<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
File No. 33-76642
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 16, 1996)
$15,500,000
RAY ELLISON MORTGAGE ACCEPTANCE CORP.
7.00% GNMA-COLLATERALIZED BONDS, SERIES 1996B, DUE MAY 31, 2027.
Ray Ellison Mortgage Acceptance Corp. (the "Issuer") is offering
$15,500,000 aggregate principal amount of 7.00% GNMA-Collateralized Bonds,
Series 1996B (the "Bonds"). The Bonds will be secured by mortgage-backed
certificates guaranteed as to full and timely payment of principal and interest
by the Government National Mortgage Association (the "GNMA Certificates") and by
certain other collateral described in this Prospectus Supplement and the
accompanying Prospectus. The guaranty obligation of GNMA with respect to the
GNMA Certificates is backed by the full faith and credit of the United States.
It is a condition to the issuance of the Bonds that they be rated "AAA" by
Standard & Poor's Ratings Group.
Interest on the Bonds will accrue from their issue date and will be payable
monthly on the last day of each month, commencing July 31, 1996. The Bonds are
subject to mandatory redemption and call by the Issuer under certain
circumstances and may be redeemed at the option of the holder to the extent that
funds are available and subject to certain priorities and limitations described
in this Prospectus Supplement and in the Prospectus. ALTHOUGH NO ASSURANCE CAN
BE GIVEN AS TO THE ACTUAL REDEMPTION EXPERIENCE OF ANY INDIVIDUAL BONDHOLDER DUE
TO THE VARIOUS FACTORS DESCRIBED HEREIN UNDER "PREPAYMENT OF THE BONDS -- THE
EFFECTS OF INTEREST RATE CHANGES AND OTHER FACTORS," IT IS ANTICIPATED THAT THE
ACTUAL MATURITY OF THE MAJORITY OF THE BONDS, BY PRINCIPAL BALANCE, WILL OCCUR
SIGNIFICANTLY EARLIER THAN THE STATED MATURITY OF THE BONDS. FURTHER, INVESTORS
SHOULD BE AWARE THAT, FOR THE REASONS DESCRIBED HEREIN, THE ACTUAL MATURITY OF
SOME OF THE BONDS WILL OCCUR SIGNIFICANTLY EARLIER THAN THE ACTUAL MATURITY OF
OTHER BONDS.
The Bonds will be available to investors only in book entry form through
the facilities of The Depository Trust Company. Bond certificates will be
available only under certain limited circumstances as described herein.
The Bonds may be purchased in minimum denominations of $1,000 and any
integral multiple thereof. There is currently no secondary market for the Bonds
and no assurance that one will develop.
ALTHOUGH PAYMENT OF THE PRINCIPAL OF AND INTEREST ON THE GNMA CERTIFICATES
SECURING THE BONDS IS GUARANTEED BY GNMA, THE BONDS REPRESENT OBLIGATIONS SOLELY
OF THE ISSUER AND ARE NOT INSURED OR GUARANTEED BY GNMA OR ANY OTHER
GOVERNMENTAL AGENCY, OR BY RAY ELLISON MORTGAGE INVESTMENT CORP., THE ISSUER'S
PARENT CORPORATION, ANY OF ITS AFFILIATES OR ANY OTHER AFFILIATE OF THE ISSUER.
SEE "SPECIAL CONSIDERATIONS" IN THE ACCOMPANYING PROSPECTUS FOR CERTAIN OTHER
FACTORS TO BE CONSIDERED BY PURCHASERS OF THE BONDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) ISSUER(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series 1996B Bond........................... 100% 3.50% 96.50%
- -------------------------------------------------------------------------------------------------------------
Total(4)........................................ $15,500,000 $542,500 $14,957,500
=============================================================================================================
</TABLE>
- --------------------
(1) Plus accrued interest from May 30, 1996.
(2) Certain parties have agreed to indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933,
as amended. (See "Underwriting" herein.)
(3) Before deduction of expenses payable by the Issuer estimated at $50,000.
(4) See "Additional Series 1996B Bonds Which May Be Offered" in this Prospectus
Supplement.
The Bonds are offered by the Underwriters, subject to prior sale, when, as
and if issued by the Issuer and accepted by the Underwriters and subject to
their right to reject any order in whole or in part. It is expected that the
Bonds will be delivered in book entry form on or about May 30, 1996, through the
facilities of The Depository Trust Company.
---------------------
RAUSCHER PIERCE REFSNES, INC.
J.C. BRADFORD & CO.
EVEREN SECURITIES, INC.
DAIN BOSWORTH, INC.
RAYMOND JAMES & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 15, 1996.
<PAGE> 2
This Prospectus Supplement does not contain complete information about the
offering of the Bonds. Additional information is contained in the Prospectus and
purchasers are urged to read both the Prospectus and this Prospectus Supplement
in full. Sale of the Bonds may not be consummated unless the purchaser has
received both the Prospectus and this Prospectus Supplement.
---------------------
The Issuer's principal executive offices are located at 4800 Fredericksburg
Road, San Antonio, Texas 78229, and its telephone number at such offices is
(210) 308-1403.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS OFFERED
HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
---------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
S-2
<PAGE> 3
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Terms used and not otherwise defined herein shall
have the respective meanings ascribed to them in the Prospectus.
Securities Offered...The securities will be 7.00% GNMA-Collateralized Bonds,
Series 1996B, Due May 31, 2027 (the "Bonds"). The Bonds
will be issued in minimum denominations of $1,000 and
integral multiples thereof. (See "Description of the
Bonds" in the Prospectus.) The Bonds are "Book Entry
Bonds" as defined in the Prospectus and will be issued
initially in the form of a single certificate registered
in the name of a nominee of The Depository Trust Company
(the "Clearing Agency"). Purchasers and other beneficial
owners of Bonds ("Beneficial Owners") will not receive
certificates ("Definitive Bonds") representing their
interests in the Bonds except upon the termination of
book entry registration ("Book Entry Termination") which
will occur only under certain limited circumstances. The
procedures relating to payments of principal and interest
on, and redemption and transfers of, Book Entry Bonds are
described in the accompanying Prospectus. (See "Special
Considerations -- Book Entry Registration" and
"Description of the Bonds -- Book Entry Registration" in
the Prospectus.)
Issuer...............The issuer will be Ray Ellison Mortgage Acceptance Corp.
(the "Issuer"), a wholly-owned, limited purpose finance
subsidiary of Ray Ellison Mortgage Investment Corp.
("REMIC"). Neither REMIC nor any other affiliate of the
Issuer has guaranteed or is otherwise obligated with
respect to the Bonds.
Bond Ratings.........It is a condition to the issuance of the Bonds that they be
assigned a bond rating of "AAA" by Standard & Poor's
Ratings Group.
Interest Payments....The Bonds will bear interest at the rate of 7.00% per annum
(the "Bond Rate"), computed on the basis of a 360-day
year of twelve 30-day months. Interest will be payable
monthly on the last day of each month, or the immediately
succeeding Business Day (each, a "Payment Date"), with
respect to interest accrued on the Bonds during the
previous calendar month (each, an "Accrual Period").
Interest payable on the initial Payment Date, July 31,
1996, will be with respect to 31 days' interest accrued
from May 30, 1996 through June 30, 1996 (the "Initial
Accrual Period"). Such monthly interest payments to be
made on each respective Payment Date will be made to
holders of record of the Bonds as of the close of
business on the last business day of the month preceding
such Payment Date (each such date being a "Regular Record
Date"). Upon maturity or earlier redemption of any Bond,
interest will be paid to the date of maturity or
redemption. The yield on the Bonds will be less than the
yield which would otherwise be produced by the interest
rate on the Bonds, because on each Payment Date (other
than the month in which a Bond matures or is redeemed)
the interest payable on the Bonds is the interest accrued
during the immediately preceding Accrual Period or
Initial Accrual Period, as the case may be, even though
such Accrual Period ends one month prior to such Payment
Date. (See "Description of the Bonds -- General" in the
Prospectus.)
Indenture Trustee
and Paying Agent.....It is currently anticipated that The Bank of New York, as
indenture trustee (the "Trustee"), will be paying agent
on behalf of the holders of the Bonds ("Bondholders"). It
is not currently anticipated that the Issuer will retain
another entity to act as a paying agent, although
permitted to do so under the indenture governing the
Bonds between the Issuer and the Trustee (the
"Indenture").
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<PAGE> 4
Collateral...........The Bonds will be secured by collateral, including the GNMA
Certificates, the Collection Account, Redemption Fund and
Reserve Fund (collectively, the "Collateral") as
described below:
A. GNMA
Certificates....The Bonds will be secured by a group of GNMA Certificates.
Such GNMA Certificates will have an initial aggregate
GNMA Collateral Value at least equal to the principal
amount of the Bonds plus $1,000. Scheduled distributions
on the GNMA Certificates will provide a cash flow
sufficient to amortize the Bonds through redemptions no
later than their stated maturity and to support the
interest payments on the Bonds. The "GNMA Collateral
Value" of a GNMA Certificate is the Maximum GNMA
Collateral Value Percentage (defined in the Series
Supplement) of the lesser of (i) the outstanding
principal amount of such GNMA Certificate, due to be
received prior to the maturity of the Bonds, and (ii) the
present value of the scheduled distributions on such GNMA
Certificates, to be received prior to the maturity of the
Bonds, discounted monthly at the Bond Rate. (See
"Description of the GNMA Certificates Securing the Bonds"
below and "The Collateral -- GNMA Certificates" in the
Prospectus.)
B. Collection
Account.........The Bonds will also be secured by amounts deposited from
time to time in the collection account (the "Collection
Account") from amounts received on the GNMA Certificates
and from other sources. As described in the accompanying
Prospectus, on each Redemption Date (as defined in this
Summary under "Redemption -- General") the amount to be
available for application to the principal of the Bonds,
in the form of redemptions as described hereafter, will
be withdrawn from the Collection Account and deposited
into the Redemption Fund. (See "Prospectus
Summary -- Redemption of Bonds -- B. Amounts to be
Deposited into the Redemption Fund" and "Description of
the Bonds -- Redemption of Bonds" in the accompanying
Prospectus.) Any funds remaining in the Collection
Account on any Payment Date following such deposit to the
Redemption Fund and following payment of all interest due
and payable on the Bonds on such Payment Date may be paid
to the Issuer, free and clear of the lien of the
Indenture. In addition, on the Closing Date, the Issuer
will deposit in the Collection Account any amount
necessary to meet the requirements of Standard & Poor's
Ratings Group so as to receive a rating on the Bonds of
"AAA."
C. Redemption
Fund............The Bonds will also be secured by amounts deposited from
time to time into the Redemption Fund from funds
available in the Collection Account as described in this
Summary and in "Prospectus Summary -- Redemption of
Bonds -- B. Amounts to be Deposited into the Redemption
Fund" and "Description of the Bonds -- Redemption of
Bonds" in the accompanying Prospectus.
D. Reserve
Fund............The Bonds will be further secured by either (1) a Reserve
Fund into which will be deposited cash, a letter of
credit or a surety bond or (2) GNMA Certificates having a
GNMA Collateral Value in excess of that sufficient to
support required principal and interest payments on the
Bonds.
At any time the Issuer elects to secure the Bonds by means
of a Reserve Fund, the amount deposited into the Reserve
Fund will represent the "Requisite Amount of the Reserve
Fund" required by Standard & Poor's Ratings Group. The
Requisite Amount of the Reserve Fund at any time will be
0.5834% of the principal amount of the Bonds then
outstanding. The Issuer may withdraw funds from the
Reserve
S-4
<PAGE> 5
Fund to the extent that the amount of the Reserve Fund
exceeds the Requisite Amount of the Reserve Fund.
In lieu of the required deposit to the Reserve Fund, the
Issuer may overcollateralize the Bonds with GNMA
Certificates having a GNMA Collateral Value in excess of
that required to support payments of principal and
interest on the Bonds in an amount (the "Applicable
Overcollateralization Amount") specified in the
Indenture. In such case, the "Maximum GNMA Collateral
Value Percentage", as described in the Series Supplement
to the Indenture setting forth the terms of the Bonds
(the "Series Supplement"), will be less than 100%. The
effect of the Maximum GNMA Collateral Value Percentage is
to provide Bondholders at any time with comparable
protection regardless of whether the Bonds are secured by
a deposit to the Reserve Fund or the Applicable
Overcollateralization Amount.
Redemption
A. General.........Principal payments on the Bonds will be made in the form of
redemptions as explained below on the last day of each
month, or the immediately succeeding Business Day,
commencing June 30, 1996 (each, a "Redemption Date"). The
aggregate principal amount of Bonds redeemed on each
Redemption Date shall be the maximum principal amount of
Bonds which may be redeemed from funds then on deposit in
the Redemption Fund. On each Redemption Date, the amount
to be deposited into the Redemption Fund will be
calculated as described in the accompanying Prospectus.
(See "Prospectus Summary -- Redemption of Bonds -- B.
Amounts to be Deposited into the Redemption Fund" and
"Description of the Bonds -- Redemption of Bonds" in the
accompanying Prospectus). In no event, however, shall the
amount of any such monthly principal payment be less than
the incremental amount necessary to make the total
principal payments made to date on the Bonds at least
equal to the aggregate amount which would have been paid
through such date were the Bonds still secured by the
GNMA Certificates originally pledged to secure the Bonds
and assuming that no prepayments had been made on the
mortgage loans underlying such GNMA Certificates.
All principal payments on the Bonds will be applied first
to redemption of Bonds at the request of Beneficial
Owners and then to mandatory redemption of Bonds under
the circumstances described hereafter and in "Prospectus
Summary -- Redemption of Bonds" in the accompanying
Prospectus.
S-5
<PAGE> 6
B. Redemption at
the Request of
Bondholders.....Redemption of Bonds pursuant to requests by Beneficial
Owners will be made on each Redemption Date in an amount
equal to the aggregate principal amount of Bonds for
which redemption has been properly requested as described
below, but not to exceed the amount available in the
Redemption Fund on such Redemption Date. A Beneficial
Owner may at any time submit a request for redemption of
his Bonds through the brokerage firm through which his
Bonds are held. Subject to certain priorities of deceased
holders and certain other limitations, Bonds will be
redeemed in the order that timely requests for redemption
are received by the Clearing Agency (as determined in
accordance with the Clearing Agency's procedures) or,
after Book Entry Termination, by the Trustee. Requests
for redemption must be submitted to the Clearing Agency
by its participants (the "Clearing Agency Participants")
in accordance with the Clearing Agency's procedures and,
in the case of a request on behalf of a deceased
Beneficial Owner, accompanied by appropriate evidence of
death and any tax waivers requested by the Trustee, and
must be received by the Clearing Agency during the period
from the first through the tenth day of the month in
which the Redemption Date occurs (each, a "Tender Date").
The Clearing Agency will forward requests for redemption
to the Trustee in accordance with the Clearing Agency's
procedures. (See "Description of Book Entry Procedures"
in this Prospectus Supplement and "Description of the
Bonds -- Redemption at Request of Bondholders or
Beneficial Owners" in the accompanying Prospectus.)
In the event of Book Entry Termination, requests for
redemption must be submitted to the Trustee by the Tender
Date in writing, in the form set forth on the Definitive
Bonds, accompanied by the Bonds to be redeemed and, in
the case of a request on behalf of a deceased Beneficial
Owner, accompanied by appropriate evidence of death and
tax waivers requested by the Trustee. (See "Description
of the Bonds -- Redemption at Request of Bondholders or
Beneficial Owners" in the accompanying Prospectus.)
Each request for redemption will remain in effect on each
subsequent Redemption Date until such Bonds have been
redeemed or until written notice is submitted withdrawing
such request for redemption of such Bonds, which request
must be received by the Tender Date in order to be
effective for the next Redemption Date. (See "Description
of Book Entry Procedures" in this Prospectus Supplement.)
All such requested redemptions will be made at 100% of
the principal amount of the Bonds redeemed plus accrued
interest to the Redemption Date.
The procedures to be used to determine the priority of
requests for redemption may be revised from time to time
by the Clearing Agency and its Clearing Agency
Participants. (See "Special Considerations -- Book Entry
Registration" in the accompanying Prospectus for a
description of other considerations regarding book entry
bonds.)
There is no assurance that the funds available in the
Redemption Fund will be sufficient to permit a Beneficial
Owner to have any Bonds redeemed prior to maturity or
within a reasonable time after redemption is requested.
Until redeemed, Bonds held for future redemption will
continue to earn interest at the Bond Rate. (See "Special
Considerations -- Funds Available for Redemption" in the
accompanying Prospectus.)
S-6
<PAGE> 7
C. Mandatory
Redemption......The Issuer is obligated to redeem Bonds on a mandatory
basis on each Redemption Date to the extent that the
amount in the Redemption Fund on such Redemption Date
exceeds the aggregate amount of all redemptions requested
by Bondholders to be made on such Redemption Date.
On the twelfth Business Day of each month (each, an
"Accounting Date"), the Trustee will notify the Clearing
Agency to determine the amount of Bonds for which
requests for redemption have been accepted through the
related Tender Date and, thereby, to determine the
principal amount, if any, of Bonds that will be subject
to mandatory redemption on the next Redemption Date. The
Clearing Agency will allocate any amounts of Bonds to be
subject to mandatory redemption among Clearing Agency
Participants (as defined under "Description of Book Entry
Procedures" herein) by random lot in accordance with the
Clearing Agency's rules and procedures, based upon the
assumption that each Clearing Agency Participant holds
individual $1,000 Bonds aggregating the full amount of
that Clearing Agency Participant's holdings. The Clearing
Agency shall notify those Clearing Agency Participants
whose holdings have been selected for mandatory
redemption on or before the Redemption Date on which
Bonds are to be redeemed. The Clearing Agency
Participants will then determine the Beneficial Owners
(or other indirect participants acting on behalf of
Beneficial Owners through such Clearing Agency
Participants) whose Bonds have been redeemed and will
forward the mandatory redemption payment of the Bonds to
such Beneficial Owners or indirect participants. No
notice of redemption will be given to Beneficial Owners
prior to the respective Redemption Dates on which their
Bonds are redeemed. The redemption price will be 100% of
the principal amount of the Bonds so redeemed plus
accrued interest to the Redemption Date on which such
Bonds are redeemed. (See "Description of the Bonds --
Mandatory Redemption" in the Prospectus).
In the event of Book Entry Termination, if mandatory
redemptions are required, the Trustee will select the
Bonds to be so redeemed by random lot.
D. Redemptions
at the Option of
the Issuer......Bonds may be redeemed at the option of the Issuer, in whole
or in part, on any Redemption Date (i) prior to the
fourth anniversary of their issuance, if the outstanding
aggregate principal amount of the Bonds declines to 20%
or less of their original aggregate principal amount, and
(ii) at any time on or after the fourth anniversary of
their issuance. The redemption price will be 100% of the
principal amount of the Bonds to be redeemed plus accrued
interest to the Redemption Date. (See "Special
Considerations -- Redemption at the Option of the Issuer"
and "Description of the Bonds -- Redemption at the Option
of the Issuer" in the Prospectus.)
S-7
<PAGE> 8
E. Principal
Redemptions of
the Bonds --
Factors
Relating to
Prepayments and
Substitutions of
GNMA
Certificates....The rate of payments of principal on the Bonds will depend
on the rate of prepayments of the principal of the
Mortgage Loans underlying the GNMA Certificates pledged
to secure the Bonds. Prepayments of principal on the
underlying Mortgage Loans are less likely to occur during
periods when prevailing mortgage interest rates are
higher than the interest rates on such Mortgage Loans,
because it is generally attractive to mortgagors to pay
off mortgage loans bearing "below-market" interest rates
as slowly as possible. However, although less funds are
likely to be available due to generally lower prepayments
rates on the Mortgage Loans during periods of higher
interest rates, it is likely that greater numbers of
Bondholders will tender their Bonds for redemption in
order to take advantage of the generally higher interest
rates then payable on other investments comparable to the
Bonds.
By contrast, prepayments of principal on the Mortgage Loans
underlying the GNMA Certificates are most likely to occur
during periods of generally lower interest rates when it
is expected that Bondholders will least desire redemption
of their Bonds. The rate of payments on the Mortgage
Loans underlying the GNMA Certificates will depend upon a
number of factors in addition to the prevailing level of
interest rates, including the economic environment as a
whole and other factors affecting individual mortgagors.
Therefore, no assurance can be given as to the actual
prepayment experience with respect to the Mortgage Loans
underlying the GNMA Certificates and, therefore, the
actual prepayment experience with respect to the Bonds
(See "Prepayment of the Bonds -- The Effects of Interest
Rate Changes and Other Factors" in this Prospectus
Supplement and "Description of the Bonds -- Maturity of
the Bonds" and "Special Considerations -- Funds Available
for Redemption at the Request of Bondholders" in the
Prospectus.)
To the extent that principal prepayments with respect to
the Mortgage Loans result in prepayments on the Bonds
during periods of generally lower interest rates,
Bondholders may be unable to reinvest such principal
prepayments in securities having a yield and rating
comparable to the Bonds.
In addition, the effect of the Issuer's ability to deposit
or substitute additional GNMA Certificates, within the
parameters described herein, may be (1) to reduce the
availability of funds to redeem Bonds pursuant to
requests by Bondholders at times when prevailing interest
rates are higher than the Bond Rate or (2) to increase
the rate of mandatory redemptions of Bonds at times when
prevailing interest rates are lower than the Bond Rate.
See "Description of the GNMA Certificates Securing the
Bonds -- Substitutions" herein and "Special
Considerations -- Funds Available for Redemption" in the
Prospectus.
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<PAGE> 9
Certain Federal
Income Tax
Matters..............Taxable Beneficial Owners will be required to include
interest paid or accrued on the Bonds in gross income.
Payments on Bonds held by foreign persons will generally
be exempt from United States withholding tax, subject to
compliance with applicable certification requirements.
Counsel to the Issuer have advised the Issuer that in
their opinion the Bonds will be treated for federal
income tax purposes as indebtedness of the Issuer.
Bonds owned by a real estate investment trust will not be
treated as "real estate assets" or "Government
securities" and interest on the Bonds will not be
considered "interest on obligations secured by mortgages
on real property or on interests in real property".
Similarly, the Bonds will not constitute "qualifying real
property loans" for mutual savings banks or domestic
building and loan associations and will not constitute
"loans secured by an interest in real property" or
"obligations of the United States" for domestic building
and loan associations. In addition, Bonds held by a
regulated investment company will not constitute
"Government securities". The Issuer will not elect to
treat the segregated pool of assets securing the Bonds as
a "real estate mortgage investment conduit" ("REMIC").
(See "Certain Federal Income Tax Consequences" in the
Prospectus.)
Legal Investment.....The Bonds constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"), and as such, are legal investments for
certain entities to the extent provided in SMMEA.
However, certain states have enacted legislation
overriding the exemption afforded by SMMEA.
Notwithstanding SMMEA, there are other restrictions on
the ability of certain investors, including depository
institutions, either to purchase Bonds or to purchase
Bonds representing more than a specified percentage of
such investors' assets. Investors should consult their
own legal advisors in determining whether and to what
extent the Bonds constitute legal investments or are
subject to restrictions on investment. (See "Legal
Investment" in the accompanying Prospectus.)
Bond Rating..........It is a condition to the issuance of the Bonds that they be
rated "AAA" by Standard & Poor's Ratings Group. (See
"Bond Rating" herein.)
S-9
<PAGE> 10
CERTAIN LEGAL CONSIDERATIONS
In the event of the bankruptcy or insolvency of any of the Issuer's
affiliates, a creditor or trustee in bankruptcy may seek a court order
consolidating the assets and liabilities of the Issuer with those of such
affiliate ("substantive consolidation"). This transaction has been structured
applying principles such that following the bankruptcy of an affiliate of the
Issuer, a court, upon motion of a creditor or trustee in bankruptcy, should not
consolidate the assets and liabilities of the Issuer and such affiliate on the
basis of any legal theory regarding substantive consolidation previously
recognized by courts of competent jurisdiction in bankruptcy proceedings. The
foregoing statement is based on and subject to a number of assumptions
concerning facts and circumstances that have been noted, cited or acknowledged
by courts adjudicating similar claims in prior cases and certain other
assumptions regarding the separate corporate identities of the Issuer and its
affiliates, many of which relate to the manner in which the Issuer and its
affiliates will conduct their respective businesses in the future.
In addition, in the event of the bankruptcy or insolvency of any of the
Issuer's affiliates from which the Issuer may purchase the GNMA Certificates, it
is possible that a creditor or trustee in bankruptcy may claim that the
transactions between the Issuer and such affiliate were pledges of the GNMA
Certificates rather than true sales, and that, accordingly, the GNMA
Certificates should be part of such affiliate's bankruptcy estate. The Issuer
and any such affiliate will treat transfers of the GNMA Certificates as sales
from the affiliate to the Issuer for tax and accounting purposes, but such
treatment will not preclude a creditor or trustee in bankruptcy of such
affiliate from pursuing such claim. If such transactions are determined to be
sales to the Issuer, the GNMA Certificates would not be part of any such
affiliate's bankruptcy estate and would not be available to any such affiliate's
creditors.
If either of the foregoing positions are argued before a court, such
arguments could prevent, even if ultimately unsuccessful, timely payments of
amounts due on the Bonds, and could result, if ultimately successful, in payment
of reduced amounts on the Bonds.
DESCRIPTION OF THE GNMA CERTIFICATES
SECURING THE BONDS
GENERAL
The GNMA Certificates securing the Bonds will be "fully modified
pass-through" mortgage-backed certificates guaranteed as to full and timely
payment of principal and interest by GNMA. The guaranty obligation of GNMA with
respect to the GNMA Certificates is backed by the full faith and credit of the
United States. (See "The Collateral -- GNMA Certificates" in the Prospectus.)
Each of the GNMA Certificates will have an original maturity of not more than 30
years. On the date of delivery of the Bonds, such GNMA Certificates will have an
aggregate GNMA Collateral Value at least equal to the principal amount of the
Bonds plus $1,000. It is anticipated that the GNMA Certificates will be held on
deposit at the Participants Trust Company, a limited purpose trust company
organized under the banking laws of the State of New York.
Each GNMA Certificate securing the Bonds was or will be issued by a
mortgage banking company or other financial concern which has been approved by
GNMA as an authorized issuer of GNMA Certificates. The Issuer anticipates that
the GNMA Certificates which will secure the Bonds on the date of delivery will
have been issued not earlier than December 1, 1985 and not later than May 1,
1996. It is further anticipated that such GNMA Certificates will bear interest
at rates ranging from 6.5% to 7.5% per annum. The foregoing information is
approximate based on information available as of the date of this Prospectus
Supplement. Since all of the GNMA Certificates may not have been acquired as of
the date of this Prospectus Supplement, there may be discrepancies between the
actual GNMA Certificates which will secure the Bonds and the GNMA Certificates
which the Issuer currently expects to acquire. However, all of the GNMA
Certificates initially securing the Bonds must bear interest at rates ranging
from 6.5% to 9.0% per annum and must have maturity dates no earlier than January
1, 2016 and no later than June 1, 2026. The actual GNMA Certificates delivered
S-10
<PAGE> 11
to secure the Bonds will be described in a Current Report on Form 8-K filed with
the Securities and Exchange Commission following the issuance of the Bonds.
In the event that the GNMA Certificates proposed to be pledged (or
comparable GNMA Certificates) are not delivered on the Closing Date, the Issuer
intends to deposit cash with the Trustee, on an interim basis pending such
delivery, in an amount such that the sum of (a) the cash deposited on the
Closing Date and (b) reinvestment income thereon to the first Payment Date at
the Assumed Reinvestment Rate is at least equal to (i) the GNMA Collateral Value
of the GNMA Certificates not delivered (which shall be assumed to have the
characteristics of the GNMA Certificates described above) (the "Undelivered
Amount") plus (ii) the interest that will accrue during the Initial Accrual
Period at the Bond Rate on an aggregate principal amount of the Bonds equal to
the Undelivered Amount. The Issuer will agree to deliver to the Trustee such
GNMA Certificates or comparable GNMA Certificates within 35 days after the
Closing Date. To the extent such GNMA Certificates are not delivered within 35
days after the Closing Date, the cash so deposited with the Trustee will be
applied to the extent required by the Indenture, which may require the
application of all or a part of such cash to redeem an aggregate principal
amount of Bonds up to the Undelivered Amount. To the extent that the Issuer is
not able to obtain adequate assurance of delivery of suitable GNMA Certificates
within the requisite 35-day period in an amount sufficient to meet the criteria
then imposed by the Securities and Exchange Commission in order for the Bonds to
be "mortgage-related securities," the aggregate principal amount of the Bonds
being issued may be reduced to the extent necessary to meet the Commission's
current criteria.
SUBSTITUTIONS
The Issuer may deposit additional GNMA Certificates as Collateral for the
Bonds or substitute GNMA Certificates for GNMA Certificates previously pledged
as Collateral for the Bonds, in each case under the conditions prescribed in the
Indenture. (See "Description of the Bonds -- Deposits, Substitution and
Withdrawal" in the Prospectus.) Notwithstanding the Issuer's ability to deposit,
substitute and withdraw GNMA Certificates, all of the GNMA Certificates securing
the Bonds must at all times conform to the characteristics prescribed for the
GNMA Certificates initially pledged to secure the Bonds, as previously described
under "General", except that the GNMA Certificates may have maturity dates no
later than May 1, 2032. Any payments of principal and interest due to be
received on any GNMA Certificate after May 31, 2027, the stated maturity date of
the Bonds, will not be included in the calculation of GNMA Collateral Value.
Additionally, the GNMA Collateral Value of the total pool of GNMA Certificates
securing the Bonds may not, at any time, exceed 106% of the GNMA Collateral
Value then required to be maintained to secure the Bonds pursuant to the
provisions of the Indenture and Series Supplement.
The effect of the deposit or substitution of other GNMA Certificates as
Collateral for the Bonds may be to limit the amount of funds required to be
deposited to the Redemption Fund for the redemption of Bonds and may therefore
reduce the availability of funds to redeem Bonds prior to their maturity date.
Alternatively, substitutions of GNMA Certificates may result in an increase in
funds available for deposit into the Redemption Fund to redeem Bonds pursuant to
requests by Bondholders. If sufficient requests by Bondholders have not been
submitted, such substitutions of GNMA Certificates may increase the rate of
mandatory redemptions on the Bonds. (See "Special Considerations -- Funds
Available For Redemption" in the Prospectus.)
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<PAGE> 12
DESCRIPTION OF BOOK ENTRY PROCEDURES
The Bonds will be issued in book entry form in denominations of $1,000 and
integral multiples of $1,000 in excess of such amount. The Bonds will be
represented by a single certificate registered in the name of the nominee of the
depository, The Depository Trust Company, as Clearing Agency or its nominee. The
Clearing Agency will maintain book entry records of ownership, transfers and
pledges of the Bonds only in the names of its Clearing Agency Participants,
which include securities brokers and dealers, banks and trust companies and
clearing corporations and may include certain other organizations. Prior to Book
Entry Termination (as defined below), Beneficial Owners who are not Clearing
Agency Participants may transfer and pledge their interests in the Bonds, and
exercise any other rights and remedies of Bondholders, only through Clearing
Agency Participants or other entities that maintain relationships with Clearing
Agency Participants. The Clearing Agency may charge its customary fee to
Clearing Agency Participants in connection with any such transfers and pledges.
Additionally, prior to Book Entry Termination, payments of principal and
interest on the Bonds will be made to Beneficial Owners only through the
Clearing Agency and its Clearing Agency Participants. (See "Special
Considerations -- Book Entry Registration" and "Description of the Bonds -- Book
Entry Registration" in the Prospectus.)
The Clearing Agency, which is a New York-chartered limited purpose trust
company, performs services for its participants, some of whom (and/or their
representatives) own the Clearing Agency. In accordance with its normal
procedures, the Clearing Agency is expected to record the positions held by each
Clearing Agency Participant in the Bonds, whether held for its own account or as
a nominee for another person.
Each payment of principal and interest on the Bonds shall be paid to the
Clearing Agency, whose nominee will be the record holder of Bonds. The Clearing
Agency will be responsible for crediting the amount of such payments to the
respective accounts of the applicable Clearing Agency Participants in accordance
with the Clearing Agency's normal procedures, which currently provide for
payments in next-day funds settled through the New York Clearing House. Each
Clearing Agency Participant will be responsible for disbursing such payments to
the Beneficial Owners that it represents and to each brokerage firm for which it
acts as agent. Each such brokerage firm will be responsible for disbursing funds
to the Beneficial Owners that it represents.
Whenever principal is to be paid on the Bonds, the payment will be rounded
downward to the amount required to redeem an integral number of the Bonds. The
Trustee will give notice to the Clearing Agency, and the Clearing Agency will
determine the number of Bonds to be redeemed from the account of each Clearing
Agency Participant. Each Clearing Agency Participant will in turn determine the
number of Bonds to be redeemed from the account of each Beneficial Owner and
each brokerage firm that it represents. A Beneficial Owner of Bonds may request
that all or any portion of his Bonds be redeemed by the Issuer at the earliest
opportunity by submitting a request for redemption to the Clearing Agency
Participant or the brokerage firm that maintains his account in the Bonds. If
submitted to a brokerage firm, that firm should in turn make the request to the
Clearing Agency Participant which acts as its agent. The Clearing Agency
Participant will submit such requests for redemption to the Clearing Agency.
Pursuant to the Letter of Representations to be entered into among the
Issuer, the Trustee and the Clearing Agency, the Trustee shall select Bonds to
be redeemed at the option of the Beneficial Owners from voluntary offering forms
previously transmitted to the Trustee by the Clearing Agency in the order such
forms were received by the Clearing Agency. The required form of the voluntary
offering forms to be submitted by Beneficial Owners, as well as the exact
procedures to be followed by the Clearing Agency for purposes of determining the
order of receipt will be established from time to time by the Clearing Agency.
In the event of termination of registration of Bonds in the name of the Clearing
Agency, requests for redemption must be submitted directly to the Trustee. A
Beneficial Owner may withdraw his request for redemption by notifying the
brokerage firm that maintains his accounts in the Bonds. For a request for
redemption, or withdrawal of request for redemption, to be honored with respect
to a Redemption Date, it must be received by the Clearing Agency (in the case of
a request for redemption) and by the Trustee (in the case of a withdrawal of a
request for redemption) during the period from the first through the tenth day
of the month in which such Redemption Date occurs (each, a "Tender Date").
Requests for redemption received by the Clearing Agency
S-12
<PAGE> 13
after the tenth day of the month in which the Payment Date occurs on which a
given redemption is desired, and requests for redemption received in a timely
manner but not accepted for redemption with respect to a given Payment Date,
will be treated as requests for redemption on the next succeeding Payment Date
and each succeeding Payment Date thereafter until the request is accepted or is
withdrawn. If a notice of withdrawal of a request for redemption has not been
received by the Trustee by the tenth day of the month in which such Redemption
Date occurs, the previously made request for redemption will be irrevocable with
respect to the selection of Bonds for redemption on the applicable Redemption
Date.
To the extent that the aggregate amount of principal payments required by
the Indenture to be applied to the Bonds exceeds the aggregate principal amount
of Bonds tendered for redemption by Beneficial Owners, Bonds will be mandatorily
redeemed in accordance with applicable established random lot procedures of the
Clearing Agency and the other established procedures of the brokerage firms
representing the Beneficial Owners. Accordingly, a Clearing Agency Participant
or brokerage firm may determine to redeem Bonds from the account of some owners
(which could include such Clearing Agency Participant or brokerage firm) without
redeeming such Bonds from the account of other Beneficial Owners. In the event
that the Issuer elects to conduct a partial optional redemption, the Bonds to be
optionally redeemed will also be determined by such Clearing Agency procedures.
The Bonds will be issued in definitive, registered form to Beneficial
Owners or their nominees, and thereupon such Beneficial Owners will become
Bondholders only upon Book Entry Termination which shall be deemed to occur in
the case of any of the following events: (i) the Clearing Agency or the Issuer
advises the Trustee in writing that the Clearing Agency is no longer willing or
able properly to discharge its responsibilities as nominee and depository with
respect to the Bonds and the Issuer and the Trustee are unable to locate a
qualified successor to serve as a Clearing Agency, (ii) the Issuer, with the
consent of the Trustee, elects to terminate the book-entry system by notice to
the Clearing Agency, or (iii) an Event of Default (as defined in the Prospectus)
shall occur and be continuing and the Clearing Agency and the Clearing Agency
Participants, at the direction of Beneficial Owners representing a majority in
outstanding principal amount of the Bonds, advise the Trustee in writing that
the continuation of a book entry system is no longer in the best interests of
Beneficial Owners. Upon Book Entry Termination, Beneficial Owners will become
registered Bondholders and will deal directly with the Trustee with respect to
transfers, notices, payments and requests for redemption.
The Clearing Agency has advised the Issuer and the Trustee that, prior to
Book Entry Termination, the Clearing Agency will take any action permitted to be
taken by a Bondholder under the Indenture only at the direction of one or more
Clearing Agency Participants to whom the Bonds are credited in an account
maintained by the Clearing Agency. The Clearing Agency has advised that it will
take such action with respect to any principal amount of the Bonds only at the
direction of and on behalf of Clearing Agency Participants with respect to those
principal amounts of such Bonds. For example, if a vote of Beneficial Owners is
required to accelerate maturity of the Bonds following an Event of Default, the
Clearing Agency, acting at the direction of Clearing Agency Participants (which
in turn are acting at the direction of Beneficial Owners), may vote in favor of
acceleration of maturity with respect to a portion of the principal amount of
such Bonds owned by a group of Beneficial Owners and against acceleration with
respect to other principal amounts of such Bonds owned by a different group of
Beneficial Owners.
Issuance of the Book Entry Bonds offered hereby in book entry form rather
than as physical certificates may adversely affect the liquidity of the Book
Entry Bonds in the secondary market and the ability of Beneficial Owners to
pledge them. In addition, as described previously prior to Book Entry
Termination distributions on the Book Entry Bonds will be made by the Trustee to
the Clearing Agency and the Clearing Agency will credit such distributions to
the accounts to its Clearing Agency Participants, which will further credit them
to the accounts of Beneficial Owners. As a result, Beneficial Owners may
experience delays in the receipt of such distributions. See "Special
Considerations -- Book Entry Registration" in the Prospectus.
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<PAGE> 14
USE OF PROCEEDS
Substantially all of the proceeds to be received by the Issuer from the
sale of the Bonds will be used to purchase the GNMA Certificates to be pledged
as Collateral for the Bonds, and any remaining net proceeds may be used by the
Issuer for its general corporate purposes. It is anticipated that the GNMA
Certificates will be purchased by the Issuer from an affiliated entity.
PREPAYMENT OF THE BONDS --
THE EFFECTS OF INTEREST RATE CHANGES AND OTHER FACTORS
Payments of principal on the Bonds will depend on the rate of prepayments
of the principal of the GNMA Certificates, which in turn will depend upon the
rate of principal prepayments with respect to the Mortgage Loans underlying such
GNMA Certificates. Prepayments of principal on the underlying Mortgage Loans are
less likely to occur during periods when prevailing mortgage interest rates are
higher than the interest rates on such Mortgage Loans, because it is generally
attractive to mortgagors to pay off mortgage loans bearing "below-market"
interest rates as slowly as possible. However, during such periods when mortgage
interest rates are higher than the rates on the Mortgage Loans it is also likely
that interest rates on investments comparable to the Bonds will be higher than
the Bond interest rate. When this is the case, greater numbers of Bonds are
expected to be tendered for redemption because Bondholders will desire to take
advantage of the higher interest rates payable on such other investments then
available. Thus, it is likely that greater numbers of Bondholders will be
tendering their Bonds for redemption during periods when less funds will be
available to honor such redemptions as a result of lower principal prepayments
on the Mortgage Loans underlying the GNMA Certificates.
By contrast, prepayments of principal on the Mortgage Loans underlying the
GNMA Certificates are most likely to occur during periods of lower interest
rates when it is expected that Bondholders will least desire redemption of their
Bonds. During periods in which prevailing mortgage interest rates are lower than
the interest rates on the underlying Mortgage Loans, many mortgagors are likely
to desire to refinance their Mortgage Loans in order to take advantage of the
lower mortgage rates then available. When a Mortgage Loan is "refinanced" the
original loan is paid off, with the result that the Mortgage Loan is prepaid in
full. Such refinancings of Mortgage Loans will, therefore, result in a greater
level of principal prepayments on the GNMA Certificates which must be applied to
principal redemptions of the Bonds. As described previously under "Summary of
Terms -- Redemption" and "Description of Book Entry Procedures" to the extent
that the amount of principal payments required by the Indenture to be applied to
the Bonds as a result of principal prepayments on the Mortgage Loans underlying
the GNMA Certificates exceeds the aggregate principal amount of the Bonds then
tendered to the Trustee for redemption, Bonds will be redeemed by mandatory
redemption in accordance with the random lot procedures of the Clearing Agency.
Thus, even though they may not have tendered their Bonds for redemption,
Bondholders are more likely to have their Bonds repaid on a mandatory basis if
interest rates fall, and Mortgage Loan prepayments increase, following the
issuance of the Bonds. During such periods of lower interest rates, Bondholders
are not expected to desire redemption of their Bonds, as they may not be able to
reinvest principal received back on the Bonds in other investments of comparable
quality bearing comparable interest rates.
The foregoing discussion of the effect of interest rates on Mortgage Loan
prepayment experience should be understood as a generalization, however, as
factors other than interest rates are likely to affect principal prepayments on
the Mortgage Loans underlying the GNMA Certificates, resulting in prepayments of
the Bonds. Principal prepayments may be influenced by a variety of economic,
geographic, social and other factors. Other factors affecting prepayment of
Mortgage Loans include changes in mortgagors' housing needs, job transfers,
unemployment and mortgagors' net equity in the mortgaged properties. For
example, even though falling interest rates may make refinancing attractive, not
all mortgagors will be able to obtain alternative financing or be in a financial
position to make partial prepayments and will continue to make only scheduled
principal payments. Higher interest rates notwithstanding, generally depressed
economic conditions may result in increased levels of foreclosures, each of
which will have the effect of a prepayment in full of the related Mortgage Loan.
S-14
<PAGE> 15
Additionally, the terms of the redemption mechanism for application of
principal to the Bonds creates additional uncertainties with respect to timing
of principal payments. Investors should note that principal is applied to the
Bonds on a mandatory basis on each Redemption Date when the total principal
which must be applied to the Bonds pursuant to the Indenture exceeds the
aggregate principal balance of the Bonds tendered for redemption. See "Summary
of Terms -- Redemption" in this Prospectus Supplement. In the case of such
mandatory redemptions whole Bonds are redeemed out in $1,000 increments on a
random lot basis. Therefore, some Bondholders will receive all of their
principal much earlier, and other Bondholders will receive none of their
principal until much later, than would have been the case if principal were
applied to all Bonds on a pro rata basis on each Redemption Date. The fact that
Bondholders may tender their Bonds for redemption and, further, that there are
certain priorities for redemption of Bonds of deceased Bondholders, pose
additional uncertainties as to timing of redemption of the Bonds owned by any
given Bondholder. Finally, the Bonds are subject to redemption at the option of
the Issuer at the earlier of four years following the date of issuance or the
date on which the aggregate outstanding principal balance of the Bonds declines
to 20% of their original aggregate principal balance.
Although no assurance can be given as to the actual prepayment experience
of any individual Bondholder, it is anticipated that the actual maturity of
substantially all of the Bonds, by principal balance, will occur significantly
earlier than the stated maturity of the Bonds. Further, for the reasons
described in the preceding paragraphs, the actual maturity of some of the Bonds
will occur much earlier than the actual maturity of other Bonds.
BOND RATING
It is a condition to the issuance of the Bonds that they be assigned a bond
rating of "AAA" by Standard & Poor's Ratings Group ("S&P"). The rating of "AAA"
is the highest rating that S&P assigns to debt obligations and is assigned by
that rating organization to bonds for which the capacity to pay interest and
repay principal is extremely strong. Such rating takes into consideration the
nature of the GNMA Certificates pledged to secure the Bonds, the guaranty of
GNMA, to the extent applicable, the structural and legal aspects associated with
the Bonds and the extent to which the stream of principal and interest payments
on the GNMA Certificates pledged to secure the Bonds is adequate to make
required payments of principal of and interest on the Bonds, as well as other
criteria. Investors should be aware that any rating assigned to the Bonds by any
rating agency will reflect such agency's assessment solely of the likelihood
that holders of such Bonds will receive payments. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
mortgage loans underlying the GNMA Certificates will be made by mortgagors or of
the degree to which the rate of such prepayments might differ from that
originally anticipated.
The Issuer has not requested a rating on the Bonds by any rating agency
other than S&P. However, there can be no assurance as to whether any other
rating agency will rate the Bonds, or, if one does, what rating would be
assigned by any such other rating agency.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization.
S-15
<PAGE> 16
UNDERWRITING
The Underwriters severally have agreed, subject to the terms and conditions
of the Terms Agreement, which incorporates by reference the terms of an
Underwriting Agreement, to purchase the respective principal amounts of the
Bonds set forth opposite their respective names.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT OF BONDS
---------------
<S> <C>
Rauscher Pierce Refsnes, Inc. ........................................ $ 4,085,000
J.C. Bradford & Co. .................................................. 4,485,000
Everen Securities, Inc. .............................................. 2,930,000
Dain Bosworth, Inc. .................................................. 2,000,000
Raymond James & Associates, Inc. ..................................... 2,000,000
----------
Total....................................................... $15,500,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, and that the
Underwriters will be obligated to purchase all of the Bonds if any are
purchased.
The Issuer has been advised by the Underwriters that they propose to offer
the Bonds to the public initially at the offering price set forth on the cover
page of this Prospectus Supplement and to certain dealers at such price less a
concession of 3% of the principal amount of the Bonds; that the Underwriters and
such dealers may allow a discount of 2.5% of such principal amount on sales to
other dealers; and that the public offering price and concession and discount to
dealers may be changed by the Underwriters.
The Issuer and Ray Ellison Mortgage Investment Corp., the parent
corporation of the Issuer, have agreed to indemnify the Underwriters of the
Bonds against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Underwriters have agreed with the Issuer that the Underwriters will
reimburse the Issuer for a portion of the fees paid by the Issuer to its
counsel.
LEGAL MATTERS
Certain legal matters, including the legality of the Bonds, will be passed
upon for the Issuer by Andrews & Kurth L.L.P., Dallas, Texas, and certain legal
matters will be passed upon for the Underwriters by Locke Purnell Rain Harrell
(A Professional Corporation), Dallas, Texas.
PREVIOUSLY-ISSUED BONDS
The Issuer has previously issued eighty-eight Series of its
GNMA-Collateralized Bonds, in an aggregate principal amount totaling
$1,335,291,000. All such prior Series of Bonds were issued pursuant to the
Indenture and are secured by Collateral other than the Collateral securing the
Bonds. No Collateral securing any other Series of Bonds will secure payments of
principal of and interest on the Bonds, and no Collateral securing the Bonds
will secure payments of principal of and interest on any other Series of Bonds.
ADDITIONAL SERIES 1996B BONDS WHICH MAY BE OFFERED
The Issuer and the Underwriters may execute an additional Terms Agreement
or Agreements for the sale of Bonds in addition to those offered hereby. If
there is an increase in the Bonds offered, additional GNMA Certificates will be
pledged to the Trustee having an aggregate GNMA Collateral Value, as of the
payment date of each GNMA Certificate immediately preceding the date of issuance
of the Bonds, at least equal to the principal amount of such additional Bonds.
Such additional GNMA Certificates will conform to the parameters set forth above
under "Description of the GNMA Certificates Securing the Bonds."
S-16
<PAGE> 17
PROSPECTUS
$277,209,000
RAY ELLISON MORTGAGE ACCEPTANCE CORP.
GNMA-COLLATERALIZED BONDS
ISSUABLE IN SERIES
Ray Ellison Mortgage Acceptance Corp., through any underwriter or
underwriters which may be designated at the time of each offering, may offer
hereby from time to time up to $277,209,000 aggregate principal amount of its
GNMA-Collateralized Bonds, issuable in Series. The Prospectus Supplement
accompanying this Prospectus sets forth, for the Series to which such Prospectus
Supplement relates, the specific designation of the Bonds of such Series
together with their aggregate principal amount, maturity and redemption dates,
interest rate, monthly interest payment date and other specific terms. Each
Prospectus Supplement also describes the collateral anticipated to initially
secure the Bonds of the Series to which it relates and the terms of the offering
including the amount of proceeds to the Issuer and the use of such proceeds by
the Issuer.
The Bonds of each Series will be secured by "fully modified pass-through"
mortgage-backed certificates guaranteed as to full and timely payment of
principal and interest by the Government National Mortgage Association. GNMA is
a wholly-owned corporate instrumentality of the United States within the
Department of Housing and Urban Development and the guaranty obligation of GNMA
with respect to the GNMA Certificates is backed by the full faith and credit of
the United States. The Bonds of each Series will, in addition, be secured by
certain funds pledged to that particular Series.
The Bonds of each Series will be subject to redemption by the Issuer (i)
upon the request of Bondholders, (ii) on a mandatory basis and (iii) at the
option of the Issuer, in each case under certain circumstances and subject to
certain priorities and limitations summarized herein under the heading
"Prospectus Summary" and described more fully herein under the heading
"Description of the Bonds".
AN INVESTMENT IN THE BONDS SHOULD BE MADE ONLY AFTER REVIEWING THE SPECIAL
CONSIDERATIONS DISCUSSED ON PAGES 10 THROUGH 12 HEREOF. THESE CONSIDERATIONS
INCLUDE, AMONG OTHERS, THE LIMITED ASSETS OF THE ISSUER OTHER THAN THE GNMA
CERTIFICATES PLEDGED TO SECURE THE BONDS OF EACH SERIES AND THE ABSENCE OF ANY
ASSURANCE THAT AMOUNTS TO BE DEPOSITED IN THE REDEMPTION FUND FOR A SERIES WILL
BE SUFFICIENT TO PERMIT A HOLDER'S BONDS TO BE REDEEMED WITHIN A REASONABLE TIME
AFTER REDEMPTION IS REQUESTED.
There is currently no public market for the Bonds, and there can be no
assurance that such a market will develop.
ALTHOUGH PAYMENT OF THE PRINCIPAL OF AND INTEREST ON THE GNMA CERTIFICATES
SECURING THE BONDS OF EACH SERIES IS GUARANTEED BY GNMA, THE BONDS REPRESENT
OBLIGATIONS SOLELY OF THE ISSUER AND ARE NOT INSURED OR GUARANTEED BY GNMA OR
ANY OTHER GOVERNMENTAL AGENCY, OR BY RAY ELLISON MORTGAGE INVESTMENT CORP., ANY
OF ITS AFFILIATES OR ANY OTHER AFFILIATE OF THE ISSUER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
This Prospectus may not be used to consummate sales of Bonds unless
accompanied by a Prospectus Supplement.
---------------------
THE DATE OF THIS PROSPECTUS IS APRIL 16, 1996.
<PAGE> 18
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a particular Series of Bonds to be
offered hereby will, among other things, set forth with respect to the Bonds of
such Series (i) the aggregate principal amount and the interest rate of such
Series of Bonds; (ii) the characteristics of the GNMA Certificates and other
Collateral securing such Bonds; (iii) the Payment Dates for payment of interest
on the Bonds of such Series; (iv) the first date upon which Bonds will be
eligible for redemption at the request of the Bondholders; (v) any restrictions
on optional redemptions by the Issuer of the Bonds of such Series; and (vi) the
redemption price to be paid for the Bonds of such Series redeemed at the option
of the Issuer. Each Prospectus Supplement delivered with this Prospectus is
specifically incorporated by reference into this Prospectus.
AVAILABLE INFORMATION
The Issuer was incorporated in Texas on October 1, 1984. The Issuer is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith is required
to file reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington
D.C. 20549; and at the Commission's regional offices at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511, and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained from the Commission at prescribed rates through
its Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Issuer has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Bonds offered by this Prospectus and the related Prospectus
Supplement. This Prospectus and Prospectus Supplement, which form a part of the
Registration Statement, do not contain all of the information set forth in the
Registration Statement, certain parts having been omitted pursuant to the rules
and regulations of the Commission. The Registration Statement will be available
for inspection and copying as set forth above.
The Issuer does not plan to send any financial reports to holders of Bonds.
The Indenture Trustee will provide the reports described herein under "The
Indenture -- Reports to Bondholders".
The Issuer's principal executive offices are located at 4800 Fredericksburg
Road, San Antonio, Texas 78229. Its telephone number is (210) 308-1403.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Issuer's Annual Report on Form 10-K for the year ended December 31,
1995 heretofore filed by the Issuer with the Commission is incorporated by
reference in this Prospectus.
All documents filed by the Issuer pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the last offering of the Bonds hereunder shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies 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.
The Issuer will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the request of such person, a copy of
any of or all the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
any such document). Requests for such copies should be directed to Locksley S.
Simmons, Vice President, Ray Ellison Mortgage Acceptance Corp., 4800
Fredericksburg Road, San Antonio, Texas 78229 (210) 308-1403.
2
<PAGE> 19
PROSPECTUS SUMMARY
The following summary (the "Summary") is qualified in its entirety by
reference to the detailed information appearing elsewhere in this Prospectus and
in the Prospectus Supplement to be prepared for each Series of Bonds (each, a
"Prospectus Supplement"), and the terms defined in this Summary have the same
meanings in the remainder of this Prospectus. This Summary and the remainder of
this Prospectus are qualified in their entirety by reference to the related
Indenture (the "Indenture"), between Ray Ellison Mortgage Acceptance Corp. (the
"Issuer") and the trustee for such Series (the "Trustee"), as supplemented by
one or more supplements to the Indenture (each a "Series Supplement"), between
the Issuer and such Trustee, governing such Series. A form of the Indenture has
been incorporated by reference as an exhibit to the Registration Statement of
which this Prospectus is a part, and a form of each Series Supplement will be
filed with the Securities and Exchange Commission upon issuance of the Series to
which it relates.
Securities Offered...The securities offered are GNMA-Collateralized Bonds (the
"Bonds"), issuable in Series (each, a "Series") in the
principal amount, at the interest rate and on the other
terms specified in the Prospectus Supplement to be
prepared for each Series. The Bonds of each Series will
be issued either in definitive, fully registered form or
book entry form in the authorized denominations specified
in the related Prospectus Supplement. Unless a
distinction is made herein between holders of Bonds
issued in definitive form ("Bondholders") or beneficial
owners of Bonds issued in book entry form ("Beneficial
Owners"), the term "Bondholders" and "holders of Bonds"
may refer to either.
Bond Rating..........Under the Indenture and pursuant to the terms of its
Articles of Incorporation, the Issuer may issue only
Bonds which have been rated in the highest bond category
by at least one nationally-recognized investment rating
agency. The rating agency or agencies and ratings
assigned with respect to each Series of Bonds will be
specified in the Prospectus Supplement for such Series.
Issuer...............The Issuer is Ray Ellison Mortgage Acceptance Corp., a
Texas corporation with its principal office located at
4800 Fredericksburg Road, San Antonio, Texas 78229,
telephone number (210) 308-1403. The Issuer is a
wholly-owned subsidiary of Ray Ellison Mortgage
Investment Corp. ("REMIC"). The Issuer was formed for the
sole purpose of acquiring "fully-modified pass-through"
mortgage-backed certificates guaranteed as to timely
payment of principal and interest by the Government
National Mortgage Association ("GNMA") and issuing bonds
collateralized by such Certificates (the "GNMA
Certificates"). The GNMA Certificates will be issued and
serviced by an approved GNMA issuer and servicer.
Each such GNMA Certificate will be backed by a pool of
mortgage loans which will be either insured by the
Federal Housing Administration (the "FHA") of the U.S.
Department of Housing and Urban Development under the
National Housing Act of 1934, as amended, guaranteed by
the Farmers Home Administration (the "FmHA") under Title
V of the Housing Act of 1949, or insured or guaranteed by
the U.S. Veterans Administration (the "VA") under Chapter
37 of Title 38, United States Code.
Neither REMIC, any of its affiliates (other than the
Issuer), nor any other affiliate of the Issuer has
guaranteed the Bonds or is otherwise obligated with
respect to any of the Bonds. The Issuer does not have,
nor is it expected in the future to have, any significant
assets other than the assets pledged to secure specific
Series of GNMA-Collateralized Bonds issued by it from
time to time.
Interest Payments....Each Series of Bonds will bear interest at the rate set
forth in the related Prospectus Supplement for such
Series. Such interest will be payable monthly on each
3
<PAGE> 20
monthly Payment Date (each, a "Payment Date"), specified
in the related Prospectus Supplement for such Series,
commencing with the month specified in such Prospectus
Supplement.
Each payment of interest on the Bonds of each Series will
include all interest accrued during the related accrual
period (each, an "Accrual Period") specified under the
heading "Summary of Terms of the Series 199
Bonds -- Interest Payments" in the related Prospectus
Supplement for such Series. Unless otherwise provided in
the related Prospectus Supplement, each Accrual Period
will end on a date prior to the related Payment Date,
with the result that the effective yield to the
bondholders of such Series will be reduced to a level
below the yield which would apply if the Accrual Period
ended on such Payment Date. Upon maturity or earlier
redemption of Bonds of any Series, interest will be paid
to the date specified in the related Prospectus
Supplement. In the event that interest is not accrued to
the maturity date or redemption date, as the case may be,
for any Series of Bonds, the effective yield to the
holder of such Bonds will be reduced to a level below the
yield that would apply if interest were paid to the
respective maturity date or redemption date of such
Series of Bonds. (See "Description of the
Bonds -- General".)
The monthly interest payments to be made on each respective
Payment Date will be made to Bondholders of record of
each Series as of the close of business on the date
specified in the related Prospectus Supplement for each
Payment Date (each being a "Regular Record Date").
Bondholders of Bonds issued in definitive form will
receive such monthly interest payments by check mailed by
the Trustee or paying agent, if any, appointed by the
Issuer for such purpose, to Bondholders at their
respective addresses appearing on the register on the
applicable Regular Record Date. Beneficial Owners of
Bonds held in book entry form ("Book Entry Bonds") will
receive interest payments according to procedures
described under "Description of the Bonds -- Book Entry
Registration" herein and the related Prospectus
Supplement for any Series of Book Entry Bonds.
Redemption of Bonds
A. General.........Principal payments on the Bonds of each Series will be made
on the dates specified in the related Prospectus
Supplement (each, a "Redemption Date") through
redemptions under certain conditions and subject to
certain limitations described herein or in the Prospectus
Supplement for such Series to the extent of any funds on
deposit in the account to be used in making redemptions
(the "Redemption Fund"). Such redemptions may be either
(i) at the request of any Bondholders for the redemption
of their Bonds, (ii) on a mandatory basis or (iii) at the
option of the Issuer. All redemptions will be made at a
redemption price equal to 100% of principal (unless the
related Prospectus Supplement specifies a higher
percentage of principal for a redemption at the option of
the Issuer) together with accrued interest to the date
specified in the related Prospectus Supplement.
4
<PAGE> 21
B. Amounts to be
Deposited into
the Redemption
Fund............On each Redemption Date, an amount equal to the Value
Differential, as defined below, for such Series
calculated as of the date specified for such Series in
the related Prospectus Supplement (each, an "Accounting
Date") will be deposited into the Redemption Fund from
funds available in the Collection Account. The "Value
Differential" for each Series is defined in the Indenture
as the amount, as of each Accounting Date, by which the
aggregate outstanding principal amount of the Bonds of
such Series exceeds the sum of the aggregate GNMA
Collateral Value (defined below) of the GNMA Certificates
securing such Series plus any amount less than $1,000
then on deposit in the Redemption Fund for such Series.
Unless specified otherwise in the Prospectus Supplement
for any Series of Bonds, the aggregate GNMA Collateral
Value of the GNMA Certificates securing any Series cannot
exceed the Maximum GNMA Collateral Value Percentage (as
specified in the related Series Supplement for each
Series of Bonds) of the lesser of (i) the aggregate
principal amount, scheduled to be received on the GNMA
Certificates prior to the maturity date of such Series,
or (ii) the present value of the scheduled distributions
on such GNMA Certificates to be received prior to the
maturity date of such Series, discounted monthly at the
interest rate payable on the Bonds of such Series. The
Issuer may voluntarily deposit or substitute GNMA
Certificates to the extent permitted by the Indenture
which may have the effect of reducing or increasing the
Value Differential. In no event, however, will the amount
transferred to the Redemption Fund with respect to any
Redemption Date be less than the incremental amount which
is necessary to make the aggregate amount transferred to
the Redemption Fund through such date at least equal to
the aggregate amount which would have been transferred
through such date were the Bonds still secured by the
GNMA Certificates originally pledged to secure such
Series of Bonds and assuming that no prepayments had been
made on the mortgage loans underlying such GNMA
Certificates.
C. Redemption at
Request of
Bondholders.....Redemptions of Bonds of each Series pursuant to the request
of any Bondholder will be made as described herein under
the heading "Description of the Bonds -- Redemption at
Request of Bondholders or Beneficial Owners" and as
described in the related Prospectus Supplement for such
Series. The Prospectus Supplement for each Series will
specify the Redemption Dates for such Series. Requested
redemptions, however, will be made only to the extent
funds are available in the Redemption Fund for such
Series as of the Redemption Date on which such redemption
is to take place. Deposits to the Redemption Fund are
described in "Amounts to be Deposited into the Redemption
Fund" above.
Certain preferences with respect to requested redemptions
will be given to Bonds held beneficially by the estates
of deceased Bondholders or Beneficial Owners ("Deceased
Holders"). Requests for redemption must be made in
accordance with the provisions described herein under the
heading "Description of the Bonds -- Redemption at
Request of Bondholders and Beneficial Owners" and in the
related Prospectus Supplement.
There is no assurance that sufficient funds will be
available in the Redemption Fund to permit a Bondholder
to have any of such Bondholder's Bonds redeemed prior to
maturity or within a reasonable time after redemption is
requested.
5
<PAGE> 22
Unless otherwise specified in the related Prospectus
Supplement, Bonds for which redemption has been requested
will continue to earn interest until redeemed at the rate
applicable to the Series and such interest will be paid
on the regular monthly Payment Dates for such Series.
D. Mandatory
Redemption......On each Redemption Date following the issuance of the Bonds
of such Series, the Issuer is obligated to redeem Bonds
on a mandatory basis to the extent that the amount in the
Redemption Fund on such Redemption Date exceeds the
aggregate amount of all redemptions to be made at the
request of Bondholders. Mandatory redemptions of Bonds
will be made as described in the related Prospectus
Supplement for such Series and "Description of the
Bonds -- Mandatory Redemption" herein.
E. Redemption at
the Option of
the Issuer......As described herein under the heading "Description of the
Bonds -- Optional Redemption", the Bonds of any Series
may be redeemed in whole or in part at the option of the
Issuer on any Redemption Date for such Series under the
conditions specified in the related Prospectus
Supplement. Such redemptions may be made from any
available funds.
Book Entry
Registration.........If the Prospectus Supplement for a Series so provides,
Bonds of such Series may be issued in book entry form in
which case a single certificate will be issued in the
name of a clearing agency registered with the Commission
(a "Clearing Agency") or its nominee. Transfers and
pledges of Book Entry Bonds may be made only through
entries on the books of the Clearing Agency in the names
of its participants ("Clearing Agency Participants") or
their nominees, and transfers and pledges by purchasers
and other Beneficial Owners of Book Entry Bonds other
than Clearing Agency Participants may be effected only
through Clearing Agency Participants. Beneficial Owners
will receive payments of principal and interest, and may
tender Bonds for redemption to the Trustee, only through
the Clearing Agency and Clearing Agency Participants.
Except as otherwise specified in this Prospectus or a
related Prospectus Supplement, the terms "Bondholders"
and "holders" shall be deemed to include Beneficial
Owners. (See "Special Considerations -- Book Entry
Registration" and "Description of the Bonds -- Book Entry
Registration.")
The Collateral.......Each Series of Bonds will be separately secured by specific
collateral, including the GNMA Certificates, a Collection
Account (each, a "Collection Account") and various
reserve funds (collectively, the "Collateral") as
described below.
A. GNMA
Certificates....Each Series of Bonds will be secured by a group of GNMA
Certificates, which are "fully-modified pass-through"
mortgage-backed certificates guaranteed as to timely
payment of principal and interest by GNMA. GNMA's
guarantee obligation is backed by the full faith and
credit of the United States. The GNMA Certificates
securing each Series of Bonds will have, as of the date
of issuance for the Bonds of such Series (its "Issue
Date"), a GNMA Collateral Value which, together with any
cash deposited into the Collection Account on the Issue
Date as provided in the related Prospectus Supplement,
will at least equal the aggregate principal amount of the
Bonds of such Series plus $1,000. Thereafter, on each
monthly Payment Date, the GNMA Collateral Value of such
GNMA Certificates, plus whatever amount is on deposit in
or to be deposited that day in
6
<PAGE> 23
the Redemption Fund for such Series, will be at least
equal to the aggregate unpaid principal amount of the
Bonds of such Series.
In the event that sufficient principal and interest
payments on the GNMA Certificates securing a Series will
not be received by the Trustee in time to fund the
Reserve Fund and the first interest payment to be made on
such Series, the Issuer will, on the Issue Date, deposit
with the Trustee an amount in cash or a letter of credit
equal to the deficiency.
The GNMA Certificates pledged as Collateral with respect to
each Series will be registered in the name of the Trustee
and held by the Trustee as security only for the Bonds of
such Series. All payments on the GNMA Certificates
securing a Series will be made directly to the Trustee
and will be available for application to the payment of
the principal of and interest on the Bonds of such
Series, unless and until such GNMA Certificates are
withdrawn by the Issuer as permitted by the Indenture, to
the extent of any Excess GNMA Collateral Value, as
defined below, or pursuant to any permitted substitution
of Collateral, and except for certain surplus amounts
which the Issuer is permitted under the Indenture to
withdraw from the Collection Account from time to time.
"Excess GNMA Collateral Value" will be the excess, if
any, on any date as of which the Issuer requests a
release of GNMA Certificates or moneys pursuant to the
Indenture, of (i) the sum of (A) the aggregate GNMA
Collateral Value of all GNMA Certificates securing such
Series and (B) any funds in the Redemption Fund over (ii)
the aggregate outstanding principal balance of the Bonds
of such Series.
B. Collection
Account.........Each Series of Bonds will also be secured by amounts
deposited from time to time in the Collection Account
from payments received on the GNMA Certificates and from
other sources. On each Redemption Date for a Series of
Bonds, the amount to be available for application to the
principal of the Bonds, in the form of redemptions as
described herein, will be withdrawn from the Collection
Account and deposited into the Redemption Fund. Unless
specified otherwise in the Prospectus Supplement for a
Series of Bonds, any funds remaining in a Collection
Account on any Payment Date following such deposit to the
Redemption Fund and following payment of all interest due
and payable on the Bonds on such Payment Date will be
promptly paid over to the Issuer in accordance with the
terms of the Indenture.
C. Redemption
Fund............Each Series of Bonds will also be secured by cash deposited
from time to time in the Redemption Fund for such Series
in an amount as described above in this Summary.
D. Reserve
Fund............With respect to each Series of Bonds, the Issuer will
either make a deposit (in the form more fully described
under "The Collateral -- Reserve Fund") to the Reserve
Fund for such Series (each, a "Reserve Fund") in an
amount, if any, specified in the related Series
Supplement for the Series (the "Requisite Amount of the
Reserve Fund") or overcollateralize such Series of Bonds
with GNMA Certificates having the additional GNMA
Collateral Value specified in the Indenture (the
"Applicable Overcollateralization Amount"). Such amounts
will be available for payment of interest on the Bonds of
such Series to the extent that funds otherwise available
therefor may be insufficient.
7
<PAGE> 24
E. Deposits,
Substitution
and
Withdrawal......The Issuer may (i) deposit additional GNMA Certificates as
Collateral for any Series, (ii) to the extent of any
Excess GNMA Collateral Value, withdraw within certain
restrictions GNMA Certificates as Collateral for the
applicable Series or (iii) substitute GNMA Certificates
for GNMA Certificates previously pledged as Collateral
for a Series, in each case under the conditions described
in the Indenture and related Prospectus Supplement. The
effect of the deposit of additional GNMA Certificates, or
the substitution of GNMA Certificates, as Collateral for
a Series may be to limit or increase the amount of funds
required to be deposited to the Redemption Fund for the
redemption of Bonds of such Series. (See "Description of
the Bonds -- Deposits, Substitution and Withdrawal".)
F. Events of
Default.........In case an Event of Default with respect to any Series of
Bonds should occur and be continuing, the Trustee or the
holders of at least 25% in principal amount of the Bonds
of such Series then outstanding may declare the principal
of the Bonds of such Series to be due and payable. Such
declaration may under certain circumstances be rescinded
by the holders of a majority in principal amount of the
Bonds of such Series then outstanding. An Event of
Default with respect to one Series of Bonds will not be
an Event of Default with respect to any other Series.
(See "The Indenture -- Events of Default".)
Tax Consequences to
Bondholders........Interest accrued or paid on Bonds from time to time will be
taxable as ordinary income. No Bonds of any Series will
be issued with any original issue discount, except as
described herein under "Certain Federal Income Tax
Consequences." Interest payments on Bonds held by foreign
persons will generally be exempt from United States
withholding tax, subject to compliance with applicable
certification procedures. See "Certain Federal Income Tax
Consequences". Bonds owned by a real estate investment
trust will not be treated as "real estate assets" or
"Government securities", and interest on the Bonds will
not be considered "interest on obligations secured by
mortgages on real property." The Bonds will not
constitute "qualifying real property loans" for thrift
institutions taxed as mutual savings banks or domestic
building and loan associations or "loans secured by an
interest in real property" or "obligations of the United
States" for domestic building and loan associations. In
addition, Bonds held by a regulated investment company
will not constitute "Government securities". Special tax
counsel has advised the Issuer that in its opinion the
Bonds will be treated for Federal income tax purposes as
indebtedness of the Issuer. Principal payments made on
the Bonds should, to the extent of a Bondholder's basis
in the Bonds, be treated as a return of capital. (See
"Certain Federal Income Tax Consequences".)
Legal Investment.....Unless otherwise specified in the Prospectus Supplement,
Bonds of each Series offered by this Prospectus and the
related Prospectus Supplement will constitute "mortgage
related securities" under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") and, as such, will be
legal investments for certain types of investors to the
extent provided in SMMEA, subject, in any case, to any
other regulations which may govern investments by such
investors. See "Legal Investment".
8
<PAGE> 25
INDEX TO DEFINITIONS OF KEY TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Accounting Date"..................................................................... 5
"Accrual Period"...................................................................... 4
"Applicable Overcollateralization Amount"............................................. 7
"Beneficial Owners"................................................................... 3
"Bonds"............................................................................... 3
"Bondholders"......................................................................... 3
"Book Entry Bonds".................................................................... 4
"Clearing Agency"..................................................................... 6
"Clearing Agency Participants"........................................................ 6
"Collateral".......................................................................... 6
"Collection Account".................................................................. 6
"Deceased Holders".................................................................... 5
"Eligible Investments"................................................................ 21
"Event of Default".................................................................... 25
"Excess GNMA Collateral Value"........................................................ 7
"FHA"................................................................................. 3
"FmHA"................................................................................ 3
"Fund"................................................................................ 21
"GNMA"................................................................................ 3
"GNMA Certificates"................................................................... 3
"GNMA Collateral Value"............................................................... 5
"Guaranty Agreement".................................................................. 18
"Indenture"........................................................................... 3
"Issue Date".......................................................................... 6
"Issuer".............................................................................. 3
"Payment Date"........................................................................ 4
"Prospectus Supplement"............................................................... 3
"Redemption Date"..................................................................... 4
"Redemption Fund"..................................................................... 4
"Regular Record Date"................................................................. 4
"Requisite Amount of the Reserve Fund"................................................ 7
"Reserve Fund"........................................................................ 7
"Series".............................................................................. 3
"Series Supplement"................................................................... 3
"Tender Date"......................................................................... 15
"Trustee"............................................................................. 3
"VA".................................................................................. 3
"Value Differential".................................................................. 5
</TABLE>
9
<PAGE> 26
SPECIAL CONSIDERATIONS
Investors should consider, among other things, the following factors in
connection with the purchase of the Bonds:
LIMITED LIQUIDITY AND POSSIBLE LACK OF PUBLIC MARKET
Although all of the Bonds of any Series may be sold in an underwritten
public offering, a public market for the Bonds of one or more Series does not
currently exist and may not develop. If a public market for the Bonds of any
Series does develop, there is no assurance that it will provide Bondholders with
liquidity of investment or that it will remain in existence for the life of such
Series. The market value of the Bonds of each Series may fluctuate with changes
in prevailing rates of interest. Consequently, sale of the Bonds of any Series
by a Bondholder in any market which may develop may be at a discount from par
value or purchase price, in which case the proceeds of such sales will be less
than the principal amount of, and accrued interest on, the Bonds sold.
FUNDS AVAILABLE FOR REDEMPTION
There can be no assurance that amounts deposited in the Redemption Fund for
a Series of Bonds will be sufficient to permit a holder's Bonds to be redeemed
within a reasonable time after redemption is requested, for the following
reasons:
1. The Effect of Deposit or Substitution of Collateral by the Issuer
May be to Limit or Increase Funds Available for Redemption. The Issuer may
deposit additional GNMA Certificates as Collateral for any Series or
substitute new GNMA Certificates for GNMA Certificates previously pledged
as Collateral for a Series, in each case under the conditions prescribed in
the Indenture. The effect of the deposit or substitution of other GNMA
Certificates as Collateral for a Series may be to limit the amount of funds
required to be deposited to the Redemption Fund for the redemption of Bonds
of such Series and may therefore reduce the availability of funds to redeem
Bonds prior to their maturity date. Alternatively, substitutions of GNMA
Certificates may increase the funds available for deposit into the
Redemption Fund to redeem Bonds of such Series pursuant to requests by
Bondholders. If sufficient requests by Bondholders have not been submitted,
such substitutions of GNMA Certificates may increase the rate of mandatory
redemptions on the Bonds of such Series. (See "Description of the
Bonds -- Deposits, Substitution and Withdrawal".)
2. Because of Minimal Scheduled Principal Payments on the GNMA
Certificates in the Early Years, the Deposit of Amounts in the Redemption
Fund for a Series is Dependent in Part Upon the Extent of Prepayments of
Principal on the GNMA Certificates Securing the Series. Scheduled principal
payments on the mortgage loans underlying each GNMA Certificate pledged
with respect to each Series of Bonds will be minimal in the early years and
will increase in the later years of such mortgage loans. As a result,
amounts deposited in the Redemption Fund for any Series (see "Description
of the Bonds -- Redemption of Bonds"), and, therefore, available for
redemptions at the request of Bondholders, will be limited in the early
years and will increase during the later years of each such Series.
Accordingly, the availability of funds for redemption of Bonds of any
Series at the request of Bondholders may depend in part upon the rates of
prepayment of the mortgage loans backing the GNMA Certificates securing the
Series, in addition to the factors described in paragraph 1 above. (See
"Description of the Bonds -- Maturity of the Bonds" and "The
Collateral -- The Underlying Mortgage Loans".)
3. Prepayments of Principal on GNMA Certificates are Least Likely to
Occur During Periods of Higher Interest Rates When it is Expected the
Requests for Redemption by Bondholders Will be Greatest. During periods in
which prevailing interest rates are higher than the interest rate paid on a
Series of Bonds, greater numbers of Bondholders are expected to request
that their Bonds be redeemed in order to take advantage of the higher
interest rates payable on other investments then available. During such
periods, there will likely also be a reduction in the rate of prepayments
on the mortgage loans backing the GNMA Certificates securing a Series of
Bonds, thus limiting the funds available to satisfy requested redemption by
Bondholders. Additionally, the Issuer would be most likely to
overcollateralize a Series of
10
<PAGE> 27
Bonds during such periods of higher interest rates, thereby further
reducing funds available to satisfy redemptions at the request of
Bondholders. (See "Description of the Bonds -- Redemption of Bonds".)
4. Deceased Holders have Certain Priorities in Redemption at the
Request of Bondholders. All living Bondholders' requests for redemptions
will be satisfied, to the extent of $10,000 per Bondholder, only after
satisfaction of all requests for redemptions of Bonds beneficially owned by
the estates of Deceased Holders holding up to $100,000 aggregate principal
amount of Bonds of the applicable Series. All living Bondholders' requests
for redemptions in excess of $10,000 per Bondholder will be satisfied only
after satisfaction of all requests for redemptions of Bonds beneficially
owned by the estates of Deceased Holders. (See "Description of the
Bonds -- Redemption at Request of Bondholders or Beneficial Owners".)
REDEMPTION AT THE OPTION OF THE ISSUER
To the extent specified in the related Prospectus Supplement, the Issuer
may redeem any Series of its Bonds. The Issuer anticipates exercising its right
to optionally redeem any Series of Bonds, if at the time such Bonds become
eligible for optional redemption as described in the related Prospectus
Supplement, such Bonds bear interest at a rate greater than the then current
market interest rate. During such periods of lower market interest rates,
Bondholders are not expected to desire redemption of their Bonds, as they may
not be able to reinvest funds received from such redemption of the Bonds in
other investments of comparable quality bearing comparable interest rates.
LIMITED ASSETS
The Issuer does not have, nor is it expected in the future to have, any
significant assets other than assets pledged to secure specific Series of
GNMA-Collateralized Bonds issued by it. Consequently, Bondholders must rely upon
payments under the GNMA Certificates for the payment of principal of, and
interest on, the Bonds. If the Collateral securing any Series of Bonds is
insufficient to pay such Series, it is unlikely that any other assets of the
Issuer will be available for payment of the deficiency. Although payment of
principal of, and interest on, the GNMA Certificates securing the Bonds is
guaranteed by GNMA, the Bonds represent obligations solely of the Issuer and are
not insured or guaranteed by GNMA or any other governmental agency, nor by Ray
Ellison Mortgage Investment Corp. ("REMIC") or any other affiliate of the
Issuer. A default with respect to a GNMA Certificate securing any Series of
Bonds will not necessarily result in an Event of Default with respect to the
Bonds secured by such Certificate.
SALE OF COLLATERAL ON DEFAULT; INTEREST RATE FLUCTUATIONS
If an Event of Default occurs on any Series of Bonds, there can be no
assurance that the Collateral securing such Series will be sufficient to pay the
principal and interest due on such Bonds. The value of the Collateral will
fluctuate with changes in prevailing rates of interest generally. Consequently,
the GNMA Certificates securing a Series, or the Eligible Investments in which
the various Funds pledged to the Series may be invested, may be liquidated at a
discount from par value or from their purchase price, in which case the proceeds
of liquidation may be less than the outstanding principal amount of, and accrued
interest on, the Bonds of the Series. In such event, the Issuer may be unable to
pay in full the principal of, and interest on, such Bonds from the proceeds of
the Collateral. The Issuer is likely to have no other assets from which the
affected Bondholders could seek payment of their Bonds. Following an Event of
Default, the Trustee may sell the Trust Estate securing the Bonds of such Series
at one or more public or private sales called and conducted in any manner
permitted by law. However, if no Event of Default resulting in a default in
payment of principal or interest has occurred, then the Trustee is prohibited
from selling the Collateral unless (a) the proceeds of such sale are sufficient
to pay in full the principal and accrued interest on the outstanding Bonds of
the Series at the date of such sale, or (b) the Trustee obtains the consent of
the holders of 100% in principal amount of the outstanding Bonds of the Series.
11
<PAGE> 28
PAYMENTS DIRECTLY TO THE ISSUER AND DEPOSITS, SUBSTITUTIONS AND WITHDRAWALS OF
COLLATERAL
The Trustee will pay directly to the Issuer the portion of the payments
made on the GNMA Certificates securing any Series received in any month that is
not required either to be applied on the Payment Date for the Series within such
month to pay interest on the Bonds of the Series or to be deposited in the
Reserve Fund or the Redemption Fund. In addition, the Issuer may at any time
recalculate the amounts required to be on deposit in the Reserve Fund, pursuant
to the related Series Supplement, and may withdraw any amount in excess of the
Requisite Amount of the Reserve Fund. Such withdrawn amounts would not
thereafter be included in the Collateral. In addition, the Issuer may withdraw
GNMA Certificates to the extent of any Excess GNMA Collateral Value. The
Indenture defines Excess GNMA Collateral Value as (a) the sum of (i) the
aggregate GNMA Collateral Value of the GNMA Certificates and (ii) any funds in
the Redemption Fund, over (b) the outstanding principal balance of the Bonds of
such Series. Further, the Issuer may (i) deposit additional GNMA Certificates or
(ii) withdraw or substitute GNMA Certificates, provided that any such deposit or
substitution is permitted only if the Trustee shall have received a certificate
signed by the appropriate officers of the Issuer, stating that, at all times
since the date of issuance of the Bonds of such Series and immediately after any
withdrawal, substitution or deposit of Collateral is made, at least 55% of the
assets securing each Series of the Issuer's Bonds consist of GNMA Certificates
representing mortgage pools for which the entire pool is represented by GNMA
Certificates pledged to secure such Series and at least 55% of the assets of the
Issuer consist of GNMA Certificates representing mortgage pools for which the
entire pool is represented by GNMA Certificates owned by the Issuer, and the
remaining 45% of the assets securing each Series and the remaining 45% of the
assets of the Issuer consist primarily of real estate-type interests in the form
of GNMA Certificates. (See "-- Funds Available for Redemption -- 1. The Effect
of Deposit or Substitution of Collateral by the Issuer May be to Limit or
Increase Funds Available for Redemption" above.)
BOOK ENTRY REGISTRATION
Because transfers and pledges of Book Entry Bonds can be effected only
through book entries at a Clearing Agency through Clearing Agency Participants,
the liquidity of the secondary market for Book Entry Bonds may be reduced to the
extent that some investors are unwilling to hold Bonds in book entry form in the
name of Clearing Agency Participants and the ability to pledge Book Entry Bonds
may be limited due to lack of a physical certificate. Beneficial Owners of Book
Entry Bonds may, in certain cases, experience delay in the receipt of payments
of principal and interest since such payments will be forwarded by the Trustee
to the Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Bonds are recorded, the ability of Beneficial Owners
to obtain timely payment and (if the limits of applicable insurance coverage by
the Securities Investor Protection Corporation are exceeded, or if such coverage
is otherwise unavailable) ultimate payment of principal and interest of Book
Entry Bonds may be impaired.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued in Series pursuant to the Indenture. The Indenture
will be supplemented by a Series Supplement for each Series. A form of the
Indenture has been incorporated by reference as an exhibit to the Registration
Statement of which this Prospectus is a part, and a form of each Series
Supplement will be filed with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K upon the issuance of the Bonds of the
Series to which it relates. As a condition to issuance, each Series will be
rated by at least one nationally-recognized investment rating agency and given
such rating agency's highest bond rating.
The Bonds of each Series will be secured by separate Collateral. (See "The
Collateral".) As explained more fully elsewhere in this Prospectus, the
Indenture requires that the GNMA Certificates deposited as Collateral for each
Series have, on the Issue Date, an aggregate GNMA Collateral Value that (a)
will, together with any cash deposited into the Collection Account for such
Series as permitted in the related Prospectus Supplement, at least equal the
aggregate principal amount of the Bonds of the Series, and (b) will produce,
together with other deposited Collateral, a cash flow sufficient to amortize the
Bonds of the Series
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through redemption and payment at their stated maturity and to support the
interest payments required to be made on the Bonds of the Series while they are
to be outstanding. The foregoing and the more detailed discussion elsewhere in
this Prospectus assume that the Trustee, as the registered holder of such GNMA
Certificates, will receive payments of principal and interest on such GNMA
Certificates on a timely basis, that the Trustee and the Issuer will comply with
all provisions of the Indenture, and that the Eligible Investments, as defined
herein under "Investment of Funds", in which the Trustee invests the funds held
by it will produce the return, if any, specified in the related Prospectus
Supplement in computing the amount of required deposit. (See "The
Collateral -- General"; and "-- Investment of Funds".)
Under the Indenture, all payments of principal of, and interest on, GNMA
Certificates securing a Series of Bonds will be paid to the Trustee as the
registered holder of each GNMA Certificate. Such payments are due on the 15th or
20th of each calendar month and, upon receipt, will immediately be deposited in
the Collection Account for the Series. Amounts on deposit in the Collection
Account for a Series will be applied on each monthly Payment Date for the
Series, first to payment of interest then due on the Bonds of the Series as
described below under "Payments of Interest", then to any necessary restoration
of the Reserve Fund for the Series to whatever amount is required under the
Indenture and then to make the deposit required to be made to the Redemption
Fund as described below under "Redemption of Bonds", pursuant to which payments
of principal in the form of redemptions are made on the Bonds.
In the case of any Series of Bonds issued in definitive form, Bonds may be
presented for payment of principal and interest at the corporate trust office of
the agent of the Trustee specified in the Series Supplement governing such
Series or at any other address of the Trustee or an agent of the Trustee,
hereafter designated in a notice to the Bondholders, or at the office of the
paying agent, if any, appointed by the Issuer for such purpose. The Trustee or
paying agent, as the case may be, shall make payment of interest by check mailed
to the holders of Bonds issued in definitive form at their respective addresses
appearing on the bond register. The specific arrangements for payments of
principal and interest on each Series of Bonds will be described in the related
Prospectus Supplement for such Series. Bonds issued in definitive form may be
transferred or exchanged without the payment of any service charge, other than
any tax or other governmental charge payable in connection therewith, at the
corporate trust office of the Bond Registrar, which initially is the Trustee.
Any Series of Bonds issued as Book Entry Bonds will receive payments of
principal and interest and be submitted for final payment, transfer or exchange
as specified in the related Prospectus Supplement and Series Supplement for such
Series.
PAYMENTS OF INTEREST
The Bonds of each Series will bear interest from the date and at the rate
specified in the related Prospectus Supplement for such Series. Interest will be
payable monthly on each Payment Date for such Series, as specified in the
related Prospectus Supplement. Each interest payment will include all interest
accrued during the related Accrual Period specified in the Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement, each
Accrual Period will end on a date prior to the related Payment Date, with the
result that the effective yield to the Bondholders of such Series will be
reduced to a level below the yield which would apply if the Accrual Period ended
on such Payment Date. Upon maturity or earlier redemption of the Bonds of any
Series, interest will be paid to the date specified in the related Prospectus
Supplement. Unless interest is accrued to the maturity date or Redemption Date,
as the case may be, for any Series of Bonds, the effective yield to the holder
of such Bonds will be reduced to a level below the yield that would apply if
interest were paid to the respective maturity date or Redemption Date of such
Series of Bonds. The monthly interest payments will be made on each Payment Date
to the persons in whose names the Bonds are registered in the bond register at
the close of business on the Regular Record Date specified in the related
Prospectus Supplement.
REDEMPTION OF BONDS
The Issuer will establish a Redemption Fund for each Series of Bonds. A
portion of the monthly payments received in respect of the GNMA Certificates
securing such Series may be deposited in the
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<PAGE> 30
Redemption Fund. There is no assurance that the Redemption Fund for any Series
will be sufficient to permit redemption of the Bonds of such Series within a
reasonable time after redemption is requested by a Bondholder. (See "Special
Considerations -- Funds Available for Redemption".)
On each Redemption Date, an amount equal to the Value Differential, as
described below, will be deposited into the Redemption Fund from funds available
in the Collection Account. The "Value Differential" for each Series is the
amount, as of each Accounting Date, by which the aggregate outstanding principal
amount of the Bonds of such Series exceeds the sum of the aggregate GNMA
Collateral Value of the GNMA Certificates securing such Series plus any amounts
less than $1,000 then on deposit in the Redemption Fund for such Series. Unless
specified otherwise in the Prospectus Supplement for any Series of Bonds, the
aggregate GNMA Collateral Value of the GNMA Certificates securing any Series
cannot exceed the Maximum GNMA Collateral Value Percentage (as specified in the
related Series Supplement for each Series of Bonds) of the lesser of (i) the
aggregate principal amount, scheduled to be received on such GNMA Certificates
prior the maturity date of such Series, or (ii) the present value of the
scheduled distributions on such GNMA Certificates to be received prior to the
maturity date of such Series, discounted monthly at the interest rate payable on
the Bonds of such Series. The Issuer may voluntarily deposit, withdraw or
substitute GNMA Certificates to the extent permitted by the Indenture which may
have the effect of reducing or increasing the Value Differential. (See "Special
Considerations -- Funds Available for Redemption" and " -- Deposits,
Substitution and Withdrawal".) In no event, however, will the amount transferred
to the Redemption Fund with respect to any Redemption Date be less than the
incremental amount which is necessary to make the aggregate amount transferred
to the Redemption Fund through such date at least equal to the aggregate amount
which would have been transferred through such date were the Bonds still secured
by the GNMA Certificates originally pledged to secure such Series of Bonds and
assuming that no prepayments had been made on the mortgage loans underlying such
GNMA Certificates.
In addition to the ability of the Issuer to deposit, withdraw or substitute
new Collateral, as described in the preceding paragraph, the rate of prepayment
of the mortgage loans backing the GNMA Certificates securing a Series may affect
the availability of funds for redemption of Bonds of the Series at the request
of the Bondholders. (See "-- Maturity of the Bonds" below.)
MATURITY OF THE BONDS
In addition to the ability of the Issuer to deposit, withdraw or substitute
GNMA Certificates, as described in "-- Deposits, Substitution and Withdrawal"
below, the rate of prepayment of the mortgage loans backing the GNMA
Certificates securing a Series may affect the availability of funds for
redemption of Bonds of the Series at the request of the Bondholders. Each GNMA
Certificate is backed exclusively by a pool of mortgage loans either (i) insured
by the Federal Housing Administration of the U.S. Department of Housing and
Urban Development, under the National Housing Act of 1934, as amended (each, an
"FHA Loan"), (ii) guaranteed by the Farmers Home Administration under Title V of
the Housing Act of 1949 (each, a "FmHA Loan") or (iii) insured or guaranteed by
the U.S. Veterans Administration under Chapter 37 of Title 38, United States
Code (each, a "VA Loan"). Prepayments on the FHA Loans, FmHA Loans and VA Loans
backing a GNMA Certificate will be passed through to the holder of the GNMA
Certificate as a prepayment on the GNMA Certificate. Accordingly, if prepayments
on FHA loans, FmHA Loans and VA Loans backing the GNMA Certificates securing a
Series of Bonds conform to the general FHA experience described above, a
substantial portion of such GNMA Certificates will be prepaid prior to their
respective maturities. However, there is no assurance that prepayments on the
mortgage loans backing the GNMA Certificates for any Series of Bonds will
conform to such FHA prepayment experience.
No comparable statistics are available with respect to FHA's prepayment
experience relating to other types of mortgage loans. (See "The
Collateral -- GNMA Certificates -- The Underlying Mortgage Loans".) In addition,
there is no assurance that the economic conditions and other factors, including
prevailing interest rates, which existed during the period when the FHA
statistics were compiled, are applicable today or will be applicable in the
future. (See "Special Considerations".)
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REDEMPTION AT REQUEST OF BONDHOLDERS OR BENEFICIAL OWNERS
General. Subject to the limitations discussed below, any Bondholder of any
Series has the right to request the redemption of its Bonds prior to maturity
unless the Bonds of such Series have been declared due and payable by reason of
an Event of Default under the Indenture, as described herein under "The
Indenture -- Events of Default". The Prospectus Supplement for each Series will
specify the first date on which Bonds of such Series will be eligible for
redemption at the request of Bondholders. Such redemptions will be made to the
extent of available funds on each Redemption Date above under "Redemption of
Bonds." On each such Redemption Date, redemptions will be made in accordance
with such requests in the order of priority described below, subject to the
limitations that (i) redemptions of Bonds will be made only in principal amounts
of $1,000 or integral multiples thereof and (ii) redemptions will be made only
to the extent funds are available in the Redemption Fund for the Series as of
such Redemption Date.*
On each Redemption Date for a Series, subject to the above limitations, the
Issuer will redeem Bonds of such Series for which redemption has been requested
in the following order: (i) Bonds beneficially owned by the estates of Deceased
Holders, subject to a limitation of $100,000 principal amount of Bonds of any
Series beneficially owned by any one Deceased Holder; (ii) Bonds registered in
the name of other Bondholders, subject to a limitation of $10,000 principal
amount of Bonds of any Series beneficially owned by any one Bondholder; (iii)
Bonds beneficially owned by the estates of Deceased Holders in excess of such
$100,000 limitation; and (iv) Bonds registered in the name of other Bondholders
in excess of such $10,000 limitation.** Within any of the above categories,
Bonds will be redeemed, but only to the extent moneys are on deposit in the
Redemption Fund, in the order of receipt of requests for redemption. The
Trustee, or in the case of any Series of Book Entry Bonds, the Clearing Agency,
may establish such procedures as it deems fair and equitable to establish the
order of receipt of requests received on the same day. Unless specified
otherwise in the related Prospectus Supplement, the redemption price for the
Bonds so redeemed will be 100% of the principal amount thereof, plus accrued
interest to the date specified in the related Prospectus Supplement for such
Series.
Procedure for Redemptions Requested by Bondholders. A Bondholder may
request redemption by delivering the following items to the Trustee, or in the
case of Book Entry Bonds, to the Clearing Agency, on or before the day specified
in the related Prospectus Supplement (each, a "Tender Date") for each Redemption
Date: (i) a written request for redemption in form satisfactory to the Trustee
(such as the form appearing on the back of each Bond in the case of each Series
of Definitive Bonds), or, in the case of Book
- ---------------
* There is no assurance that amounts to be deposited in the Redemption Fund for
a Series will be sufficient to permit a holder's Bonds to be redeemed within
a reasonable time after redemption is requested. (See "Special
Considerations".)
** For purposes of these limitations, a Bond held by tenants by the entirety,
joint tenants or tenants in common is considered to be held by a single
Bondholder. However, a Bond held by a trustee is considered to be held by
each beneficiary of the trust to the extent of such beneficiary's beneficial
interest therein. Also for purposes of these limitations, the death of a
tenant by the entirety, joint tenant or tenant in common will be deemed to
be the death of the holder of the Bond and the entire principal amount of
the Bond so held will be subject to priority in redemption, and the death of
a beneficiary of a trust will be deemed to be the death of the holder of a
Bond held by the trustee of the trust to the extent of such beneficiary's
beneficial interest in such Bond. A person who is, or during his lifetime
was, entitled to substantially all of the beneficial interests of ownership
of a Bond will be deemed to be the beneficial owner and holder of such Bond
to the extent of his beneficial interest therein, regardless of the
registered Bondholder, if such beneficial interest can be established to the
satisfaction of the Trustee. Such beneficial interest will be deemed to
exist in typical cases of street name or nominee ownership, ownership by a
trustee, ownership under the Uniform Gifts to Minors Act and community
property or other joint ownership arrangements between a husband and wife
and in trust arrangements and certain other arrangements where a person has
substantially all of the beneficial ownership interest in the Bond during
his or her lifetime. Beneficial interests shall include the power to sell,
transfer or otherwise dispose of a Bond and the right to receive the
proceeds therefrom, as well as interest and principal payable with respect
thereto.
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<PAGE> 32
Entry Bonds, in a form satisfactory to the Clearing Agency, by the Bondholder or
Beneficial Owner, as the case may be, or the legal representative of either,
with appropriate evidence of authority; (ii) in the case of each Series of
Definitive Bonds, the certificate or certificates representing the Bond or Bonds
for which redemption is being requested, and (iii) in the case of a request on
behalf of a Deceased Holder, appropriate evidence of death and any tax waivers
requested by the Trustee or Clearing Agency, as applicable. Requests for
redemptions received in proper form will be accepted by the Trustee only to the
extent funds are available in the Redemption Fund as described above. Requests
for redemption made after the Tender Date for a given Redemption Date, and
requests for redemption received in a timely manner but not accepted in respect
of a given Redemption Date, will be treated as requests for redemption on the
next succeeding Redemption Date and each succeeding Redemption Date thereafter
until the request is accepted or is withdrawn as described in the following
paragraph. Bonds submitted with a request for redemption will be held by the
Trustee until the request has been accepted or has been withdrawn and will
continue to bear interest until redeemed. Bonds, or portions thereof in integral
multiples of $1,000 principal amount, which have been accepted for redemption
shall become due and payable on the applicable Redemption Date and shall cease
to bear interest on such Redemption Date or such other date as may be specified
in the related Prospectus Supplement for such Series.
Any Bondholder who has requested redemption may withdraw his request at any
time by causing delivery of written notice of withdrawal to the Trustee, or in
the case of withdrawal by a Beneficial Owner of a request with respect to Book
Entry Bonds, by causing delivery of written notice of withdrawal to his Clearing
Agency Participant, who in turn will deliver such notice of withdrawal to the
Trustee. In either case, if such written notice has not been received on or
before the Tender Date for a given Redemption Date, the previously made
redemption request will be irrevocable with respect to the acceptance of Bonds
for redemption on such given Redemption Date.
MANDATORY REDEMPTION
On each Redemption Date following the issuance of the Bonds of such Series,
the Issuer is obligated to redeem Bonds on a mandatory basis to the extent that
the amount in the Redemption Fund on such Redemption Date exceeds the aggregate
amount of all redemptions to be made at the request of Bondholders. Mandatory
redemptions of Bonds will be made in accordance with the procedures described in
the related Prospectus Supplement for such Series.
It is expected that mandatory redemptions for any Series of Bonds are most
likely to occur when prevailing interest rates are such that fewer Bondholders
would otherwise request redemptions; accordingly, holders of Bonds so redeemed
may not be immediately able to reinvest the proceeds of such redemption in
assets bearing interest equal to that paid on the Bonds so redeemed. (See
"Special Considerations -- Funds Available For Redemption".)
OPTIONAL REDEMPTION
The Issuer may at its sole option redeem all or a portion of the Bonds of
any Series, under the conditions specified in the related Series Supplement. The
redemption price for the Bonds of each Series will be 100% of the principal
amount of such Bonds, unless a higher percentage of principal is specified in
the related Prospectus Supplement for such Series, together with accrued
interest to the date specified in the related Prospectus Supplement.
DEPOSITS, SUBSTITUTION AND WITHDRAWAL
Under the terms of the Indenture, the Issuer may from time to time deposit,
withdraw or substitute GNMA Certificates to be held as security for the Bonds of
any Series provided certain tests are met and provided that any such deposit,
withdraw or substitution may be made only if the Trustee shall have received a
certificate signed by the appropriate officers of the Issuer, stating that, at
all times since the date of issuance of the Bonds of such Series and immediately
after any deposit, withdrawal or substitution of Collateral is made, at least
55% of the assets securing each Series of the Issuer's Bonds consist of GNMA
Certificates representing mortgage pools for which the entire pool is
represented by GNMA Certificates pledged to secure such Series and at least 55%
of the assets of the Issuer consist of GNMA Certificates representing mortgage
pools for which the entire pool is represented by GNMA Certificates owned by the
Issuer, and the remaining
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<PAGE> 33
45% of the assets securing each Series and the remaining 45% of the assets of
the Issuer consist primarily of real-estate type interests in the form of GNMA
Certificates. The Issuer may also withdraw GNMA Certificates on any date during
the period beginning on any Accounting Date for any Series of Bonds and ending
on the next to the last business day of the calendar month in which such
Accounting Date occurs, subject to certain conditions and provided that the GNMA
Collateral Value of all GNMA Certificates securing such Series and other funds
in the Redemption Fund exceed the aggregate outstanding principal balance of the
Bonds of such Series. Deposits, substitutions and withdrawals of GNMA
Certificates by the Issuer may have the effect of reducing or increasing the
funds deposited into the Redemption Fund. (See Special Considerations -- Funds
Available For Redemption".)
OPEN MARKET PURCHASES
The Issuer and its affiliates may acquire by open market purchase Bonds of
any Series at any time, in privately negotiated transactions or otherwise. For
purposes of determining whether the requisite percentage of Bondholders has been
satisfied with respect to certain actions of Bondholders described in the
Indenture, Bonds known by the Trustee to be owned by the Issuer and its
affiliates shall be disregarded.
BOOK ENTRY REGISTRATION
If the Prospectus Supplement for a Series so provides, Bonds of any Series
may be Book Entry Bonds issued and held in the form of a single certificate
issued in the name of a Clearing Agency registered with the Commission or its
nominee. Transfers and pledges of Book Entry Bonds may be made only through
entries on the books of the Clearing Agency in the name of Clearing Agency
Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Bonds.
Purchasers and other Beneficial Owners of Book Entry Bonds may hold,
transfer or pledge their ownership interest in the Bonds only through Clearing
Agency Participants and will receive all payments of principal and interest with
respect to the Bonds, and, if applicable, may request redemption of Bonds, only
through the Clearing Agency and the Clearing Agency Participants. Beneficial
Owners will not be registered holders of Bonds or be entitled to receive
definitive certificates representing their ownership interest in the Bonds
except under the limited circumstances, if any, described in the related
Prospectus Supplement. (See "Special Considerations -- Book Entry
Registration.")
If Bonds of a Series are issued as Book Entry Bonds, the Clearing Agency
will be required to make book entry transfers among Clearing Agency
Participants, to receive and transmit payments of principal and interest with
respect to the Bonds of such Series, and to receive and transmit requests for
redemption with respect to such Bonds. Clearing Agency Participants with whom
Beneficial Owners have accounts with respect to such Book Entry Bonds will be
similarly required to make book entry transfers and receive and transmit
payments and redemption requests on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not be registered holders
of Bonds and will not possess physical certificates, a method will be provided
whereby Beneficial Owners may receive payments, transfer their interests, and
submit redemption requests.
THE COLLATERAL
GENERAL
Each Series of Bonds will be separately secured by assignments to the
Trustee of Collateral as described in this paragraph. Such Collateral will
include GNMA Certificates having, as of the Issue Date of such Series, an
aggregate GNMA Collateral Value at least equal to the aggregate principal amount
of the Bonds plus $1,000. Scheduled distributions on such GNMA Certificates
will, together with any amount of cash deposited into the Collection Account on
the Issue Date as provided in the related Prospectus Supplement, be sufficient
to amortize the Bonds of such Series through redemptions and payment at their
stated maturity and to support the interest payments required to be made on the
Bonds of such Series while they are to be outstanding. Such Collateral will also
include (i) a Collection Account, (ii) a Reserve Fund as described below under
the subheading "Reserve Fund", and (iii) the Redemption Fund for such Series
described above under the heading "Description of the Bonds -- Redemption of
Bonds". In the event that sufficient interest and
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<PAGE> 34
principal on the GNMA Certificates securing a Series will not be received by the
Trustee in time to fund the Reserve Fund and make payments of interest to
Bondholders on the first monthly Payment Date for such Series, the Collateral
deposited on the Issue Date will include an amount in cash and/or a letter of
credit and/or surety bond at least equal to such deficiency. There is no
agreement between the Issuer and any of its affiliates for the advancement of
moneys required to fund the Collection Account, the Redemption Fund or the
Reserve Fund. The Collateral securing each Series of Bonds will serve as
collateral only for such Series.
GNMA CERTIFICATES
General. The GNMA Certificates are "fully-modified pass-through"
mortgage-backed certificates issued by any GNMA approved issuer. The full and
timely payment of principal of, and interest on, the GNMA Certificates is
guaranteed by GNMA. Such guaranty obligation is backed by the full faith and
credit of the United States. (See "The Collateral -- GNMA
Certificates -- GNMA".) Each GNMA Certificate will provide for its issuer to
make payments to the registered holders of such GNMA Certificate of monthly
payments of principal and interest equal to the Certificate holder's
proportionate interest in the aggregate amount of the scheduled monthly payments
of principal of and interest on the underlying mortgage loans, less amounts to
cover servicing and guaranty fees aggregating the excess of the interest on the
mortgage loans over the GNMA Certificate's pass-through rate. In addition, each
payment to a GNMA Certificate holder will include proportionate pass-through
payments to such holder of any unscheduled recoveries of principal of the
mortgage loans underlying the GNMA Certificate including any prepayments of
principal of and proceeds in the event of a foreclosure or other disposition of
any such mortgage loan.
All of the GNMA Certificates securing any Series of Bonds will have
original maturities of not more than 30 years, but may have original maturities
of substantially less than 30 years, and will be registered in the name of the
Trustee. In general, GNMA requires that at least 90% of the original principal
amount of the mortgage pool underlying a GNMA Certificate must consist of
mortgage loans with maturities of twenty years or more. However, in certain
circumstances, GNMA Certificates may be backed by pools of mortgage loans at
least 90% of the original principal amount of which have original maturities of
at least 15 years. Such Mortgage Loans may be secured by either one-to
four-family or multifamily residential properties.
The GNMA Certificates do not constitute a liability of nor evidence any
recourse against the Issuer, REMIC, any other affiliate of the Issuer or any
issuer of any GNMA Certificate, and the only recourse of the Trustee as holder
thereof is to enforce the guaranty of GNMA.
The Issuer expects that interest and principal payments on the FHA Loans,
FmHA Loans and VA Loans backing each GNMA Certificate will be the source of
funds for payments due on the GNMA Certificates. The Issuer similarly
anticipates that payments on the GNMA Certificates and, when necessary, payments
from the Reserve Fund and earnings on the investment of funds in the Redemption
Fund securing a Series will be available sources of funds for payments of
interest due on such Series.
Pursuant to the agreement (each, a "Guaranty Agreement") entered into
between an issuer of any GNMA Certificate and GNMA with respect to each such
GNMA Certificate, the issuer is required to advance its own funds in order to
make timely payment of all amounts due on the GNMA Certificate regardless of
whether the payments are received by such issuer on the FHA Loans, FmHA Loans
and VA Loans underlying such GNMA Certificate in amounts corresponding to the
amounts due on the GNMA Certificate. If such issuer is unable to make payments
on any GNMA Certificate as they become due, it must promptly notify GNMA and
request GNMA to make such payments. Upon such notification and request, GNMA
will make such payments directly to the Trustee as registered holder of the GNMA
Certificate. In the event no payment is made by such issuer and such issuer
fails so to notify GNMA and request GNMA to make such payment, the Trustee, as
holder of the GNMA Certificate, has recourse only against GNMA to obtain such
payment and may proceed directly against GNMA under the terms of each GNMA
Certificate or the Guaranty Agreement relating to such GNMA Certificate for any
amounts which are not paid, when due, under each GNMA Certificate.
Regular monthly installment payments on a GNMA Certificate will be composed
of interest due as specified on the GNMA Certificate plus the scheduled
principal payments on the FHA Loans, FmHA Loans
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<PAGE> 35
and VA Loans underlying such GNMA Certificate due on the first day of the month
in which the scheduled monthly installment on the GNMA Certificate is due. The
regular monthly installments on each GNMA Certificate will be paid to the
Trustee as registered holder on the 15th day of each calendar month in the case
of GNMA Certificates issued under the GNMA I program ("GNMA I Certificates") and
will be mailed by the 20th day of each calendar month in the case of GNMA
Certificates issued under the GNMA II program ("GNMA II Certificates"). In
addition, any unscheduled recoveries of principal on the FHA Loans, VA Loans or
FmHA Loans backing such GNMA Certificates received during any month will be
passed through to the Trustee as the holder of the GNMA Certificate on the 15th
or 20th day of the following month for GNMA I and GNMA II Certificates,
respectively. A portion of the payments received on the GNMA Certificates
securing a Series of Bonds may be available for redemption of the Bonds of the
Series. See "Description of the Bonds -- Redemption Fund".
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on each GNMA I Certificate
is equal to the interest rate on the mortgage loans included in the pool of
mortgage loans backing such GNMA I Certificate, less one half percentage point
per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate is between one half percentage
point and one and one half percentage points lower than the highest interest
rate on the mortgage loans included in the pool of mortgage loans backing such
GNMA II Certificate (except for pools of mortgages secured by manufactured
homes).
The related Prospectus Supplement for each Series of Bonds will describe
the GNMA Certificates anticipated to initially secure such Series, maturities
and interest rates. The Issuer may, from time to time, deposit or withdraw
additional GNMA Certificates or substitute for one or more GNMA Certificates
included in the Collateral other GNMA Certificates, provided certain tests are
met.
As specified in the related Prospectus Supplement, GNMA Certificates
securing a Series of Bonds may be held on deposit at the Participants Trust
Company ("PTC"), a newly established, limited purpose trust company organized
under the banking law of the State of New York. PTC operates a private sector,
industry-owned depository and settlement facility for the book-entry transfer of
interests in GNMA Certificates. Distributions of principal of and interest on
each GNMA Certificate held through PTC will be credited by PTC to the PTC
participant to whose account the GNMA Certificate is credited.
The Underlying Mortgage Loans. The mortgage loans backing each GNMA
Certificate will be either FHA Loans, VA Loans or FmHA Loans originated by
mortgage lending companies which are FHA or VA approved lenders and GNMA
approved issuers. The mortgage loans will be serviced by GNMA approved
servicers, pursuant to the Guaranty Agreements between such servicers and GNMA.
Each servicer shall be obligated under its Guaranty Agreement with GNMA to
service or to provide for the servicing of FHA Loans, VA Loans and FmHA Loans
pooled with respect to GNMA Certificates in accordance with FHA and VA
requirements and with generally accepted practices in the mortgage lending
industry. The respective servicer's responsibilities with respect to the pooled
FHA Loans, VA Loans and FmHA Loans include collection of all principal and
interest payments and payments made by mortgagors toward escrows established for
taxes and insurance premiums; maintenance of necessary hazard insurance
policies; institution of all actions necessary to foreclose on, or take other
appropriate action with respect to, loans and defaults, and collection of FHA
insurance and VA guarantee benefits. The servicer must also perform or provide
for the performance of the routine functions required for the servicing of FHA
Loans, VA Loans and FmHA Loans and GNMA payments, payment of taxes, hazard and
private insurance premiums, remittances to GNMA holders, collections and
customer service. GNMA's obligations under the GNMA Certificates are not
affected by the performance or nonperformance by any issuer of a GNMA
Certificate of its obligations under the relevant Guaranty Agreement.
Each GNMA Certificate will be backed by level payment mortgage loans. Level
payment mortgage loans provide for payments of equal monthly installments over
the term of the loan. Scheduled principal payments on level payment mortgage
loans will be minimal in the early years and will increase in later years.
Certain
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pools of level payment mortgages backing GNMA Certificates included in the
Collateral for a Series may consist of mortgages for which funds have been
provided (and deposited into escrow accounts) to reduce the borrowers' monthly
payments during the early years of the mortgage loans. Payments due to the
registered holders of such "buydown" GNMA Certificates, however, are computed in
the same manner as payments derived from level payment, non-buydown GNMA
Certificates and include amounts to be collected from both the borrowers and the
escrow accounts. The obligations of GNMA and the issuer of such buydown GNMA
Certificates with respect thereto are the same as with respect to non-buydown
Certificates.
GNMA. GNMA is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Section 306(g) of Title
III of the National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and interest
on, certificates which are based on and backed by a pool of mortgages insured by
the FHA under the Housing Act, guaranteed by the FmHA under Title V of the
Housing Act of 1949, or insured or guaranteed by the VA under Chapter 37 of
Title 38, United States Code.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." An opinion dated
December 12, 1969, of an Assistant Attorney General of the United States holds
that such guaranties under Section 306(g) of the mortgage-backed certificates of
the type to be assigned to the Trustee as security for the Bonds are authorized
to be made by GNMA and "would constitute general obligations of the United
States backed by its full faith and credit".
In order to meet its obligation under such guaranties, GNMA may, in its
corporate capacity, under Section 306(d) of Title III of the Housing Act, issue
its general obligations to the United States Treasury in an amount which is at
any one time sufficient to enable GNMA, with no limitations as to amount, to
perform its obligations under such guaranties. GNMA further warrants that, in
the event it is called upon at any time to make good any such guaranty, it has
the full power and authority to borrow from the Treasury of the United States,
if necessary, amounts sufficient to make payments of principal and interest in
accordance with such guaranty, and that the Secretary of the Treasury has agreed
to lend such amounts.
GNMA has approved the issuance of each GNMA Certificate in accordance with
a Guaranty Agreement between GNMA and the issuer of the GNMA Certificate. Each
Guaranty Agreement provides that in the event of certain events of default by
the issuer of a GNMA Certificate, GNMA shall have the right, by letter to such
issuer, to effect the complete extinguishment of such issuer's interest in the
pool of FHA Loans, FmHA Loans and VA Loans underlying the GNMA Certificate, and
the FHA Loans, FmHA Loans and VA Loans shall become the absolute property of
GNMA, subject only to the unsatisfied rights of the holders of the GNMA
Certificates backed thereby. In such event, the Guaranty Agreement provides
that, on and after the time GNMA directs such a letter of extinguishment to the
issuer of a GNMA Certificate, GNMA shall be the successor in all respects to
such issuer in its capacity under the Guaranty Agreement, and shall be subject
to all responsibilities, duties and liabilities theretofore placed on such
issuer by the terms and provisions of the Guaranty Agreement. At any time
thereafter GNMA may enter into an agreement with any other eligible issuer of
GNMA Certificates under which such other issuer undertakes and agrees to assume
all or any part of such responsibilities, duties and liabilities placed on the
original issuer, provided that no such agreement shall detract from the
responsibilities, duties and liabilities of GNMA as a guarantor of the GNMA
Certificates or otherwise adversely affect the rights of the holders thereof to
principal and interest payments on the GNMA Certificates. The applicable events
of default include (i) an advance by GNMA pursuant to a request by the GNMA
Certificate holder to GNMA to make a payment of principal and interest on the
applicable GNMA Certificates or (ii) insolvency of the issuer of the GNMA
Certificate.
RESERVE FUND
In the event of any failure to receive, in a timely manner, payments on the
GNMA Certificates securing a Series of Bonds, or in the event of substantial
prepayments on such GNMA Certificates and the inability of the Trustee to invest
such prepaid amounts at interest rates equal to or greater than the interest
rate on the Bonds until applied to redemption, there may be insufficient funds
available in the Collection Account for the payment of interest on the Bonds on
a given monthly Payment Date for the Series. In order to provide against
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any such insufficiency, the Issuer will deposit with the Trustee, in the Reserve
Fund established by the Issuer for each Series of Bonds, cash and/or a letter of
credit and/or a surety bond in an amount stated in the related Prospectus
Supplement. Such amount will also be available to cover the additional interest
which will be payable on the Bonds of the Series which provides for an Accrual
Date which is not a current accrual date, when such Bonds mature or are to be
redeemed on a monthly Payment Date for the period from the corresponding Accrual
Date to such Payment Date. Any such letter of credit or surety bond will provide
that it is subject to termination upon not less than 60 days' prior written
notice to the Trustee, in which case the Indenture requires that, upon receipt
of any such written notice, and in the absence of delivery by the Issuer of a
qualified substitute letter of credit or surety bond, the Trustee shall promptly
draw on the letter of credit or surety bond for the entire remaining balance
thereof and that such amount shall be held pursuant to the Indenture.
At any time the Issuer elects to secure any Series of the Bonds by means of
a Reserve Fund, the amount deposited into the Reserve Fund will represent the
"Requisite Amount of the Reserve Fund" required by Standard & Poor's Ratings
Group. For each Series of Bonds, the Requisite Amount of the Reserve Fund will
be the percentage of the principal amount of the Bonds then outstanding which is
specified in the Prospectus Supplement for such Series. The Issuer may withdraw
funds from the Reserve Fund to the extent that the amount of the Reserve Fund
exceeds the Requisite Amount of the Reserve Fund.
In lieu of the required deposit to the Reserve Fund, the Issuer may
overcollateralize any Series of the Bonds with GNMA Certificates having a GNMA
Collateral Value equivalent to the Applicable Overcollateralization Amount. In
such case, the Maximum GNMA Collateral Value Percentage will be less than 100%.
The effect of the Maximum GNMA Collateral Value Percentage is to provide
Bondholders at any time with comparable protection regardless of whether the
Bonds are secured by a deposit to the Reserve Fund or the Applicable
Overcollateralization Amount.
INVESTMENT OF FUNDS
Amounts held in the Collection Account, Reserve Fund and Redemption Fund
(each, a "Fund") for each Series of Bonds are to be invested by the Trustee, as
directed by the Issuer, in certain eligible investments (the "Eligible
Investments"), consisting of (i) direct obligations of, and obligations fully
guaranteed by, the United States of America and direct obligations of, and
obligations fully guaranteed by, any agency thereof which has the full faith and
credit of the United States of America, (ii) time or demand deposits which are
made in, or bankers' acceptances issued by, certain qualified banks (including,
if so qualified, the Trustee and any of its bank or trust company affiliates),
(iii) any time or demand deposits which are fully insured by the Federal Deposit
Insurance Corporation, (iv) commercial paper which has been given the highest
rating by a nationally-recognized investment rating agency, (v) certain
repurchase agreements in respect of obligations as described in clause (i) of
this sentence, entered into with certain qualified institutions, (vi) guaranteed
investment contracts issued by an insurance company or other corporation whose
claims paying ability is acceptable to the rating agency providing a rating of
the Bonds and (vii) any other obligations which are then rated in the highest
applicable rating by the rating agency or agencies rating the Bonds of the
Series. Eligible Investments include only such obligations or securities that
mature no later than 90 days from the date of calculation and in any event on or
before the date on which the amounts represented thereby are required or may be
anticipated to be required to be applied for the benefit of the Bondholders in
accordance with the terms of the Indenture, to the extent that the principal of
such Eligible Investments shall be or may be anticipated to be so required to be
applied. Amounts in any Funds established with respect to a Series of Bonds may
be invested in Eligible Investments which do not bear or accrue interest. If a
Default or an Event of Default has occurred and is continuing, or if the Issuer
fails to direct the Trustee, the Trustee is to invest such funds in Eligible
Investments at its own discretion. Any income or other gain from investments of
amounts in the Redemption Fund for a Series will be credited to the Collection
Account for such Series, and any loss resulting from such investments will be
charged to such Collection Account. Any income or other gain from investments of
amounts in the other Funds for a Series will be credited to, and any losses
therefrom will be charged to, the respective Fund.
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THE ISSUER
GENERAL
The Issuer was incorporated in the State of Texas on October 1, 1984 and is
a wholly-owned subsidiary of Ray Ellison Mortgage Investment Corp. ("REMIC").
Ray Ellison Industries, Inc. is the parent corporation of REMIC and the ultimate
corporate parent of REMAC. The Issuer's principal office is located at 4800
Fredericksburg Road, San Antonio, Texas 78229. Its telephone number is (210)
308-1403.
The Issuer was organized for the purpose of facilitating the financing of
long-term residential mortgage loans and does not intend to engage in any
business or investment activities other than issuing and selling
GNMA-Collateralized Bonds and acquiring, owning, holding, pledging and dealing
with GNMA Certificates to be pledged as collateral for such Bonds, together with
any activities incidental to the foregoing. Substantially all of the assets of
the Issuer consist of the GNMA Certificates pledged to secure specific Series of
GNMA-Collateralized Bonds. The Issuer's term of existence is not limited under
its Articles of Incorporation. The Issuer has no intent to file, and REMIC has
no intent to cause the filing of, a voluntary application under insolvency laws
with respect to the Issuer so long as the Issuer is solvent and does not foresee
becoming insolvent.
REMIC, the parent corporation of the Issuer, has its principal office at
4800 Fredericksburg Road, San Antonio, Texas 78229. Its telephone number is
(210) 308-1403.
Neither REMIC nor any of its affiliates insures or guarantees the Bonds or
the GNMA Certificates. Moreover, the GNMA Certificates do not constitute
liability of or evidence any recourse against REMIC or any of its affiliates.
(See "The Collateral -- GNMA Certificates".)
The Issuer will operate as a self-sufficient entity and will have no
dependency on REMIC. The Issuer will own sufficient Collateral to retire the
Bonds, and timely payment of the Bonds will in no way be contingent upon any
activity by REMIC. Although REMIC may contribute additional Collateral to the
Issuer, it has no obligation to do so. As REMIC will have no security interest
in the Collateral securing any Series and no obligation to pay or guarantee, in
whole or in part, the Bonds of any Series, there should be no conflicts of
interest between the Issuer and REMIC impacting the Bonds or Bondholders of any
Series. There are no agreements between the Issuer and REMIC relating to payment
of the Bonds or Bondholders of any Series.
As of December 31, 1995, the Issuer has completed the issuance of
eighty-seven series of its GNMA-Collateralized Bonds. Each Series of Bonds has
been assigned a bond rating of "AAA" by Standard & Poor's Ratings Group.
Proceeds from the sale of each Series of Bonds have been used by the Issuer to
purchase GNMA Certificates from affiliated companies. The GNMA Certificates
purchased are pledged as collateral for one or more Series of the Issuer's
Bonds.
From time to time, the Issuer has substituted or deposited additional GNMA
Certificates to secure Series having a Bond Rate less than the then current
market interest rate as permitted by Section 7.12 of the Indenture. Management
anticipates that such substitutions or deposits of additional GNMA Certificates
will defer redemptions in the Series affected. Additionally, from time to time
the Issuer has substituted or withdrawn GNMA Certificates securing Series having
Bond Rates greater than the then current market interest rate to the extent
permitted by Section 7.12 of the Indenture. Management anticipates that such
substitutions or withdrawals of GNMA Certificates will accelerate redemptions to
some extent in the Series affected. See "Special Considerations."
As of March 31, 1996, the Issuer has exercised its option to redeem its
Series 1985A through Series 1985K Bonds, its Series 1986A through Series 1986J
Bonds, its Series 1987A through Series 1987F Bonds, its Series 1988A through
Series 1988M Bonds, its Series 1989A, Series 1989B Bonds, its Series 1990A
through Series 1990H Bonds and its Series 1991A through Series 1991J Bonds.
The exercise of its option to redeem Series of its Bonds has produced
significant gains for the Issuer. The Issuer has exercised its option to redeem
Series of its Bonds whenever such Series by their terms have become redeemable
at the option of the Issuer and the Series interest rate borne by any such
Series was above the then current market interest rate. Management anticipates
continuing to redeem any Series of Bonds bearing interest at a rate greater than
the then current market interest rate at the earliest date permitted for the
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redemption of such Series of Bonds under the respective Prospectus Supplement
for such Series. (See "Special Considerations -- Redemption at the Option of the
Issuer".)
As market conditions warrant, the Issuer anticipates depositing GNMA
Certificates into certain Series of its Bonds bearing interest at rates below
the current market rates, which may have the effect of limiting funds available
for redemptions at the request of Bondholders. (See "Special
Considerations -- Funds Available for Redemption".)
During the year ended December 31, 1993, the Issuer declared dividends
totalling $20,000,000, of which $10,000,000 was paid in cash and $10,000,000 by
the transfer of short-term government agency securities. The Issuer did not pay
any dividends during the year ended December 31, 1994. During the year ended
December 31, 1995, the Issuer declared and paid $2,000,000 in cash dividends.
The Issuer anticipates that receipts from the GNMA Certificates securing
each outstanding Series of Bonds together with reinvestment income thereon and
funds available in any reserve funds which may be established for such Series,
will be adequate to meet the Issuer's cash flow requirements to pay
administrative expenses and the principal of and interest on each Series of
Bonds as they become due. The Issuer does not have, nor does management expect
that the Issuer will have, any significant source of cash flow other than
capital contributions from its parent and/or advances from its affiliates and
receipts on collateral securing Bonds which have been or may be issued by the
Issuer.
Because each Series of outstanding Bonds is secured by GNMA Certificates
paying interest and principal at specified rates backed by existing pools of
mortgage loans, and because payment on outstanding Bonds issued by the Issuer
are at fixed interest rates, management does not expect that changes in economic
factors will significantly affect the Issuer's ability to meet its obligations
as they come due.
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (the "Statement") effective for fiscal years
beginning after December 15, 1993. The Issuer adopted the provisions of the new
standard for investments held or acquired after January 1, 1994. Under the new
rules, debt securities that the Issuer does not have the positive intent and
ability to hold to maturity are carried at fair value. Unrealized holding gains
and losses on securities classified as available-for-sale are carried as a
separate component of shareholders' equity.
All GNMA securities are classified as available-for-sale as of January 1,
1994. Accordingly, GNMA securities are reflected on the Issuer's balance sheet
at fair value, with the unrealized gains and losses, net of tax reported in a
separate category of shareholders' equity. In accordance with FAS 115, prior
period financial statements have not been restated to reflect the change in
accounting principal. The opening balance of stockholders' equity was increased
$14,500,000 (net of tax), representing the recognition of unrealized
appreciation, for the Issuer's investment in GNMA securities determined to be
available-for-sale, which were previously carried at amortized cost. At December
31, 1994, application of FAS 115 resulted in a reduction in stockholder's equity
of $24,491,230, net of $0 taxes, for the Issuer's investment in GNMA securities
determined to be available-for-sale. At December 31, 1995, application of FAS
115 resulted in an increase in stockholders' equity of $14,427,611 (net of
$7,432,405 in deferred income taxes) representing the net unrealized gain on
securities classified as available-for-sale.
The Issuer wishes to emphasize that due to the nature of its business, the
GNMA securities carried as available-for-sale collateralize specific Series of
its GNMA-Collateralized Bonds, and the securities are not salable before the
Bonds are callable, at some future date. In addition, the market value of GNMA
securities fluctuates significantly as interest rates change; therefore, the
market values of the GNMA securities as of the optional future redemption dates
may vary significantly from the current date, and the realization of the
unrealized gains is not assured. In addition, should the market fluctuate such
that the value of the GNMA securities is less than amortized cost of such GNMA
securities at any time when one or more Series of the Issuer's Bonds is
redeemable, by its terms, the Issuer would elect not to redeem such Series but,
rather, the Issuer expects that they would be held to maturity (or until the
market value of the GNMA securities exceeded amortized cost) as collateral for
the related GNMA-Collateralized Bonds, and the Issuer would not
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realize any unrealized losses. In such a scenario, no tax benefit for unrealized
losses would be recognized by the Issuer on its investment in such GNMA
securities.
BUSINESS RESTRICTIONS
Article Three of the Issuer's Articles of Incorporation limits the nature
of the business to be conducted by the Issuer to (a) issuing and selling its
Bonds, notes or other obligations which a Texas corporation is authorized to
issue, which Bonds shall be rated by a nationally recognized investment rating
agency and given that agency's highest bond rating, (b) buying, selling,
holding, transferring, pledging, assigning, refinancing, or otherwise dealing in
GNMA Certificates, and (c) doing anything else required or suitable and
convenient to accomplish the foregoing. The Issuer is prohibited without the
prior written consent of the Trustee by Article Nine of its Articles of
Incorporation from (i) dissolving or liquidating, (ii) consolidating or merging
with or into any other entity or transferring its properties and assets to any
other entity unless certain conditions in its Articles of Incorporation are met
and (iii) amending, altering, changing or repealing either Article Three or
Nine.
Except as described in this Prospectus or the related Prospectus
Supplement, the Issuer does not intend to engage in any transactions with its
officers, directors or sole shareholder, except as permitted by its Articles of
Incorporation or Bylaws, to make loans to persons not affiliated with the
Issuer, to invest in or underwrite the securities of other issuers, to offer
securities in exchange for property, to engage in the purchase or sale of any
investments, to issue senior securities, to borrow money from persons not
affiliated with the Issuer or to repurchase or otherwise reacquire its
securities.
USE OF PROCEEDS
The use of proceeds from the sale of each Series of the Bonds will be
described in the related Prospectus Supplement for such Series.
THE INDENTURE
The following summaries describe certain provisions of the Indenture. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Indenture. Where
particular provisions or terms used in the Indenture are referred to, the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summaries. The Indenture is governed by and subject to the Trust
Indenture Act of 1939, as amended (the "TIA").
MODIFICATION OF INDENTURE
With the consent of the holders of not less than a majority in principal
amount of the Bonds of each Series to be affected which are then Outstanding (as
defined in the Indenture), the Trustee and the Issuer may execute a supplemental
indenture to add provisions to or change in any manner or eliminate any
provisions of the Indenture relating to such Series, or modify in any manner the
rights of the holders of the Bonds of such Series except as set forth below.
(Section 8.02.)
Without the consent of the holder of each affected Outstanding Bond,
however, no such supplemental indenture may (a) change the time or times for
payment of the principal of, or interest on, any Bond, or reduce the principal
amount thereof or the rate of interest thereon, or impair the right to institute
an action for the enforcement of any such payment on or after the time such
payment is due, (b) reduce the percentage of Bonds of the affected Series the
consent of the holders of which is required for the authorization of any such
supplemental indenture or for any waiver of compliance with certain provisions
of the Indenture or certain defaults thereunder or their consequences, (c)
impair the right of Bondholders to request the redemption of their Bonds, or the
priorities or preferences associated therewith, (d) impair or adversely affect
the Collateral applicable to a Series of Bonds, (e) reduce the percentage of
Bonds of any Series the consent of the holders of which is required to direct
the Trustee to liquidate the Collateral for such Series of Bonds if the proceeds
of such liquidation would be insufficient to pay the principal amount of and
accrued interest on the Outstanding
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Bonds of such Series, or (f) modify any of the provisions of the Indenture with
respect to supplemental indentures except to increase the percentage of
Outstanding Bonds, the consent of the holders of which is required for any such
action or to provide that other provisions of the Indenture cannot be modified
or waived without the consent of the holders of each Outstanding Bond affected
thereby. (Section 8.02.)
The Issuer and Trustee may also enter into supplemental indentures, without
obtaining the consent of Bondholders of such Series, to cure ambiguities or to
correct or supplement any provision of the Indenture which may be defective or
inconsistent with any other provision, or to do such other things as would not
adversely affect the interests of the holders of the Bonds of such Series.
(Section 8.01.)
EVENTS OF DEFAULT
An event of default ("Event of Default") with respect to any Series of
Bonds is defined in the Indenture as being: (a) a continuing default for 30 days
in the payment of interest on any Bond of such Series; (b) a default in the
payment of principal of any Bond of such Series; (c) a default in the
performance of any other covenant in the Indenture and the continuation of such
default for a period of 60 days after notice has been given by registered or
certified mail to the Issuer by the Trustee or to the Issuer and the Trustee by
the holders of at least 25% in principal amount of the Bonds of such Series then
Outstanding; or (d) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer. In case an Event of Default with respect to any
Series of Bonds should occur and be continuing, the Trustee or the holders of at
least 25% in principal amount of the Bonds of such Series then Outstanding may
declare the principal of the Bonds of such Series to be due and payable. Such
declaration may under certain circumstances be rescinded by the holders of a
majority in principal amount of the Bonds of such Series then Outstanding.
(Sections 5.01 and 5.02.)
If, following an Event of Default with respect to any Series of Bonds, such
Bonds have been declared to be due and payable, the Trustee may, in its
discretion, refrain from liquidating the Collateral for such Series if such
Collateral continues to provide sufficient funds for the payment of principal
of, and interest on, the Bonds of such Series as such principal and interest
would have become due if there had not been such a declaration. (Section 5.05.)
In addition, if no Event of Default resulting in a default in payment of
principal or interest has occurred, then the Trustee is prohibited from selling
the Collateral unless (a) the proceeds of such sale are sufficient to pay in
full the principal and accrued interest on the Outstanding Bonds of such Series
at the date of such sale, or (b) the Trustee obtains the consent of the holders
of 100% in principal amount of the Outstanding Bonds of such Series to such
sale. (Section 5.04.)
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee shall be under no obligation to exercise any of the rights
or powers under the Indenture at the request or direction of any of the
Bondholders of a Series unless such Bondholders shall have offered to the
Trustee reasonable security or indemnity. (Section 6.03.) Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the Outstanding
Bonds of a Series shall have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Trustee for exercising
any trust or power conferred on the Trustee with respect to the Bonds of such
Series; and the holders of a majority in principal amount of the Outstanding
Bonds of a Series may, in certain cases, waive any default with respect to such
Series, except a default in payment of principal or interest or the observance
of certain provisions. (Sections 5.13 and 5.14.)
ISSUER'S ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Trustee a brief
certificate as to its compliance with all conditions and covenants under the
Indenture. (Section 3.08.)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will be discharged as to a Series of Bonds upon the delivery
to the Trustee for cancellation of all of the Bonds of such Series other than
(i) Bonds which have been destroyed, lost or stolen and have been replaced or
paid and (ii) Bonds for whose payment money has been held in trust or segregated
by the Issuer and have been discharged from such trust or repaid by the Issuer.
The Indenture will also be discharged
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if all Bonds become due and payable within one year (by their maturity or
redemption) and a certain qualifying deposit has been made to assure such
payment. (Section 4.01.)
LIMITATION ON SUITS
No holder of any Bond of any Series shall have any right to institute any
judicial or other proceedings with respect to the Indenture unless (a) such
Bondholder has previously given written notice to the Trustee of a continuing
Event of Default in respect of such Series of Bonds, (b) the holders of at least
25% of the aggregate outstanding principal amount of the Bonds of such Series
have made such written request to the Trustee to institute such proceedings in
its own name, (c) such Bondholder or Bondholders have offered to indemnify the
Trustee against the costs, expenses and liabilities to be incurred in connection
with such proceeding, (d) the Trustee has failed to institute any such
proceeding within 60 days after its receipt of such notice, request and offer of
indemnity, and (e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the holders of more than 50%
of the aggregate outstanding principal amount of the Bonds of that Series.
(Section 5.09.)
REPORTS TO BONDHOLDERS
Except as set forth in the following paragraph and as otherwise may be
required pursuant to the TIA, the Issuer is not under any obligation to provide
information to the Bondholders and has no current plans to do so on any regular
basis, although the Issuer may, at its option, provide certain information to
Bondholders, from time to time, which may or may not contain financial
information examined or reported upon by independent public or certified public
accountants.
Except to the extent provided otherwise in the related Series Supplement,
the Trustee will be required to mail, in each year when required by the TIA, to
all Bondholders a brief report relating to (i) its eligibility and
qualifications to continue as the Trustee under the Indenture, (ii) the creation
of or material change to any relationship specified in TIA Section 310(b) (which
sets forth relationships in which the Trustee may be deemed to have a conflict
of interest upon an Event of Default), (iii) any amounts advanced by the Trustee
under the Indenture, (iv) the amount, interest rate and maturity date of certain
indebtedness by the Issuer to the Trustee in its individual capacity, (v) the
property and funds physically held by the Trustee as such, (vi) any additional
issue of Bonds not previously reported and (vii) any action taken by it which
materially affects the Bonds and which has not been previously reported.
(Section 7.03.)
Upon written request received by the Trustee at least fifteen days prior to
the next Payment Date for any Series of Bonds, the Trustee will on such Payment
Date inform a Bondholder of his priority status with respect to such
Bondholder's requested redemption, the remaining balance in each of the Funds
which are Collateral for the Bonds and other information with respect to the
Bonds. (Section 7.03.)
THE TRUSTEE
The Trustee for each Series of Bonds will be specified in the respective
Prospectus Supplement.
PAYMENT OF TRUSTEE FEES AND OTHER EXPENSES
The Issuer's obligation for the payment of fees and expenses of the Trustee
may be satisfied only from certain surplus assets included in the Collateral for
a Series which the Issuer is permitted to withdraw free and clear of the lien of
the Indenture, and the Trustee has no right to apply to such payment any assets
subject to the pledge of the Indenture. (Section 6.07.)
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<PAGE> 43
UNDERWRITING
The Issuer may issue the Bonds of each Series, from time to time, through
one or more underwriters, which may be designated at the time of each offering.
The Prospectus Supplement with respect to each Series of Bonds sets forth the
terms of the offering of such Series, including the name or names of the
underwriter or underwriters, the place and time of delivery for such Series, the
proceeds to and their use by the Issuer, and either the initial public offering
price, the discounts and commissions to the underwriter or underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the underwriter or underwriters will sell the Bonds
will be determined.
The obligations of the Underwriters will be subject to certain conditions
precedent, and such Underwriters will be obligated to purchase all of the Series
of Bonds described in the Prospectus Supplement with respect to such Series if
any such Bonds are purchased. The Bonds may be acquired by the Underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale.
The Issuer will, and certain affiliates of the Issuer may, agree to
indemnify the underwriters of the Bonds of each Series against certain civil
liabilities, including liabilities under the Securities Act of 1933.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of certain tax considerations which may be
relevant to an investment in the Bonds by a Bondholder. The discussion of
various aspects of federal income taxation contained herein is based on the
Internal Revenue Code of 1986, as amended to date (the "Code"), judicial
decisions, administrative regulations, published rulings and procedures, all of
which are subject to change and any such change could retroactively apply to the
discussion herein and may adversely affect the anticipated tax consequences of
an investment in the Bonds. THE DISCUSSION BELOW DOES NOT PURPORT TO ADDRESS ALL
FEDERAL TAX CONSEQUENCES APPLICABLE TO PARTICULAR CATEGORIES OF INVESTORS, SOME
OF WHICH MAY BE SUBJECT TO SPECIAL RULES. EACH PROSPECTIVE BONDHOLDER SHOULD
CONSULT HIS OR ITS OWN TAX ADVISOR TO DETERMINE THE POSSIBLE TAX CONSEQUENCES OF
HIS OR ITS INVESTMENT IN THE BONDS.
In the opinion of Andrews & Kurth L.L.P., special tax counsel ("Counsel"),
the Bonds will be treated for federal income tax purposes as indebtedness of the
Issuer. Accordingly, Bonds owned by a real estate investment trust will not be
treated as "real estate assets" or "Government securities" within the meaning of
Code Section 856(c)(5)(A) and interest on the Bonds will not be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B). Similarly,
Bonds owned by domestic building and loan associations and other thrift
institutions will not be considered as "loans . . . secured by an interest in
real property" within the meaning of Code Section 7701(a)(19)(C)(v) or as
"obligations of the United States" within the meaning of Code Section
7701(a)(19)(C)(ii), Bonds held by a mutual savings bank or a domestic building
and loan association will not be considered as "qualifying real property loans"
within the meaning of Code Section 593(d)(1), and Bonds held by a regulated
investment company will not constitute "Government securities" within the
meaning of Code Section 851(b)(4)(A)(i).
TAX CHARACTERIZATION OF INTEREST
Interest payments received by Bondholders are accorded the same tax
treatment under the Code as interest payments received on other taxable
corporate bonds. In general, interest accrued or paid upon the unpaid principal
balance of the Bonds from time to time should be taxed as ordinary income in
accordance with the method of accounting used by the Bondholder. Principal
payments made on each Bond should, to the extent of the Bondholder's basis
therein, be treated as a nontaxable return of capital.
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<PAGE> 44
ORIGINAL ISSUE DISCOUNT
Original issue discount ("OID") occurs when a debt obligation is issued for
less than an amount equal to such debt obligation's stated redemption price at
maturity. Thus, generally OID is the difference between the issue price of a
debt obligation and its face or principal amount. Certain complex provisions of
the Code govern the computation and amortization of OID. However, because the
Issuer intends that the Bonds will be issued at par value, it is anticipated
that there will be no difference between their issue price and principal amount
and, therefore, no OID, except as described in the following paragraph.
The Bonds will provide for interest payable monthly and each interest
payment will include all interest accrued during the related monthly Accrual
Period specified in the Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, each Accrual Period will end on a date before the
related Payment Date. Under applicable Treasury regulations a portion of the
interest accrued in such case is included in the stated redemption price at
maturity. However, unless otherwise provided in the related Prospectus
Supplement the effect will be to create no more than "de minimis" OID. As a
result all interest will be reportable when paid or accrued, in accordance with
the Bondholder's method of accounting.
PREMIUM
A Bond purchased at a cost greater than its stated redemption price at
maturity is considered to be purchased at a premium. If the holder of a Bond
holds such Bond as a "capital asset" within the meaning of Code Section 1221,
the holder of a Bond may elect to amortize such premium under a constant yield
to maturity method. Except as to be provided in regulations, such amortizable
bond premium is to be applied against (and operate to reduce) the amount of
interest payments on the Bonds.
SALE OR EXCHANGE OF BONDS
If a Bond is sold, the seller will recognize gain or loss equal to the
difference between the amount realized in the sale and the seller's adjusted
basis in the Bond. The adjusted basis generally will equal the cost of the Bond
to the seller increased by any market discount, as described below, which the
seller has elected to accrue and has included in his gross income and decreased
by any amortized premium. Similarly, a Bondholder whose Bonds are redeemed will
recognize gain or loss equal to the difference between the amount of the
redemption payment and the Bondholder's adjusted basis in the Bonds satisfied by
such payment. Except as discussed below with respect to market discount, if the
Bondholder is not a dealer in securities, any such gain or loss will be capital
gain or loss and will be long-term if the Bonds have been held for more than one
year and short-term otherwise. There are limitations on the extent to which
capital losses may be deducted from ordinary income. For taxable years beginning
after December 31, 1990, the maximum tax rate for individuals on the excess of
net long-term capital gains over net short-term capital losses is 28%.
MARKET DISCOUNT
Gain on the sale, redemption or other disposition of a Bond by a subsequent
purchaser of any Bond having "market discount" will be treated as ordinary
income (interest income for all federal income tax purposes except with respect
to reporting requirements and withholding at the source on payments to certain
foreign persons) to the extent such "market discount" does not exceed the
accrued "market discount" on such Bond. "Market discount" for a subsequent
purchaser is generally the excess (if any) of (i) the stated redemption price of
the Bond, over (ii) such purchaser's initial adjusted basis in the Bond. If,
however, the "market discount" with respect to a Bond is less than 1/4% of the
stated redemption price of a Bond multiplied by the number of complete years to
maturity (after the subsequent purchaser has acquired the Bond), then the
"market discount" shall be considered to be zero.
Subsequent purchasers may accrue "market discount" on a Bond using either a
straight-line method or a constant accrual method. If the straight-line method
is employed, accrued "market discount" is computed by determining the amount
that bears the same ratio to the "market discount" on the Bond as (i) the number
of days which the subsequent purchaser held the Bond, bears to (ii) the number
of days after the date the subsequent purchaser acquired the Bond and up to (and
including) the date of its maturity. If the constant accrual method is employed,
accrued "market discount" is computed by multiplying the subsequent
28
<PAGE> 45
purchaser's adjusted basis in the Bond by the Bond's yield to maturity, and then
subtracting the interest payable on the Bond during the period the subsequent
purchaser holds the Bond.
Interest expense (in excess of interest income on the Bond) incurred or
continued by a subsequent purchaser to purchase or carry a Bond having "market
discount" is generally deferred as a deduction to the extent of unrecognized but
accrued "market discount" until such "market discount" or net interest income is
recognized on the Bond. However, if a subsequent purchaser elects to include
accrued "market discount" on a Bond in gross income for the taxable years to
which it is attributable, neither the rule requiring ordinary income treatment
upon the sale, redemption or other disposition of the Bond nor the deferral of
interest deduction rule would apply. Once this election to include "market
discount" in income currently is made by a subsequent purchaser of a Bond, it
cannot be revoked without the consent of the United States Secretary of
Treasury.
TAXATION OF CERTAIN FOREIGN INVESTORS
Interest payments made to Bondholders who are nonresident alien
individuals, foreign corporations or other non-United States persons ("foreign
Bondholders") will not be subject to a 30% United States withholding tax,
provided certain certifications as to the Bondholder's status are made. As to
any foreign Bondholders who are not exempt from the 30% tax, the 30% tax may be
reduced or eliminated by tax treaties between the United States and the
Bondholder's home country. If, however, interest or gain is effectively
connected with the foreign Bondholder's conduct of a trade or business within
the United States, such income is subject to United States federal income tax at
regular graduated rates. Foreign persons should consult their own tax advisors
regarding the specific tax consequences to them of holding a Bond.
BACKUP WITHHOLDING
Payments of interest or other reportable payments made on the Bonds, and
proceeds from the sale, including redemption, of the Bonds to or through certain
brokers, including the Trustee, may be subject to a "backup" withholding tax of
31% of "reportable payments" (including interest payments and, under certain
circumstances, principal payments) unless a Bondholder complies with certain
reporting and/or certification procedures. Any amount so withheld from payments
on the Bonds would be refunded or allowed as a credit against a Bondholder's
federal income tax.
LEGAL INVESTMENT
The Bonds constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), and as such are
legal investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including but not limited to
state-chartered savings banks, commercial banks, savings and loan associations
and insurance companies, as well as trustees and state government employee
retirement systems) created pursuant to or existing under the laws of the United
States or any State (including the District of Columbia and Puerto Rico) whose
authorized investments are subject to State regulation to the same extent that,
under applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, in all States which
enacted legislation prior to October 4, 1991 specifically limiting the legal
investment authority of any of such entities with respect to "mortgage related
securities," the Bonds will constitute legal investments for entities subject to
such legislation only to the extent provided in such legislation. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest in
any securities or require the sale or other disposition of any securities, so
long as such contractual commitment was made or such securities were acquired
prior to the enactment of such legislation. Alaska, Arkansas, Colorado,
Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland,
Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina, Ohio,
South Dakota, Utah, Virginia and West Virginia each enacted legislation
overriding the exemption afforded by SMMEA prior to the October 4, 1991
deadline.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in the Bonds. Any financial institution which is
subject to the jurisdiction of the Comptroller of the Currency, the Board of
Governors of
29
<PAGE> 46
the Federal Reserve System, the Federal Deposit Insurance Corporation ("FDIC"),
the Office of Thrift Supervision ("OTS"), the National Credit Union
Administration ("NCUA") or other federal or state agencies with similar
authority should review any applicable rules, guidelines and regulations prior
to purchasing the Bonds. The Federal Financial Institutions Examination Council,
for example, has issued a Supervisory Policy Statement on Securities Activities
effective February 10, 1992 (the "Policy Statement"). The Policy Statement has
been adopted by the Comptroller of the Currency, the Federal Reserve Board, the
FDIC and the OTS with respect to the depository institutions that they regulate.
The Policy Statement prohibits depository institutions from investing in certain
"high-risk mortgage securities," except under certain limited circumstances, and
sets forth certain investment practices deemed to be unsuitable for regulated
institutions. The NCUA issued final regulations effective December 2, 1991 that
restrict and in some instances prohibit the investment by federal credit unions
in certain types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
Notwithstanding SMMEA, there may be other restrictions on the ability of
certain investors, including depository institutions, either to purchase Bonds
or to purchase Bonds representing more than a specified percentage of the
investors' assets.
Investors should consult their own legal advisors in determining whether
and to what extent the Bonds constitute legal investments for such investors.
ERISA MATTERS
Under certain circumstances, any underwriter of the Bonds or an affiliate
of an underwriter of the Bonds may be or may become a "party in interest" within
the meaning of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or a "disqualified person" within the meaning of the Code with
respect to an employee benefit plan subject to such statutes (a "Plan"). In that
case the acquisition or holding of Bonds by or on behalf of such a Plan may
constitute a "prohibited transaction" within the meaning of ERISA and the Code.
However, certain exemptions from the prohibited transaction rules could be
applicable depending in part on the type and circumstances of the Plan fiduciary
making the decision to acquire a Bond. Included among these exemptions are:
Prohibited Transaction Exemption ("PTE") 90-1, regarding investments by
insurance company pooled separate accounts; PTE 91-38, regarding investments by
bank collective investment funds; or PTE 84-14, regarding transactions effected
by a "qualified professional asset manager". Employee benefit plans which are
governmental plans (as defined in section 3(32) of ERISA), and certain church
plans (as defined in section 3(33) of ERISA) are not subject to ERISA
requirements. Due to the complexity of these rules and the penalties imposed
upon persons involved in prohibited transactions, it is particularly important
that potential Plan investors consult with their counsel regarding the
consequences under ERISA of their acquisition and ownership of Bonds.
LEGAL MATTERS
Certain legal matters, including the legality of each Series of the Bonds,
will be passed upon for the Issuer by Andrews & Kurth L.L.P., Counsel to the
Issuer. Andrews & Kurth L.L.P. will also render certain opinions as special tax
counsel. (See "Certain Federal Income Tax Consequences".)
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<PAGE> 47
EXPERTS
The financial statements of Ray Ellison Mortgage Acceptance Corp. appearing
in Ray Ellison Mortgage Acceptance Corp.'s Annual Report (Form 10-K) for the
year ended December 31, 1995 have been audited by Ernst & Young, L.L.P.,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits and amendments thereto are on file at the offices of the
Securities and Exchange Commission in Washington, D.C. Copies may be obtained at
rates prescribed by the Commission upon request to the Commission, and may be
inspected, without charge, at the offices of the Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D. C. 20549 (See "Statement of Available
Information".)
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<PAGE> 48
==================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY RAY
ELLISON MORTGAGE ACCEPTANCE CORP., ANY OF ITS AFFILIATES OR BY ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR ANY
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF RAY ELLISON MORTGAGE
ACCEPTANCE CORP. SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED IN THE
PROSPECTUS SUPPLEMENT OR ANY PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS RESPECTIVE DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY. THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR ANY PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary of Terms.................................. S-3
Certain Legal Considerations...................... S-10
Description of the GNMA Certificates Securing
the Bonds....................................... S-10
Description of Book Entry Procedures.............. S-12
Use of Proceeds................................... S-14
Prepayment of the Bonds -- The Effects of Interest
Rate Changes and Other Factors.................. S-14
Bond Rating....................................... S-15
Underwriting...................................... S-16
Legal Matters..................................... S-16
Previously-Issued Bonds........................... S-16
Additional Series 1996B Bonds
Which May Be Offered............................ S-16
PROSPECTUS
Prospectus Supplement............................. 2
Available Information............................. 2
Incorporation of Certain Documents by Reference... 2
Prospectus Summary................................ 3
Index to Definitions of Key Terms................. 9
Special Considerations............................ 10
Description of the Bonds.......................... 12
The Collateral.................................... 17
The Issuer........................................ 22
Use of Proceeds................................... 24
The Indenture..................................... 24
Underwriting...................................... 27
Certain Federal Income Tax Consequences........... 27
Legal Investment.................................. 29
ERISA Matters..................................... 30
Legal Matters..................................... 30
Experts........................................... 31
Additional Information............................ 31
</TABLE>
==================================================
==================================================
$15,500,000
RAY ELLISON MORTGAGE
ACCEPTANCE CORP.
7.00% GNMA-COLLATERALIZED BONDS
SERIES 1996B
DUE MAY 31, 2027
--------------------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------------------
RAUSCHER PIERCE REFSNES, INC.
J.C. BRADFORD & CO.
EVEREN SECURITIES, INC.
DAIN BOSWORTH, INC.
RAYMOND JAMES & ASSOCIATES, INC.
DATED MAY 15, 1996
==================================================
