<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1995
-------------
Commission file number 1-10360
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CRIIMI MAE INC.
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(Exact name of registrant as specified in charter)
Maryland 52-1622022
------------------------------------------ ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
----------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(301) 816-2300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of August 11, 1995
---------------------------- ---------------------------------
Common Stock, $.01 par value 30,434,344
<PAGE>2
CRIIMI MAE INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1995
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - as of June 30, 1995
(unaudited) and December 31, 1994 . . . . . . . 3
Consolidated Statements of Income - for the
three and six months ended June 30, 1995
and 1994 (unaudited) . . . . . . . . . . . . . 5
Consolidated Statement of Changes in
Shareholders' Equity - for the six months
ended June 30, 1995 (unaudited) . . . . . . . . 6
Consolidated Statements of Cash Flows -
for the six months ended June 30, 1995
and 1994 (unaudited) . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . .
(unaudited) . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 37
PART II. Other Information
Item 2. Legal Proceedings . . . . . . . . . . . . . . . . 61
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 62
Signature . . . . . . . . . . . . . . . . . . . . . . . . 63
<PAGE>3
PART I. FINANCIAL INFORMATION
PART 1. FINANCIAL STATEMENTS
<TABLE>
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Investment in mortgages, at amortized
cost, net of unamortized discount
and premium $700,611,676 $703,215,753
Investment in mortgages, at fair value 112,579,125 154,373,576
Investment in subordinated securities,
at amortized cost, net of unamortized
discount and premium 67,325,382 38,858,349
Investment in insured mortgage funds
and advisory partnership 29,575,953 29,923,240
Investment in Services Corporation 6,871,000 --
Investment in Services Partnership 538,000 --
Mortgage servicing assets 881,000 --
Terminated contract and workforce 23,900,000 --
Goodwill 3,845,417 --
Cash and cash equivalents 5,456,592 5,143,171
Note receivable 5,002,183 --
Receivables and other assets 8,361,240 9,097,080
Deferred financing costs, net of accumulated
amortization of $13,081,858 and
$11,065,595, respectively 6,732,592 8,632,333
Deferred costs, principally paid to related
parties, net of accumulated amortization
of $1,126,940 and $1,933,697,
respectively 5,625,254 5,806,499
------------ ------------
Total assets $977,305,414 $955,050,001
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>4
PART I. FINANCIAL INFORMATION
PART 1. FINANCIAL STATEMENTS
<TABLE>
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Liabilities:
Master Repurchase Agreements $509,006,770 $456,984,347
Revolving Credit Facility 56,000,000 115,000,000
Other Repurchase Agreements 41,984,845 24,891,783
Bank Term Loans 22,016,880 30,371,800
Deferred compensation payable 5,002,183 --
Interest payable 5,129,000 6,645,676
Accounts payable and accrued expenses 3,411,435 1,497,290
------------ ------------
Total liabilities 642,551,113 635,390,896
------------ ------------
Minority interests in
consolidated subsidiary 51,378,861 69,617,184
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock -- --
Common stock, $0.01 par value, 30,185,618
and 26,227,253 shares issued as of June 30,
1995 and December 31, 1994, respectively
and 29,684,344 and 25,725,979 shares
outstanding as of June 30, 1995 and
December 31, 1994, respectively 301,856 262,272
Net unrealized gains on mortgage
investments 14,070,531 10,316,768
Additional paid-in capital 273,765,156 244,224,984
------------ ------------
288,137,543 254,804,024
Less treasury stock, at cost -
501,274 shares (4,762,103) (4,762,103)
------------ ------------
Total shareholders' equity 283,375,440 250,041,921
------------ ------------
Total liabilities and shareholders'
equity $977,305,414 $955,050,001
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Mortgage investment income $ 16,485,758 $ 16,350,064 $33,301,625 $ 31,179,465
Income from investment in subordinated
securities 2,084,527 -- 3,436,444 --
Other investment income 228,354 286,521 997,916 765,221
Income from investment in insured
mortgage funds and advisory partnership 583,294 547,456 1,147,394 1,158,327
------------ ------------ ----------- ------------
19,381,933 17,184,041 38,883,379 33,103,013
------------ ------------ ----------- ------------
Expenses:
Interest expense 11,904,387 8,521,400 24,053,790 17,040,851
Annual fee to related party 855,870 791,671 1,718,129 1,482,883
Incentive fee to related party -- 46,830 -- 264,052
General and administrative 909,345 734,820 1,862,088 1,796,346
Amortization of deferred costs 64,800 101,647 135,090 194,932
Mortgage servicing fees 135,378 157,248 281,498 276,412
Adjustment to provision for settlement
of litigation -- (557,340) -- (557,340)
------------ ------------ ----------- ------------
13,869,780 9,796,276 28,050,595 20,498,136
------------ ------------ ----------- ------------
Income before mortgage dispositions 5,512,153 7,387,765 10,832,784 12,604,877
Mortgage dispositions:
Gains 66,933 456,640 1,819,176 12,282,981
Losses -- (10,893) (184,897) (210,038)
------------ ------------ ----------- ------------
Income before minority interests 5,579,086 7,833,512 12,467,063 24,677,820
Minority interests in net income of
consolidated subsidiary (969,674) (1,757,138) (2,942,254) (8,619,396)
------------ ------------ ----------- ------------
Net income $ 4,609,412 $ 6,076,374 $ 9,524,809 $ 16,058,424
============ ============ =========== ============
Net income per share $ .17 $ .24 $ .36 $ .69
============ ============ =========== ============
Weighted average shares outstanding,
exclusive of shares held in treasury 26,773,071 25,183,533 26,521,755 23,150,566
============ ============ =========== ============
The accompanying notes are an integral
part of these consolidated financial statements.
</TABLE>
<PAGE>6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 1995
(Unaudited)
<CAPTION>
Net
Unrealized
Gains on Additional Total
Common Stock Mortgage Paid-In Undistributed Treasury Shareholders'
Par Value Investments Capital Net Income Stock Equity
----------- ------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 262,272 $ 10,316,768 $244,224,984 $ -- $(4,762,103) $ 250,041,921
Net income -- -- -- 9,524,809 -- 9,524,809
Dividends of $0.45 per weighted
average share -- -- (2,454,066) (9,524,809) -- (11,978,875)
Adjustment to net unrealized
gains on mortgage investments of subsidiary
and mortgages held for disposition -- 3,753,763 -- -- -- 3,753,763
Shares issued 39,584 -- 31,994,238 -- -- 32,033,822
----------- ------------- ------------ ------------ ----------- -------------
Balance, June 30, 1995 $ 301,856 $ 14,070,531 $273,765,156 $ -- $(4,762,103) $283,375,440
=========== ============= ============ ============ =========== =============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>7
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,524,809 $ 16,058,424
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred costs 135,090 194,932
Amortization of deferred financing costs 2,019,604 3,042,838
Amortization of deferred AIM acquisition costs 135,156 123,179
Mortgage discount amortization (333,241) (502,886)
Subordinated securities discount amortization (482,058) --
Mortgage premium accretion 54,779 45,310
Gains on mortgage dispositions (1,819,176) (12,282,981)
Losses on mortgage dispositions 184,897 210,038
Equity in income from investment in limited
partnerships (59,763) (7,038)
Minority interests in earnings of consolidated subsidiary 2,942,254 8,619,396
Changes in assets and liabilities:
Decrease (increase) in receivables and other assets 631,442 (1,174,371)
Decrease in accounts payable and accrued
expenses (58,099) (1,664,247)
(Decrease) increase in interest payable (1,516,676) 2,114,256
------------ ------------
Net cash provided by operating activities 11,359,018 14,776,850
------------ ------------
Cash flows from investing activities:
Purchase of mortgages and advances on construction loans (5,463,466) (218,698,388)
Purchase of subordinated securities (28,151,595) --
Receipt of principal from subordinated securities 166,620 --
Proceeds from mortgage dispositions 55,455,341 62,983,484
Receipt of mortgage principal from scheduled payments 2,933,771 3,026,226
Receipt of principal from investment in insured mortgage funds 212,131 527,598
Payment of deferred costs (1,091,197) (357,435)
Annual return from investment in limited partnerships 126,645 126,646
------------ ------------
Net cash provided by (used in) investing activities 24,188,250 (152,391,869)
------------ ------------
Cash flows from financing activities:
Proceeds from obligations incurred under financing facilities 205,979,801 232,714,877
Principal payments on obligations incurred under financing
facilities (213,319,236) (111,711,000)
Increase in deferred financing costs (119,863) (2,750,802)
Dividends (including return of capital) paid to shareholders,
including minority interests (36,045,470) (41,185,491)
Proceeds from the issuance of common stock 8,388,594 56,250,000
Payment of stock issuance/offering costs (117,673) (4,050,000)
------------ ------------
Net cash (used in) provided by financing activities (35,233,847) 129,267,584
------------ ------------
Net increase (decrease) in cash and cash equivalents 313,421 (8,347,435)
Cash and cash equivalents, beginning of period 5,143,171 13,599,860
------------ ------------
Cash and cash equivalents, end of period $ 5,456,592 $ 5,252,425
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>8 CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
CRIIMI MAE Inc. (CRIIMI MAE) (formerly CRI Insured Mortgage Association,
Inc.) is an infinite-life, actively managed real estate investment trust (REIT).
On June 30, 1995, pursuant to a shareholder-approved merger transaction (the
Merger), CRIIMI MAE became a fully integrated, self-administered and self-
managed mortgage company, engaging in mortgage investment, mortgage advisory
services and mortgage servicing and origination activities. CRIIMI MAE's
principal objectives are to provide stable or growing quarterly cash
distributions to its shareholders while preserving and protecting its capital.
CRIIMI MAE has sought to achieve these objectives primarily by investing in
government insured and guaranteed mortgage investments secured by multifamily
housing complexes (Government Insured Multifamily Mortgages) located throughout
the United States and, to a lesser extent, higher yielding uninsured
subordinated securities, using a combination of debt and equity financing.
In connection with the Merger, as further described in Note 4, on June 30,
1995, CRICO Mortgage Company, Inc. (CRICO Mortgage), CRI/AIM Management Inc.
(CRI/AIM Management), and CRI Acquisition, Inc. (CRI Acquisition ) were merged
with and into CRIIMI MAE Management, Inc. (CRIIMI Management), a newly-formed,
wholly owned subsidiary of CRIIMI MAE. CRICO Mortgage, CRI/AIM Management and
CRI Acquisition (collectively, the CRI Mortgage Businesses) were affiliates of
C.R.I., Inc. (CRI). In connection with the Merger, on June 30, 1995, all of the
employees of the CRI Mortgage Businesses became employees of CRIIMI Management
and the advisory agreement with CRI Insured Mortgage Associates Limited
Partnership (the Adviser) was terminated, as discussed below. Immediately prior
to the Merger, the CRI Mortgage Businesses sold the sub-advisory contracts
related to four publicly held limited partnerships known as the American Insured
Mortgage Investors Funds (the AIM Funds) and certain mortgage servicing
contracts to CRIIMI MAE Services, Inc. (the Services Corporation), a newly-
formed Maryland Corporation, in exchange for 15-year interest bearing
installment notes in the aggregate principal amount of $6,586,000. The Services
Corporation immediately contributed these assets to CRIIMI MAE Services Limited
Partnership, a newly-formed Maryland limited partnership, (the Services
Partnership) in exchange for a 92% sole limited partnership interest. The
remaining mortgage servicing contracts acquired by CRIIMI Management in the
Merger were immediately contributed to the Services Partnership in exchange for
an 8% sole general partnership interest. Additionally, on June 30, 1995, CRIIMI
MAE contributed $285,000 to the Services Corporation in exchange for 100% of the
non-voting common stock (which shares are entitled to 95% of the dividends) of
the Services Corporation and certain directors and officers of CRIIMI MAE
collectively contributed $15,000 to the Services Corporation in exchange for
100% of the voting common stock (which shares are entitled to 5% of the
dividends) of the Services Corporation. It is anticipated that substantially
all of the economic benefits of ownership of the Services Corporation will inure
to the benefit of CRIIMI MAE by virtue of its debt and equity and interests
therein.
The Services Partnership provides mortgage servicing and advisory services
to third parties, certain affiliates of CRI and the AIM Funds on a fee basis.
As of August 1, 1995, the Services Partnership's mortgage servicing
portfolio consisted of 181 loans with an aggregate unpaid principal balance of
$859 million. CRIIMI MAE, through CRIIMI Management, controls the Services
Partnership as general partner.
In addition to its investments in Government Insured Multifamily Mortgages,
subordinated securities, the Services Partnership and the Services Corporation,
CRIIMI MAE also owns approximately 57% of CRI Liquidating REIT, Inc. (CRI
Liquidating), a finite-life, self-liquidating REIT which owns Government Insured
Multifamily Mortgages. Additionally, CRIIMI, Inc., a wholly owned subsidiary of
CRIIMI MAE, owns all of the general partnership interests in the AIM Funds.
<PAGE>9
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization - Continued
CRIIMI MAE, CRI Liquidating, CRIIMI, Inc. and CRIIMI Management are Maryland
Corporations.
CRIIMI MAE is governed by a board of directors (the Board of Directors), a
majority of whom are independent directors. From inception through June 30,
1995, the Board of Directors engaged the Adviser, an affiliate of CRI, to act in
the capacity of adviser to CRIIMI MAE. Prior to June 30, 1995, the Adviser
conducted CRIIMI MAE's day-to-day operations and managed CRIIMI MAE's portfolio
of Government Insured Multifamily Mortgages and other assets with the goal of
maximizing CRIIMI MAE's value. Under the advisory agreement between CRIIMI MAE
and the Adviser, the Adviser and its affiliates received certain fees and
expense reimbursements from CRIIMI MAE through June 30, 1995. However, as
discussed in Note 4, effective June 30, 1995, CRIIMI MAE became a self-
administered and self-managed REIT and, pursuant to the Merger, the advisory
agreement was terminated. Accordingly, the Adviser no longer manages CRIIMI
MAE's operations and is, thus, not entitled to receive fees and expense
reimbursements from CRIIMI MAE.
CRI Liquidating is also governed by the Board of Directors, which has
engaged the Adviser to act in the capacity of adviser to CRI Liquidating.
Under an advisory agreement between CRI Liquidating and the Adviser, the Adviser
is obligated to provide administrative services on behalf of CRI Liquidating,
evaluate and negotiate voluntary dispositions of mortgage investments and
conduct CRI Liquidating's day-to-day affairs. In return for these services, the
Adviser is entitled to receive annual fees based on amounts invested by CRI
Liquidating and incentive fees based on the achievement of certain performance
goals. From inception through June 30, 1995, the Adviser and its affiliates
were entitled to reimbursement for certain expenses incurred in connection with
the operation and administration of CRI Liquidating. However, as discussed in
Note 4, on June 30, 1995, affiliates of CRIIMI MAE acquired the mortgage
servicing, origination and advisory businesses conducted by CRI and certain of
its affiliates, including certain of the physical assets and the workforce of
the Adviser. The Adviser will continue to perform advisory services on behalf
of CRI Liquidating following the Merger. However, pursuant to a reimbursement
agreement entered into between the Adviser and CRIIMI Management in connection
with the Merger, the employees of CRIIMI Management will perform certain
services on behalf of the Adviser under the CRI Liquidating advisory agreement.
While neither CRIIMI Management nor CRIIMI MAE will receive advisory fees in
return for these services, CRIIMI Management will be reimbursed, at cost, for
its employees time and expenses pursuant to the reimbursement agreement.
2. Basis of Presentation
In management's opinion, the accompanying unaudited consolidated financial
statements of CRIIMI MAE, including CRI Liquidating, CRIIMI Management and
CRIIMI MAE Financial Corporation (a wholly owned subsidiary of CRIIMI MAE formed
in June 1995), contain all adjustments (consisting of only normal recurring
adjustments and consolidating adjustments) necessary to present fairly the
consolidated financial position of CRIIMI MAE as of June 30, 1995 and December
31, 1994 and the consolidated results of its operations for the three and six
months ended June 30, 1995 and 1994 and its cash flows for the six months ended
June 30, 1995 and 1994.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. While management believes that the disclosures
<PAGE>10
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Basis of Presentation - Continued
presented are adequate to make the information not misleading, it is suggested
that these financial statements be read in conjunction with the financial
statements and the notes included in CRIIMI MAE's Annual Report filed on Form
10-K and amended on Forms 10-K/A for the year ended December 31, 1994. In
relation to the Merger, it is also suggested that these financial statements be
read in conjunction with the Proxy Statement dated April 28, 1995, and the
report on Form 8-K dated June 30, 1995, and filed with the SEC on July 14, 1995.
3. Summary of Significant Accounting Policies
Merger of CRI Mortgage Businesses
---------------------------------
Assets acquired and costs incurred in connection with the Merger were
recorded using the purchase method of accounting. The amounts allocated to
the assets acquired are based on management's estimate of their fair values
with the excess of purchase price over fair value allocated to goodwill.
<PAGE>11
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Summary of Significant Accounting Policies - Continued
The AIM sub-advisory contracts and the mortgage servicing contracts
transferred to the Services Partnership will be amortized using the
effective interest method over 10 years. CRIIMI MAE will reflect this
amortization through its equity in earnings of the Services Partnership and
the Services Corporation. The remaining assets acquired by CRIIMI MAE,
including goodwill, will be amortized using the straight-line method over
ten years.
Fixed Assets
------------
Fixed assets acquired in connection with the Merger of approximately
$212,000 (included in receivables and other assets on the accompanying
consolidated balance sheet as of June 30, 1995) are recorded at cost.
Depreciation of furniture and equipment is computed over the estimated
useful lives of the related assets. Amortization of leasehold improvements
is computed over the base period of the related lease or the estimated life
of the improvement, whichever is shorter. Depreciation and amortization
are computed using the straight-line method.
Investment in Services Corporation
----------------------------------
CRIIMI MAE accounts for its investment in the Services Corporation
under the equity method because the voting common stock of the Services
Corporation is owned by directors and officers of CRIIMI MAE and because
CRIIMI MAE is entitled to substantially all of the economic benefits of
ownership of the Services Corporation.
Investment in Services Partnership
----------------------------------
CRIIMI MAE's investment in the Services Partnership is accounted for
under the equity method since the limited partner has the right to approve
any action that would make it impossible for the Services Partnership to
carry on its ordinary business.
Statements of Cash Flows
------------------------
Interest expense paid for the six months ending June 30, 1995 and 1994
was $23,550,862 and $11,883,757, respectively.
In connection with the Merger, the following significant non-cash
investing and financing activities were recorded during the six months
ending June 30, 1995:
<PAGE>12
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Summary of Significant Accounting Policies - Continued
Assets Acquired
---------------
Investment in Services Corporation $ 6,871,000
Investment in Services Partnership 538,000
Note receivable 5,002,183
Terminated contract and workforce 23,900,000
Mortgage servicing assets 881,000
Goodwill 3,845,417
Fixed assets 212,484
Decrease in deferred costs (1,162,756)
Decrease in receivables and other
costs (250,000)
-----------
Total assets acquired $39,837,328
===========
Liabilities assumed and stock issued
------------------------------------
Bank term loan $ 9,100,000
Deferred compensation payable 5,002,183
Merger costs payable 1,972,244
Common stock issued 22,262,901
Value of stock options issued 1,500,000
-----------
Liabilities assumed and stock issued $39,837,328
===========
4. Merger of CRI Mortgage Businesses
On September 29, 1994, a special committee of the Board of Directors (the
Special Committee) was appointed by the Board of Directors to consider whether,
and on what basis, CRIIMI MAE should become self-administered and self-managed.
The members of the Special Committee, Garrett G. Carlson, Sr., G. Richard
Dunnells and Robert F. Tardio, are not and have not been affiliates of CRI or
the CRI Mortgage Businesses nor officers or employees of CRIIMI MAE.
The consideration paid by CRIIMI MAE in connection with the Merger was
determined by negotiations between William B. Dockser and H. William Willoughby
(collectively, the Principals) and the Special Committee. In the negotiations,
the Special Committee was assisted by Duff & Phelps Capital Markets Co. (Duff &
Phelps) and took into account the views of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, the financial adviser to CRIIMI MAE with respect to the merger
proposal. Duff & Phelps rendered an opinion to the effect that the merger
proposal was fair to CRIIMI MAE and its stockholders, other than the Principals,
from a financial point of view.
The Special Committee unanimously recommended the merger proposal to the
Board of Directors. The Board of Directors (with the Principals abstaining)
unanimously approved the merger proposal and recommended that the stockholders
of CRIIMI MAE vote for the merger proposal. The merger proposal was approved by
the stockholders of CRIIMI MAE at a meeting held on June 21, 1995. Holders of
approximately fifty six percent of the 26,888,456 shares outstanding as of the
April 24, 1995 record date voted in favor of the Merger. Of the shares voted,
the margin was 8.5 to 1 in favor of the Merger.
The Merger became effective on June 30, 1995 (the Closing Date) at which
time certain assets and liabilities of the CRI Mortgage Businesses were merged
with and into CRIIMI Management. The CRI Mortgage Businesses were affiliates of
<PAGE>13
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Merger of CRI Mortgage Businesses - Continued
CRI. CRI and its affiliates had been involved in mortgage origination,
underwriting, investment and related activities for over 20 years. CRICO
Mortgage was formed in 1975 to assist CRI and its affiliates with mortgage-
related activities. Since that time, CRICO Mortgage had originated nearly $300
million in construction loans which eventually became part of CRI sponsored
funds. From 1991 through June 30, 1995, CRICO Mortgage personnel had
underwritten in excess of $500 million of uninsured loans and assisted with the
underwriting and asset management of more than $600 million in insured
investments held by the AIM Funds.
CRI/AIM Management was formed in 1991 to act as sub-advisor to the AIM
Funds, which hold investments in Government Insured Multifamily Mortgages.
CRI/AIM Management provided origination, servicing, and loan management services
on behalf of the AIM Funds pursuant to its advisory agreements.
As discussed in Note 1, through June 30, 1995, the Adviser provided
advisory services to CRIIMI MAE pursuant to an advisory agreement. Immediately
prior to the Merger, the advisory agreement between CRIIMI MAE and the Adviser
was sold to CRI Acquisition, a newly formed entity.
The consideration paid by CRIIMI MAE (measured on the Closing Date) for the
CRI Mortgage Businesses was approximately $32,900,000. Additionally, CRIIMI MAE
incurred costs of approximately $3.1 million to execute the Merger. As part
of the consideration paid in the Merger, CRIIMI MAE issued on the Closing Date
1,325,419 shares of common stock (Common Shares), which vested immediately, to
each of the Principals. On the Closing Date, CRIIMI MAE issued, for services
rendered in connection with the Merger, to Jay R. Cohen, Frederick J. Burchill,
Deborah A. Linn and Cynthia O. Azzara (collectively, the Executive Officers) a
total of 110,452 Common Shares. The Common Shares issued to the Executive
Officers will vest in three equal installments on the first three anniversaries
of the Closing Date. The aforementioned Common Shares issued to the Principals
and the Executive Officers may not be sold or otherwise transferred, with
certain exceptions, until the third anniversary of the Closing Date. As a
result of these transactions, the Principals and Executive Officers held
approximately 11% of the 29,684,344 Common Shares outstanding as of June 30,
1995.
Pursuant to the Merger Agreement, CRIIMI Management became liable for
certain debt of the CRI Mortgage Businesses in the principal amount of
$9,100,000, as discussed in Note 10, below.
As discussed in Note 9, the Principals and the Executive Officers entered
into employment agreements with CRIIMI Management for terms of five years and
three years, respectively. In addition, each of the Principals received from
CRIIMI MAE options to purchase one million Common Shares at $1.50 per share more
than the aggregate average of the high and low sale prices of Common Shares on
the New York Stock Exchange during the ten trading days preceding the Closing
Date, which average sale price was calculated at $8.27 per share (the Trading
Price) and 500,000 Common Shares at $4.00 per share more than the Trading Price.
The options vest in equal installments on the first five anniversaries of the
Closing Date. The Executive Officers received options to purchase a total of
180,000 Common Shares at $1.50 per share more than the Trading Price. In
<PAGE>14
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Merger of CRI Mortgage Businesses - Continued
addition, certain other officers (the Other Officers) of CRIIMI MAE received
options to purchase a total of 50,000 Common Shares at $1.50 per share more than
the Trading Price. These options vest in equal installments on the first three
anniversaries of the Closing Date. The Principals', Executive Officers' and
Other Officers' options expire on the eighth anniversary of the Closing Date.
As discussed in Note 14, on June 20, 1995, a complaint was filed in the
United States District Court of the District of Maryland against CRIIMI MAE's
directors in connection with the Merger.
5. Investment in Mortgages
CRIIMI MAE's consolidated investment in mortgages is comprised of
participation certificates evidencing a 100% undivided beneficial interest in
Government Insured Multifamily Mortgages issued or sold pursuant to programs of
the Federal Housing Administration (FHA) (FHA-Insured Loans) and mortgage-backed
securities guaranteed by the Government National Mortgage Association (GNMA)
(GNMA Mortgage-Backed Securities). Payment of principal and interest on FHA-
Insured Loans is insured by the United States Department of Housing and Urban
Development (HUD) pursuant to Title 2 of the National Housing Act. Payment of
principal and interest on GNMA Mortgage-Backed Securities is guaranteed by GNMA
pursuant to Title 3 of the National Housing Act.
As of June 30, 1995 and December 31, 1994, CRIIMI MAE directly owned 170
and 173 Government Insured Multifamily Mortgages and Government Insured
Construction Mortgages, as defined below, respectively, which had a weighted
average net effective interest rate of approximately 8.00% and 8.00%, a weighted
average remaining term of approximately 32 and 33 years, and an aggregate fair
value of approximately $701 million and $653 million, respectively.
As of June 30, 1995 and December 31, 1994, CRIIMI MAE indirectly owned
through its subsidiary, CRI Liquidating, 23 and 44 Government Insured
Multifamily Mortgages, respectively, which had a weighted average net effective
interest rate of approximately 10.67% and 10.02%, a weighted average remaining
term of approximately 27 years and 26 years, and an aggregate fair value of
approximately $113 million and $154 million, respectively.
Thus, on a consolidated basis, as of June 30, 1995 and December 31, 1994,
CRIIMI MAE owned, directly or indirectly, 193 and 217 Government Insured
Multifamily Mortgages and Government Insured Construction Mortgages,
respectively. As of June 30, 1995, these investments had a weighted average net
effective interest rate of approximately 8.37%, a weighted average remaining
term of approximately 32 years and an aggregate fair value of approximately $813
million. These amounts compare to a weighted average net effective interest
rate of approximately 8.33%, a weighted average remaining term of approximately
32 years and an aggregate fair value of approximately $807 million, as of
December 31, 1994. In addition, as of June 30, 1995, CRIIMI MAE had committed
approximately $3.7 million for advances on FHA-Insured Loans and GNMA Mortgage-
Backed Securities relating to the construction or rehabilitation of multifamily
housing projects, including nursing homes and intermediate care facilities
(Government Insured Construction Mortgages).
During the six months ended June 30, 1995, CRIIMI MAE directly acquired one
<PAGE>15
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Investment in Mortgages - Continued
Government Insured Multifamily Mortgage with a purchase price of $0.2 million, a
net effective interest rate of 9.25% and a remaining term of 32 years. In
addition, during the first six months of 1995, CRIIMI MAE funded advances of
$5.3 million on Government Insured Construction Mortgages with a weighted
average net effective interest rate of approximately 8.27%. These loans are
anticipated to convert to permanent loans over the next five months with an
anticipated maturity of 40 years.
During the six months ended June 30, 1995, CRIIMI MAE, through its
subsidiary, CRI Liquidating, disposed of 21 mortgage investments which
constituted approximately 33% of CRI Liquidating's December 31, 1994 portfolio
balance. The 21 dispositions resulted in net financial statement gains of
approximately $1.6 million and tax basis gains of $9.5 million. In addition,
during the six months ended June 30, 1995, there were four prepayments of
Government Insured Multifamily Mortgages held directly by CRIIMI MAE. The
prepayment of one of the above-mentioned mortgages resulted in a loss of
approximately $12,000 which is included in losses from mortgage dispositions on
the accompanying consolidated statement of income for the six months ended June
30, 1995. The other mortgage prepayments resulted in financial statement gains
of approximately $67,000, which are included in gains from mortgage dispositions
on the accompanying consolidated statements of income for the three and six
months ended June 30, 1995.
The following estimated fair values of CRIIMI MAE's Government Insured
Multifamily Mortgages are presented in accordance with generally accepted
accounting principles which define fair value as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. These estimated fair values,
however, do not represent the liquidation value or the market value of CRIIMI
MAE.
The fair value of the Government Insured Multifamily Mortgages is based on
quoted market prices.
<PAGE>16
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Investment in Mortgages - Continued
<TABLE>
<CAPTION>
As of June 30, 1995 As of December 31, 1994
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment in mortgages, at amortized cost $700,611,676 $700,755,564 $703,215,753 $653,062,381
============ ============ ============ ============
Investment in mortgages, at fair value $ 87,686,668 $112,579,125 $136,120,900 $154,373,576
============ ============ ============ ============
</TABLE>
6. Investment in Subordinated Securities
In addition to investing in Government Insured Multifamily Mortgages,
CRIIMI MAE's Board of Directors has authorized CRIIMI MAE to invest in other
mortgage investments which are not federally insured or guaranteed. Since
adoption of this policy, CRIIMI MAE has been reviewing opportunities for
investment in other real estate securities which complement CRIIMI MAE's
existing holdings. In the current investment climate, CRIIMI MAE's management
believes that investments in higher yielding subordinated securities represent
attractive investment opportunities. In August 1995, the Board of Directors
modified CRIIMI MAE's investment policy and authorized CRIIMI MAE to invest up
to 30% of CRIIMI MAE's total consolidated assets in uninsured mortgage and
mortgage-related investments, of which a maximum of 25% of total consolidated
assets may be invested in subordinated securities.
As of June 30, 1995, CRIIMI MAE had purchased three tranches of securities
issued by Mortgage Capital Funding, Inc. Series 1994-MC1 (MCF 1994-MC1), two
tranches of securities issued by Mortgage Capital Funding, Inc. Series 1993-C1
(MCF 1993-C1), three tranches of securities issued by Nomura Asset Securities
Corporation, Series 1994-C3 (Nomura 1994-C3) and three tranches of securities
issued by Structured Mortgage Securities Corporation Series 1995-M1 (SMC 1995-
M1). MCF 1994-MC1, MCF 1993-C1, Nomura 1994-C3 and SMC 1995-M1 issued multiple
tranches of securities and have elected to be treated as real estate mortgage
investment conduits (REMICs).
The REMICs allocate the cash flow from the underlying mortgages to the
securitized tranches, with the investment grade or higher rated tranches having
a priority right to the cash flow until their investment returns are met. Then,
any remaining cash flow is allocated among the other tranches in order of their
relative seniority. To the extent there are defaults and unrecoverable losses
on the underlying mortgages, resulting in reduced cash flows, the unrated
tranche will bear this loss first. To the extent there are losses in excess of
the unrated tranche's stated right to principal, then the most subordinated
rated tranches will begin absorbing losses.
The following table summarizes financial statement information related to
these investments on an aggregate basis by pool:
<PAGE>17
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Investment in Subordinated Securities - Continued
<TABLE>
<CAPTION>
Original Amortized Fair
Face Purchase Cost Value
Pool Amount Price (as of June 30, 1995) (as of June 30, 1995)
--------- ----------- ----------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
MCF 1994-MC1 $34,404,343 $22,038,132 $22,058,116 $22,948,503
MCF 1993-C1 19,678,873 16,810,299 17,155,738 18,065,300
Nomura 1994-C3 21,177,237 18,256,802 18,220,133 18,830,695
SMC 1995-M1 15,204,614 9,894,793 9,891,395 10,122,620
----------- ----------- ----------- -----------
Total $90,465,067 $67,000,026 $67,325,382 $69,967,118
=========== =========== =========== ===========
</TABLE>
The aggregate investments by the underlying rating of the securities are as
follows:
<TABLE>
<CAPTION>
Amortized Cost
Security Rating Face Amount (as of June 30, 1995)
--------------- ----------- ----------------------
<C> <C> <C>
BB Rated $35,254,405 $31,806,632
B Rated 33,111,334 26,624,720
Unrated 22,099,328 8,894,030
----------- -----------
Total $90,465,067 $67,325,382
=========== ===========
</TABLE>
As described in Note 10, upon closing on the purchase of the subordinated
securities, CRIIMI MAE entered into a series of repurchase agreements which
provided financing to purchase the rated tranches of the subordinated securities
(the unrated tranches were purchased with equity or available cash). As of June
30, 1995, between 65% and 80% of the purchase price was financed for aggregate
borrowings of approximately $42.0 million. See Note 10 for a further discussion
of these repurchase agreements.
On August 1, 1995, CRIIMI MAE purchased the BBB rated tranche of the Nomura
1994-C3 securitization for approximately $4 million. Also on August 1, 1995, a
repurchase agreement representing 80% of the purchase price of the security was
entered into to finance this investment. CRIIMI MAE expects to invest
approximately $20 million in an additional subordinated security transaction
during late August 1995.
Based on the timing and amount of future credit losses estimated by
<PAGE>18
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Investment in Subordinated Securities - Continued
management, the weighted average anticipated yield to maturity for the
investments in subordinated securities made to date is approximately 14%. The
accounting treatment required under generally accepted accounting principles
requires that the income on these investments be recorded on a level yield basis
given the anticipated yield to maturity on these investments. This currently
results in income which is lower for financial statement purposes than for tax
purposes. On a leveraged basis, the current weighted average anticipated yield
to maturity on these investments is approximately 24%. This anticipated return
was determined based on the anticipated yield to maturity net of interest
expense attributed to the financing of the rated tranches.
The anticipated returns on these investments are based upon a number of
assumptions that are currently subject to several business and economic
uncertainties and contingencies, including, without limitation, the potential
lack of a liquid secondary market for these securities, prevailing interest
rates, renewal of the repurchase agreements which provided financing to purchase
the subordinated securities at similar terms, the general condition of the real
estate market, competition for tenants, and changes in market rental rates. As
these uncertainties and contingencies are generally beyond CRIIMI MAE's control,
no assurance can be given that the anticipated yield to maturity will be
achieved.
In making these investments, CRIIMI MAE and its affiliates applied their
knowledge of multifamily and other commercial mortgages to perform due diligence
on the mortgage investments collateralizing the securities. This analysis may
include reviewing, to the extent available, the operating records of the
underlying real estate assets, appraisals, environmental studies, market studies
and architectural and engineering studies, and where deemed necessary,
independently developing projected operating budgets. In addition, site visits
may be conducted at certain of the properties. In addition to performing these
steps in connection with the due diligence, CRIIMI MAE also reviews the
servicing terms of the transactions. CRIIMI MAE will generally make investments
of this type when satisfactory arrangements exist whereby CRIIMI MAE can closely
monitor the collateral. All transactions entered into to date have had such
satisfactory arrangements.
Although investments in Government Insured Multifamily Mortgages and
Government Insured Construction Mortgages will continue to comprise the majority
of CRIIMI MAE's total consolidated asset base, CRIIMI MAE expects that
investments in subordinated securities will represent a major component of
CRIIMI MAE's new business activity during 1995 and 1996. As of June 30, 1995,
these investments represent approximately 7% of CRIIMI MAE's total consolidated
assets. As previously stated, in August 1995, CRIIMI MAE's Board of Directors
modified CRIIMI MAE's investment policy and authorized CRIIMI MAE to invest up
to 30% of total consolidated assets in uninsured mortgage and mortgage-related
investments, of which a maximum of 25% of total consolidated assets may be
invested in subordinated securities.
7. Reconciliation of Financial Statement Net Income to Tax Basis
Income
On an annual basis, CRIIMI MAE expects to pay to its shareholders
quarterly cash dividends equal to virtually all of its tax basis income.
<PAGE>19
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Reconciliation of Financial Statement Net Income to Tax Basis
Income - Continued
Reconciliations of the financial statement net income to the tax basis
income for the three and six months ended June 30, 1995 and 1994 are as follows:
<PAGE>20
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Reconciliation of Financial Statement Net Income to Tax Basis
Income - Continued
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Consolidated financial statement net income $ 4,609,412 $ 6,076,374 $ 9,524,809 $ 16,058,424
Adjustment due to accounting for subsidiary
as a pooling for financial statement
purposes and a purchase for tax purposes (12,572) 304,283 4,447,853 2,106,741
Income from investment in insured
mortgage funds and advisory partnership 32,938 33,277 65,883 16,768
Mortgage dispositions 27,637 -- 39,155 43,289
Reamortization of investments in
subordinated securities 156,993 -- 276,627 --
Interest income - U.S. Treasuries 182,828 218,371 371,425 442,040
Interest expense - defeased notes (257,365) (305,518) (526,771) (623,094)
Interest expense - amortization of deferred
financing costs (355,100) (137,109) (869,210) (78,427)
Interest expense - write-off of deferred
financing costs -- (47,261) -- 891,174
Provision for settlement of litigation -- (557,340) -- (557,340)
Other (12,820) (4,179) (9,885) (9,478)
------------ ------------ ------------ ------------
Tax basis income $ 4,371,951 $ 5,580,898 $ 13,319,886 $ 18,290,097
============ ============ ============ ============
Tax basis income per share $ .16 $ .22 $ .50 $ .73
============ ============ ============ ============
Weighted average number of shares
outstanding (for tax purposes) 26,888,456 25,183,533 26,621,202 25,183,533
============ ============ ============ ============
</TABLE>
8. Dividends to Shareholders
For the six months ended June 30, 1995, dividends of $0.45 per share were
paid to shareholders. These dividends, which include long-term capital gains,
are as follows:
Dividend Record Date
-------- -----------
Quarter ended March 31, 1995 $ 0.225 March 20, 1995
Quarter ended June 30, 1995 0.225 June 19, 1995
--------
Year-to-date June 30, 1995 $ 0.450
========
CRIIMI MAE's objective is to pay a stable quarterly dividend and to
increase the tax basis income over time, and thereby increase the quarterly
<PAGE>21
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Dividends to Shareholders - Continued
dividend. However, the rise in short-term interest rates during 1994
significantly increased CRIIMI MAE's interest expense which resulted in reduced
net income and, ultimately, lower dividend distributions. The anticipated
dividend level for 1995 of $0.90 per share includes assumptions regarding
interest rates, the amount and timing of investments in subordinated securities,
and other factors. The assumption regarding interest rates is that short-term
interest rates would, on average, remain at the levels of early March 1995.
While a sustained period of higher short-term interest rates could reduce the
dividend, the adverse effects of such an increase in interest rates would be
limited by CRIIMI MAE's interest rate caps, as discussed in Note 11. The
estimated dividend level also assumes that, during 1995, CRIIMI MAE will invest
approximately $62 million in subordinated securities ($28 million of which was
invested during the first and second quarters of 1995) with terms that are
similar to the $39 million of subordinated securities that CRIIMI MAE purchased
in 1994. The dividend estimate for 1995 does not include any of the anticipated
effects of CRIIMI MAE's Merger.
9. Transactions with Related Parties
Below is a summary of the related party transactions which occurred during
the three and six months ended June 30, 1995 and 1994:
<PAGE>22
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Transactions with Related Parties - Continued
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Payments to the Adviser (i):
----------------------------
Annual fee - CRIIMI MAE (a)(h) $ 760,912 $ 620,325 $ 1,493,297 $ 1,117,036
Annual fee - CRI Liquidating (a)(g) 94,958 171,346 224,832 365,847
Incentive fee - CRIIMI MAE (a) -- 46,830 -- 264,052
Incentive fee - CRI Liquidating (f) -- -- -- 394,812
Mortgage selection fees - CRIIMI MAE (b) 211,137 1,029,232 211,137 1,132,798
------------- ------------ ------------ ------------
Total $ 1,067,007 $ 1,867,733 $ 1,929,266 $ 3,274,545
============= ============ ============ ============
Payments to CRI (i):
--------------------
Expense reimbursement - CRIIMI MAE (c) $ 435,653 $ 344,213 $ 929,416 $ 699,867
Expense reimbursement - CRI
Liquidating (c) 42,165 69,527 111,586 145,613
------------- ------------ ------------ ------------
Total $ 477,818 $ 413,740 $ 1,041,002 $ 845,480
============= ============ ============ ============
Amounts Received or Accrued from Related Parties
------------------------------------------------
CRIIMI,Inc.
-----------
Income (d) $ 475,872 $ 434,045 $ 932,550 $ 931,505
Return of capital (e) 117,921 204,181 212,131 527,599
------------- ------------ ------------ ------------
Total $ 593,793 $ 638,226 $ 1,144,681 $ 1,459,104
============= ============ ============ ============
CRI/AIM Investment Limited
Partnership (d)(h) $ 175,000 $ 175,000 $ 350,000 $ 350,000
============= ============ ============ ============
</TABLE>
(a) Included in the accompanying consolidated statements of income.
(b) Included as deferred costs on the accompanying consolidated balance
sheets and amortized over the expected mortgage life.
(c) Included as general and administrative expenses on the accompanying
consolidated statements of income.
(d) Included as income from investment in insured mortgage funds and
advisory partnership, before amortization, on the accompanying
consolidated statements of income.
(e) Included as a reduction of investment in insured mortgage funds and
advisory partnership on the accompanying consolidated balance sheets.
(f) Netted with gains on mortgage dispositions on the accompanying
consolidated statements of income.
(g) As a result of reaching the carryover CRI Insured Mortgage Investments
<PAGE>23
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Transactions with Related Parties - Continued
Limited Partnership (CRIIMI I) target yield during the first quarter
of 1995, CRI Liquidating paid deferred annual fees of $28,467. The
carryover CRIIMI I target yield was not achieved during the second
quarter of 1995. As a result of reaching the carryover CRIIMI I
target yield during the first and second quarters of 1994, CRI
Liquidating paid deferred annual fees of $31,279 and $29,068,
respectively.
(h) As of June 1, 1993, pursuant to the First Amendment to the CRI Insured
Mortgage Association, Inc. advisory agreement (the Advisory
Agreement), CRI guaranteed that CRIIMI MAE would receive an annual
distribution from CRI/AIM Investment Limited Partnership of $700,000.
CRIIMI MAE was granted the right to reduce the amounts paid to the
Adviser by the difference between the guaranteed $700,000 distribution
and the amount actually paid to CRIIMI MAE by CRI/AIM Investment
Limited Partnership. As such, the amounts paid to the Adviser for the
three and six months ended June 30, 1995 were reduced by $77,355 and
$154,862, respectively, which represents the difference between the
guaranteed distribution for the period and the amount actually paid to
CRIIMI MAE. The amounts paid to the Adviser for the three and six
months ended June 30, 1994, were reduced by $77,580 and $157,070,
respectively, which represents the difference between the guaranteed
distribution for the period and the amount actually paid to CRIIMI
MAE. This guarantee was terminated effective June 30, 1995 in
connection with the transaction in which CRIIMI MAE acquired the CRI
Mortgage Businesses and became self-managed and self-administered, as
discussed in Notes 1 and 4.
(i) As discussed in Notes 1 and 4, effective with the Closing Date on June
30, 1995, all payments made by CRIIMI MAE under the Advisory Agreement
to the Adviser and to CRI ceased and CRIIMI MAE no longer receives the
guaranteed $700,000 payment discussed in (h) above. Although expense
reimbursements to CRI by CRIIMI MAE no longer will be made, CRIIMI MAE
will incur these expenses directly. This transaction has no impact on
the payments required to be made by CRI Liquidating, other than that
the expense reimbursement previously paid to CRI will be paid to a
subsidiary of CRIIMI MAE effective June 30, 1995.
In addition to the transactions discussed above, in connection with the
Merger (as discussed in Note 4, above), CRIIMI MAE has entered into the
following transactions with related parties and certain directors and officers
as of June 30, 1995:
CRI Sublease - CRIIMI MAE has entered into an agreement with CRI to
sublease approximately 11,800 square feet of office space leased by CRI, at a
total annual rent of approximately $237,000. All increases in lease occupancy
charges, including inflation adjustments and expense reimbursements, will be
passed through on a per square foot basis. This amount reflects prevailing
market rates and is below CRI's rental cost. The term of this sublease will run
concurrently with CRI's lease, which expires on October 31, 1997. CRIIMI MAE
anticipates leasing an additional 1,800 square feet from CRI, at a total annual
rent of approximately $36,000, subject to the landlord's approval.
Administrative Services Agreement - Pursuant to an agreement between
CRIIMI MAE and CRI (the CRI Administrative Services Agreement), CRI will
<PAGE>24
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Transactions with Related Parties - Continued
provide CRIIMI MAE with certain administrative and office facility services
and other services, at cost, with respect to certain aspects of CRIIMI MAE's
business. CRIIMI MAE intends to use the services provided under the CRI
Administrative Services Agreement to the extent such services are not
performed by CRIIMI Management or provided by another service provider. The
CRI Administrative Services Agreement is terminable on 30 days notice at any
time by CRIIMI MAE. CRIIMI MAE and its subsidiaries expect the charges under
the CRI Administrative Services Agreement to approximate $190,000 during the
third and fourth quarters of 1995.
Registration Rights and Lock-up Agreement - The Common Shares received by
the Principals and the Executive Officers pursuant to the Merger Agreement (the
Restricted Shares) are "restricted securities" within the meaning of Rule 144
under the Securities Act of 1933, as amended (the Securities Act), and may be
sold only pursuant to an effective registration statement under the Securities
Act or an applicable exemption, including an exemption under Rule 144. On June
30, 1995, the Principals and the Executive Officers entered into an agreement
with CRIIMI MAE (the Registration Rights and Lock-Up Agreement) pursuant to
which those persons are not permitted to offer, sell, contract to sell or
otherwise dispose of any Restricted Shares for 36 months after the Closing Date,
except for gifts to relatives and charitable contributions. Each Principal is
prohibited from making such gifts in excess of 662,709 Common Shares during such
period. After expiration of the lock-up period, the holders of the Restricted
Shares, after notifying CRIIMI MAE of their intention, will be permitted,
subject to certain procedural requirements, to sell Restricted Shares. If an
exemption from the registration requirements is not available, the Principals
and Executive Officers may exercise piggyback registration rights, may utilize
any available shelf-registration and, if the aggregate number of Common Shares
to be registered exceeds 50,000 Common Shares, exercise demand registration
rights; provided that a maximum of two demand registration statements may be
required and a second notice demanding registration must be at least a year
after the first. Under the agreements providing for such registration rights,
CRIIMI MAE will pay all expenses, other than underwriting discounts, in
connection with any registration.
Employment and Non-Competition Agreements - In connection with the Merger,
on June 30, 1995, CRIIMI Management entered into employment and non-competition
agreements with each of the Principals. Each Principal's employment agreement
provides for minimum annual compensation of $125,000 and a term expiring on the
fifth anniversary of the Closing Date. The agreements require each Principal to
devote the substantial portion of his time to the affairs of CRIIMI MAE and its
affiliated entities, except that each of them may devote time to his other
existing business activities; provided that the time devoted to such other
existing business activities does not interfere with the performance of his
duties to CRIIMI MAE and its affiliated entities. The agreements define the
phrase "the substantial portion" to mean all of the time required to perform the
services necessary and appropriate for the conduct of the businesses of CRIIMI
MAE and its affiliated entities.
The employment agreements include provisions prohibiting the Principal from
competing with CRIIMI Management, CRIIMI MAE or CRIIMI MAE's affiliated entities
for at least six years after the Closing Date, unless the Principal's employment
<PAGE>25
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Transactions with Related Parties - Continued
is terminated other than for "cause" or pursuant to an "involuntary resignation"
(as such terms are defined in the employment agreements). However, subsequent
to the Merger, the Principals continue to have a substantial economic interest
in, and control over, CRI and its affiliates, which will continue to (1) be a
general partner in, and have minority economic interests in, certain existing
partnerships which, directly or indirectly, own equity or debt investments in
multifamily or commercial properties, (2) engage in and manage trading
operations in multifamily and related mortgages, and (3) through the Adviser,
which is an affiliate of CRI, serve as the adviser to CRI Liquidating.
Also in connection with the Merger, on June 30, 1995, CRIIMI Management
entered into employment agreements with each of the Executive Officers, namely
Jay R. Cohen, Frederick J. Burchill, Deborah A. Linn, and Cynthia O. Azzara.
The Executive Officers' agreements have three-year terms and provide for minimum
annual salaries of $175,000, $175,000, $125,000 and $120,000 ($130,000 beginning
on September 1, 1995 for Ms. Linn and Ms. Azzara), respectively. Each of the
Agreements with the Executive Officers includes provisions prohibiting the
Executive Officer from competing with CRIIMI Management, CRIIMI MAE or CRIIMI
MAE's affiliated entities while employed by CRIIMI Management.
Stock Options - As discussed in Note 4, in connection with the Merger, the
Principals, Executive Officers and Other Officers received certain stock options
for services provided in connection with the Merger.
Deferred Compensation Payable and Note Receivable - As discussed in Note
12, below, in connection with the Merger, on June 30, 1995, CRIIMI MAE entered
into a deferred compensation agreement with each of the Principals and acquired
a note receivable from CRI in the amount of $5,002,183 (the Note Receivable).
10. Obligations under Financing Facilities
Master Repurchase Agreements
----------------------------
Nomura
------
On April 30, 1993, CRIIMI MAE entered into master repurchase agreements
(collectively, with the additional repurchase agreements described below, the
Master Repurchase Agreements-Nomura) with Nomura Securities International, Inc.
and Nomura Asset Capital Corporation (collectively, Nomura) which provided
CRIIMI MAE with $350 million of available financing for a three-year term
expiring April 30, 1996, secured by FHA-Insured Loans and GNMA Mortgage-Backed
Securities. As of January 23, 1995, the borrowings collateralized with FHA-
Insured Loans were paid off, terminating the related FHA portion of the Master
Repurchase Agreements-Nomura. Replacement financing was obtained from German
American Capital Corporation (GACC) through a master repurchase agreement at
substantially similar terms, except as related to collateral requirements, as
discussed below under Master Repurchase Agreement-GACC. Interest on these
Nomura borrowings is based on the three-month London Interbank Offered Rate
(LIBOR) plus a spread of .50%. During any period where the average market value
of each security pledged is less than $4 million, the spread increases by .05%.
The rate in effect on June 30, 1995 was set on April 24, 1995 for three months
at 6.75%, including the spread. In July 1995, CRIIMI MAE entered into a swap
<PAGE>26
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Obligations under Financing Facilities - Continued
agreement whereby the interest rate on this facility was set on July 24, 1995
for a three month period at 5.8%, plus a spread of .5%. The value of the GNMA
Mortgage-Backed Securities pledged as collateral must equal at least 110% of the
amounts borrowed.
On November 30, 1993, CRIIMI MAE entered into additional repurchase
agreements with Nomura pursuant to which Nomura agreed to provide CRIIMI MAE
with an additional $150 million of available financing for a three-year term
expiring October 27, 1996, secured by FHA-Insured Loans and GNMA Mortgage-Backed
Securities. As mentioned above, as of January 23, 1995, the borrowings
collateralized with FHA-Insured Loans were paid off, terminating the related FHA
portion of the Master Repurchase Agreements-Nomura. Replacement financing was
obtained from GACC through a master repurchase agreement at substantially
similar terms except as related to collateral requirements, as discussed under
Master Repurchase Agreement-GACC. Interest on these Nomura borrowings for the
first twelve months after the initial funding (April 29, 1994 through April 28,
1995) was based on three-month LIBOR plus a spread of .70%. Interest on the
borrowings from April 29, 1995 to October 28, 1995 and from October 29, 1995
through the maturity of the facility is based on three-month LIBOR plus a spread
of .50% and .30%, respectively. During any period where the average market
value of each security pledged is less than $4 million, the spread increases by
.05%. The rate in effect on June 30, 1995 was set on April 24, 1995 for three
months at 6.75%, including the spread. In July 1995, CRIIMI MAE entered into a
swap agreement whereby the interest rate on this facility was set on July 24,
1995 for a three month period at 5.8%, plus a spread of .5%. The value of the
GNMA Mortgage-Backed Securities pledged as collateral must equal at least 110%
of the amounts borrowed.
As of June 30, 1995, CRIIMI MAE had borrowed approximately $331 million of
the funds available under the Master Repurchase Agreements-Nomura primarily to
acquire Government Insured Multifamily Mortgages. As of June 30, 1995, mortgage
investments directly owned by CRIIMI MAE, which approximate $365 million at fair
value, were used as collateral pursuant to certain terms of the Master
Repurchase Agreements-Nomura.
GACC
----
On January 23, 1995, CRIIMI MAE entered into a master repurchase agreement
with GACC (Master Repurchase Agreement-GACC) which provided CRIIMI MAE with $300
million of available financing through April 1, 1996. Interest on such
borrowings is based on one-month LIBOR, plus a spread of .75% or .50% depending
on whether FHA-Insured Loans or GNMA Mortgage-Backed Securities, respectively,
are pledged as collateral. Generally, the value of the FHA-Insured Loans or
GNMA Mortgage-Backed Securities pledged as collateral must equal at least 105%
of the amounts outstanding and no more than 60% of the collateral pledged may be
FHA-Insured Loans and no less than 40% may be GNMA Mortgage-Backed Securities.
As of June 30, 1995, approximately $178 million was outstanding under this
facility primarily to pay down the portion of the borrowings secured by FHA-
Insured Loans under the Master Repurchase Agreements-Nomura and to effect a $50
million required, permanent reduction of the Revolving Credit Facility, as
discussed below. As of June 30, 1995, these borrowings were collateralized by
<PAGE>27
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Obligations under Financing Facilities - Continued
mortgage investments directly owned by CRIIMI MAE with an aggregate fair value
of approximately $190 million. The weighted average interest rate on this
facility, including applicable spreads, was 6.69% as of June 30, 1995.
Revolving Credit Facility
-------------------------
As of June 30, 1995, the lenders in the Revolving Credit Facility, which
matures August 28, 1996, have agreed to loan CRIIMI MAE an aggregate principal
amount of $85 million for the remaining term of the facility. CRIIMI MAE made a
$50 million permanent reduction in the Revolving Credit Facility on January 27,
1995, bringing the maximum allowable amount outstanding to $85 million.
As of June 30, 1995, CRIIMI MAE had borrowed $56 million under the
Revolving Credit Facility primarily to acquire Government Insured Multifamily
Mortgages, other mortgage investments and to repay other borrowings.
The interest rate on borrowings under the Revolving Credit Facility is
based on CRIIMI MAE's choice of several different base rates with varying
spreads depending on the percentage of GNMA Mortgage-Backed Securities held as
collateral. The weighted average interest rate on this facility, including
applicable spreads, as of June 30, 1995 was 6.63%, which is based on one-month
LIBOR and a spread of .625%.
The value of the collateral pledged must equal at least 110% of the amounts
borrowed. No more than 60% of the collateral pledged may be FHA-Insured Loans
and no less than 40% may be GNMA Mortgage-Backed Securities. As of June 30,
1995, mortgage investments directly owned by CRIIMI MAE, which approximated $66
million at fair value, were used as collateral pursuant to the terms of the
Revolving Credit Facility.
The Revolving Credit Agreement also requires a minimum Fixed Charge
Coverage Ratio, as defined in the amended agreement, of 1.35 to 1.0 for any
fiscal quarter through September 30, 1995 and a minimum of 1.4 to 1.0 for any
fiscal quarter after September 30, 1995. For the quarter ended June 30, 1995,
the Fixed Charge Coverage Ratio was 1.52 to 1.0.
Bank Term Loans
---------------
Bank Term Loan I
----------------
The reducing term loan facility (Bank Term Loan I) had an outstanding
principal balance of approximately $13 million as of June 30, 1995. As of June
30, 1995, Bank Term Loan I was secured by the value of 6,950,000 CRI Liquidating
shares owned by CRIIMI MAE. In April 1995, CRIIMI MAE obtained the release of
6,174,000 of CRI Liquidating shares due to the revision in collateral
requirements resulting from the refinancing, as discussed below.
Bank Term Loan I was refinanced effective March 31, 1995. The revised
terms provide for an interest rate spread based on .75% (versus an interest rate
spread of 1.10%, previously) over CRIIMI MAE's choice of one, two or three-month
LIBOR and collateral requirements of 175% of the outstanding loan amount. Bank
Term Loan I requires a quarterly principal payment based on the greater of (i)
<PAGE>28
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Obligations under Financing Facilities - Continued
the return of capital portion of the dividend received by CRIIMI MAE on its CRI
Liquidating shares securing Bank Term Loan I or (ii) the amount necessary to
bring Bank Term Loan I to its scheduled outstanding balance at the end of such
quarter. Any remaining amounts outstanding are due by April 1, 1997.
As of June 30, 1995, the interest rate on Bank Term Loan I was 6.8125%,
based on one-month LIBOR plus a spread of .75%.
Bank Term Loan II
-----------------
In connection with the Merger of the CRI Mortgage Businesses into CRIIMI
MAE as discussed in Note 4, CRIIMI Management assumed certain debt of the CRI
Mortgage Businesses in the principal amount of $9,100,000. Simultaneous with
the closing of the Merger, the debt was refinanced. The term loan is secured by
certain cash flows generated by CRIIMI MAE's direct and indirect interests in
the AIM funds and is guaranteed by CRIIMI MAE. The loan requires quarterly
principal payments of $650,000 and will mature December 31, 1998. Interest is
based on CRIIMI MAE's choice of one, two or three-month LIBOR plus a spread of
1.25%. A one time commitment fee of $22,750 was due at closing. As of June 30,
1995, the interest rate on Bank Term Loan II was 7.3125% based on one-month
LIBOR plus a spread of 1.25%.
Other Repurchase Agreements
---------------------------
As of June 30, 1995, CRIIMI MAE financed, through repurchase agreements,
between 65% and 80% of the purchase price of the BB rated and B rated tranches
of subordinated securities. The following table summarizes the financing
related to these investments:
<PAGE>29
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Obligations under Financing Facilities - Continued
<TABLE>
<CAPTION>
Amount Current
Financed Rate
Security (As of June Base (including
Pool Rating 30, 1995) Rate Spread Spread) Term
---- ------- ------------ -------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
MCF 1994-MC1 BB $ 7,754,739 6M LIBOR 1.000% 7.7500% 1/95-7/95(1)
MCF 1994-MC1 B 5,396,106 6M LIBOR 1.100% 7.5375% 3/95-9/95(1)
MCF 1993-C1 BB 7,544,577 6M LIBOR 1.000% 7.0000% 6/95-12/95(1)
MCF 1993-C1 B 5,165,704 6M LIBOR 1.100% 7.1000% 6/95-12/95(1)
Nomura 1994-C3 BB 6,630,441 1M LIBOR 1.375% 7.4375% 4/95-4/96
Nomura 1994-C3 B 4,675,758 1M LIBOR 1.375% 7.4375% 4/95-4/96
SMC 1995-M1 BB 1,895,037 1M LIBOR 1.000% 7.0625% 5/95-5/96
SMC 1995-M1 B 2,922,483 1M LIBOR 1.000% 7.0625% 5/95-5/96
-----------
$41,984,845
===========
</TABLE>
(1) These agreements have an initial term of six months, cancellation
notification periods ranging from six months to one year and several six
month renewals. CRIIMI MAE has not received notification of the
cancellation of any of the agreements currently in place and is therefore
assuming that the financing will be renewed for a minimum of an additional
six months. On August 1, 1995, CRIIMI MAE entered into an additional
repurchase agreement for approximately $3.2 million, representing 80% of
the purchase price of the BBB tranche of the Nomura 1994-C3 transaction
which was purchased simultaneous with the closing of the repurchase
agreement. The repurchase agreement has a base rate of one-month LIBOR and
a spread of 1.00%.
Working Capital Line of Credit
------------------------------
CRIIMI MAE executed a $10 million working capital line of credit with Riggs
National Bank on February 24, 1995. This line of credit will be secured by
shares of CRI Liquidating valued at approximately 175% of any outstanding
borrowings. At CRIIMI MAE's option, the interest rate will be set at one, two
or three-month LIBOR plus .60%, the daily federal funds rate plus .80% or prime
minus 1.0%.
No amounts were borrowed under the working capital line of credit during
the six months ended June 30, 1995.
Debt Refinancing
----------------
In July 1995, CRIIMI MAE Financial Corporation, a newly-formed, special-
purpose, wholly-owned subsidiary of CRIIMI MAE, filed a registration statement
with the SEC in connection with an offering of fixed-rate collateralized
mortgage obligations (CMOs). CRIIMI MAE is in the process of arranging for<PAGE>
<PAGE>30
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Obligations under Financing Facilities - Continued
similar additional financings to supplement the plan to offer CMOs. The net
proceeds from these fixed-rate CMOs and other financings would be used primarily
to refinance approximately $380 million of CRIIMI MAE's secured, floating rate
debt. The remaining net proceeds would be used for other corporate purposes,
which could include investing in subordinated securities or acquiring mortgage
servicing rights. The CMOs are expected to be collateralized by approximately
$475 million of FHA-Insured Loans and GNMA Mortgage-Backed Securities held by
CRIIMI MAE affiliates.
Other Debt Related Information
------------------------------
During December 1994, CRIIMI MAE negotiated with its lenders to amend debt
agreements to provide for more flexibility in the restrictive covenants. Under
certain of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt to equity
ratio, as defined, may not exceed 3.0 to 1.0. As of June 30, 1995, CRIIMI MAE's
debt-to-equity ratio was approximately 2.2 to 1.0. The weighted average cost of
borrowings, including amortization of deferred financing fees of $2 million for
the six months ended June 30, 1995, on all of CRIIMI MAE's borrowings, was
approximately 7.69%.
Certain of the debt agreements require that a minimum level of unencumbered
assets be maintained, the most restrictive of which requires 2% of total
indebtedness be maintained by CRIIMI MAE. As of June 30, 1995, CRIIMI MAE had
approximately $79 million, at estimated fair value, of unencumbered FHA-Insured
Loans and GNMA Mortgage-Backed Securities. Additionally, CRIIMI MAE has other
unencumbered assets which in some cases are subject to certain lender
eligibility requirements including, but not limited to, cash, working capital
line of credit and unencumbered CRI Liquidating stock.
Fluctuations in interest rates impact the value of CRIIMI MAE's mortgage
investments as well as the potential returns to shareholders through increased
cost of funds. Increases in long-term rates could decrease the value of
mortgage investments and, in certain circumstances, require CRIIMI MAE to pledge
additional collateral in connection with its borrowing facilities. This would
reduce CRIIMI MAE's borrowing capacity and, in certain circumstances, could
force CRIIMI MAE to liquidate a portion of its assets at a loss in order to
comply with certain covenants under its borrowing facilities.
Management is continually monitoring the levels of unencumbered collateral
and has taken steps to negotiate more favorable collateral requirements with
lenders. As discussed above, during the first quarter of 1995, CRIIMI MAE
executed a master repurchase agreement with GACC for maximum borrowings of $300
million secured by FHA-Insured Loans and GNMA Mortgage-Backed Securities valued
at approximately 105% of the amounts borrowed. This compares to collateral
value requirements of 110% or borrowings under the Master Repurchase Agreements-
Nomura and the Revolving Credit Facility.
The collateral requirements on Bank Term Loan I were also reduced when the
refinancing was completed on March 31, 1995. The value of the required
collateral was reduced from 200% of the outstanding borrowings to 175% of the
outstanding borrowings. CRIIMI MAE also provided for more flexibility through
the February 1995 closing on a $10 million working capital line of credit,<PAGE>
<PAGE>31
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Obligations under Financing Facilities - Continued
secured by shares of CRI Liquidating stock. As previously discussed, management
is exploring financing alternatives other than secured, floating rate lending of
the type currently in place.
A reduction in long-term interest rates could have the impact of increasing
the value of CRIIMI MAE's mortgage investments, lowering collateral
requirements, and could also increase the level of prepayments on CRIIMI MAE's
mortgage investments. CRIIMI MAE's yield on mortgage investments will be
reduced to the extent CRIIMI MAE reinvests the proceeds from such prepayments in
new mortgage investments with effective rates which are below the rates of the
prepaid mortgages. Offsetting this risk is the opportunity to invest the
proceeds from a prepayment into other higher yielding mortgage investments such
as the subordinated securities. As discussed above, CRIIMI MAE's planned
refinancing of approximately $380 million of floating rate debt is expected to
reduce the impact of fluctuating interest rates on CRIIMI MAE's earnings and
better match the maturities of CRIIMI MAE's liabilities with its assets.
As previously discussed, management is actively pursuing investments in
subordinated securities. While management believes the investments in
subordinated securities are attractive investment opportunities on a risk-
adjusted basis, changes in interest rates have an impact on the value of the
subordinated securities and the cost to finance these transactions. As
discussed above, in relation to all of CRIIMI MAE's mortgage investments,
changes in interest rates can increase or decrease the value of the subordinated
securities. Given that CRIIMI MAE intends to hold these investments to
maturity, the most significant impact of this potential change in value is on
the collateral requirements under the debt facilities. Management continually
monitors the collateral requirements under the repurchase agreements which were
used to finance the purchases of the rated tranches to ensure that adequate
collateral exists to meet these requirements. Management also monitors the
overall level of interest rate hedge agreements in place to ensure that all
debt, including that entered into in connection with the subordinated
securities, is adequately hedged against substantial increases in interest
rates. It is anticipated that investments in subordinated securities will
comprise a substantial portion of CRIIMI MAE's new business activity during 1995
and 1996.
Management also believes that the Merger will create an overall return
which will be less interest rate sensitive. The income which is derived from
the Merger is primarily fee based, in the form of servicing fees, origination
fees and advisory fees. While origination fees may decline in a rising interest
rate environment, servicing fees are expected to become more stable in a rising
interest rate environment as the likelihood of prepayments or refinancings
decreases with higher rates. The potential loss of servicing fees as loans
prepay or refinance in a period of declining interest rates is expected to be
offset by the savings CRIIMI MAE would have on its cost of borrowing.
CRIIMI MAE has sought to enhance the return to its shareholders through the
use of leverage. Nevertheless, CRIIMI MAE's use of leverage carries with it the
risk that the cost of borrowings could increase without a corresponding increase
in the return on its mortgage investments, which could result in reduced net
income and thereby reduce the return to shareholders. To partially limit the<PAGE>
<PAGE>32
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Obligations under Financing Facilities - Continued
adverse effects of rising interest rates, CRIIMI MAE has entered into a series
of interest rate hedging agreements, as discussed in Note 11, and is in the
process of refinancing a portion of its floating rate debt with the proceeds
from fixed rate CMOs, as discussed above. Currently, the flexibility in CRIIMI
MAE's leverage is dependent upon the levels of unencumbered assets, which, as
discussed above, are inherently linked to prevailing interest rates. CRIIMI
MAE's ability to extend or refinance its debt facilities upon maturity will
depend on a number of variables including, among other things, CRIIMI MAE's
financial condition and its current and projected results from operations which
are impacted by changes in interest rates. Management continuously monitors
CRIIMI MAE's outstanding borrowings and hedging techniques in an effort to
ensure that CRIIMI MAE is making optimal use of its borrowing ability based on
market conditions and opportunities. As mentioned previously, management is
exploring financing alternatives other than secured, floating rate lending of
the type currently in place.
11. Interest Rate Hedge Agreements
CRIIMI MAE has entered into a series of interest rate hedging agreements to
partially limit the adverse effects of rising interest rates on its aggregate
borrowings. The following hedge agreements with an aggregate notional amount of
approximately $623 million were in place at June 30, 1995:
<PAGE>33
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Interest Rate Hedge Agreements - Continued
<TABLE>
<CAPTION>
Hedging Notional
Instrument Amount Effective Date Maturity Date Floor Cap Index(c)
---------------- -------------- -------------------- ----------------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Accreting Collar(d) 35,000,000 July 9, 1990 July 9, 1995 8.750% 10.500% CP
Cap (b) 25,000,000 May 24, 1991 May 24, 1996 N/A 9.0000% CP
Cap 25,000,000 June 17, 1991 June 17, 1996 N/A 8.4500% CP
Cap 50,000,000 June 25, 1993 June 25, 1998 N/A 6.5000% 3M LIBOR
Cap 50,000,000 July 1, 1993 June 3, 1996 N/A 6.5000% 3M LIBOR
Cap 50,000,000 July 20, 1993 July 20, 1998 N/A 6.2500% 3M LIBOR
Cap 50,000,000 August 10, 1993 August 10, 1997 N/A 6.0000% 3M LIBOR
Cap 50,000,000 August 27, 1993 August 27, 1997 N/A 6.1250% 3M LIBOR
Cap 50,000,000 November 10, 1993 November 10, 1997 N/A 6.0000% 3M LIBOR
Cap (a) 35,000,000 February 2, 1994 February 2, 1999 N/A 6.1250% 1M LIBOR
Cap (a) 50,000,000 March 15, 1994 March 15, 1997 N/A 6.3750% 3M LIBOR
Cap (a) 50,000,000 March 25, 1994 March 25, 1998 N/A 6.5000% 3M LIBOR
Cap 50,000,000 October 7, 1994 October 7, 1997 N/A 6.7500% 3M LIBOR
Cap (c) 23,025,875 December 31, 1991 March 31, 1996 N/A 6.5000% 3M LIBOR
Cap (c) 2,381,858 January 15, 1993 March 29, 1996 N/A 6.5000% 3M LIBOR
Cap (c) 22,974,125 December 31, 1991 March 31, 1996 N/A 10.500% 3M LIBOR
Cap (c) 4,180,642 March 31, 1993 December 31, 1996 N/A 10.500% 3M LIBOR
------------
$622,562,500 (e)(f)
============
</TABLE>
[FN]
(a) Approximately $2.3 million of costs were incurred during the first six
months of 1994 in connection with the purchase of interest rate hedge
agreements. These costs are being amortized using the effective interest
method over the term of the interest rate hedge agreements for financial
statement purposes and in accordance with the regulations under Internal
Revenue Code Section 446 with respect to notional principal contracts for
tax purposes. No new hedge agreements were entered into during the first
six months of 1995.
(b) On May 24, 1993, CRIIMI MAE and the counterparty to the collar, Canadian
Imperial Bank of Commerce (CIBC), terminated the floor on this former
collar. In consideration of such termination, CRIIMI MAE paid CIBC
approximately $2.3 million. This amount was deferred on the accompanying
consolidated balance sheets as the underlying debt being hedged is still
outstanding. This amount will be amortized for the period from May 24,
1993 through May 26, 1996. CRIIMI MAE amortized approximately $0.4 million
and $0.4 million of this deferred amount in the accompanying consolidated
statements of income for the six months ended June 30, 1995 and 1994,
respectively. Additionally, certain costs incurred during 1991 in
connection with an extinguishment of debt which was financed with proceeds
from a replacement facility, were deferred and are being amortized using
the effective interest method over the life of the replacement facility.
CRIIMI MAE amortized approximately $0.3 million and $0.8 million of such<PAGE>
<PAGE>34
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Interest Rate Hedge Agreements - Continued
costs, during the six months ended June 30, 1995 and 1994, respectively.
As of June 30, 1995, the unamortized balance of such costs was
approximately $343,000.
(c) The notional amount of these hedges amortize based on the expected pay down
schedule of Bank Term Loan I. The average notional amount of these hedges
is expected to be $22,925,806, $2,349,661, $18,529,194 and $2,806,590,
respectively, for the remainder of 1995.
(d) The accreting collar increased on a monthly basis from an original notional
amount of $10 million in July 1990 to a final notional amount of $35
million in December 1990. The notional amount remained at $35 million from
December 1990 until maturity in July 1995.
(e) All of CRIIMI MAE's interest rate hedge agreements hedge CRIIMI MAE's
borrowing costs. As of June 30, 1995, total borrowings, including
outstanding commitments under CRIIMI MAE's Master Repurchase Agreements-
Nomura, Master Repurchase Agreement-GACC, Revolving Credit Facility, other
repurchase agreements and the bank term loans are hedged by the interest
rate hedge agreements.
(f) During the six months ended June 30, 1995, $80 million in collars matured.
Additionally, during July 1995, an accreting collar with a notional amount
of $35 million (as described in (d), above) matured.
Interest Rate Caps
------------------
Interest rate caps provide protection to CRIIMI MAE to the extent interest
rates, based on a readily determinable interest rate index, increase above the
stated interest rate cap. As of June 30, 1995, CRIIMI MAE had in place interest
rate caps aggregating $588 million based on the Commercial Paper Composite Rate
(CP Index) and LIBOR. The caps that are based on the CP Index have an aggregate
notional amount of $50 million at June 30, 1995, with a weighted average cap of
8.73%. The cap that is based on the one-month LIBOR has a notional amount of
$35 million and a cap rate of 6.125%. Those based on the three-month LIBOR have
an aggregate notional amount of $503 million at June 30, 1995, with a weighted
average cap rate of 6.57%. CRIIMI MAE will receive payments based on the
difference between the index and the cap. During the first six months of 1995,
the interest rate indices exceeded the interest rate cap on four caps which had
the result of reducing CRIIMI MAE's overall interest expense by approximately
$104,000.
Interest Rate Collar
--------------------
Interest rate collars are hedging instruments that provide protection
within a range of interest rates, based on a readily determinable interest rate
index. When the interest rate index exceeds the cap, the counterparty pays the
difference between the index and the cap to CRIIMI MAE. Alternatively, if the
interest rate index is below the floor, CRIIMI MAE pays the difference to the
counterparty.
During 1995 and 1994, the CP Index was below the floor on all of the
collars in place, resulting in CRIIMI MAE making payments to the counterparties.
Total payments to the counterparties on the interest rate collars during the six
<PAGE>35
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Interest Rate Hedge Agreements - Continued
months ended June 30, 1995 and 1994 amounted to approximately $801,000 and
$2,752,000, respectively, which is included in interest expense in the
accompanying consolidated statements of income. As of July 9, 1995, all of
CRIIMI MAE's collars had expired.
CRIIMI MAE is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate hedge agreements should interest rates
exceed the caps. However, management does not anticipate nonperformance by any
of the counterparties. All except one counterparty to a $50 million cap have
long-term debt ratings of A or above by Standard and Poor's and A3 or above by
Moody's. The counterparty to the previously mentioned $50 million cap has a
long-term debt rating of A+ by Standard and Poor's and Baa1 by Moody's.
Management believes that these hedge instruments are highly liquid. The hedges
could be sold or transferred with the consent of the counterparty. Management
does not believe that this consent would be withheld. Although none of CRIIMI
MAE's hedge instruments are exchange-traded, there are a number of financial
institutions which enter into these types of transactions as part of their day-
to-day activities.
Although CRIIMI MAE expects the overall average life of its mortgage
investments to exceed ten years, CRIIMI MAE's hedging agreements range in
initial maturity from 3 to 5 years, principally because of the high cost of
hedging instruments with maturities greater than 5 years. As of June 30, 1995,
the average remaining term of these hedging agreements is approximately 2 years.
Because CRIIMI MAE's mortgage investments have fixed interest rates, upon
expiration of CRIIMI MAE's cap agreements, CRIIMI MAE will have interest rate
risk to the extent interest rates increase on its variable rate borrowings
unless the hedges are replaced or other steps are taken to mitigate this risk.
As previously discussed, management continues to review its debt and
asset/liability hedging techniques in order to minimize the impact of interest
rate risk.
12. Deferred Compensation Payable and Note Receivable
In connection with the Merger discussed in Note 4, CRIIMI MAE has entered
into a deferred compensation arrangement with the Principals in the aggregate
amount of $5,002,183 pursuant to which CRIIMI MAE agreed to pay each of the
Principals for services performed in connection with structuring the Merger.
CRIIMI MAE's obligation to pay the deferred compensation is limited, with
certain exceptions to the creation of an irrevocable grantor trust for the
benefit of the Principals and to the transfer to such trust of the Note
Receivable in the amount of $5,002,183. The deferred compensation is fully
vested and payable only to the extent that CRI continues to make principal
payments on the Note Receivable. However, in the event of bankruptcy or a
similar event affecting CRIIMI MAE, the remaining trust corpus would revert back
to CRIIMI MAE, and the Principals would become unsecured creditors of CRIIMI
MAE. Payments of principal and interest on the Note Receivable and the deferred
compensation are payable quarterly and terminate in 10 years. Both the Note
Receivable and deferred compensation obligation will bear interest at the prime
rate (9% as of June 30, 1995) plus 2%.
<PAGE>36
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Issuance of Stock
On June 23, 1994, CRIIMI MAE filed with the SEC a shelf registration
statement on Form S-3 (Commission File No. 33-54267) in order to register debt
securities, preferred shares and common shares of CRIIMI MAE for sale to the
public in the aggregate principal amount of up to $200 million. CRIIMI MAE may
from time to time offer in one or more series the securities in amounts, at
prices and on terms to be set forth in supplements to the registration
statement. During the six months ended June 30, 1995, CRIIMI MAE issued
1,125,000 shares under the shelf registration statement for net proceeds of
approximately $7.7 million. These proceeds were invested in subordinated
securities. Through June 30, 1995, 1,625,000 shares, resulting in net proceeds
of approximately $12 million, have been issued under the shelf registration
statement. On August 7, 1995, CRIIMI MAE issued an additional 750,000 shares
under the shelf registration statement for net proceeds of approximately $5.8
million. It is anticipated that these proceeds will be invested in higher-
yielding subordinated securities, used to acquire mortgage servicing rights, or
used for other corporate purposes.
14. Litigation
On June 20, 1995, Edge Partners, L.P. filed in the United States District
Court of the District of Maryland a complaint against CRIIMI MAE's directors.
The complaint purports to be on behalf of CRIIMI MAE and alleges breach of
fiduciary duty by the directors and a misleading proxy statement in connection
with the Merger. The plaintiff seeks unspecified damages, a determination that
the shareholder vote in favor of the Merger should be set aside and other
relief. Management of CRIIMI MAE and the defendants believe that the suit is
without merit.
<PAGE>37
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
1995 VERSUS 1994
----------------
CRIIMI MAE earned approximately $4.4 million in tax basis income for the
three months ended June 30, 1995, a 21.7% decrease from approximately $5.6
million for the corresponding period in 1994. CRIIMI MAE earned approximately
$13.3 million in tax basis income for the six months ended June 30, 1995, a
27.2% decrease from approximately $18.3 million for the corresponding period in
1994. On a per share basis, tax basis income for the three months ended June
30, 1995 decreased to $.16 per weighted average share from $.22 per weighted
average share for the corresponding period in 1994. On a per share basis, tax
basis income for the six months ended June 30, 1995 decreased to $.50 per
weighted average share from $.73 per weighted average share for the
corresponding period in 1994. These decreases were primarily attributable to
the CRI Liquidating mortgage dispositions which resulted in approximately $5.4
million in tax basis gains (net of minority interest) for the six months ended
June 30, 1995 as compared to tax basis gains of approximately $8.7 million (net
of minority interest) for the corresponding period in 1994 and to an increase in
interest expense, as discussed below. Also contributing to the decrease in tax
basis income for the three and six months ended June 30, 1995 from the
corresponding periods in 1994 was a reduction in ordinary income arising from
the decrease in CRI Liquidating's mortgage base, as a result of mortgage
dispositions during 1994 and 1995.
Net income for financial statement purposes was approximately $4.6 million
for the three months ended June 30, 1995, a 24.1% decrease from approximately
$6.1 million for the three months ended June 30, 1994. Net income for financial
statement purposes was approximately $9.5 million for the six months ended June
30, 1995, a 40.7% decrease from approximately $16.1 million for the six months
ended June 30, 1994. On a per share basis, financial statement net income for
the three months ended June 30, 1995 decreased to $.17 per weighted average
share from $.24 per weighted average share for the three months ended June 30,
1994. On a per share basis, financial statement net income for the six months
ended June 30, 1995 decreased to $.36 per weighted average share from $.69 per
weighted average share for the six months ended June 30, 1994.
Total income increased approximately $2.2 million or 12.8% to approximately
$19.4 million for the three months ended June 30, 1995 from approximately $17.2
million for the three months ended June 30, 1994. Total income increased
approximately $5.8 million or 17.5% to approximately $38.9 million for the six
months ended June 30, 1995 from approximately $33.1 million for the six months
ended June 30, 1994. These increases were primarily due to growth in income from
subordinated securities and mortgage investment income (net of decreases as a
result of CRI Liquidating mortgage dispositions) which CRIIMI MAE experienced
during 1995 and 1994, as described below.
Income from investment in subordinated securities was approximately $2.1
million for the three months ended June 30, 1995 versus $0 for the three months
ended June 30, 1994. Income from investment in subordinated securities was
approximately $3.4 million for the six months ended June 30, 1995 versus $0 for
the six months ended June 30, 1994. These increases were a result of the
acquisitions of subordinated securities at purchase prices of approximately
$38.9 million during the third and fourth quarters of 1994 and approximately
<PAGE>38
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
$28.2 million during the second quarter of 1995.
Mortgage investment income increased approximately $136,000 or .8% to
approximately $16.5 million for the three months ended June 30, 1995 from
approximately $16.4 million for the three months ended June 30, 1994. Mortgage
investment income increased approximately $2.1 million or 6.8% to approximately
$33.3 million for the six months ended June 30, 1995 from approximately $31.2
million for the six months ended June 30, 1994. These increases were principally
due to an increase in mortgage investments, resulting from acquisitions of
Government Insured Multifamily Mortgages held directly by CRIIMI MAE and
advances on Government Insured Construction Mortgages during 1994 and 1995,
partially offset by a decrease in mortgage investment income as a result of the
dispositions of CRI Liquidating's mortgage investments in 1994 and 1995.
Other investment income decreased approximately $59,000 or 20.3% to
approximately $228,000 for the three months ended June 30, 1995 from
approximately $287,000 for the three months ended June 30, 1994. Other
investment income increased approximately $233,000 or 30.4% to approximately
$1.0 million for the six months ended June 30, 1995 from approximately $765,000
for the six months ended June 30, 1994. These fluctuations were primarily
attributable to income earned from the short term investment of CRI
Liquidating's mortgage disposition proceeds received in January 1995 pending the
distribution to shareholders on March 31, 1995.
Total expenses increased approximately $4.1 million or 41.6% to
approximately $13.9 million for the three months ended June 30, 1995 from
approximately $9.8 million for the three months ended June 30, 1994. Total
expenses increased approximately $7.6 million or 36.8% to approximately $28.1
million for the six months ended June 30, 1995 from approximately $20.5 million
for the six months ended June 30, 1994. These increases are principally due to
an increase in interest expense, as described below. Also contributing to these
increases was a non-recurring adjustment to the provision for settlement of
litigation of $557,340 in 1994 and an increase in annual fees to related party.
Partially offsetting these increases was a decrease in incentive fee to related
party, as described below.
Interest expense increased approximately $3.4 million or 39.7% to
approximately $11.9 million for the three months ended June 30, 1995 from
approximately $8.5 million for the three months ended June 30, 1994. Interest
expense increased approximately $7.0 million or 41.2% to approximately $24.1
million for the six months ended June 30, 1995 from approximately $17.0 million
for the six months ended June 30, 1994. These increases were principally a
result of additional amounts borrowed during 1995 and 1994 under CRIIMI MAE's
financing facilities and an increase in short term interest rates. Partially
offsetting these increases was a decrease in interest expense as a result of the
expiration of CRIIMI MAE's interest rate collars during the first quarter of
1995.
Other operating expenses increased approximately $691,000 or 54.2% to
approximately $2.0 million for the three months ended June 30, 1995 from
approximately $1.3 million for the three months ended June 30, 1994. Other
operating expenses increased approximately $540,000 or 15.6% to approximately
$4.0 million for the six months ended June 30, 1995 from approximately $3.5
million for the six months ended June 30, 1994. These increases were primarily
<PAGE>39
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
due to a non-recurring adjustment to the provision for settlement of litigation
in the second quarter of 1994 in the amount of $557,340.
Total fees to related party, as presented on the consolidated statements of
income, are comprised of annual fees and incentive fees paid to the Adviser.
From inception through June 30, 1995, the Adviser received annual fees for
managing CRIIMI MAE's portfolio. In connection with the Merger, effective June
30, 1995, CRIIMI MAE is no longer required to pay such fees. The Adviser
continues to receive annual fees for managing CRI Liquidating's portfolio.
These fees include a base component equal to a percentage of average invested
assets. In addition, fees paid to the Adviser by CRI Liquidating may include a
performance-based component that is referred to as the deferred component. The
deferred component, which is also calculated as a percentage of average invested
assets, is computed each quarter but paid (and expensed) only upon meeting
certain performance goals. If these goals are not met, the deferred component
accumulates and may be paid in the future if cumulative goals are met. In
addition, certain incentive fees were paid by CRIIMI MAE and are paid by CRI
Liquidating on a current basis if certain performance goals were/are met.
Total fees to related party increased approximately $17,000 or 2.1% to
approximately $856,000 for the three months ended June 30, 1995 from
approximately $839,000 for the three months ended June 30, 1994. Total fees to
related party decreased approximately $29,000 or 1.6% to approximately
$1,718,000 for the six months ended June 30, 1995 from approximately $1,747,000
for the six months ended June 30, 1994. These changes were primarily the result
of decreases in the CRIIMI MAE incentive fee during the three and six months
ended June 30, 1995, as discussed below, partly offset by an increase in annual
fees. Annual fees increased approximately $64,000 or 8.1% to approximately
$856,000 for the three months ended June 30, 1995 from approximately $792,000
for the three months ended June 30, 1994. Annual fees increased approximately
$235,000 or 15.9% to approximately $1,718,000 for the six months ended June 30,
1995 from approximately $1,483,000 for the six months ended June 30, 1994.
These increases were primarily due to investments in mortgages and subordinated
securities and advances on Government Insured Construction Mortgages during 1994
and 1995. Partially offsetting these increases in annual fees for the three and
six months ended June 30, 1995, as compared to the corresponding periods in
1994, were reductions in the base component of the annual fees payable by CRI
Liquidating resulting from mortgage dispositions during 1994 and 1995. In
connection with the Merger, effective June 30, 1995, CRIIMI MAE is no longer
required to pay annual fees to the Adviser.
The CRIIMI MAE incentive fee was equal to 25% of the amount by which net
income from additional mortgage investments exceeded the annual target return on
equity and was payable quarterly, subject to year-end adjustment. The incentive
fee decreased approximately $47,000 or 100% for the three months ended June 30,
1995 from approximately $47,000 for the three months ended June 30, 1994. The
incentive fee decreased approximately $264,000 or 100% for the six months ended
June 30, 1995 from approximately $264,000 for the six months ended June 30,
1994. These decreases were primarily attributable to the increase in interest
expense during the three and six months ended June 30, 1995 as a result of the
increase in interest rates, as discussed above. In connection with the Merger,
effective June 30, 1995, CRIIMI MAE is no longer required to pay incentive fees
to the Adviser.
<PAGE>40
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Net gains on mortgage dispositions decreased approximately $379,000 or
85.0% to approximately $67,000 for the three months ended June 30, 1995 from
approximately $446,000 for the three months ended June 30, 1994. Net gains on
mortgage dispositions decreased approximately $10.4 million or 86.5% to
approximately $1.6 million in the six months ended June 30, 1995 from
approximately $12.1 million for the six months ended June 30, 1994. Gains or
losses on mortgage dispositions are based on the number, carrying amounts, and
proceeds of mortgage investments disposed of during the period. The net gains
recognized during the six months ended June 30, 1995 resulted from the
disposition of 21 CRI Liquidating and four CRIIMI MAE Government Insured
Multifamily Mortgages which resulted in net financial statement gains of
approximately $1.6 million. This compares to the disposition of 13 CRI
Liquidating and 3 CRIIMI MAE Government Insured Multifamily Mortgages during the
six months ended June 30, 1994 that generated net financial statement gains of
approximately $12.1 million.
The Merger will impact CRIIMI MAE's results of operations on both a
financial statement basis and an income tax basis. On a financial statement
basis, this transaction is expected to result in an increase in revenues over
what they would be without the Merger as a result of CRIIMI MAE's new lines of
business - mortgage servicing, origination and advisory services. The increases
in revenues will be reflected on CRIIMI MAE's consolidated statements of income
as equity in the earnings of the Services Partnership and the Services
Corporation, as well as in other investment income. As of August 1, 1995, the
Services Partnership's mortgage servicing portfolio consisted of 181 loans with
an aggregate unpaid principal balance of $859 million. However, it is expected
that net income per share for financial statement purposes will decrease as a
result of the Merger, primarily as a result of non-cash expenses arising from
the amortization of assets acquired in the merger. Partially offsetting this
increase in non-cash expenses is a reduction in annual and incentive management
fees that CRIIMI MAE will realize as a result of the termination of the advisory
agreement with the Advisor.
On an income tax basis, it is anticipated that the Merger will be accretive
(on a pro forma basis) to CRIIMI MAE's shareholders because the increase in the
revenue streams acquired from the CRI Mortgage Businesses and the reduction in
CRIIMI MAE's annual expenses, as a result of the termination of the advisory
agreement, as well as the add-back of the majority of the non-cash amortization
expenses described above, should result in additional tax basis income, on a per
share pro forma basis, as described in the proxy statement dated April 28, 1995.
In connection with the Merger, CRIIMI MAE will no longer receive a
guaranteed $700,000 annual distribution from its investment in the AIM Funds.
Additionally, although expense reimbursements will no longer be made to CRI by
CRIIMI MAE, CRIIMI MAE will incur these expenses directly.
The Merger will have no impact on the payments required to be made by CRI
Liquidating, other than that the expense reimbursement previously paid by CRI
Liquidating to CRI will be paid to CRIIMI Management subsequent to the Merger.
LIQUIDITY AND FINANCIAL CONDITION
---------------------------------
CRIIMI MAE and CRI Liquidating closely monitor their cash flow and
liquidity positions, including compliance with debt covenants, in an effort to
<PAGE>41
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
ensure that sufficient cash is available for operations and debt service
requirements and to continue to qualify as REITs. CRIIMI MAE's cash receipts,
which have been derived from scheduled payments of outstanding principal of, and
interest on, and proceeds from dispositions of, mortgage investments and
investments in subordinated securities plus cash receipts from interest on
temporary investments, borrowings, cash received from the AIM Funds and the
advisory partnership, were sufficient for the six months ended June 30, 1995 and
1994 to meet operating, investing and financing cash requirements. It is
anticipated that cash receipts will be sufficient to meet operating, investing
and financing cash requirements in future periods. Cash flows from CRIIMI MAE's
operating activities are expected to increase over what they would be without
the Merger as a result of the revenue streams acquired from the CRI Mortgage
Businesses. Cash flow was also sufficient to provide for the payment of
dividends to shareholders and to meet the IRS requirements to continue to
qualify as a REIT. As of June 30, 1995, there were no significant commitments
for capital expenditures; however, as of such date, CRIIMI MAE had committed to
fund additional Government Insured Construction Mortgages totaling approximately
$3.7 million. As of June 30, 1995, accounts payable and accrued expenses
includes Merger costs payable of approximately $2 million. In addition, on
August 1, 1995, CRIIMI MAE purchased the BBB rated tranche of the Nomura 1994-C3
Securitization for approximately $4 million. CRIIMI MAE expects to invest
approximately $20 million in an additional subordinated security transaction
during late August 1995.
Dividends -- During the first six months of 1995, CRIIMI MAE decreased its
quarterly dividend to $0.225 per share. During the four consecutive quarters of
1994, CRIIMI MAE paid dividends of $0.29 per share. CRIIMI MAE's objective is
to pay a stable quarterly dividend and to increase the tax basis income over
time, and thereby increase the quarterly dividend. However, the rise in short-
term interest rates during 1994 significantly increased CRIIMI MAE's interest
expense which resulted in reduced net income and, ultimately, lower dividend
distributions. The anticipated dividend level for 1995 of $0.90 per share
includes assumptions regarding interest rates, the amount and timing of
investments in subordinated securities, and other factors. The assumption
regarding interest rates is that short-term interest rates would, on average,
remain at the levels of early March 1995. While a sustained period of higher
short-term interest rates could reduce the dividend, the adverse effects of such
an increase in interest rates would be limited by CRIIMI MAE's interest rate
caps, as discussed in "Interest Rate Hedge Agreements." The estimated dividend
level also assumes that, during 1995, CRIIMI MAE will invest approximately $62
million in subordinated securities ($28 million of which was invested during the
first and second quarters of 1995) with terms that are similar to the $39
million of subordinated securities that CRIIMI MAE purchased in 1994. The
dividend estimate for 1995 does not include any of the anticipated effects of
CRIIMI MAE's Merger, as discussed below in "Other Events."
Although the mortgage investments held by CRIIMI MAE and CRI Liquidating
yield a fixed monthly mortgage payment once purchased, the cash dividends paid
by CRIIMI MAE and by CRI Liquidating will vary during each period due to several
factors. The factors which impact CRIIMI MAE's dividend include (i) the
distributions which CRIIMI MAE receives on its CRI Liquidating shares, (ii)
level of income earned on CRIIMI MAE's mortgage investments depending on
prepayments, defaults, etc. (iii) level of income earned on investments in
subordinated securities which vary depending on prepayments, defaults, etc. (iv)
the fluctuating yields on short-term debt and the rate at which CRIIMI MAE's
LIBOR based debt is priced, (v) the fluctuating yields in the short-term money
<PAGE>42
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
market where the monthly mortgage payments received are temporarily invested
prior to the payment of quarterly dividends, (vi) the yield at which principal
from scheduled monthly mortgage payments, mortgage dispositions and
distributions from the AIM Funds and from CRI Liquidating can be reinvested,
(vii) variations in the cash flow received from the AIM Funds, and (viii)
changes in operating expenses. CRIIMI MAE's dividends will also be impacted by
the timing and amounts of cash flows attributable to its new lines of business -
mortgage servicing, advisory and origination services.
The factors which impact CRI Liquidating's dividend include (i) gains or
losses on dispositions of CRI Liquidating's mortgage investments, (ii) the
reduction in the monthly mortgage payments due to mortgage dispositions, (iii)
changes in interest rates which impact the gain or loss from dispositions, (iv)
the fluctuating yields in the short-term money market where the monthly mortgage
payments received are temporarily invested prior to the payment of quarterly
dividends and (v) changes in operating expenses. Additionally, mortgage
dispositions may increase the return to the shareholders for a period, although
neither the timing nor the amount can be predicted.
INVESTMENT IN MORTGAGES
-----------------------
CRIIMI MAE's consolidated investment in mortgages is comprised of FHA-
Insured Loans and GNMA Mortgage-Backed Securities. Payment of principal and
interest on FHA-Insured Loans is insured by HUD pursuant to Title 2 of the
National Housing Act. Payment of principal and interest on GNMA Mortgage-Backed
Securities is guaranteed by GNMA pursuant to Title 3 of the National Housing
Act.
As of June 30, 1995 and December 31, 1994, CRIIMI MAE directly owned 170
and 173 Government Insured Multifamily Mortgages and Government Insured
Construction Mortgages, respectively, which had a weighted average net effective
interest rate of approximately 8.0% and 8.0%, a weighted average remaining term
of approximately 32 and 33 years, and an aggregate fair value of approximately
$701 million and $653 million, respectively.
As of June 30, 1995 and December 31, 1994, CRIIMI MAE indirectly owned
through its subsidiary, CRI Liquidating, 23 and 44 Government Insured
Multifamily Mortgages, respectively, which had a weighted average net effective
interest rate of approximately 10.67% and 10.02%, a weighted average remaining
term of approximately 27 years and 26 years, and an aggregate fair value of
approximately $113 million and $154 million, respectively.
Thus, on a consolidated basis, as of June 30, 1995 and December 31, 1994,
CRIIMI MAE owned, directly or indirectly, 193 and 217 Government Insured
Multifamily Mortgages and Government Insured Construction Mortgages,
respectively. As of June 30, 1995, these investments had a weighted average net
effective interest rate of approximately 8.37%, a weighted average remaining
term of approximately 32 years and an aggregate fair value of approximately $813
million. These amounts compare to a weighted average net effective interest
rate of approximately 8.33%, a weighted average remaining term of approximately
32 years and an aggregate fair value of approximately $807 million, as of
December 31, 1994. In addition, as of June 30, 1995, CRIIMI MAE had committed
approximately $3.7 million for advances on FHA-Insured Loans relating to the
construction or rehabilitation of multifamily housing projects, including
<PAGE>43
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
nursing homes and intermediate care facilities.
During the six months ended June 30, 1995, CRIIMI MAE directly acquired one
Government Insured Multifamily Mortgage with a purchase price of $0.2 million, a
net effective interest rate of 9.25% and a remaining term of 32 years. In
addition, during the first six months of 1995, CRIIMI MAE funded advances of
$5.2 million on Government Insured Construction Mortgages with a weighted
average net effective interest rate of approximately 8.27%. These loans are
anticipated to convert to permanent loans over the next five months with an
anticipated maturity of 40 years.
During the six months ended June 30, 1995, CRIIMI MAE, through its
subsidiary, CRI Liquidating, disposed of 21 mortgage investments which
constituted approximately 33% of CRI Liquidating's December 31, 1994 portfolio
balance. The 21 dispositions resulted in net financial statement gains of $1.6
million and tax basis gains of $9.5 million. In addition, during the six months
ended June 30, 1995, there were four prepayments of Government Insured
Multifamily Mortgages held directly by CRIIMI MAE. The prepayment of one of the
above-mentioned mortgages resulted in a loss of approximately $12,000 which is
included in losses from mortgage dispositions on the accompanying consolidated
statement of income for the six months ended June 30, 1995. The other mortgage
prepayments resulted in financial statement gains of approximately $67,000,
which are included in gains from mortgage dispositions on the accompanying
consolidated statements of income for the three and six months ended June 30,
1995.
The following estimated fair values of CRIIMI MAE's Government Insured
Multifamily Mortgages are presented in accordance with generally accepted
accounting principles which define fair value as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. These estimated fair values,
however, do not represent the liquidation value or the market value of CRIIMI
MAE.
The fair value of the Government Insured Multifamily Mortgages is based on
quoted market prices.
<PAGE>44
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
As of June 30, 1995 As of December 31, 1994
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
[S] [C] [C] [C] [C]
Investment in
mortgages,
at amortized
cost $700,611,676 $700,755,564 $703,215,753 $653,062,381
============ ============ ============ ============
Investment in
mortgages,
at fair value $ 87,686,668 $112,579,125 $136,120,900 $154,373,576
============ ============ ============ ============
Investment in Subordinated Securities
-------------------------------------
In addition to investing in Government Insured Multifamily Mortgages,
CRIIMI MAE's Board of Directors has authorized CRIIMI MAE to invest in other
mortgage investments which are not federally insured or guaranteed. Since
adoption of this policy, CRIIMI MAE has been reviewing opportunities for
investment in other real estate securities which complement CRIIMI MAE's
existing holdings. In the current investment climate, CRIIMI MAE's management
believes that investments in higher yielding subordinated securities represent
attractive investment opportunities. In August 1995, the Board of Directors
modified CRIIMI MAE's investment policy and authorized CRIIMI MAE to invest up
to 30% of CRIIMI MAE's total consolidated assets in uninsured mortgage and
mortgage-related investments, of which a maximum of 25% of total consolidated
assets may be invested in subordinated securities.
As of June 30, 1995, CRIIMI MAE had purchased three tranches of securities
issued by MCF 1994-MC1, two tranches of securities issued by MCF 1993-C1, three
tranches of securities issued by Nomura 1994-C3 and three tranches of securities
issued by SMC 1995-M1. MCF 1994-MC1, MCF 1993-C1, Nomura 1994-C3 and SMC 1995-
M1 issued multiple tranches of securities and have elected to be treated as
REMICs.
The REMICs allocate the cash flow from the underlying mortgages to the
securitized tranches, with the investment grade or higher rated tranches having
a priority right to the cash flow until their investment returns are met. Then,
any remaining cash flow is allocated among the other tranches in order of their
relative seniority. To the extent there are defaults and unrecoverable losses
on the underlying mortgages, resulting in reduced cash flows, the unrated
tranche will bear this loss first. To the extent there are losses in excess of
the unrated tranche's stated right to principal, then the most subordinated
rated tranches will begin absorbing losses.
The following table summarizes financial statement information related to
these investments on an aggregate basis by pool:
<PAGE>45
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
<TABLE>
<CAPTION>
Original Amortized Fair
Face Purchase Cost Value
Pool Amount Price (as of June 30, 1995) (as of June 30, 1995)
--------- ----------- ----------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
MCF 1994-MC1 $34,404,343 $22,038,132 $22,058,116 $22,948,503
MCF 1993-C1 19,678,873 16,810,299 17,155,738 18,065,300
Nomura 1994-C3 21,177,237 18,256,802 18,220,133 18,830,695
SMC 1995-M1 15,204,614 9,894,793 9,891,395 10,122,620
----------- ----------- ----------- -----------
Total $90,465,067 $67,000,026 $67,325,382 $69,967,118
=========== =========== =========== ===========
</TABLE>
The aggregate investments by the underlying rating of the securities
are as follows:
<PAGE>46
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
<TABLE>
<CAPTION>
Amortized Cost
Security Rating Face Amount (as of June 30, 1995)
--------------- ----------- ----------------------
<S> <C> <C>
BB Rated $35,254,405 $31,806,632
B Rated 33,111,334 26,624,720
Unrated 22,099,328 8,894,030
----------- -----------
Total $90,465,067 $67,325,382
=========== ===========
</TABLE>
Upon closing on the purchase of the subordinated securities, CRIIMI MAE
entered into a series of repurchase agreements which provided financing to
purchase the rated tranches of the subordinated securities (the unrated tranches
were purchased with equity or available cash). As of June 30, 1995, between 65%
and 80% of the purchase price was financed for aggregate borrowings of
approximately $42.0 million. The table under "Other Repurchase Agreements"
describes more fully the terms of the financing.
On August 1, 1995, CRIIMI MAE purchased the BBB rated tranche of the Nomura
1994-C3 securitization for approximately $4 million. Also on August 1, 1995, a
repurchase agreement representing 80% of the purchase price of the security was
entered into to finance this investment. CRIIMI MAE expects to invest
approximately $20 million in an additional subordinated security transaction
during late August 1995.
Based on the timing and amount of future credit losses estimated by
management, the weighted average anticipated yield to maturity for the
investments in subordinated securities made to date is approximately 14%. The
accounting treatment required under generally accepted accounting principles
requires that the income on these investments be recorded on a level yield basis
given the anticipated yield to maturity on these investments. This currently
results in income which is lower for financial statement purposes than for tax
purposes. CRIIMI MAE anticipates the leveraged tax basis return on these
investments will approximate 26% during 1995. This return was determined based
on projected cash basis interest income, assuming no defaults or unrecoverable
losses, net of interest expense attributable to the financing of the rated
tranches, as discussed below, and adjusted for amortization of original issue
discount related to these securities. CRIIMI MAE anticipates the leveraged
return on these investments for financial statement purposes will approximate
24%. This return was determined based on the anticipated yield to maturity,
which factors in anticipated losses, net of interest expense attributable to the
financing of the rated tranches, as discussed below.
The anticipated returns on these investments are based upon a number of
assumptions that are currently subject to several business and economic
uncertainties and contingencies, including, without limitation, the potential
lack of a liquid secondary market for these securities, prevailing interest
rates, renewal of the repurchase agreements which provided financing to purchase
<PAGE>47
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
the subordinated securities at similar terms, the general condition of the real
estate market, competition for tenants, and changes in market rental rates. As
these uncertainties and contingencies are generally beyond CRIIMI MAE's control,
no assurance can be given that the anticipated yields to maturity will be
achieved.
In making these investments, CRIIMI MAE and its affiliates applied their
knowledge of multifamily and other commercial mortgages to perform due diligence
on the mortgage investments collateralizing the securities. This analysis may
include reviewing the operating records of the underlying real estate assets,
appraisals, environmental studies, market studies and architectural and
engineering studies, and where deemed necessary, independently developing
projected operating budgets. In addition, site visits may be conducted at
certain of the properties. In addition to performing these steps in connection
with the due diligence, CRIIMI MAE also reviews the servicing terms of the
transactions. CRIIMI MAE will generally make investments of this type when
satisfactory arrangements exist whereby CRIIMI MAE can closely monitor the
collateral of the pool. All transactions entered into to date have had such
satisfactory arrangements.
Although investments in Government Insured Multifamily Mortgages and
Government Insured Construction Mortgages will continue to comprise the majority
of CRIIMI MAE's total consolidated asset base, CRIIMI MAE expects that
investments in subordinated securities will represent a major component of
CRIIMI MAE's new business activity during 1995 and 1996. As of June 30, 1995,
these investments represent approximately 7% of CRIIMI MAE's total consolidated
assets. As previously stated, in August 1995, CRIIMI MAE's Board of Directors
modified CRIIMI MAE's investment policy and authorized CRIIMI MAE to invest up
to 30% of total consolidated assets in uninsured mortgage and mortgage-related
investments, of which a maximum of 25% of total consolidated assets may be
invested in subordinated securities.
FINANCIAL FLEXIBILITY
---------------------
Fluctuations in interest rates impact the value of CRIIMI MAE's mortgage
investments as well as the potential returns to shareholders through increased
cost of funds. Increases in long-term rates could decrease the value of
mortgage investments and, in certain circumstances, require CRIIMI MAE to pledge
additional collateral in connection with its borrowing facilities. This would
reduce CRIIMI MAE's borrowing capacity and, in certain circumstances, could
force CRIIMI MAE to liquidate a portion of its assets at a loss in order to
comply with certain covenants under its borrowing facilities. As discussed
below, however, CRIIMI MAE's planned refinancing of approximately $380 million
of floating rate debt with long-term fixed-rate debt is expected to reduce the
impact of interest rate fluctuations on CRIIMI MAE's earnings and ability to
borrow without pledging additional collateral and will better match the
maturities of CRIIMI MAE's liabilities with its assets.
As of June 30, 1995, CRIIMI MAE had pledged mortgage investments with an
aggregate fair value of approximately $621 million as collateral for aggregate
borrowings of approximately $565 million under the Master Repurchase Agreements-
Nomura, the Master Repurchase Agreement-GACC and the Revolving Credit Facility.
CRIIMI MAE also had pledged 6,950,000 shares of CRI Liquidating stock with a
fair value of approximately $24 million as collateral for borrowings of <PAGE>
<PAGE>48
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
approximately $13 million under Bank Term Loan I and subordinated securities
with an aggregate fair value of approximately $70 million as collateral for $42
million in borrowings under other repurchase agreements.
Management is continually monitoring the levels of unencumbered collateral
and has taken steps to negotiate more favorable collateral requirements with
lenders. During the first quarter of 1995, CRIIMI MAE executed a master
repurchase agreement with GACC for maximum borrowings of $300 million secured by
FHA-Insured Loans and GNMA Mortgage-Backed Securities valued at approximately
105% of the amounts borrowed. This compares to collateral value requirements of
110% on borrowings under the Master Repurchase Agreements-Nomura and the
Revolving Credit Facility. As a result, in January 1995, CRIIMI MAE paid down
$126 million on the borrowings under the Master Repurchase Agreements-Nomura,
secured by FHA-Insured Loans, and $50 million on the Revolving Credit Facility
and replaced these borrowings with financing provided by GACC.
The collateral requirements on Bank Term Loan I were also reduced when the
refinancing was completed on March 31, 1995. The value of the required
collateral was reduced from 200% of the outstanding borrowings to 175% of the
outstanding borrowings. CRIIMI MAE also provided for more flexibility through
the February 1995 closing on a $10 million working capital line of credit,
secured by shares of CRI Liquidating stock.
A reduction in long-term interest rates could have the impact of increasing
the value of CRIIMI MAE's mortgage investments, lowering collateral
requirements, and could also increase the level of prepayments on CRIIMI MAE's
mortgage investments. CRIIMI MAE's yield on mortgage investments will be
reduced to the extent CRIIMI MAE reinvests the proceeds from such prepayments in
new mortgage investments with effective rates which are below the rates of the
prepaid mortgages. Offsetting this risk is the opportunity to invest the
proceeds from a prepayment into other higher yielding mortgage investments such
as the subordinated securities.
As previously discussed, management is actively pursuing investments in
subordinated securities. While management believes the investments in
subordinated securities are attractive investment opportunities on a risk-
adjusted basis, changes in interest rates have an impact on the value of the
subordinated securities and the cost to finance these transactions. As
discussed above in relation to all of CRIIMI MAE's mortgage investments, changes
in interest rates can increase or decrease the value of the subordinated
securities. Given that CRIIMI MAE intends to hold these investments to
maturity, the most significant impact of this potential change in value is on
the collateral requirements under the debt facilities. Management continually
monitors the collateral requirements under the repurchase agreements which were
used to finance the purchases of the rated tranches to ensure that adequate
collateral exists to meet these requirements. Management also monitors the
overall level of interest rate hedge agreements in place to ensure that all
debt, including that entered into in connection with the subordinated
securities, is adequately hedged against substantial increases in interest
rates.
Management also believes that the Merger will create an overall return
which will be less interest rate sensitive. The income which is anticipated to
be derived from the Merger is primarily fee based, in the form of servicing <PAGE>
<PAGE>49
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
fees, origination fees and advisory fees. While origination fees may decline in
a rising interest rate environment, servicing fees are expected to become more
stable in a rising interest rate environment as the likelihood of prepayments or
refinancings decreases with higher rates. The potential loss of servicing fees
as loans prepay or refinance in a period of declining interest rates is expected
to be offset by the savings CRIIMI MAE would have on its cost of borrowing.
CRIIMI MAE has sought to enhance the return to its shareholders through the
use of leverage. Nevertheless, CRIIMI MAE's use of leverage carries with it the
risk that the cost of borrowings could increase without a corresponding increase
in the return on its mortgage investments, which could result in reduced net
income and thereby reduce the return to shareholders. To partially limit the
adverse effects of rising interest rates, CRIIMI MAE has entered into a series
of interest rate hedging agreements. (See "Interest Rate Hedge Agreements" for
a further discussion.) The flexibility in CRIIMI MAE's leverage is dependent
upon the levels of unencumbered assets, which, as discussed above, are
inherently linked to prevailing interest rates. CRIIMI MAE's ability to extend
or refinance debt facilities upon maturity will depend on a number of variables
including, among other things, CRIIMI MAE's financial condition and its current
and projected results from operations which are impacted by changes in interest
rates. Management continuously monitors CRIIMI MAE's outstanding borrowings and
hedging techniques in an effort to ensure that CRIIMI MAE is making optimal use
of its borrowing ability based on market conditions and opportunities.
CORPORATE BORROWINGS
--------------------
Master Repurchase Agreements
----------------------------
Nomura
------
On April 30, 1993, CRIIMI MAE entered into the Master Repurchase
Agreements-Nomura which provided CRIIMI MAE with $350 million of available
financing for a three-year term expiring April 30, 1996, secured by FHA-Insured
Loans and GNMA Mortgage-Backed Securities. As of January 23, 1995, the
borrowings collateralized with FHA-Insured Loans were paid off, terminating the
related FHA portion of the Master Repurchase Agreements-Nomura. Replacement
financing was obtained from GACC through a master repurchase agreement at
substantially similar terms, except as related to collateral requirements, as
discussed below under Master Repurchase Agreement-GACC. Interest on these
Nomura borrowings is based on three-month LIBOR plus a spread of .50%. During
any period where the average market value of each security pledged is less than
$4 million, the spread increases by .05%. The rate in effect on June 30, 1995
was set on April 24, 1995 for three months at 6.75%, including the spread. In
July 1995, CRIIMI MAE entered into a swap agreement whereby the interest rate on
this facility was set on July 24, 1995 for a three month period at 5.8%, plus a
spread of .5%. The value of the GNMA Mortgage-Backed Securities pledged as
collateral must equal at least 110% of the amounts borrowed.
On November 30, 1993, CRIIMI MAE entered into additional repurchase
agreements with Nomura pursuant to which Nomura agreed to provide CRIIMI MAE
with an additional $150 million of available financing for a three-year term
expiring October 27, 1996, secured by FHA-Insured Loans and GNMA Mortgage-Backed
Securities. As mentioned above, as of January 23, 1995, the borrowings
collateralized with FHA-Insured Loans were paid off, terminating the related
<PAGE>50
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
FHA portion of the Master Repurchase Agreements-Nomura. Replacement financing
was obtained from GACC through a master repurchase agreement at substantially
similar terms, except as related to collateral requirements, as discussed under
Master Repurchase Agreement-GACC. Interest on these Nomura borrowings for the
first twelve months after the initial funding (April 29, 1994 through April 28,
1995) was based on three-month LIBOR plus a spread of .70%. Interest on the
borrowings from April 29, 1995 to October 28, 1995 and from October 29, 1995
through the maturity of the facility is based on three-month LIBOR plus a spread
of .50% and .30%, respectively. During any period where the average market
value of each security pledged is less than $4 million, the spread increases by
.05%. The rate in effect on June 30, 1995 was set on April 24, 1995 for three
months at 6.75%, including the spread. In July 1995, CRIIMI MAE entered into a
swap agreement whereby the interest rate on this facility was set on July 24,
1995 for a three month period at 5.8%, plus a spread of .5%. The value of the
GNMA Mortgage-Backed Securities pledged as collateral must equal at least 110%
of the amounts borrowed.
As of June 30, 1995, CRIIMI MAE had borrowed approximately $331 million of
the funds available under the Master Repurchase Agreements-Nomura primarily to
acquire Government Insured Multifamily Mortgages. As of June 30, 1995, mortgage
investments directly owned by CRIIMI MAE, which approximate $365 million at fair
value, were used as collateral pursuant to certain terms of the Master
Repurchase Agreements-Nomura.
GACC
----
On January 23, 1995, CRIIMI MAE entered into the Master Repurchase
Agreement-GACC which provided CRIIMI MAE with $300 million of available
financing through April 1, 1996. Interest on such borrowings is based on one-
month LIBOR, plus a spread of .75% or .50% depending on whether FHA-Insured
Loans or GNMA Mortgage-Backed Securities, respectively, are pledged as
collateral. Generally, the value of the FHA-Insured Loans or GNMA Mortgage-
Backed Securities pledged as collateral must equal at least 105% of the amounts
outstanding and no more than 60% of the collateral pledged may be FHA-Insured
Loans and no less than 40% may be GNMA Mortgage-Backed Securities.
As of June 30, 1995, approximately $178 million was outstanding under this
facility primarily to pay down the portion of the borrowings secured by FHA-
Insured Loans under the Master Repurchase Agreements-Nomura and to effect a $50
million required, permanent reduction of the Revolving Credit Facility. As of
June 30, 1995, these borrowings were collateralized by mortgage investments
directly held by CRIIMI MAE with an aggregate fair value of approximately $190
million. The weighted average interest rate on this facility, including
applicable spreads, was 6.69% as of June 30, 1995.
Revolving Credit Facility
-------------------------
As of June 30, 1995, the lenders in the Revolving Credit Facility, which
matures August 28, 1996, have agreed to loan CRIIMI MAE an aggregate principal
amount of $85 million for the remaining term of the facility. CRIIMI MAE made a
$50 million permanent reduction in the Revolving Credit Facility on January 27,
1995, bringing the maximum allowable amount outstanding to $85 million.
As of June 30, 1995, CRIIMI MAE had borrowed $56 million under the
<PAGE>51
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Revolving Credit Facility primarily to acquire Government Insured Multifamily
Mortgages, other mortgage investments and to repay other borrowings.
The interest rate on borrowings under the Revolving Credit Facility is
based on CRIIMI MAE's choice of several different base rates with varying
spreads depending on the percentage of GNMA Mortgage-Backed Securities held as
collateral. The weighted average interest rate on this facility, including
applicable spreads, as of June 30, 1995 was 6.63%, which is based on one-month
LIBOR and a spread of .625%.
The value of the collateral pledged must equal at least 110% of the amounts
borrowed. No more than 60% of the collateral pledged may be FHA-Insured Loans
and no less than 40% may be GNMA Mortgage-Backed Securities. As of June 30,
1995, mortgage investments directly owned by CRIIMI MAE, which approximated $66
million at fair value, were used as collateral pursuant to the terms of the
Revolving Credit Facility.
The Revolving Credit Agreement also requires a minimum Fixed Charge
Coverage Ratio, as defined in the amended agreement, of 1.35 to 1.0 for any
fiscal quarter through September 30, 1995 and a minimum of 1.4 to 1.0 for any
fiscal quarter after September 30, 1995. For the quarter ended June 30, 1995,
the Fixed Charge Coverage Ratio was 1.52 to 1.0.
Bank Term Loans
---------------
Bank Term Loan I
----------------
Bank Term Loan I had an outstanding principal balance of approximately $13
million as of June 30, 1995. As of June 30, 1995, Bank Term Loan I was secured
by the value of 6,950,000 CRI Liquidating shares owned by CRIIMI MAE. In April
1995, CRIIMI MAE obtained the release of 6,174,000 of CRI Liquidating shares due
to the revision in collateral requirements resulting from the refinancing, as
discussed below.
Bank Term Loan I was refinanced effective March 31, 1995. The revised
terms provide for an interest rate spread based on .75% (versus an interest rate
spread of 1.10%, previously) over CRIIMI MAE's choice of one, two or three-month
LIBOR and collateral requirements of 175% of the outstanding loan amount. Bank
Term Loan I requires a quarterly principal payment based on the greater of (i)
the return of capital portion of the dividend received by CRIIMI MAE on its CRI
Liquidating shares securing Bank Term Loan I or (ii) the amount necessary to
bring Bank Term Loan I to its scheduled outstanding balance at the end of such
quarter. Any remaining amounts outstanding are due by April 1, 1997.
As of June 30, 1995, the interest rate on Bank Term Loan I was 6.8125%,
based on one-month LIBOR plus a spread of .75%.
<PAGE>52
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Bank Term Loan II
-----------------
In connection with the Merger of the CRI Mortgage Businesses into CRIIMI
MAE, CRIIMI Management assumed certain debt of the CRI Mortgage Businesses in
the principal amount of $9,100,000. Simultaneous with the closing of the
Merger, the debt was refinanced. The term loan is secured by certain cash flows
generated by CRIIMI MAE's direct and indirect interests in the AIM funds and is
guaranteed by CRIIMI MAE. The loan requires quarterly principal payments of
$650,000 and will mature December 31, 1998. Interest is based on CRIIMI MAE's
choice of one, two or three-month LIBOR plus a spread of 1.25%. A one time
commitment fee of $22,750 was due at closing. As of June 30, 1995, the interest
rate on Bank Term Loan II was 7.3125%, based on one-month LIBOR plus a spread of
1.25%.
Other Repurchase Agreements
---------------------------
As of June 30, 1995, CRIIMI MAE financed, through repurchase agreements,
between 65% and 80% of the purchase price of the BB rated and B rated tranches
of subordinated securities. The following table summarizes the financing
related to these investments.
<PAGE>53
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
<TABLE>
<CAPTION>
Amount Current
Financed Rate
Security (As of June Base (including
Pool Rating 30, 1995) Rate Spread Spread) Term
---- ------- ------------ -------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
MCF 1994-MC1 BB $ 7,754,739 6M LIBOR 1.000% 7.7500% 1/95-7/95(1)
MCF 1994-MC1 B 5,396,106 6M LIBOR 1.100% 7.5375% 3/95-9/95(1)
MCF 1993-C1 BB 7,544,577 6M LIBOR 1.000% 7.0000% 6/95-12/95(1)
MCF 1993-C1 B 5,165,704 6M LIBOR 1.100% 7.1000% 6/95-12/95(1)
Nomura 1994-C3 BB 6,630,441 1M LIBOR 1.375% 7.4375% 4/95-4/96
Nomura 1994-C3 B 4,675,758 1M LIBOR 1.375% 7.4375% 4/95-4/96
SMC 1995-M1 BB 1,895,037 1M LIBOR 1.000% 7.0625% 5/95-5/96
SMC 1995-M1 B 2,922,483 1M LIBOR 1.000% 7.0625% 5/95-5/96
-----------
$41,984,845
===========
</TABLE>
[FN]
(1) These agreements have an initial term of six months, cancellation
notification periods ranging from six months to one year and several six
month renewals. CRIIMI MAE has not received notification of the
cancellation of any of the agreements currently in place and is therefore
assuming that the financing will be renewed for a minimum of an additional
six months. On August 1, 1995, CRIIMI MAE entered into an additional
repurchase agreement for approximately $3.2 million, representing 80% of
the purchase price of the BBB tranche of the Nomura 1994-C3 transaction
which was purchased simultaneous with the closing of the repurchase
agreement. The repurchase agreement has a base rate of one-month LIBOR
and a spread of 1.00%.
Working Capital Line of Credit
------------------------------
CRIIMI MAE executed a $10 million working capital line of credit with
Riggs National Bank on February 24, 1995. This line of credit will be secured
by shares of CRI Liquidating valued at approximately 175% of any outstanding
borrowings. At CRIIMI MAE's option, the interest rate will be set at one, two
or three-month LIBOR plus .60%, the daily federal funds rate plus .80% or prime
minus 1.0%.
No amounts were borrowed under the working capital line of credit during
the six months ended June 30, 1995.
Debt Refinancing
----------------
In July 1995, CRIIMI MAE Financial Corporation, a newly-formed, special-
purpose, wholly-owned subsidiary of CRIIMI MAE filed a registration statement
with the SEC in connection with an offering of fixed-rate collateralized
mortgage obligations (CMOs). CRIIMI MAE is in the process of arranging for
similar additional financings to supplement the plan to sell CMOs. The net
proceeds from these fixed-rate CMOs and other financings are expected to be
<PAGE>54
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
used primarily to refinance approximately $380 million of CRIIMI MAE's secured,
floating rate debt. The remaining net proceeds would be used for other
corporate purposes, which could include investing in subordinated securities or
acquiring mortgage servicing rights. The CMOs are expected to be collateralized
by approximately $475 million of FHA-Insured Loans and GNMA Mortgage-Backed
Securities held by CRIIMI MAE affiliates.
Other Debt Related Information
------------------------------
During December 1994, CRIIMI MAE negotiated with its lenders to amend debt
agreements to provide for more flexibility in the restrictive covenants. Under
certain of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt to equity
ratio, as defined, may not exceed 3.0 to 1.0. As of June 30, 1995, CRIIMI MAE's
debt-to-equity ratio was approximately 2.2 to 1.0. The weighted average cost of
borrowings, including amortization of deferred financing fees of $2 million for
the six months ended June 30, 1995, on all of CRIIMI MAE's borrowings, was
approximately 7.69%.
Certain of the debt agreements require that a minimum level of
unencumbered assets be maintained, the most restrictive of which requires 2% of
total indebtedness be maintained by CRIIMI MAE. As of June 30, 1995, CRIIMI MAE
had approximately $79 million, at estimated fair value, of unencumbered FHA-
Insured Loans and GNMA Mortgage-Backed Securities. Additionally, CRIIMI MAE has
other unencumbered assets which in some cases are subject to certain lender
eligibility requirements including, but not limited to, cash, working capital
line of credit and unencumbered CRI Liquidating stock.
Interest Rate Hedge Agreements
------------------------------
CRIIMI MAE has entered into a series of interest rate hedging agreements
to partially limit the adverse effects of rising interest rates on its aggregate
borrowings. The following hedge agreements with an aggregate notional amount of
approximately $623 million were in place at June 30, 1995:
<PAGE>55
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
<TABLE>
<CAPTION>
Hedging Notional
Instrument Amount Effective Date Maturity Date Floor Cap Index(c)
---------------- -------------- -------------------- ----------------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Accreting Collar(d) 35,000,000 July 9, 1990 July 9, 1995 8.750% 10.500% CP
Cap (b) 25,000,000 May 24, 1991 May 24, 1996 N/A 9.0000% CP
Cap 25,000,000 June 17, 1991 June 17, 1996 N/A 8.4500% CP
Cap 50,000,000 June 25, 1993 June 25, 1998 N/A 6.5000% 3M LIBOR
Cap 50,000,000 July 1, 1993 June 3, 1996 N/A 6.5000% 3M LIBOR
Cap 50,000,000 July 20, 1993 July 20, 1998 N/A 6.2500% 3M LIBOR
Cap 50,000,000 August 10, 1993 August 10, 1997 N/A 6.0000% 3M LIBOR
Cap 50,000,000 August 27, 1993 August 27, 1997 N/A 6.1250% 3M LIBOR
Cap 50,000,000 November 10, 1993 November 10, 1997 N/A 6.0000% 3M LIBOR
Cap (a) 35,000,000 February 2, 1994 February 2, 1999 N/A 6.1250% 1M LIBOR
Cap (a) 50,000,000 March 15, 1994 March 15, 1997 N/A 6.3750% 3M LIBOR
Cap (a) 50,000,000 March 25, 1994 March 25, 1998 N/A 6.5000% 3M LIBOR
Cap 50,000,000 October 7, 1994 October 7, 1997 N/A 6.7500% 3M LIBOR
Cap (c) 23,025,875 December 31, 1991 March 31, 1996 N/A 6.5000% 3M LIBOR
Cap (c) 2,381,858 January 15, 1993 March 29, 1996 N/A 6.5000% 3M LIBOR
Cap (c) 22,974,125 December 31, 1991 March 31, 1996 N/A 10.500% 3M LIBOR
Cap (c) 4,180,642 March 31, 1993 December 31, 1996 N/A 10.500% 3M LIBOR
------------
$622,562,500 (e)(f)
============
</TABLE>
(a) Approximately $2.3 million of costs were incurred during the first six
months of 1994 in connection with the purchase of interest rate hedge
agreements. These costs are being amortized using the effective interest
method over the term of the interest rate hedge agreements for financial
statement purposes and in accordance with the regulations under Internal
Revenue Code Section 446 with respect to notional principal contracts for
tax purposes. No new hedge agreements were entered into during the first
six months of 1995.
(b) On May 24, 1993, CRIIMI MAE and the counterparty to the collar, Canadian
Imperial Bank of Commerce (CIBC), terminated the floor on this former
collar. In consideration of such termination, CRIIMI MAE paid CIBC
approximately $2.3 million. This amount was deferred on the accompanying
consolidated balance sheets as the underlying debt being hedged is still
outstanding. This amount will be amortized for the period from May 24,
1993 through May 26, 1996. CRIIMI MAE amortized approximately $0.4 million
and $0.4 million of this deferred amount in the accompanying consolidated
statements of income for the six months ended June 30, 1995 and 1994,
respectively. Additionally, certain costs incurred during 1991 in
connection with an extinguishment of debt which was financed with proceeds
from a replacement facility, were deferred and are being amortized using
the effective interest method over the life of the replacement facility.
CRIIMI MAE amortized approximately $0.3 million and $0.8 million of such
costs, during the six months ended June 30, 1995 and 1994, respectively.
As of June 30, 1995, the unamortized balance of such costs was
<PAGE>56
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
approximately $343,000.
(c) The notional amount of these hedges amortize based on the expected pay down
schedule of Bank Term Loan I. The average notional amount of these hedges
is expected to be $22,925,806, $2,349,661, $18,529,194 and $2,806,590,
respectively, for the remainder of 1995.
(d) The accreting collar increased on a monthly basis from an original notional
amount of $10 million in July 1990 to a final notional amount of $35
million in December 1990. The notional amount remained at $35 million from
December 1990 until maturity in July 1995.
(e) All of CRIIMI MAE's interest rate hedge agreements hedge CRIIMI MAE's
borrowing costs. As of June 30, 1995, total borrowings, including
outstanding commitments under CRIIMI MAE's Master Repurchase Agreements-
Nomura, Master Repurchase Agreement-GACC, Revolving Credit Facility, other
repurchase agreements and the bank term loans are hedged by the interest
rate hedge agreements.
(f) During the six months ended June 30, 1995, $80 million in collars matured.
Additionally, in July 1995, an accreting collar with a notional amount of
$35 million (as described in (d), above) matured.
Interest Rate Caps
------------------
Interest rate caps provide protection to CRIIMI MAE to the extent interest
rates, based on a readily determinable interest rate index, increase above the
stated interest rate cap. As of June 30, 1995, CRIIMI MAE had in place interest
rate caps aggregating $588 million based on the CP Index and LIBOR. The caps
that are based on the CP Index have an aggregate notional amount of $50 million
at June 30, 1995, with a weighted average cap of 8.73%. The cap that is based
on the one-month LIBOR has a notional amount of $35 million and a cap rate of
6.125%. Those based on the three-month LIBOR have an aggregate notional amount
of $503 million at June 30, 1995, with a weighted average cap rate of 6.57%.
CRIIMI MAE will receive payments based on the difference between the index and
the cap. During the first six months of 1995, the interest rate indices
exceeded the interest rate cap on four caps which had the result of reducing
CRIIMI MAE's overall interest expense by approximately $104,000.
Interest Rate Collar
--------------------
Interest rate collars are hedging instruments that provide protection
within a range of interest rates, based on a readily determinable interest rate
index. When the interest rate index exceeds the cap, the counterparty pays the
difference between the index and the cap to CRIIMI MAE. Alternatively, if the
interest rate index is below the floor, CRIIMI MAE pays the difference to the
counterparty.
During 1995 and 1994, the CP Index was below the floor on all of the
collars in place, resulting in CRIIMI MAE making payments to the counterparties.
Total payments to the counterparties on the interest rate collars during the six
months ended June 30, 1995 and 1994 amounted to approximately $801,000 and
$2,752,000, respectively, which is included in interest expense in the
accompanying consolidated statements of income. As of July 9, 1995, all of
CRIIMI MAE's collars had expired.
<PAGE>57
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
CRIIMI MAE is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate hedge agreements should interest rates
exceed the caps. However, management does not anticipate nonperformance by any
of the counterparties. All except one counterparty to a $50 million cap have
long-term debt ratings of A or above by Standard and Poor's and A3 or above by
Moody's. The counterparty to the previously mentioned $50 million cap has a
long-term debt rating of A+ by Standard and Poor's and Baa1 by Moody's.
Management believes that these hedge instruments are highly liquid. The hedges
could be sold or transferred with the consent of the counterparty. Management
does not believe that this consent would be withheld. Although none of CRIIMI
MAE's hedge instruments are exchange-traded, there are a number of financial
institutions which enter into these types of transactions as part of their day-
to-day activities.
Although CRIIMI MAE expects the overall average life of its mortgage
investments to exceed ten years, CRIIMI MAE's hedging agreements range in
initial maturity from 3 to 5 years, principally because of the high cost of
hedging instruments with maturities greater than 5 years. As of June 30, 1995,
the average remaining term of these hedging agreements is approximately 2 years.
Because CRIIMI MAE's mortgage investments have fixed interest rates, upon
expiration of CRIIMI MAE's cap agreements, CRIIMI MAE will have interest rate
risk to the extent interest rates increase on its variable rate borrowings
unless the hedges are replaced or other steps are taken to mitigate this risk.
As previously discussed, management continues to review its debt and
asset/liability hedging techniques in order to minimize the impact of interest
rate risk.
Deferred Compensation Payable and Note Receivable
-------------------------------------------------
In connection with the Merger, CRIIMI MAE has entered into a deferred
compensation arrangement with the Principals in the aggregate amount of
$5,002,183 pursuant to which CRIIMI MAE agreed to pay each of the Principals for
services performed in connection with structuring the Merger. CRIIMI MAE's
obligation to pay the deferred compensation is limited, with certain exceptions
to the creation of an irrevocable grantor trust for the benefit of the
Principals, and to the transfer to such trust of the Note Receivable in the
amount of $5,002,183. The deferred compensation is fully vested and payable
only to the extent that CRI continues to make principal payments on the Note
Receivable. However, in the event of bankruptcy or a similar event affecting
CRIIMI MAE, the remaining trust corpus would revert back to CRIIMI MAE, and the
Principals would become unsecured creditors of CRIIMI MAE. Payments of
principal and interest on the Note Receivable and the deferred compensation are
payable quarterly and terminate in 10 years. Both the Note Receivable and
deferred compensation obligation will bear interest at the prime rate (9% as of
June 30, 1995) plus 2%.
CASH FLOW
---------
Net cash provided by operating activities decreased for the six months
ended June 30, 1995, as compared to the corresponding period in 1994 primarily
due to the timing and amount of interest payments made during the six months
ended June 30, 1995, as compared to the corresponding period in 1994, and to the
decrease in net income, as previously discussed.
<PAGE>58
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Net cash provided by investing activities increased for the six months
ended June 30, 1995, as compared to the corresponding period in 1994 primarily
as a result of a decrease in mortgage acquisitions and advances on construction
loans. Partially offsetting this increase was a decrease in proceeds from the
disposition of CRI Liquidating Government Insured Multifamily Mortgages and an
increase in subordinated securities acquisitions.
Net cash used in financing activities increased for six months ended June
30, 1995, as compared to the corresponding period in 1994. This increase was
primarily due to a decrease in net proceeds from the issuance of common stock to
approximately $8.3 million for the six months ended June 30, 1995 from
approximately $52.2 million for the corresponding period in 1994. Also
contributing to this increase was an increase in principal payments on
obligations incurred under financing facilities to approximately $213.3 million
for the six months ended June 30, 1995 from approximately $111.7 million for the
corresponding period in 1994. Also contributing to this increase was a decrease
in proceeds from obligations incurred under financing facilities to $206.0
million in 1995 from $232.7 million in 1994.
OTHER EVENTS
------------
Merger of CRI Mortgage Businesses
---------------------------------
On September 29, 1994, the Special Committee was appointed by the Board of
Directors to consider whether, and on what basis, CRIIMI MAE should become self-
administered and self-managed. The members of the Special Committee, Garrett G.
Carlson, Sr., G. Richard Dunnells and Robert F. Tardio, are not and have not
been affiliates of CRI or the CRI Mortgage Businesses nor officers or employees
of CRIIMI MAE.
The consideration paid by CRIIMI MAE in connection with the Merger was
determined by negotiations between the Principals and the Special Committee. In
the negotiations, the Special Committee was assisted by Duff & Phelps and took
into account the views of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
the financial adviser to CRIIMI MAE with respect to the merger proposal. Duff &
Phelps rendered an opinion to the effect that the merger proposal was fair to
CRIIMI MAE and its stockholders, other than the Principals, from a financial
point of view.
The Special Committee unanimously recommended the merger proposal to the
Board of Directors. The Board of Directors (with the Principals abstaining)
unanimously approved the merger proposal and recommended that the stockholders
of CRIIMI MAE vote for the merger proposal. The merger proposal was approved by
the stockholders of CRIIMI MAE at a meeting held on June 21, 1995. Holders of
approximately fifty six percent of the 26,888,456 shares outstanding as of the
April 24, 1995 record date voted in favor of the Merger. Of the shares voted,
the margin was 8.5 to 1 in favor of the Merger.
The Merger became effective on the Closing Date at which time certain
assets and liabilities of the CRI Mortgage Businesses were merged with and into
CRIIMI Management. The CRI Mortgage Businesses were affiliates of CRI. CRI and
its affiliates had been involved in mortgage origination, underwriting,
investment and related activities for over 20 years. CRICO Mortgage was formed
in 1975 to assist CRI and its affiliates with mortgage-related activities.
<PAGE>59
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Since that time, CRICO Mortgage had originated nearly $300 million in
construction loans which eventually became part of CRI sponsored funds. From
1991 through June 30, 1995, CRICO Mortgage personnel had underwritten in excess
of $500 million of uninsured loans and assisted with the underwriting and asset
management of more than $600 million in insured investments held by the AIM
Funds.
CRI/AIM Management was formed in 1991 to act as sub-advisor to the AIM
Funds, which hold investments in Government Insured Multifamily Mortgages.
CRI/AIM Management provided origination, servicing, and loan management services
on behalf of the AIM Funds pursuant to its advisory agreements.
As discussed in Note 1, through June 30, 1995, the Adviser, an affiliate of
CRI, provided advisory services to CRIIMI MAE pursuant to an advisory agreement.
Immediately prior to the Merger, the advisory agreement between CRIIMI MAE and
the Adviser was sold to CRI Acquisition, a newly formed entity.
The consideration paid by CRIIMI MAE (measured on the Closing Date) for the
CRI Mortgage Businesses was approximately $32,900,000. Additionally, CRIIMI MAE
incurred costs of approximately $3.1 million to execute the Merger. As part
of the consideration paid in the Merger, CRIIMI MAE issued on the Closing Date
1,325,419 Common Shares, which vested immediately, to each of the Principals.
On the Closing Date, CRIIMI MAE issued, for services rendered in connection with
the Merger, to the Executive Officers a total of 110,452 Common Shares. The
Common Shares issued to the Executive Officers will vest in three equal
installments on the first three anniversaries of the Closing Date. The
aforementioned Common Shares issued to the Principals and the Executive Officers
may not be sold or otherwise transferred, with certain exceptions, until the
third anniversary of the Closing Date. As a result of these transactions, the
Principals and Executive Officers held approximately 11% of the 29,684,344
Common Shares outstanding as of June 30, 1995.
Pursuant to the Merger Agreement, CRIIMI Management became liable for
certain debt of the CRI Mortgage Businesses in the principal amount of
$9,100,000, as discussed in Note 10.
As discussed in Note 9, the Principals and the Executive Officers entered
into employment agreements with CRIIMI Management for terms of five years and
three years, respectively. In addition, each of the Principals received from
CRIIMI MAE options to purchase one million Common Shares at $1.50 per share more
than the Trading Place, which average sale price was calculated at $8.27 per
share, and 500,000 Common Shares at $4.00 per share more than the Trading Price.
The options vest in equal installments on the first five anniversaries of the
Closing Date. The Executive Officers received options to purchase a total of
180,000 Common Shares at $1.50 per share more than the Trading Price. In
addition, the Other Officers received options to purchase a total of 50,000
Common Shares at $1.50 per share more than the Trading Price. These options
vest in equal installments on the first three anniversaries of the Closing Date.
The Principals', Executive Officers' and Other Officers' options expire on the
eighth anniversary of the Closing Date.
As discussed below, in Legal Proceedings, on June 20, 1995, a complaint was
filed in the United States District Court of the District of Maryland against
CRIIMI MAE's directors in connection with the Merger.
<PAGE>60
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
For further information with respect to the Merger, reference is made to
the proxy statement dated April 28, 1995.
Issuance of Stock
-----------------
On June 23, 1994, CRIIMI MAE filed with the SEC a shelf registration
statement on Form S-3 (Commission File No. 33-54267) in order to register debt
securities, preferred shares and common shares of CRIIMI MAE for sale to the
public in the aggregate principal amount of up to $200 million. CRIIMI MAE may
from time to time offer in one or more series the securities in amounts, at
prices and on terms to be set forth in supplements to the registration
statement. During the six months ended June 30, 1995, CRIIMI MAE issued
1,125,000 shares under the shelf registration statement for net proceeds of
approximately $7.7 million. These proceeds were invested in subordinated
securities. Through June 30, 1995, 1,625,000 shares, resulting in net proceeds
of approximately $12 million, have been issued under the shelf registration
statement. On August 7, 1995, CRIIMI MAE issued an additional 750,000 shares
under the shelf registration statement for net proceeds of approximately $5.8
million. It is anticipated that these proceeds will be invested in higher-
yielding subordinated securities, used to acquire mortgage servicing rights or
used for other corporate purposes.
<PAGE>61
PART II. OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
On June 20, 1995, Edge Partners, L.P. filed in the United States District
Court of the District of Maryland a complaint against CRIIMI MAE's directors.
The complaint purports to be on behalf of CRIIMI MAE and alleges breach of
fiduciary duty by the directors and a misleading proxy statement in connection
with the Merger. The plaintiff seeks unspecified damages, a determination that
the shareholder vote in favor of the Merger should be set aside and other
relief. Management of CRIIMI MAE and the defendants believe that the suit is
without merit.
<PAGE>62
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on form 8-K were filed during the quarter ended June 30, 1995.
The exhibits filed as part of this report are listed below.
Exhibit No. Description
----------- --------------------------------
27 Financial Data Schedule
All other items are not applicable.
<PAGE>63
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CRIIMI MAE INC.
August 11, 1995 /s/ Cynthia O. Azzara
------------------------- -----------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 5,457
<SECURITIES> 179,905
<RECEIVABLES> 713,975
<ALLOWANCES> 0
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<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 977,305
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<COMMON> 302
0
0
<OTHER-SE> 283,074
<TOTAL-LIABILITY-AND-EQUITY> 977,305
<SALES> 0
<TOTAL-REVENUES> 40,703
<CGS> 0
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<OTHER-EXPENSES> 6,939
<LOSS-PROVISION> 185
<INTEREST-EXPENSE> 24,054
<INCOME-PRETAX> 9,525
<INCOME-TAX> 0
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