otherwise, to enforce such Indenture except in the case of failure
of the applicable Trustee thereunder, for 60 days, to act after it has received
a written request to enforce such Indenture by the Holders of at least 25% in
aggregate principal amount of the then outstanding Debt Securities of such
series, and an offer of reasonable indemnity. (Section 607) This provision will
not prevent any Holder of Debt Securities from enforcing payment of the
principal thereof, premium, if any, and interest thereon at the respective due
dates thereof. (Section 608) The Holders of a majority in aggregate principal
amount of the Debt Securities of any series issued under either Indenture then
outstanding may direct the time, method and place of conducting any proceeding
for any remedy available to the applicable Trustee or exercising any trust or
power conferred on it with respect to the Debt Securities of such series. Such
Trustee may, however, refuse to follow any direction that it determines may not
lawfully be taken or would be illegal or in conflict with such Indenture or
involve it in personal liability or which would be unjustly prejudicial to
Holders of the Debt Securities of such series not joining therein. (Section
612)
 
  Each Indenture provides that the applicable Trustee will, within 90 days
after the occurrence of a default with respect to any series of Debt Securities
issued thereunder, give to the Holders thereof notice of such default, unless
such default has been cured or waived. Except in the case of a default in the
payment of principal of, or premium, if any, or interest on any Debt Securities
or payment of any sinking fund installment, each Trustee shall be protected in
the withholding of such notice if it determines in good faith that the
withholding of such notice is in the interest of the Holders of the Debt
Securities of such series. (Section 702)
 
  The Company and, in the case of the CFC Debt Securities, CFC will be required
to file with each Trustee annually an Officers' Certificate as to the absence
of certain defaults under the terms of the applicable Indenture. (Section 1105)
 
MODIFICATION AND WAIVER
 
  Modifications of and amendments to each Indenture may be made by the Company
and, in the case of the CFC Indenture, CFC, and the applicable Trustee with the
consent of the Holders of a majority in aggregate principal amount of the
outstanding Debt Securities of each series affected by such modification or
amendment; provided, however, that no such modification or amendment may,
without the consent of the Holder of each outstanding Debt Security affected
thereby: (i) except as otherwise permitted in such Indenture in connection with
Debt Securities for which the Stated Maturity is extendible, change the Stated
Maturity of the principal of, or any installment of interest on, such Debt
Security; (ii) reduce the principal amount of, or, except as otherwise
permitted in such Indenture in connection with Debt Securities for which the
interest rate may be reset, interest on, or any premium payable upon redemption
or repayment of, such Debt Security; (iii) reduce the amount of the principal
of an Original Issue Discount Security that would be due and payable upon a
declaration of acceleration of the Maturity thereof; (iv) adversely affect the
right of repayment at the option of a Holder of such Debt Security; (v) reduce
the amount of, or postpone the date fixed for, any payment under any sinking
fund or analogous provisions of such Debt Security; (vi) change the place or
currency or currency unit of payment of the principal of, premium, if any, or
interest on such Debt Security; (vii) change or eliminate the rights of a
Holder to receive payment in a designated currency; (viii) impair the right to
institute suit for the enforcement of any required payment on or with respect
to such Debt Security; (ix) reduce the percentage of the aggregate principal
amount of the outstanding Debt Securities of any series the consent of whose
Holders is required for modification or amendment of such Indenture, for waiver
of compliance with certain provisions of such Indenture, or for waiver of
certain defaults; (x) modify any of the provisions of Section 613 (described
below) except to increase such percentage or to provide that certain other
provisions of such Indenture cannot be modified or waived without the consent
of the Holder
 
                                       24

 
of each outstanding Debt Security affected thereby; or (xi) in the case of the
CFC Indenture, modify or affect the terms and conditions of the related
Guarantees in a manner adverse to the interests of the Holders of the CFC Debt
Securities.
 
  Each Indenture also contains provisions permitting the Company and, in the
case of the CFC Indenture, CFC, and the applicable Trustee, without the consent
of any Holders of Debt Securities under such Indenture, to enter into
supplemental indentures, in form satisfactory to such Trustee, for any of the
following purposes: (i) to evidence the succession of another corporation to
the Company or, in the case of the CFC Indenture, CFC or the Guarantor and the
assumption by such successor of the obligations and covenants of the Company
or, in the case of the CFC Indenture, CFC or the Guarantor contained in such
Indenture and in the Debt Securities and, in the case of the CFC Indenture, the
related Guarantees, as the case may be; (ii) to add to the covenants of the
Company or, in the case of the CFC Indenture, CFC or the Guarantor, for the
benefit of the Holders of all or any series of Debt Securities issued under
such Indenture (and if such covenants are to be for the benefit of less than
all series of Debt Securities issued under such Indenture, stating that such
covenants are expressly being included solely for the benefit of such series),
or to surrender any right or power herein conferred upon the Company or, in the
case of the CFC Indenture, CFC or the Guarantor; (iii) to add any additional
Events of Default (and if such Events of Default are to be applicable to less
than all series of Debt Securities issued under such Indenture, stating that
such Events of Default are expressly being included solely to be applicable to
such series); (iv) to add or change any of the provisions of such Indenture to
such extent as shall be necessary to permit or facilitate the issuance of Debt
Securities in bearer form, registrable or not registrable as to principal, and
with or without interest coupons; (v) to change or eliminate any of the
provisions of such Indenture, provided that any such change or elimination
shall become effective only when there is no Debt Security outstanding of any
series created prior to the execution of such supplemental indenture which is
entitled to the benefit of such provision; (vi) to establish the form or terms
of Debt Securities of any series as otherwise permitted by such Indenture;
(vii) to evidence and provide for the acceptance of appointment under such
Indenture by a successor Trustee with respect to the Debt Securities of one or
more series issued under such Indenture and to add to or change any of the
provisions of such Indenture as shall be necessary to provide for or facilitate
the administration of the trusts thereunder by more than one Trustee, pursuant
to the requirements of such Indenture; (viii) to secure the Debt Securities
issued under such Indenture; (ix) to cure any ambiguity, to correct or
supplement any provision in such Indenture which may be defective or
inconsistent with any other provision of such Indenture, or to make any other
provisions with respect to matters or questions arising under such Indenture
which shall not be inconsistent with any provision of such Indenture, provided
such other provisions shall not adversely affect the interests of the Holders
of Debt Securities of any series issued under such Indenture in any material
respect; (x) to modify, eliminate or add to the provisions of such Indenture to
such extent as shall be necessary to effect the qualification of such Indenture
under the TIA or under any similar federal statute subsequently enacted and to
add to such Indenture such other provisions as may be expressly required under
the TIA; or (xi) in the case of the CFC Indenture, to effect the assumption, by
the Guarantor or a Subsidiary thereof, of the payment obligations with respect
to the CFC Debt Securities and of the performance of every covenant of the CFC
Indenture on the part of CFC to be performed or observed. (Section 1001)
 
  The Holders of a majority in aggregate principal amount of the outstanding
Debt Securities of each series may, on behalf of all Holders of Debt Securities
of that series, waive any past default under the applicable Indenture with
respect to Debt Securities of that series except a default in the payment of
the principal of, (or premium, if any) or interest on, any Debt Security of
that series and except a default in respect of a covenant or provision the
modification or amendment of which would require the consent of the Holder of
each outstanding Debt Security of the affected series. (Section 613)
 
CONVERSION AND EXCHANGE RIGHTS
 
  The terms and conditions, if any, upon which the Company Debt Securities of
any series are convertible into or exchangeable for other securities will be
set forth in the applicable Prospectus Supplement relating
 
                                       25

 
thereto. Such terms will include whether such Company Debt Securities are
convertible into or exchangeable for other securities, the conversion or
exchange price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the Holders
thereof or the Company, the events requiring an adjustment of the conversion
or exchange price and provisions affecting conversion or exchange in the event
of the redemption of such Company Debt Securities.
 
GLOBAL SECURITIES
 
  The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the Prospectus Supplement relating to such series. Global Securities may be
issued in either registered or bearer form and in either temporary or
permanent form. Unless and until it is exchanged in whole or in part for
individual certificates evidencing Debt Securities in definitive form
represented thereby, a Global Security may not be transferred except as a
whole by the Depositary for such Global Security to a nominee of such
Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any such nominee to a
successor of such Depositary or a nominee of such successor.
 
  The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the Prospectus Supplement relating to
such series.
 
CONSOLIDATION, MERGER AND TRANSFER OF ASSETS
 
  Under the Company Indenture, the Company may not consolidate with or merge
into any corporation, or transfer its assets substantially as an entirety to
any Person, unless: (i) the successor corporation or transferee assumes the
Company's obligations on the Company Debt Securities and under the Company
Indenture; (ii) after giving effect to the transaction, no Event of Default
and no event which, after notice or lapse of time or both, would become an
Event of Default shall have occurred and be continuing; and (iii) certain
other conditions are met. (Section 901)
 
  Under the CFC Indenture, neither CFC nor the Guarantor may consolidate with
or merge into any corporation, or transfer its assets substantially as an
entirety to any Person, unless: (i) the successor corporation or transferee
assumes the Company's or the Guarantor's obligations on the Debt Securities or
the related Guarantees, as the case may be, and under the CFC Indenture, and
in the case of a consolidation or merger of CFC, the Guarantor delivers an
affirmation of the continuance of its obligations to the CFC Trustee; (ii)
after giving effect to the transaction, no Event of Default and no event
which, after notice or lapse of time or both, would become an Event of Default
shall have occurred and be continuing; and (iii) certain other conditions are
met. (Sections 901 and 903)
 
SATISFACTION, DISCHARGE AND DEFEASANCE
 
  Each Indenture, with respect to any series of Debt Securities (except for
certain specified surviving obligations, including (A) any rights of
registration of transfer and exchange and (B) rights to receive the principal,
premium, if any, and interest on the Debt Securities) will be discharged and
cancelled upon the satisfaction of certain conditions, including the
following: (i) all Debt Securities of such series not theretofore delivered to
the applicable Trustee for cancellation have become due or payable, will
become due and payable at their Stated Maturity within one year, or are to be
called for redemption within one year and (ii) the deposit with such Trustee
of an amount in the Specified Currency sufficient to pay the principal,
premium, if any, and interest to the Maturity of all Debt Securities of such
series. (Section 501)
 
  If so specified in the Prospectus Supplement with respect to Debt Securities
of any series, the Company or CFC, as the case may be, at its option, (i) will
be discharged from any and all obligations in respect of the Debt Securities
of such series (except for certain obligations to register the transfer or
exchange of Debt Securities of such series, replace stolen, lost or mutilated
Debt Securities of such series, maintain certain offices or agencies in each
Place of Payment, and hold moneys for payment in trust), or (ii) will not be
subject
 
                                      26

 
to provisions of the applicable Indenture described above under "--
Consolidation, Merger and Transfer of Assets" with respect to the Debt
Securities of such series, in each case if the Company or CFC, as the case may
be, irrevocably deposits with the applicable Trustee, in trust, money or U.S.
Government Obligations (as defined in the applicable Indenture) which through
the payment of interest thereon and principal thereof in accordance with their
terms will provide money in an amount sufficient (in the opinion of independent
public accountants) to pay all the principal (including any mandatory sinking
fund payments) of, and premium, if any, and interest on, the Debt Securities of
such series on the dates such payments are due in accordance with the terms of
such Debt Securities. To exercise any such option, the Company or CFC, as the
case may be, is required to deliver to the applicable Trustee (1) an opinion of
counsel to the effect that (a) the deposit and related defeasance would not
cause the Holders of the Debt Securities of such series to recognize income,
gain or loss for Federal income tax purposes, (b) the Company's exercise of
such option will not cause any violation of the Investment Company Act of 1940,
as amended, and (c) if the Debt Securities of such series are then listed on
the New York Stock Exchange, such Debt Securities would not be delisted as a
result of the exercise of such option and (2) in the case of the Debt
Securities of such series being discharged, a ruling received from or published
by the United States Internal Revenue Service to the effect that the deposit
and related defeasance would not cause the Holders of the Debt Securities of
such series to recognize income, gain or loss for Federal income tax purposes.
(Sections 1401 and 1402)
 
GUARANTEES
 
  The CFC Debt Securities will be unconditionally guaranteed (the "Guarantees")
by the Guarantor as to payment of principal, premium, if any, and interest when
and as the same shall become due and payable, whether at their Stated Maturity
or upon redemption or repayment or otherwise. (Section 401) The Guarantees will
rank pari passu in right of payment with all other unsecured and unsubordinated
obligations of the Guarantor, including the Company Debt Securities.
 
  The obligations of the Guarantor under the Guarantees will be unconditional
regardless of the enforceability of the CFC Debt Securities or the CFC
Indenture and will not be discharged until all obligations contained in such
CFC Debt Securities and the CFC Indenture are satisfied. Holders of the CFC
Debt Securities may proceed directly against the Guarantor in the event of an
Event of Default with respect to such CFC Debt Securities without first
proceeding against CFC. (Section 401)
 
  Because the Guarantor is a holding company, the rights of its creditors,
including the Holders of the CFC Debt Securities in the event the Guarantees
are enforced, to share in the distribution of the assets of any subsidiary upon
the subsidiary's liquidation or recapitalization will be subject to the prior
claims of the subsidiary's creditors, except to the extent the Guarantor may
itself be a creditor with recognized claims against the subsidiary. See "--
General" above.
 
CONCERNING THE TRUSTEES
 
  The Bank of New York is the Trustee under each of the Company Indenture and
the CFC Indenture. The Company and CFC maintain banking relationships in the
ordinary course of business with the Trustee. Among other things, The Bank of
New York is a lending bank under CFC's revolving credit facility. See Notes to
the Company's Consolidated Financial Statements included elsewhere herein.
 
                              PLAN OF DISTRIBUTION
 
  The Company or CFC may sell Securities to or through one or more underwriters
or dealers and also may sell Securities directly to institutional investors or
other purchasers, or through agents.
 
  The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
 
  In connection with the sale of Securities, underwriters or agents may receive
compensation from the Company or CFC or from purchasers of Securities for whom
they may act as agents in the form of discounts,
 
                                       27

 
concessions or commissions. Underwriters may sell Securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers and agents
that participate in the distribution of Securities may be deemed to be
underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of Securities by them may be deemed to be
underwriting discounts and commissions, under the Securities Act. Any such
underwriter or agent will be identified, and any such compensation received
from the Company or CFC will be described, in the related Prospectus
Supplement.
 
  Under agreements which may be entered into by the Company and/or CFC,
underwriters and agents who participate in the distribution of Securities may
be entitled to indemnification by the Company and CFC against certain
liabilities, including liabilities under the Securities Act.
 
  If so indicated in the related Prospectus Supplement, the Company or CFC will
authorize underwriters or other persons acting as the Company's or CFC's agents
to solicit offers by certain institutions to purchase Securities from the
Company or CFC pursuant to contracts providing for payment and delivery on a
future date. Institutions with which such contracts may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but in all cases
such institutions must be approved by the Company or CFC. The obligations of
any purchaser under any such contract will be subject to the condition that the
purchase of the Securities shall not at the time of delivery be prohibited
under the laws of the jurisdiction to which such purchaser is subject. The
underwriters and such other agents will not have any responsibility in respect
of the validity or performance of such contracts.
 
  Certain of the underwriters or agents and their associates may engage in
transactions with and perform services for the Company, CFC or their respective
affiliates in the ordinary course of their respective businesses.
 
  The Securities may or may not be listed on a national securities exchange
(other than the Common Stock, which is listed on the New York Stock Exchange
and the Pacific Stock Exchange). Any Common Stock sold pursuant to a Prospectus
Supplement will be listed on the New York Stock Exchange and the Pacific Stock
Exchange, subject to official notice of issuance. No assurances can be given
that there will be an active trading market for the Securities.
 
                             VALIDITY OF SECURITIES
 
  The validity of the Securities will be passed upon for the Company and CFC by
Fried, Frank, Harris, Shriver & Jacobson, a partnership including professional
corporations, New York, New York. Edwin Heller, whose professional corporation
is a member of Fried, Frank, Harris, Shriver & Jacobson, is a director of the
Company. Brown & Wood, New York, New York will serve as counsel for any
underwriters and agents. Brown & Wood also serves as counsel for CWMBS, Inc., a
wholly owned subsidiary of the Company, in connection with offerings of
mortgage pass-through certificates, and as counsel to CWM.
 
                                    EXPERTS
 
  The consolidated financial statements of the Company included or incorporated
by reference in this Registration Statement, of which this Prospectus forms a
part, have been audited by Grant Thornton LLP, independent certified public
accountants, for the periods and to the extent indicated in their report
thereon, and have been included or so incorporated in reliance upon the
authority of said firm as experts in accounting and auditing.
 
                                       28

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
                         INDEX TO FINANCIAL STATEMENTS
 
                               FEBRUARY 28, 1995
 


                                                                            PAGE
                                                                            ----
                                                                         
Report of Independent Certified Public Accountants ........................ F-2
Financial Statements
  Consolidated Balance Sheets.............................................. F-3
  Consolidated Statements of Earnings...................................... F-4
  Consolidated Statement of Common Shareholders' Equity.................... F-5
  Consolidated Statements of Cash Flows.................................... F-6
  Notes to Consolidated Financial Statements............................... F-7

 
                                      F-1

 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
Board of Directors and Shareholders
Countrywide Credit Industries, Inc.
 
  We have audited the accompanying consolidated balance sheets of Countrywide
Credit Industries, Inc. and Subsidiaries as of February 28, 1995 and 1994, and
the related consolidated statements of earnings, common shareholders' equity,
and cash flows for each of the three years in the period ended February 28,
1995. These financial statements are the responsibility of the Company's
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 consolidated financial position of Countrywide
Credit Industries, Inc. and Subsidiaries as of February 28, 1995 and 1994, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended February 28, 1995, in
conformity with generally accepted accounting principles.
 
GRANT THORNTON LLP
 
Los Angeles, California
April 18, 1995
 
                                      F-2

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                                  FEBRUARY 28,
 


                                                              1995       1994
                         ASSETS                            ---------- ----------
                                                            (DOLLAR AMOUNTS IN
                                                           THOUSANDS, EXCEPT PER
                                                                SHARE DATA)
                                                                
Cash.....................................................  $   17,624 $    4,034
Receivables for mortgage loans shipped...................   1,174,648  1,970,431
Mortgage loans held for sale.............................   1,724,177  1,743,830
Other receivables........................................     476,754    349,770
Property, equipment and leasehold improvements, at cost--
 net of
 accumulated depreciation and amortization...............     145,612    145,625
Capitalized servicing fees receivable....................     464,268    289,541
Purchased servicing rights...............................   1,332,629    836,475
Other assets.............................................     243,950    245,815
                                                           ---------- ----------
  Total assets...........................................  $5,579,662 $5,585,521
                                                           ========== ==========
Borrower and investor custodial accounts (segregated in
 special
 accounts--excluded from corporate assets)...............  $1,063,676 $1,366,643
                                                           ========== ==========

          LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                
Notes payable............................................  $3,963,091 $3,859,227
Drafts payable issued in connection with mortgage loan
 closings................................................     200,221    449,814
Accounts payable and accrued liabilities.................     105,097     87,818
Deferred income taxes....................................     368,695    308,525
                                                           ---------- ----------
  Total liabilities......................................   4,637,104  4,705,384
Commitments and contingencies............................         --         --
Shareholders' equity
Preferred stock--authorized, 1,500,000 shares of $0.05
 par value;
 issued and outstanding, none............................         --         --
Common stock--authorized, 240,000,000 shares of $0.05 par
 value;
 issued and outstanding, 91,370,364 shares in 1995 and
 91,063,751 shares in 1994...............................       4,568      4,553
Additional paid-in capital...............................     608,289    606,031
Retained earnings........................................     329,701    269,553
                                                           ---------- ----------
  Total shareholders' equity.............................     942,558    880,137
                                                           ---------- ----------
  Total liabilities and shareholders' equity.............  $5,579,662 $5,585,521
                                                           ========== ==========
Borrower and investor custodial accounts.................  $1,063,676 $1,366,643
                                                           ========== ==========

 
        The accompanying notes are an integral part of these statements.
 
                                      F-3

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
 
                            YEAR ENDED FEBRUARY 28,
 


                                                    1995      1994      1993
                                                  --------  --------  --------
                                                      (DOLLAR AMOUNTS IN
                                                          THOUSANDS,
                                                    EXCEPT PER SHARE DATA)
                                                             
Revenues
  Loan origination fees.......................... $203,426  $379,533  $241,584
  Gain (loss) on sale of loans, net of commitment
   fees..........................................  (41,342)   88,212    67,537
                                                  --------  --------  --------
    Loan production revenue......................  162,084   467,745   309,121
  Interest earned................................  343,138   376,225   211,542
  Interest charges............................... (267,685) (275,906) (148,765)
                                                  --------  --------  --------
    Net interest income..........................   75,453   100,319    62,777
  Loan servicing income..........................  428,994   307,477   177,291
  Less amortization of servicing assets..........  (95,768) (242,177) (151,362)
  Add (less) servicing hedge benefit (expense)...  (40,030)   73,400    74,075
  Less write-off of servicing hedge..............  (25,600)      --        --
                                                  --------  --------  --------
    Net loan administration income...............  267,596   138,700   100,004
  Gain on sale of servicing......................   56,880       --        --
  Commissions, fees and other income.............   40,650    48,816    33,656
                                                  --------  --------  --------
      Total revenues.............................  602,663   755,580   505,558
Expenses
  Salaries and related expenses..................  199,061   227,702   140,063
  Occupancy and other office expenses............  102,193   101,691    64,762
  Guarantee fees.................................   85,831    57,576    29,410
  Marketing expenses.............................   23,217    26,030    12,974
  Branch and administrative office consolidation
   costs.........................................    8,000       --        --
  Other operating expenses.......................   37,016    43,481    24,894
                                                  --------  --------  --------
      Total expenses.............................  455,318   456,480   272,103
                                                  --------  --------  --------
Earnings before income taxes.....................  147,345   299,100   233,455
  Provision for income taxes.....................   58,938   119,640    93,382
                                                  --------  --------  --------
  NET EARNINGS................................... $ 88,407  $179,460  $140,073
                                                  ========  ========  ========
Earnings per share
  Primary........................................    $0.96     $1.97     $1.65
  Fully diluted..................................    $0.96     $1.94     $1.52

 
        The accompanying notes are an integral part of these statements.
 
                                      F-4

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
 
                      THREE YEARS ENDED FEBRUARY 28, 1995
 


                                                  ADDITIONAL
                                  NUMBER   COMMON  PAID-IN   RETAINED
                                OF SHARES  STOCK   CAPITAL   EARNINGS   TOTAL
                                ---------- ------ ---------- --------  --------
                                        (DOLLAR AMOUNTS IN THOUSANDS)
                                                        
BALANCE AT MARCH 1, 1992......  50,474,619 $2,523  $462,465  $ 93,629  $558,617
Cash dividends paid--
 preferred....................         --     --        --     (3,482)   (3,482)
Cash dividends paid--common...         --     --        --    (20,090)  (20,090)
Stock options exercised.......     471,288     24     2,252       --      2,276
Tax benefit of stock options
 exercised....................         --     --      2,808       --      2,808
Conversion of preferred stock
 for common stock.............   1,964,794     98    11,633       --     11,731
Dividend reinvestment plan....       1,571    --         38       --         38
401(k) Plan contribution......      39,716      2     1,141       --      1,143
Settlement of three-for-two
 stock split..................      65,688      4       (13)      --         (9)
Net earnings for the year.....         --     --        --    140,073   140,073
Effect of 5% stock dividend
 effective subsequent to year
 end..........................   2,650,884    133    93,311   (93,444)      --
                                ---------- ------  --------  --------  --------
BALANCE AT FEBRUARY 28, 1993..  55,668,560  2,784   573,635   116,686   693,105
Cash dividends paid--
 preferred....................         --     --        --       (732)     (732)
Cash dividends paid--common...         --     --        --    (24,389)  (24,389)
Stock options exercised.......     452,522     22     3,338       --      3,360
Tax benefit of stock options
 exercised....................         --     --      2,495       --      2,495
Conversion of preferred stock
 for common stock.............   4,511,283    225    25,575       --     25,800
Dividend reinvestment plan....       1,994    --         55       --         55
401(k) Plan contribution......      33,637      2     1,005       --      1,007
Settlement of 5% stock
 dividend.....................      41,171      2     1,446    (1,472)      (24)
Net earnings for the year.....         --     --        --    179,460   179,460
Effect of three-for-two stock
 split effective subsequent to
 year end.....................  30,354,584  1,518    (1,518)      --        --
                                ---------- ------  --------  --------  --------
BALANCE AT FEBRUARY 28, 1994..  91,063,751  4,553   606,031   269,553   880,137
Cash dividends paid--common...         --     --        --    (28,259)  (28,259)
Stock options exercised.......     283,147     14     1,584       --      1,598
Tax benefit of stock options
 exercised....................         --     --        697       --        697
Dividend reinvestment plan....         --     --        (14)      --        (14)
Settlement of three-for-two
 stock split..................      23,466      1        (9)      --         (8)
Net earnings for the year.....         --     --        --     88,407    88,407
                                ---------- ------  --------  --------  --------
BALANCE AT FEBRUARY 28, 1995..  91,370,364 $4,568  $608,289  $329,701  $942,558
                                ========== ======  ========  ========  ========

 
         The accompanying notes are an integral part of this statement.
 
                                      F-5

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                          INCREASE (DECREASE) IN CASH
                            YEAR ENDED FEBRUARY 28,
 


                                           1995          1994          1993
                                       ------------  ------------  ------------
                                           (DOLLAR AMOUNTS IN THOUSANDS)
                                                          
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net earnings........................  $     88,407  $    179,460  $    140,073
 Adjustments to reconcile net
  earnings to net cash provided
  (used) by operating activities:
  Amortization of purchased servicing
   rights............................        92,897       141,321       119,878
  Amortization of capitalized
   servicing fees receivable.........         2,871       100,856        31,484
  Depreciation and other
   amortization......................        26,050        15,737         8,746
  Deferred income taxes..............        58,938       119,640        93,382
  Gain on bulk sale of servicing
   rights............................       (56,880)          --            --
  Origination and purchase of loans
   held for sale.....................   (27,866,170)  (52,458,879)  (32,387,774)
  Principal repayments and sale of
   loans.............................    28,681,606    51,060,915    31,725,953
                                       ------------  ------------  ------------
  Decrease (increase) in mortgage
   loans shipped and held for sale...       815,436    (1,397,964)     (661,821)
  Increase in other receivables and
   other assets......................      (142,241)     (407,080)      (28,700)
  Increase in accounts payable and
   accrued liabilities...............        17,279        30,221        16,462
                                       ------------  ------------  ------------
  Net cash provided (used) by
   operating activities..............       902,757    (1,217,809)     (280,496)
                                       ------------  ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Additions to purchased servicing
  rights.............................      (589,051)     (521,326)     (280,459)
 Additions to capitalized servicing
  fees receivable....................      (207,663)     (178,611)     (148,248)
 Purchase of property, equipment and
  leasehold improvements--net........       (21,414)      (64,660)      (49,401)
 Proceeds from bulk sale of servicing
  rights.............................       100,676           --            --
 Proceeds from sale of finance
  receivables........................           --            --        111,897
 Finance receivables originations....           --            --           (425)
 Principal repayments on finance
  receivables........................           --            --          4,254
                                       ------------  ------------  ------------
  Net cash used by investing
   activities........................      (717,452)     (764,597)     (362,382)
                                       ------------  ------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net (decrease) increase in warehouse
  debt and other short-term
  borrowings.........................      (451,915)    1,477,593       526,820
 Issuance of long-term debt..........       399,205       576,718       462,000
 Repayment of long-term debt.........       (93,019)      (59,721)     (103,723)
 Issuance of common stock............         2,273         4,398         3,448
 Cash dividends paid.................       (28,259)      (25,121)      (23,572)
 Net decrease in thrift investment
  accounts...........................           --            --       (224,036)
                                       ------------  ------------  ------------
  Net cash (used) provided by
   financing activities..............      (171,715)    1,973,867       640,937
                                       ------------  ------------  ------------
Net increase (decrease) in cash......        13,590        (8,539)       (1,941)
Cash at beginning of period..........         4,034        12,573        14,514
                                       ------------  ------------  ------------
Cash at end of period................  $     17,624  $      4,034  $     12,573
                                       ============  ============  ============
Supplemental cash flow information:
 Cash used to pay interest...........      $262,858      $277,518      $143,106
 Cash (refunded from) used to pay
  income taxes.......................         $(841)      $(1,823)       $4,567
 Noncash financing activities--
  conversion of preferred stock......          $--        $25,800       $11,731

 
        The accompanying notes are an integral part of these statements.
 
                                      F-6

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows.
 
1. Principles of Consolidation
 
  The consolidated financial statements include the accounts of the parent and
all wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
 
2. Receivables for Mortgage Loans Shipped
 
  Gain or loss on the sale of mortgage loans is recognized at the date the
loans are shipped to investors pursuant to existing sales commitments.
 
3. Mortgage Loans Held for Sale
 
  Mortgage loans held for sale are carried at the lower of cost or market,
which is computed by the aggregate method (unrealized losses are offset by
unrealized gains). The cost of mortgage loans is adjusted by gains and losses
generated from corresponding closed hedging transactions entered into to
protect the inventory value from increases in interest rates. Hedge positions
are also used to protect the pipeline of loan applications in process from
changes in interest rates. Gains and losses resulting from changes in the
market value of the inventory, pipeline and open hedge positions are netted.
Any net gain that results is deferred; any net loss that results is recognized
when incurred. Hedging gains and losses realized during the commitment and
warehousing period related to the pipeline and mortgage loans held for sale are
deferred. Hedging losses are recognized currently if deferring such losses
would result in mortgage loans held for sale and the pipeline being valued in
excess of their estimated net realizable value.
 
4. Property, Equipment and Leasehold Improvements
 
  Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using the
straight-line method. Leasehold improvements are amortized over the lesser of
the life of the lease or service lives of the improvements using the straight-
line method.
 
5. Capitalized Servicing Fees Receivable
 
  The Company sells substantially all of the mortgage loans it produces and
retains the servicing rights thereto. These servicing rights entitle the
Company to a future stream of cash flows based on the outstanding principal
balance of the mortgage loans and the related contractual service fee. The
sales price of the loans, which is generally at or near par, and the resulting
gain or loss on sale are adjusted to provide for the recognition of a normal
service fee rate over the estimated lives of the serviced loans. The amount of
the adjustment approximates the amount that investors were willing to pay for
the excess servicing fees at the time of the loan sale. The adjustment results
in a receivable that is expected to be realized through receipt of the excess
service fee over time.
 
6. Purchased Servicing Rights
 
  The Company capitalizes the cost of bulk purchases of servicing rights, as
well as the net cost of servicing rights acquired through the purchase of loans
servicing-released which will be sold servicing-retained. The purchase price of
loans acquired servicing-released is allocated between the servicing rights and
the value of the loans on a servicing-retained basis. The portion of the
purchase price that represents the cost of acquiring the servicing rights in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 65,
 
                                      F-7

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Accounting for Certain Mortgage Banking Activities, is capitalized as purchased
servicing. The remainder of the purchase price represents the cost basis of the
loan that will be sold. Purchased mortgage loans include closed loans acquired
from financial institutions and table funded loans meeting all the criteria set
forth in EITF Issue 92-10, "Loan Acquisitions Involving Table Funding
Arrangements," acquired from financial institutions and mortgage brokers. The
amount capitalized does not exceed the present value of future net servicing
income related to the purchased loans.
 
7. Servicing Portfolio Hedge
 
  The Company acquires financial instruments, including derivative contracts,
that increase in value when interest rates decline ("Servicing Hedge"). These
financial instruments include call options on U.S. treasury futures and
mortgage-backed securities ("MBS"), interest rate floors and certain tranches
of collateralized mortgage obligations ("CMOs"). The Servicing Hedge partially
protects the value of the capitalized servicing fees receivable and purchased
servicing rights ("Servicing Assets") from the effects of increased prepayment
activity. The value of the interest rate floors and call options is derived
from an underlying instrument or index. The notional or contractual amount is
not recognized in the balance sheet. The cost of the interest rate floors and
call options is charged to expense (and included in net loan administration
income) over the contractual life of the contract. Unamortized costs are
included in Other Assets in the balance sheet. Realized gains from the
Servicing Hedge are recognized first as an offset to the "Incremental
Amortization" of the Servicing Assets (i.e., amortization due to impairment
caused by increased projected prepayment speeds). To the extent the Servicing
Hedge generates gains in excess of Incremental Amortization, the Company
reduces the carrying amount of the Servicing Assets by such excess through
additional amortization. The Company recognized $65 million in net expense
(including a write-off of the Servicing Hedge amounting to $26 million) and $73
million as an offset to incremental amortization for the years ended February
28, 1995 and 1994, respectively. The Company measures the effectiveness of its
Servicing Hedge by computing the correlation under a variety of interest rate
scenarios between the present value of servicing cash flows and the value of
the Servicing Hedge instruments.
 
8. Amortization of Purchased Servicing Rights and Capitalized Servicing Fees
Receivable
 
  Amortization of each year's purchased servicing rights is based on the ratio
of net servicing income received in the current period to total net servicing
income projected to be realized from each year's purchased servicing rights.
The Company evaluates the recoverability of each year's purchased servicing
rights separately by type of loan and interest rate stratum. This level of
disaggregation results in pools of loans which have homogeneous credit and
prepayment risk characteristics. The Company records any additional
amortization necessary to adjust the carrying value of each such stratum's
purchased servicing portfolio to its net realizable value. Amortization of
capitalized servicing fees receivable is based on the decline during the period
in the present value of the projected excess servicing fees using the same
discount rate as that which is implied by the price that investors were willing
to pay for the excess servicing fees at the time of the loan sale. Projected
net servicing income and excess servicing fees are in turn determined on the
basis of the estimated future balance of the underlying mortgage loan
portfolio, which declines over time from prepayments and scheduled loan
amortization. The Company estimates future prepayment rates based on current
interest rate levels, other economic conditions and market forecasts, as well
as relevant characteristics of the servicing portfolio, such as loan types,
interest rate stratification and recent prepayment experience.
 
9. Deferred Commitment Fees
 
  Deferred commitment fees, included in Other Assets, primarily consist of fees
paid to permanent investors to ensure the ultimate sale of loans and put and
call option fees paid for the option of selling or
 
                                      F-8

 
             COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
buying MBS. Fees paid to permanent investors are recognized as an adjustment
to the sales price when the loans are shipped to permanent investors or
charged to expense when it becomes evident the commitment will not be used.
Put and call option fees are amortized over the life of the option to reflect
the decline in its time value. Any unamortized option fees are charged to
income when the related option is exercised.
 
10. Investment Securities
 
  The Company has designated its investments in certain tranches of CMOs as
available for sale. Those securities are reported at fair value, with any net
material unrealized gains and losses included in equity. Unrealized losses
that are other than temporary are recognized in earnings.
 
11. Loan Origination Fees
 
  Loan origination fees and discount points are recorded as an adjustment of
the cost of the loan and are included in loan production revenue when the loan
is sold.
 
12. Interest Rate Swap Agreements
 
  The differential to be received or paid under the agreements is accrued and
is recognized as an adjustment to net interest income. The related amount
payable to or receivable from counterparties is included in Accounts Payable
and Accrued Liabilities.
 
13. Sale of Servicing Rights
 
  The Company recognizes gain or loss on the sale of servicing rights when
title and all risks and rewards have irrevocably passed to the buyer and there
are no significant unresolved contingencies.
 
14. Income Taxes
 
  Effective March 1, 1993, the Company adopted SFAS No. 109, Accounting for
Income Taxes. The adoption of SFAS 109 changes the Company's method of
accounting from the deferred method to an asset and liability approach.
Previously, the Company deferred the past tax effects of timing differences
between financial reporting and taxable income. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of other assets and
liabilities. Adoption of SFAS 109 did not result in a material adjustment to
previously recorded deferred income tax liabilities.
 
15. Earnings Per Share
 
  Primary earnings per share is computed on the basis of the weighted average
number of common and common equivalent shares outstanding during the
respective periods after giving retroactive effect to stock dividends and
stock splits. Fully diluted earnings per share is based on the assumption that
all dilutive convertible preferred stock and stock options were converted at
the beginning of the reporting period. The computations assume that net
earnings have been adjusted for the dividends on the convertible preferred
stock.
 
  The weighted average shares outstanding for computing primary and fully
diluted earnings per share were 92,087,000 and 92,216,000, respectively, for
the year ended February 28, 1995; 90,501,000 and 92,445,000, respectively, for
the year ended February 28, 1994 and 82,514,000 and 92,214,000, respectively,
for the year ended February 28, 1993.
 
16. Financial Statement Reclassifications and Restatement
 
  Certain amounts reflected in the Consolidated Financial Statements for the
years ended February 28, 1994 and 1993 have been reclassified to conform to
the presentation for the year ended February 28, 1995.
 
                                      F-9

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
  On July 17, 1992, a 3-for-2 split of the Company's $0.05 par value common
stock was accomplished. On April 23, 1993, a 5% stock dividend was paid. On May
3, 1994, the Company's $0.05 par value common stock was split 3 for 2. All
references in the accompanying consolidated balance sheets, consolidated
statements of earnings and notes to consolidated financial statements to the
number of common shares and share amounts have been restated to reflect the
stock splits and the stock dividend.
 
NOTE B--PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
 
  Property, equipment and leasehold improvements consisted of the following:
 


                                                        FEBRUARY 28,
                                                ------------------------------
                                                     1995            1994
                                                --------------  --------------
                                                (DOLLAR AMOUNTS IN THOUSANDS)
                                                          
   Buildings................................... $       36,983  $       35,305
   Office equipment............................        116,661          95,976
   Leasehold improvements......................         25,729          23,656
   Mobile homes................................          3,751           8,829
                                                --------------  --------------
                                                       183,124         163,766
   Less: accumulated depreciation and
    amortization...............................        (55,848)        (41,823)
                                                --------------  --------------
                                                       127,276         121,943
   Land........................................         18,336          23,682
                                                --------------  --------------
                                                $      145,612  $      145,625
                                                ==============  ==============

 
NOTE C--CAPITALIZED SERVICING FEES RECEIVABLE AND PURCHASED SERVICING RIGHTS
 
  The components of capitalized servicing fees receivable and purchased
servicing rights are as follows:
 


                                                        FEBRUARY 28,
                                                -------------------------------
                                                   1995       1994       1993
                                                ----------  ---------  --------
                                                (DOLLAR AMOUNTS IN THOUSANDS)
                                                              
   CAPITALIZED SERVICING FEES RECEIVABLE
     Balance at beginning of period............ $  289,541  $ 211,785  $ 95,021
     Additions.................................    207,663    178,612   148,248
     Sale of servicing.........................    (30,065)       --        --
     Amortization
       Scheduled...............................     (2,871)   (32,970)  (21,333)
       Unscheduled.............................        --     (67,886)  (10,151)
                                                ----------  ---------  --------
     Balance at end of period.................. $  464,268  $ 289,541  $211,785
                                                ==========  =========  ========
   PURCHASED SERVICING RIGHTS
     Balance at beginning of period............ $  836,475  $ 456,470  $295,889
     Additions.................................    589,051    521,326   280,459
     Amortization
       Scheduled...............................    (92,897)  (108,822)  (55,511)
       Unscheduled.............................        --     (32,499)  (64,367)
                                                ----------  ---------  --------
     Balance at end of period.................. $1,332,629  $ 836,475  $456,470
                                                ==========  =========  ========

 
 
                                      F-10

 
             COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--NOTES PAYABLE
 
  Notes payable consisted of the following:


                                                          FEBRUARY 28,
                                                  -----------------------------
                                                       1995           1994
                                                  -------------- --------------
                                                  (DOLLAR AMOUNTS IN THOUSANDS)
                                                           
   Commercial paper.............................. $    2,122,348 $    2,194,543
   Medium-term notes, Series A, B and C, net of
    discounts....................................      1,393,900      1,088,550
   Reverse-repurchase agreements.................        245,212        312,129
   Pre-sale funding facilities...................            --          63,210
   Subordinated notes............................        200,000        200,000
   Other notes payable (2.40%-2.90%).............          1,631            795
                                                  -------------- --------------
                                                  $    3,963,091 $    3,859,227
                                                  ============== ==============

 
REVOLVING CREDIT FACILITY AND COMMERCIAL PAPER
 
  As of February 28, 1995, Countrywide Funding Corporation ("CFC"), the
Company's mortgage banking subsidiary, had an unsecured credit agreement
(revolving credit facility) with forty-two commercial banks permitting CFC to
borrow an aggregate maximum amount of $2.5 billion, less commercial paper
backed by the agreement. The amount available under the facility is subject to
a borrowing base, which consists of mortgage loans held for sale, receivables
for mortgage loans shipped and mortgage servicing rights. The facility
contains various financial covenants and restrictions, certain of which limit
the amount of dividends that can be paid by the Company or CFC. The interest
rate on direct borrowings is based on a variety of sources, including the
prime rate and the London Interbank Offered Rates ("LIBOR") for U.S. dollar
deposits. This interest rate varies depending on CFC's credit ratings. The
weighted average borrowing rate on direct borrowings and commercial paper
borrowings for the year ended February 28, 1995, including the effect of the
interest rate swap agreements discussed in Note F, was 4.69%. The weighted
average borrowing rate on commercial paper outstanding as of February 28, 1995
was 5.94%. Under certain circumstances, including the failure to maintain
specified minimum credit ratings, borrowings under the revolving credit
facility and commercial paper may become secured by mortgage loans held for
sale, receivables for mortgage loans shipped and mortgage servicing rights.
The revolving credit facility expires on September 19, 1997.
 
MEDIUM-TERM NOTES
 
  As of February 28, 1995, outstanding medium-term notes issued by the parent
and CFC under various shelf registrations filed with the Securities and
Exchange Commission were as follows:
 


                    OUTSTANDING BALANCE       INTEREST RATE     MATURITY DATE
              ------------------------------- --------------  -----------------
              FLOATING-
                RATE    FIXED-RATE   TOTAL     FROM     TO      FROM      TO
              --------- ---------- ---------- ------- ------  -------- --------
                               (DOLLAR AMOUNTS IN THOUSANDS)
                                                  
Parent
  Series A... $    --   $   10,600 $   10,600  10.60%  10.60% Jun 1995 Aug 1995
CFC
  Series A...    5,000     424,800    429,800   6.10%   8.79% Mar 1995 Mar 2002
  Series B...   11,000     469,000    480,000   5.11%   6.98% Mar 1996 Aug 2005
  Series C...  278,000     195,500    473,500   6.31%   8.43% Dec 1997 Mar 2004
              --------  ---------- ----------
  Subtotal... $294,000  $1,089,300 $1,383,300
              --------  ---------- ----------
  Total...... $294,000  $1,099,900 $1,393,900
              ========  ========== ==========

 
 
                                     F-11

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--NOTES PAYABLE (CONTINUED)
 
  As of February 28, 1995, all of the outstanding fixed-rate notes of CFC had
been effectively converted by interest rate swap agreements to floating-rate
notes. The weighted average borrowing rate on CFC's medium-term note borrowings
for the year ended February 28, 1995, including the effect of the interest rate
swap agreements, was 5.54%. As of February 28, 1995, $26.5 million was
available for future issuance under the Series C shelf registration.
 
REVERSE-REPURCHASE AGREEMENTS
 
  As of February 28, 1995, the Company had entered into short-term financing
arrangements to sell MBS and whole loans under agreements to repurchase. The
weighted average borrowing rate for the year ended February 28, 1995, was
4.63%. The weighted average borrowing rate on reverse-repurchase agreements
outstanding as of February 28, 1995 was 6.01%. The reverse-repurchase
agreements were collateralized by either MBS or whole loans. All MBS and whole
loans underlying reverse-repurchase agreements are held in safekeeping by
broker-dealers, and all agreements are to repurchase the same or substantially
identical MBS or whole loans.
 
PRE-SALE FUNDING FACILITIES
 
  As of February 28, 1995, CFC had a $500 million revolving credit facility
("As Soon as Pooled Agreement") with the Federal National Mortgage Association
("Fannie Mae"). The credit facility is secured by conforming mortgage loans
which are in the process of being pooled into Fannie Mae MBS. Interest rates
are based on LIBOR and/or federal funds. The weighted average borrowing rate
for the year ended February 28, 1995, was 5.03%. This facility is committed
through July 20, 1995, subject to CFC's compliance with certain financial and
operational covenants. As of February 28, 1995, the Company had no outstanding
borrowings under this facility.
 
  As of February 28, 1995, CFC had an uncommitted revolving credit facility
("Pre-sale Funding Facility") with an affiliate of an investment banking firm.
The credit facility is secured by conforming mortgage loans which are in the
process of being pooled into MBS. Interest rates are based on LIBOR. The
weighted average borrowing rate for the year ended February 28, 1995, was
6.03%. As of February 28, 1995, the Company had no outstanding borrowings under
this facility.
 
  As of February 28, 1995, CFC had an uncommitted revolving credit facility
("Early Funding Agreement") with the Federal Home Loan Mortgage Corporation
("Freddie Mac"). The credit facility is secured by conforming mortgage loans
which are in the process of being pooled into Freddie Mac participation
certificates. Interest rates under the agreement are based on the prevailing
rates for MBS reverse-repurchase agreements. The weighted average borrowing
rate for the year ended February 28, 1995 was 3.91%. As of February 28, 1995,
the Company had no outstanding borrowings under this facility.
 
SUBORDINATED NOTES
 
  The 8.25% subordinated notes are due July 15, 2002. Interest is payable semi-
annually on each January 15 and July 15. The subordinated notes are not
redeemable prior to maturity and are not subject to any sinking fund.
 
                                      F-12

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--NOTES PAYABLE (CONTINUED)
 
  Maturities of notes payable are as follows:
 


     YEAR ENDING FEBRUARY 28(29),
     ----------------------------                (DOLLAR AMOUNTS IN THOUSANDS)
                                              
     1996.......................................          $2,463,785
     1997.......................................             114,006
     1998.......................................             180,300
     1999.......................................             102,000
     2000.......................................             228,000
     Thereafter.................................             875,000
                                                          ----------
                                                          $3,963,091
                                                          ==========

 
NOTE E--INCOME TAXES
 
  Components of the provision for income taxes consisted of the following:
 


                                                    YEAR ENDED FEBRUARY 28,
                                                 ------------------------------
                                                   1995       1994      1993
                                                 --------- ---------- ---------
                                                 (DOLLAR AMOUNTS IN THOUSANDS)
                                                             
     Federal expense--deferred.................. $  48,680 $   99,074 $  71,152
     State expense--deferred....................    10,258     20,566    22,230
                                                 --------- ---------- ---------
                                                 $  58,938 $  119,640 $  93,382
                                                 ========= ========== =========

 
  The following is a reconciliation of the statutory federal income tax rate to
the effective income tax rate reflected in the consolidated statements of
earnings:
 


                                                     YEAR ENDED FEBRUARY 28,
                                                     -------------------------
                                                      1995     1994     1993
                                                     -------  -------  -------
                                                              
     Statutory federal income tax rate..............    35.0%    35.0%    34.0%
     State income and franchise taxes...............     5.0      5.0      6.4
     Tax rate differential on reversing timing dif-
      ferences......................................     --       --       (.4)
                                                     -------  -------  -------
       Effective income tax rate....................    40.0%    40.0%    40.0%
                                                     =======  =======  =======

 
  In August 1993, legislation was enacted that implemented a one percent
increase in the corporate federal tax rate. As a result, the Company increased
its deferred federal tax liability in the amount of approximately $5 million.
Also, the Company has diversified its business activities outside California, a
state that has a corporate tax rate that is higher than the average tax rate
among the states in which the Company does business. This diversification
reduced the Company's effective state tax rate by approximately one percent,
and therefore its deferred state tax liability was decreased by approximately
$5 million. Consequently, the Company's total deferred tax liability and
combined tax rate did not change materially as a result of these two events.
 
                                      F-13

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E--INCOME TAXES (CONTINUED)
 
  The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities are presented below:
 


                                                        YEAR ENDED FEBRUARY 28,
                                                        -----------------------
                                                           1995        1994
                                                        ----------- -----------
                                                            (DOLLAR AMOUNTS
                                                             IN THOUSANDS)
                                                              
   Deferred income tax assets:
     Federal net operating losses...................... $   111,455 $    68,240
     State net operating losses........................      10,685       7,342
     Alternative minimum tax credits...................       2,664       2,664
     State income and franchise taxes..................      25,183      22,326
     Allowance for losses..............................       4,968       5,965
     Other.............................................       3,297       1,650
                                                        ----------- -----------
   Total deferred income tax assets....................     158,252     108,187
                                                        ----------- -----------
   Deferred income tax liabilities:
     Capitalized servicing fees receivable and pur-
      chased servicing rights..........................     521,225     410,773
     Accumulated depreciation..........................       5,722       5,939
                                                        ----------- -----------
   Total deferred income tax liabilities...............     526,947     416,712
                                                        ----------- -----------
   Deferred income taxes............................... $   368,695 $   308,525
                                                        =========== ===========

 
  Deferred income tax expense (benefit) resulted from timing differences in the
recognition of revenues and expenses for tax and financial statement purposes.
The sources of these differences and the effects of each were as follows:
 


                                                               FEBRUARY 28, 1993
                                                               -----------------
                                                                (DOLLAR AMOUNTS
                                                                 IN THOUSANDS)
                                                            
     Capitalized servicing fees...............................     $101,800
     State income and franchise taxes.........................       (7,729)
     Accelerated depreciation.................................        1,022
     Allowance for credit losses..............................       (1,711)
                                                                   --------
                                                                   $ 93,382
                                                                   ========

 
  At February 28, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of $13,612,000 expiring in 2003, $16,448,000
expiring in 2004, $4,712,000 expiring in 2006, $8,034,000 expiring in 2008,
$124,160,000 expiring in 2009 and $151,477,000 expiring in 2010.
 
NOTE F--FINANCIAL INSTRUMENTS
 
DERIVATIVE FINANCIAL INSTRUMENTS
 
  The Company utilizes a variety of derivative financial instruments in the
management of interest-rate risk. These instruments include priced short-term
commitments to extend credit, MBS mandatory forward delivery and purchase
commitments, put and call options to sell or buy mortgage-backed and treasury
securities, interest rate floors and interest rate swaps. These instruments
involve, to varying degrees, elements of credit and interest-rate risk. All of
the Company's derivative financial instruments are held or issued for purposes
other than trading.
 
                                      F-14

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--FINANCIAL INSTRUMENTS (CONTINUED)
 
  While the Company does not anticipate nonperformance by any counterparty, the
Company is exposed to credit loss in the event of nonperformance by the
counterparties to the various instruments. The Company manages credit risk with
respect to MBS mandatory forward commitments, put or call options to sell or
buy mortgage-backed and treasury securities and interest rate swaps and floors
by entering into agreements with entities approved by senior management and
initially having a long-term credit rating of single A or better. These
entities include Wall Street firms having primary dealer status, money center
banks and permanent investors. The Company's exposure to credit risk in the
event of default by the counterparty is the difference between the contract
price and the current market price offset by any available margins retained by
the Company or an independent clearing agent. The amounts of credit risk as of
February 28, 1995, if the counterparties failed completely and if the margins,
if any, retained by the Company or an independent clearing agent were to become
unavailable, are approximately $61 million for MBS mandatory forward
commitments, approximately $14 million for interest rate swaps and
approximately $23 million for interest rate floors.
 
  As of February 28, 1995, the Company had priced short-term commitments
amounting to approximately $2.2 billion (including $1.5 billion fixed-rate and
$0.7 billion adjustable-rate) to fund mortgage loan applications in process
subject to approval of the loans and an additional $2.7 billion (including $2.5
billion fixed-rate and $0.2 billion adjustable-rate) subject to property
identification and approval of the loans. Substantially all of these
commitments are for periods of 90 days or less. After funding and sale of the
mortgage loans, the Company's exposure to credit loss in the event of
nonperformance by the mortgagor is limited as described in Note G4. The Company
uses the same credit policies in the approval of the commitments as are applied
to all lending activities.
 
HEDGE OF MORTGAGE LOAN INVENTORY AND COMMITTED PIPELINE
 
  In order to offset the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that substantially all of its inventory of conforming and
government loans and the maximum portion of its Committed Pipeline that may
close be hedged with forward contracts for the delivery of MBS or options on
MBS. The MBS that are to be delivered under these contracts and options are
fixed- or adjustable-rate, corresponding with the composition of the Company's
inventory and Committed Pipeline. At February 28, 1995, the Company had open
commitments amounting to approximately $8.5 billion to sell MBS with varying
settlement dates generally not extending beyond May 1995 and options on MBS
through October 1995 with a total notional amount of $4.2 billion. The mortgage
loan inventory is used to form the MBS that will fill the forward delivery
contracts and options. The Company hedges its inventory and Committed Pipeline
of jumbo mortgage loans by using whole-loan sale commitments to ultimate buyers
or by using temporary "cross hedges" with sales of MBS since such loans are
ultimately sold based on a market spread to MBS. As such, the Company is not
exposed to significant risk nor will it derive any significant benefit from
changes in interest rates on the price of the mortgage loan inventory net of
gains or losses of associated hedge positions. The correlation between the
price performance of the hedge instruments and the inventory being hedged is
very high due to the similarity of the asset and the related hedge instrument.
The Company is exposed to interest-rate risk to the extent that the portion of
loans from the Committed Pipeline that actually closes at the committed price
is less than the portion expected to close in the event of a decline in rates
and such decline in closings is not covered by forward contracts and options to
purchase MBS needed to replace the loans in process that do not close at their
committed price. At February 28, 1995, the notional amount of forward contracts
and options to purchase MBS aggregated $4.1 billion and $2.6 billion,
 
                                      F-15

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--FINANCIAL INSTRUMENTS (CONTINUED)
 
respectively. The forward contracts extend through May 1995 and the options
extend through September 1995. The Company determines the portion of its
Committed Pipeline that it will hedge based on numerous factors, including the
composition of the Company's Committed Pipeline, the portion of such Committed
Pipeline likely to close, the timing of such closings and anticipated changes
in interest rates.
 
SERVICING HEDGE
 
  The primary means used by the Company to reduce the sensitivity of its
earnings to changes in interest rates is through a strong production capability
and a growing servicing portfolio. To further mitigate the effect on earnings
of higher amortization (which is deducted from loan servicing income) resulting
from increased prepayment activity, the Company utilizes its Servicing Hedge,
consisting of financial instruments, including derivative contracts, that
increase in value when interest rates decline. These financial instruments
include call options on U.S. treasury futures and MBS, interest rate floors and
certain tranches of CMOs.
 
  The CMOs, which consist primarily of principal-only ("P/O") securities, have
been purchased at deep discounts to their par values. As interest rates
decline, prepayments on the collateral underlying the CMOs should increase.
These changes should result in a decline in the average lives of the P/O
securities and an increase in the present values of their cash flows.
 
  The following summarizes the notional amounts of Servicing Hedge derivative
contracts:
 


                                         INTEREST     LONG     LONG CALL OPTIONS
                                           RATE   CALL OPTIONS ON U.S. TREASURY
                                          FLOORS     ON MBS         FUTURES
                                         -------- ------------ -----------------
                                              (DOLLAR AMOUNTS IN MILLIONS)
                                                      
   Balance, March 1, 1992...............  $  --      $  560         $  --
     Additions..........................     --       2,287            700
     Dispositions.......................     --       2,847            700
                                          ------     ------         ------
   Balance, February 28, 1993...........     --         --             --
     Additions..........................     --       4,700          2,520
     Dispositions.......................     --       2,700            750
                                          ------     ------         ------
   Balance, February 28, 1994...........     --       2,000          1,770
     Additions..........................   4,000        --           1,300
     Dispositions.......................     --       2,000          3,070
                                          ------     ------         ------
   Balance, February 28, 1995...........  $4,000     $  --          $  --
                                          ======     ======         ======

 
  The terms of the open Servicing Hedge derivative contracts at February 28,
1995 are presented below:
 


                                                  INTEREST RATE FLOORS
                                                  --------------------
                                     
     Index............................. 10-Year Constant Maturity Treasury Yield
     Floor.............................               6.50%--7.25%
     Term..............................                3--5 Years

 
  The Servicing Hedge instruments utilized by the Company partially protect the
value of the investment in servicing rights from the effects of increased
prepayment activity that generally results from declining interest rates. To
the extent that interest rates increase, the value of the servicing rights
increases while the value of the hedge instruments declines. However, the
Company is not exposed to loss beyond its initial outlay to acquire the hedge
instruments. At February 28, 1995, the carrying value of interest rate floor
contracts and P/O securities included in the Servicing Hedge was approximately
$16 million and $42 million, respectively. There can be no assurance the
Company's Servicing Hedge will generate gains in the future.
 
                                      F-16

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--FINANCIAL INSTRUMENTS (CONTINUED)
 
INTEREST RATE SWAPS
 
  As of February 28, 1995, CFC had interest rate swap agreements with certain
financial institutions having notional principal amounts totaling $2.47
billion. The effect of these agreements is to enable CFC to convert a portion
of its medium-term note borrowings to LIBOR-based floating-rate cost borrowings
(notional amount $1.09 billion), to convert a portion of its commercial paper
and medium-term note borrowings from one floating-rate index to another
(notional amount $0.13 billion) and to convert the earnings rate on the
custodial accounts held by CFC from floating to fixed (notional amount $1.25
billion). Payments are due periodically through the termination date of each
agreement. The agreements expire between March 1995 and August 2005.
 
  The terms of the open interest rate swap agreements at February 28, 1995 are
presented below:
 
                                                         
     Swaps related to debt
       Average receive rate.....................................      6.367%
       Average pay rate.........................................      6.329%
       Index....................................................  3-month LIBOR
     Swaps related to custodial accounts
       Average receive rate.....................................      6.468%
       Average pay rate.........................................      6.223%
       Index.................................................... 1-3 month LIBOR

     
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The following disclosure of the estimated fair value of financial instruments
as of February 28, 1995 and 1994 is made by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
 


                                    FEBRUARY 28, 1995      FEBRUARY 28, 1994
                                  ---------------------  ---------------------
                                   CARRYING  ESTIMATED    CARRYING  ESTIMATED
                                    AMOUNT   FAIR VALUE    AMOUNT   FAIR VALUE
                                  ---------- ----------  ---------- ----------
                                         (DOLLAR AMOUNTS IN THOUSANDS)
                                                        
Assets:
  Mortgage loans shipped and held
   for sale...................... $2,898,825 $2,941,709  $3,714,261 $3,725,913
  Capitalized servicing fees re-
   ceivable......................    464,268    473,623     289,541    295,403
  Items included in other assets:        --         --      238,841    173,829
    Principal-only securities....     91,793     92,726         --         --
  Derivatives:
    Interest rate floors.........     15,820     23,396         --         --
    Contracts and options related
     to mortgage loans shipped
     and held for sale...........     47,647     (2,926)        --      59,533
Liabilities:
  Notes payable..................  3,963,091  3,934,160   3,859,227  3,901,179
  Derivatives gain (loss):
    Interest rate swaps..........      4,093    (55,570)      2,950     (6,669)
    Short-term commitments to ex-
     tend credit.................        --      69,252         --     (59,533)

 
                                      F-17

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--FINANCIAL INSTRUMENTS (CONTINUED)
 
  The fair value estimates as of February 28, 1995 and 1994 are based on
pertinent information available to management as of the respective dates.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
 
  The following describes the methods and assumptions used by the Company in
estimating fair values.
 
 Mortgage Loans Shipped and Held for Sale
 
  Fair value is estimated using the quoted market prices for securities backed
by similar types of loans and dealer commitments to purchase loans on a
servicing-retained basis.
 
 Capitalized Servicing Fees Receivable
 
  Fair value is estimated by discounting future cash flows from excess
servicing fees using discount rates that approximate current market rates and
market consensus prepayment rates.
 
 Other Financial Instruments
 
  Fair value is estimated using quoted market prices and by discounting future
cash flows using discount rates that approximate current market rates and
market consensus prepayment rates.
 
 Derivatives
 
  Fair value is estimated as the amounts that the Company would receive or pay
to terminate the contracts at the reporting date, taking into account the
current unrealized gains or losses on open contracts. Market or dealer quotes
are available for many derivatives; otherwise, pricing or valuation models are
applied to current market information to estimate fair value.
 
 Notes Payable
 
  Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
 
NOTE G--COMMITMENTS AND CONTINGENCIES
 
1. Commitments to Sell Mortgage-Backed Securities
 
  In connection with its open commitments to buy or sell MBS and with its
interest rate swap agreements, the Company may be required to maintain margin
deposits. With respect to the MBS commitments, these requirements are generally
greatest during periods of rapidly declining interest rates. The interest rate
swap margin requirements are generally greatest during periods of increasing
interest rates.
 
                                      F-18

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--COMMITMENTS AND CONTINGENCIES (CONTINUED)
 
2. Lease Commitments
 
  The Company leases office facilities under lease agreements extending through
September 2011. Future minimum annual rental commitments under these non-
cancelable operating leases with initial or remaining terms of one year or more
are as follows:
 


     YEAR ENDING FEBRUARY 28(29),
     ----------------------------                (DOLLAR AMOUNTS IN THOUSANDS)
                                              
     1996.......................................           $ 15,214
     1997.......................................             13,151
     1998.......................................             10,778
     1999.......................................              8,619
     2000.......................................              6,078
     Thereafter.................................             55,588
                                                           --------
                                                           $109,428
                                                           ========

 
  Rent expense was $22,136,000, $19,115,000 and $13,049,000 for the years ended
February 28, 1995, 1994 and 1993, respectively.
 
3. Restrictions on Transfers of Funds
 
  The Company and certain of its subsidiaries are subject to regulatory and/or
credit agreement restrictions which limit their ability to transfer funds to
the Company through intercompany loans, advances or dividends. Pursuant to the
revolving credit facility as of February 28, 1995, the Company is required to
maintain $750 million in consolidated net worth and CFC is required to maintain
$725 million of net worth, as defined in the credit agreement.
 
4. Loan Servicing
 
  As of February 28, 1995, 1994 and 1993, the Company was servicing loans
totaling approximately $113.1 billion, $84.7 billion and $54.5 billion,
respectively. Included in the loans serviced as of February 28, 1995, 1994 and
1993 were loans being serviced under subservicing agreements with total
principal balances of $679 million, $592 million and $627 million,
respectively.
 
  Conforming conventional loans serviced by the Company (57% of the servicing
portfolio at February 28, 1995) are securitized through Fannie Mae or Freddie
Mac programs on a non-recourse basis, whereby foreclosure losses are generally
the responsibility of Fannie Mae or Freddie Mac and not of the Company.
Similarly, the government loans serviced by the Company are securitized through
Government National Mortgage Association programs, whereby the Company is
insured against loss by the Federal Housing Administration (16% of the
servicing portfolio at February 28, 1995) or partially guaranteed against loss
by the Veterans Administration (6% of the servicing portfolio at February 28,
1995). In addition, jumbo mortgage loans (21% of the servicing portfolio at
February 28, 1995) are also serviced on a non-recourse basis.
 
  Properties securing the mortgage loans in the Company's servicing portfolio
are geographically dispersed throughout the United States. As of February 28,
1995, approximately 43% of the mortgage loans (measured by unpaid principal
balance) in the Company's servicing portfolio are secured by properties located
in California. No other state contains more than 4% of the properties securing
mortgage loans.
 
                                      F-19

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE H--EMPLOYEE BENEFITS
 
1. Stock Option Plans
 
  The Company has stock option plans (the "Plans") that provide for the
granting of both qualified and non-qualified options to employees and
directors. Options are generally granted at the average market price of the
Company's common stock on the date of grant and are exercisable beginning one
year from the date of grant and expire up to eleven years from date of grant.
 
  Stock option transactions under the Plans were as follows:
 


                                             YEAR ENDED FEBRUARY 28,
                                      ----------------------------------------
                                          1995          1994          1993
                                      ------------  ------------  ------------
                                                (NUMBER OF SHARES)
                                                         
Shares subject to:
  Outstanding options at beginning of
   year..............................    5,603,325     4,478,703     3,653,193
    Options granted..................    1,948,290     1,955,273     1,749,678
    Options exercised................     (307,847)     (701,619)     (837,621)
    Options expired or canceled......     (560,354)     (129,032)      (86,547)
                                      ------------  ------------  ------------
  Outstanding options at end of year.    6,683,414     5,603,325     4,478,703
                                      ============  ============  ============
Exercise price:
  Per share for options exercised
   during the year................... $2.19-$19.50  $2.19-$16.19  $1.98-$12.65
  Per share for options outstanding
   at end of year.................... $2.39-$21.83  $2.19-$21.83  $2.19-$16.19

 
  Of the outstanding options as of February 28, 1995, 2,704,728 shares were
immediately exercisable under the Plans. Also as of February 28, 1995,
2,393,441 shares were designated for future grants under the Plans.
 
2. Pension Plan
 
  The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The Company's policy is to contribute the
amount actuarially determined to be necessary to pay the benefits under the
Plan, and in no event to pay less than the amount necessary to meet the minimum
funding standards of ERISA.
 
                                      F-20

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--EMPLOYEE BENEFITS (CONTINUED)
 
  The following table sets forth the Plan's funded status and amounts
recognized in the Company's financial statements.
 


                                                                 YEAR ENDED
                                                                FEBRUARY 28,
                                                               ----------------
                                                                1995     1994
                                                               -------  -------
                                                               (DOLLAR AMOUNTS
                                                                IN THOUSANDS)
                                                                  
   Actuarial present value of benefit obligations:
     Vested..................................................  $ 5,112  $ 5,024
     Non-vested..............................................    1,095    1,540
                                                               -------  -------
   Total accumulated benefit obligation......................    6,207    6,564
   Additional benefits based on estimated future salary lev-
    els......................................................    4,250    4,517
                                                               -------  -------
   Projected benefit obligations for service rendered to
    date.....................................................   10,457   11,081
   Less Plan assets at fair value, primarily mortgage-backed
    securities...............................................   (9,484)  (7,482)
                                                               -------  -------
   Projected benefit obligation in excess of Plan assets.....      973    3,599
   Unrecognized net gain (loss) from past experience
    different from that assumed and effects of changes in
    assumptions..............................................    1,862     (780)
   Prior service cost not yet recognized in net periodic pen-
    sion cost................................................   (1,422)  (1,522)
   Unrecognized net asset at February 28, 1987 being recog-
    nized over 15 years......................................      496      566
                                                               -------  -------
   Accrued pension cost......................................  $ 1,909  $ 1,863
                                                               =======  =======
   Net pension cost included the following components:
     Service cost--benefits earned during the period.........  $ 1,648  $ 1,395
     Interest cost on projected benefit obligations..........      789      677
     Actual return on Plan assets............................     (318)    (413)
     Net amortization and deferral...........................     (327)     (28)
                                                               -------  -------
   Net periodic pension cost.................................  $ 1,792  $ 1,631
                                                               =======  =======

 
  The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.625% and 5.0%, respectively. The weighted
average expected long-term rate of return on assets used was 8.125%. Pension
expense for 1995, 1994 and 1993 was $1,792,000, $1,631,000 and $992,000,
respectively. The Company makes contributions to the Plan in amounts that are
deductible in accordance with federal income tax regulations.
 
NOTE I--REDEEMABLE PREFERRED STOCK
 
  On July 6, 1993, the Company called all of its outstanding convertible
preferred stock, which was represented by depositary convertible shares (each
depositary share represented 1/10 of a share of convertible preferred stock).
Each depositary share was convertible into 6.3 shares of common stock, and each
depositary share not converted was redeemable for $27.375 in cash. All holders
converted their shares into common stock.
 
NOTE J--SHAREHOLDERS' EQUITY
 
  In February 1988, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") for each
outstanding share of the Company's common stock. As a
 
                                      F-21

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SHAREHOLDERS' EQUITY (CONTINUED)
 
result of stock splits and stock dividends, 0.399 of a Right is presently
associated with each outstanding share of the Company's common stock and the
same fraction of a Right will be associated with each share of the Company's
common stock issued prior to the Distribution Date (as defined below). Each
Right, when exercisable, entitles the holder to purchase from the Company one
one-hundredth of a share of Series A Participating Preferred Stock, par value
$0.05 per share, of the Company (the "Series A Preferred Stock"), at a price of
$145, subject to adjustments in certain cases to prevent dilution.
 
  The Rights are evidenced by the common stock certificates and are not
exercisable or transferable, apart from the common stock, until the date (the
"Distribution Date") of the earlier of a public announcement that a person or
group, without prior consent of the Company, has acquired 20% or more of the
common stock (an "Acquiring Person"), or ten days (subject to extension by the
Board of Directors) after the commencement of a tender offer made without the
prior consent of the Company.
 
  In the event a person becomes an Acquiring Person, then each Right (other
than those owned by the Acquiring Person) will entitle its holder to purchase,
at the then current exercise price of the Right, that number of shares of
common stock, or the equivalent thereof, of the Company which, at the time of
such transaction, would have a market value of two times the exercise price of
the Right. The Board of Directors of the Company may delay the exercisability
of the Rights during the period in which they are exercisable only for Series A
Preferred Stock (and not common stock).
 
  In the event that, after a person has become an Acquiring Person, the Company
is acquired in a merger or other business combination, as defined for the
purposes of the Rights, each Right (other than those held by the Acquiring
Person) will entitle its holder to purchase, at the then current exercise price
of the Right, that number of shares of common stock, or the equivalent thereof,
of the other party (or publicly traded parent thereof) to such merger or
business combination which at the time of such transaction would have a market
value of two times the exercise price of the Right. The Rights expire on the
earlier of February 28, 2002, the consummation of certain merger transactions
or optional redemption by the Company prior to any person becoming an Acquiring
Person.
 
NOTE K--RELATED PARTY TRANSACTIONS
 
  Countrywide Asset Management Corporation ("CAMC"), a wholly-owned subsidiary
of the Company, has entered into an agreement (the "Management Agreement") with
CWM Mortgage Holdings, Inc. ("CWM"), formerly Countrywide Mortgage Investments,
Inc., a real estate investment trust. CAMC has entered into a subcontract with
its affiliate, CFC, to perform such services for CWM and its subsidiaries as
CAMC deems necessary. In accordance with the Management Agreement, CAMC advises
CWM on various facets of its business and manages its operations subject to the
supervision of CWM's Board of Directors. For performing these services, CAMC
receives certain management fees and incentive compensation. CAMC waived all
management fees pursuant to the above for calendar year 1993 and 25% of
incentive compensation earned in 1994. In addition, in 1993 CAMC absorbed $0.9
million of operating expenses incurred in connection with its duties under the
Management Agreement. CWM and its subsidiaries began paying all expenses of the
new operations in June 1993. During the fiscal years ended February 28, 1995,
1994 and 1993, CAMC earned $0.3 million, $0.1 million and $0.8 million,
respectively, in base management fees from CWM and its subsidiaries. In
addition, during the fiscal year ended February 28, 1995, CAMC recorded $1.1
million in incentive compensation, net of the amount waived as described above.
The Management Agreement is renewable annually and expires on May 15, 1995. As
of February 28, 1995, the Company and CAMC own 1,120,000 shares or
approximately 2.77% of the common stock of CWM.
 
                                      F-22

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K--RELATED PARTY TRANSACTIONS (CONTINUED)
 
  CAMC incurs many of the expenses related to the operations of CWM and its
subsidiaries, including personnel and related expenses, subject to
reimbursement by CWM. CWM's conduit operations are primarily conducted in
Independent National Mortgage Corporation ("INMC"), formerly Countrywide
Mortgage Conduit, and all other operations are conducted in CWM. Accordingly,
INMC is charged with the majority of the conduit's cost and CWM is charged with
the other operations' costs. During Fiscal 1995, the amount of common expenses
incurred by CFC which were allocated to CAMC and reimbursed by CWM totaled $1.2
million.
 
  CWM has an option to purchase conventional loans from CFC at the prevailing
market price. During the years ended February 28, 1995, 1994 and 1993, CWM
purchased $80.4 million, $300.5 million and $130.3 million, respectively, of
conventional non-conforming mortgage loans from CFC pursuant to this option.
 
  During the year ended February 28, 1995, CFC purchased from INMC bulk
servicing rights for loans with principal balances aggregating $3.0 billion at
a price of $38.2 million. In 1987 and 1993, subsidiaries of CWM entered into
servicing agreements appointing CFC as servicer of mortgage loans
collateralizing five series of CMOs with outstanding balances of approximately
$94.0 million at February 28, 1995. CFC is entitled under each agreement to an
annual fee of up to 0.32% of the aggregate unpaid principal balance of the
pledged mortgage loans. Servicing fees received by CFC under such agreements
for the years ended February 28, 1995, 1994 and 1993 were approximately $0.3
million, $0.5 million and $0.3 million, respectively.
 
  CFC has extended CWM a $10 million line of credit bearing interest at prime
and maturing September 30, 1995. At February 28, 1995, there was no outstanding
amount under the agreement.
 
NOTE L--SEGMENT INFORMATION
 
  The Company and its subsidiaries operate primarily in the mortgage banking
industry. Operations in mortgage banking involve CFC's origination and purchase
of mortgage loans, sale of mortgage loans in the secondary mortgage market,
servicing of mortgage loans and the purchase and sale of rights to service
mortgage loans.
 
  Segment information for the year ended February 28, 1995 follows:
 


                                                      ADJUSTMENTS
                                 MORTGAGE                 AND
                                 BANKING     OTHER    ELIMINATIONS CONSOLIDATED
                                ---------- ---------- ------------ ------------
                                         (DOLLAR AMOUNTS IN THOUSANDS)
                                                       
Unaffiliated revenue........... $  563,586 $   39,077  $     --     $  602,663
Intersegment revenue...........        744        --        (744)          --
                                ---------- ----------  ---------    ----------
  Total revenue................ $  564,330 $   39,077  $    (744)   $  602,663
                                ========== ==========  =========    ==========
Earnings before income taxes... $  136,220 $   11,125  $     --     $  147,345
                                ========== ==========  =========    ==========
Identifiable assets as of Feb-
 ruary 28, 1995................ $5,520,283 $1,014,391  $(955,012)   $5,579,662
                                ========== ==========  =========    ==========

 
                                      F-23

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L--SEGMENT INFORMATION (CONTINUED)
 
  Segment information for the year ended February 28, 1994 follows:
 


                                                       ADJUSTMENTS
                                    MORTGAGE               AND
                                    BANKING    OTHER   ELIMINATIONS CONSOLIDATED
                                   ---------- -------- ------------ ------------
                                           (DOLLAR AMOUNTS IN THOUSANDS)
                                                        
   Unaffiliated revenue..........  $  719,533 $ 36,047  $     --     $  755,580
   Intersegment revenue..........         744      --        (744)          --
                                   ---------- --------  ---------    ----------
     Total revenue...............  $  720,277 $ 36,047  $    (744)   $  755,580
                                   ========== ========  =========    ==========
   Earnings before income taxes..  $  286,069 $ 13,031  $     --     $  299,100
                                   ========== ========  =========    ==========
   Identifiable assets as of Feb-
    ruary 28, 1994...............  $5,523,664 $930,720  $(868,863)   $5,585,521
                                   ========== ========  =========    ==========

 
  Segment information for the year ended February 28, 1993 follows.
 


                                                       ADJUSTMENTS
                                    MORTGAGE               AND
                                    BANKING    OTHER   ELIMINATIONS CONSOLIDATED
                                   ---------- -------- ------------ ------------
                                           (DOLLAR AMOUNTS IN THOUSANDS)
                                                        
   Unaffiliated revenue..........  $  463,394 $ 42,164  $     --     $  505,558
   Intersegment revenue..........       3,021      --      (3,021)          --
                                   ---------- --------  ---------    ----------
     Total revenue...............  $  466,415 $ 42,164  $  (3,021)   $  505,558
                                   ========== ========  =========    ==========
   Earnings before income taxes..  $  217,073 $ 16,382  $     --     $  233,455
                                   ========== ========  =========    ==========
   Identifiable assets as of Feb-
    ruary 28, 1993...............  $3,229,243 $765,954  $(696,064)   $3,299,133
                                   ========== ========  =========    ==========

 
NOTE M--BRANCH AND ADMINISTRATIVE OFFICE CONSOLIDATION COSTS
 
  As a result of the decline in production caused by increasing mortgage
interest rates during Fiscal 1995, the Company reduced headcount by
approximately 30%, closed underperforming branch offices and consolidated its
administrative offices. A charge of $8 million related to these consolidation
efforts was recorded during the year ended February 28, 1995.
 
  Branch and administrative office consolidation costs incurred during Fiscal
1995 and related reserves at February 28, 1995 are presented below:
 


                                                                 RESERVED AT
                                             EXPENSE INCURRED FEBRUARY 28, 1995
                                             ---------------- -----------------
                                               (DOLLAR AMOUNTS IN THOUSANDS)
                                                        
   Office lease costs.......................      $4,348           $  743
   Equipment and improvement relocation,
    disposal and abandonment costs..........       1,976              474
   Other....................................       1,676            1,146
                                                  ------           ------
                                                  $8,000           $2,363
                                                  ======           ======

 
NOTE N--SUBSEQUENT EVENTS
 
  On March 20, 1995, the Company declared a cash dividend of $0.08 per common
share paid April 17, 1995 to shareholders of record on April 3, 1995.
 
                                      F-24

 
              COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE O--QUARTERLY FINANCIAL DATA (UNAUDITED)
 
  Summarized quarterly data is as follows:
 


                                              THREE MONTHS ENDED
                            -----------------------------------------------------------
                              MAY 31       AUGUST 31      NOVEMBER 30     FEBRUARY 28
                            ------------- -------------  --------------  --------------
                             (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                             
   Year ended February 28,
    1995
     Revenue............... $     177,118 $     151,106   $     133,726   $     140,713
     Expenses..............       120,903       119,257         106,795         108,363
     Provision for income
      taxes................        22,486        12,739          10,773          12,940
     Net earnings..........        33,729        19,110          16,158          19,410
     Earnings per share(1)
       Primary............. $        0.37 $        0.21   $        0.18   $        0.21
       Fully diluted....... $        0.37 $        0.21   $        0.18   $        0.21
   Year ended February 28,
    1994
     Revenue............... $     166,665 $     188,272   $     196,446   $     204,197
     Expenses..............        94,503       111,507         124,844         125,626
     Provision for income
      taxes................        28,865        30,706          28,641          31,428
     Net earnings..........        43,297        46,059          42,961          47,143
     Earnings per share(1)
       Primary............. $        0.49 $        0.51   $        0.46   $        0.51
       Fully diluted....... $        0.47 $        0.50   $        0.46   $        0.51

--------
(1) Earnings per share is computed independently for each of the quarters
    presented. Therefore, the sum of the quarterly earnings per share amounts
    may not equal the annual amount. This is caused by rounding and the
    averaging effect of the number of share equivalents utilized throughout the
    year, which changes with the market price of the common stock.
 
NOTE P--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
 
  Summarized financial information for Countrywide Funding Corporation is as
follows:
 


                                                           FEBRUARY 28,
                                                   -----------------------------
                                                        1995           1994
                                                   -------------- --------------
                                                   (DOLLAR AMOUNTS IN THOUSANDS)
                                                            
   Balance Sheets:
     Mortgage loans shipped and held for sale..... $    2,898,825 $    3,714,261
     Other assets.................................      2,621,458      1,809,403
                                                   -------------- --------------
       Total assets............................... $    5,520,283 $    5,523,664
                                                   ============== ==============
     Short- and long-term debt.................... $    4,152,712 $    4,296,291
     Other liabilities............................        433,025        374,559
     Equity.......................................        934,546        852,814
                                                   -------------- --------------
       Total liabilities and equity............... $    5,520,283 $    5,523,664
                                                   ============== ==============
   Statements of Earnings:
     Revenues..................................... $      564,330 $      720,277
     Expenses.....................................        428,110        434,208
     Provision for income taxes...................         54,488        114,427
                                                   -------------- --------------
       Net earnings............................... $       81,732 $      171,642
                                                   ============== ==============

 
                                      F-25

 
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  No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained or in-
corporated by reference in this Prospectus Supplement or the Prospectus in
connection with the offering covered by this Prospectus Supplement and the
Prospectus. If given or made, such information or representations must not be
relied upon as having been authorized by the Company, the Guarantor or any
Agent. This Prospectus Supplement and the Prospectus do not constitute an of-
fer to sell, or a solicitation of an offer to buy, the Notes in any jurisdic-
tion where, or to any person whom, it is unlawful to make such offer or solic-
itation. Neither the delivery of this Prospectus Supplement and the Prospectus
nor any sale made hereunder or thereunder shall, under any circumstances, cre-
ate an implication that there has not been any change in the facts set forth
in this Prospectus Supplement or the Prospectus or in the affairs of CFC or
the Guarantor since the date hereof.
 
                                ---------------
 
                               TABLE OF CONTENTS
 


                                                                            Page
                                                                            ----
                             Prospectus Supplement
 
                                                                         
Risk Factors..............................................................   S-2
Description of Notes......................................................   S-4
Certain Federal Income Tax Considerations.................................  S-21
Plan of Distribution of Notes.............................................  S-25
Validity of Notes.........................................................  S-26
 
                                  Prospectus
 
Available Information.....................................................     2
Incorporation of Certain Documents
 by Reference.............................................................     2
The Company and CFC.......................................................     3
Use of Proceeds...........................................................     4
Selected Consolidated Financial Data......................................     5
Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................     6
Description of Capital Stock..............................................    18
Description of Debt Securities and Guarantees.............................    20
Plan of Distribution......................................................    27
Validity of Securities....................................................    28
Experts...................................................................    28
Index to Financial Statements.............................................   F-1

 
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                              U. S. $500,000,000
 
                                 COUNTRYWIDE 
                                   FUNDING 
                                 CORPORATION
 
                          MEDIUM-TERM NOTES, SERIES D
 
                            DUE NINE MONTHS OR MORE
                              FROM DATE OF ISSUE
 
                        PAYMENT OF PRINCIPAL, PREMIUM, 
                             IF ANY, AND INTEREST
                         UNCONDITIONALLY GUARANTEED BY
 
               [LOGO] - COUNTRYWIDE(SM) CREDIT INDUSTRIES, INC.
 
                                ---------------
 
                                PROSPECTUS AND 
                             PROSPECTUS SUPPLEMENT
                                August 16, 1995
 
                                ---------------
 
                                LEHMAN BROTHERS
 
                             GOLDMAN, SACHS & CO.
 
                              MERRILL LYNCH & CO.
 
                             SALOMON BROTHERS INC
 
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