<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 3)
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
CRIIMI MAE INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
/ / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14(a)-6(i)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rule 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: (1)
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11 (a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
------------------------------------------------------------------------
(3) Filing party:
------------------------------------------------------------------------
(4) Date filed:
------------------------------------------------------------------------
- ------------------------
(1) Set forth the amount on which the filing fee is calculated and state how it
was determined.
<PAGE>
CRIIMI MAE Inc.
[LOGO] The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
(301) 468-9200
(800) 678-1116
April 28, 1995
Dear Stockholder:
On behalf of the Board of Directors of CRIIMI MAE Inc. ("CRIIMI MAE"), I
cordially invite you to attend the Special Meeting of Stockholders of CRIIMI MAE
to be held at the Hyatt Regency Bethesda, One Metro Center, Bethesda, Maryland,
on June 21, 1995, at 10:00 A.M., local time.
At the Special Meeting, you will be asked to consider and vote upon the
proposed merger in which a newly formed subsidiary of CRIIMI MAE will succeed to
substantially all of the mortgage advisory, servicing and related businesses of
C.R.I., Inc. ("CRI") and its affiliates, including the activities performed on
CRIIMI MAE's behalf by its current adviser, an affiliate of CRI, and related
transactions (collectively, the "Merger Proposal").
If the Merger Proposal is approved, CRIIMI MAE will become a fully
integrated, self- administered and self-managed mortgage investment, advisory,
servicing and origination real estate investment trust, which CRIIMI MAE
believes should provide opportunities for future growth.
Because two members of the Board of Directors of CRIIMI MAE (the "Board"),
William B. Dockser and H. William Willoughby (the "Principals"), are the sole
owners of CRI and its affiliates, a Special Committee of the Board (the "Special
Committee") was appointed by the Board to consider whether, and on what basis,
CRIIMI MAE should become self-administered and self-managed, including
considering the Merger Proposal. The three members of the Special Committee are
neither affiliates of CRI or the corporations proposed to be acquired in the
Merger Proposal nor officers or employees of CRIIMI MAE. After considering all
of the factors that the Special Committee deemed relevant, the Special Committee
unanimously recommended the Merger Proposal to the Board.
BASED ON THESE AND OTHER FACTORS DISCUSSED MORE FULLY IN THE ACCOMPANYING
PROXY STATEMENT, THE BOARD BELIEVES THAT THE MERGER PROPOSAL IS FAIR TO, AND IN
THE BEST INTERESTS OF, CRIIMI MAE AND ITS STOCKHOLDERS OTHER THAN THE PRINCIPALS
(THE "PUBLIC STOCKHOLDERS"), AND RECOMMENDS THAT YOU VOTE FOR THE MERGER
PROPOSAL.
The Merger Proposal is conditioned upon, among other things, the approval of
the holders of a majority of the shares voted at the Special Meeting. Therefore,
YOUR VOTE IS IMPORTANT, regardless of the number of shares you own.
The accompanying Proxy Statement contains a detailed description of the
Merger Proposal as well as background about the transactions that should help
you better understand why the Board believes that the Merger Proposal is fair
to, and in the best interests of, CRIIMI MAE and the Public Stockholders. Please
give the enclosed material your careful attention.
Whether or not you plan to attend the Special Meeting, on behalf of the
Board I urge you to complete, sign and date the enclosed proxy card and return
it in the enclosed postage-paid envelope as soon as possible so that your shares
will be represented. If you attend the Special Meeting, you may vote in person
even if you have previously returned your proxy card. Your prompt cooperation
will be greatly appreciated.
Sincerely,
William B. Dockser
CHAIRMAN OF THE BOARD OF DIRECTORS
<PAGE>
CRIIMI MAE INC.
THE CRI BUILDING
11200 ROCKVILLE PIKE
ROCKVILLE, MARYLAND 20852
------------------------
NOTICE
------------------------
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 21, 1995
A Special Meeting of Stockholders of CRIIMI MAE Inc. will be held at the
Hyatt Regency Bethesda, One Metro Center, Bethesda, Maryland, on June 21, 1995,
at 10:00 A.M., local time for the following purposes:
(1) To consider and vote upon a proposal to approve the Agreement and Plan of
Merger, dated as of April 20, 1995, pursuant to which CRICO Mortgage
Company, Inc., CRI/AIM Management, Inc. and CRI Acquisition, Inc.,
affiliates of C.R.I., Inc. through which C.R.I., Inc. conducts substantially
all of its mortgage advisory, servicing and related businesses, will be
merged with and into CRIIMI MAE Management, Inc., a newly formed Maryland
corporation and a wholly owned subsidiary of CRIIMI MAE Inc., and related
transactions, all as more fully described in the accompanying Proxy
Statement; and
(2) To transact such other business relating to the purposes for which the
Special Meeting was called, or ancillary to the conduct thereof, as may
properly come before the Special Meeting.
Stockholders of record at the close of business on April 24, 1995 are
entitled to notice of, and to vote at, the Special Meeting and at any
postponements or adjournments thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE AT YOUR EARLIEST CONVENIENCE.
H. William Willoughby
SECRETARY
Rockville, Maryland
April 28, 1995
<PAGE>
CRIIMI MAE INC.
THE CRI BUILDING
11200 ROCKVILLE PIKE
ROCKVILLE, MARYLAND 20852
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 21, 1995
INTRODUCTION
This Proxy Statement is furnished to holders of Common Stock, par value
$0.01 per share (the "Common Shares"), of CRIIMI MAE Inc., a Maryland
corporation ("CRIIMI MAE"), in connection with the solicitation by the Board of
Directors of CRIIMI MAE (the "Board") of proxies to be used at the Special
Meeting of Stockholders of CRIIMI MAE to be held at the Hyatt Regency Bethesda,
One Metro Center, Bethesda, Maryland, on June 21, 1995, at 10:00 a.m., local
time, and at any adjournments or postponements thereof (the "Special Meeting").
This Proxy Statement and the enclosed proxy card are being first sent to
stockholders on or about April 28, 1995.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the Agreement and Plan of Merger, dated as of April 20, 1995
(the "Merger Agreement"), pursuant to which CRICO Mortgage Company, Inc. ("CRICO
Mortgage"), CRI/AIM Management, Inc. ("CRI/AIM Management") and CRI Acquisition,
Inc. ("CRI Acquisition") will be merged with and into CRIIMI MAE Management,
Inc. ("CRIIMI Management"), a newly formed Maryland corporation and a wholly
owned subsidiary of CRIIMI MAE (the "Merger"), and related transactions
(collectively, the "Merger Proposal"), all as more fully described in this Proxy
Statement. If the Merger is completed, CRIIMI MAE will be a fully integrated,
self-administered and self-managed mortgage investment, advisory, servicing and
origination real estate investment trust ("REIT").
CRICO Mortgage, CRI/AIM Management and CRI Acquisition (collectively, the
"CRI Mortgage Businesses") are affiliates of C.R.I., Inc., a Delaware
corporation ("CRI"). CRI and its affiliates have 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 has originated
nearly $300 million in construction loans which eventually became part of CRI
sponsored public funds. CRICO Mortgage personnel have underwritten in excess of
$500 million of uninsured loans since 1991 and have assisted with the
underwriting and asset management of the more than $600 million in insured
investments held by the American Insured Mortgage Investors series of public
limited partnerships (the "AIM Funds"). In addition, CRICO Mortgage currently
acts as a loan servicer or special servicer for CRI affiliated entities and
third parties for loan portfolios consisting of 115 loans with an aggregate face
value of approximately $590 million in addition to assisting the Adviser
(defined below) with its activities on behalf of CRIIMI MAE.
CRI/AIM Management was formed in 1991 to act as subadviser to the AIM Funds,
which hold investments in insured mortgages. A subsidiary of CRIIMI MAE is the
general partner of the AIM Funds. CRI/AIM Management provides origination,
servicing and loan management services pursuant to its advisory agreements.
Another affiliate of CRI, CRI Insured Mortgage Associates Adviser Limited
Partnership (the "Adviser"), currently performs advisory services for CRIIMI MAE
pursuant to an advisory agreement (the "Advisory Agreement"). Immediately prior
to the Merger, the Advisory Agreement will be sold to CRI Acquisition, a newly
formed entity. Together, the CRI Mortgage Businesses employ 33 persons to
perform their activities.
William B. Dockser and H. William Willoughby (the "Principals"), who are
directors and senior executive officers of CRIIMI MAE, are the sole stockholders
and directors of CRI and each of the CRI Mortgage Businesses.
<PAGE>
The consideration to be paid by CRIIMI MAE (measured on the day the Merger
Agreement was executed) is believed by the Board and the Special Committee
(defined below) to total approximately $30,300,000. The principal components of
the consideration are Common Shares, the assumption of debt and options to
purchase Common Shares. The value of the Common Shares is based on a closing
price of $7.125 per share on the day the Merger Agreement was executed. See "The
Merger Proposal -- Considerations and Events Leading to the Merger" and " --
Opinion of Duff & Phelps."
As part of the consideration to be paid in the Merger, CRIIMI MAE will issue
a total of 2,650,838 Common Shares to the Principals, subject to a maximum
aggregate market value of $21,984,000 at the closing of the Merger (the
"Closing"). Half of the Common Shares being issued to the Principals will be
issued to each of the Principals and will vest immediately. The date of the
Closing is referred to herein as the "Closing Date."
At the Closing, CRIIMI MAE will issue, for services rendered in connection
with the Merger, to its four executive officers, Jay R. Cohen, Frederick J.
Burchill, Deborah A. Linn and Cynthia O. Azzara (the "Executive Officers"), a
total of 110,452 Common Shares, subject to a maximum aggregate market value of
$916,000 on the Closing Date. The Common Shares issued to the Executive Officers
will vest in three equal installments on the first three anniversaries of the
Closing Date.
The Executive Officers constitute the management group immediately below the
Principals. Mr. Cohen, Executive Vice President and Treasurer, is responsible
for CRIIMI MAE's day-to-day operations. Mr. Burchill, Executive Vice President,
is responsible for uninsured mortgage securities acquisitions, loan management
and servicing, asset management, and loan and acquisition underwriting. Ms.
Azzara, Senior Vice President and Chief Financial Officer, is responsible for
CRIIMI MAE's accounting and financial oversight and reporting. Ms. Linn, General
Counsel, is responsible for all of CRIIMI MAE's legal affairs.
The 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 of April 25, 1995, the last sale price per
Common Share as reported on the New York Stock Exchange ("NYSE") Composite Tape
was $7.25.
Pursuant to the Merger Agreement, CRIIMI Management will become liable for
certain debt of the CRI Mortgage Businesses in the principal amount of
approximately $9,100,000. (See "The Merger Proposal -- Benefits to the
Principals Resulting from the Merger Proposal -- Liability for Debt; Release
from Obligation.") The Merger Agreement is attached to this Proxy Statement as
APPENDIX A.
In connection with the Merger Proposal, the Principals and the Executive
Officers will enter into employment agreements with CRIIMI Management for terms
of five years and three years, respectively. In addition, each of the Principals
will receive from CRIIMI MAE options to purchase 1,000,000 Common Shares at
$1.50 per share more than the aggregate average of the high and low sale prices
of Common Shares on the NYSE during the ten trading days preceding the Closing
Date (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 will receive from
CRIIMI MAE options to purchase a total of 180,000 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' and the
Executive Officers' options expire on the eighth anniversary of the Closing
Date.
As a result of the consummation of the Merger Proposal, CRIIMI MAE will
become a fully integrated, self-administered and self-managed mortgage company,
engaging in not only its current activities but also in mortgage advisory,
servicing and origination activities.
The Board believes that the Merger Proposal, if consummated, should result
in the following benefits to CRIIMI MAE and its stockholders other than the
Principals (the "Public Stockholders"):
- Existing conflicts of interest between CRIIMI MAE and CRI and its
affiliates will be substantially eliminated.
2
<PAGE>
- CRIIMI MAE will be more attractive to institutional and other investors,
improving CRIIMI MAE's ability to raise capital.
- CRIIMI MAE will acquire the CRI Mortgage Businesses, including investment
advisory, servicing and origination capabilities and the Advisory
Agreement, other existing advisory and servicing agreements, and certain
other assets. As a result, CRIIMI MAE will expand its lines of business
and increase its revenues over what they would be without the Merger.
- CRIIMI MAE will have within its organization the proven expertise and
substantial experience of the Principals and the Executive Officers,
enhancing CRIIMI MAE's ability to manage its assets, including pursuit of
its strategy of increasing holdings of higher-yielding investments, and to
expand its lines of business.
See "The Merger Proposal."
Because the Principals are the sole owners of CRI and its affiliates, a
Special Committee of the Board (the "Special Committee") was appointed by the
Board to consider whether, and on what basis, CRIIMI MAE should become
self-administered and self-managed, including considering the Merger Proposal.
The three members of the Special Committee, Garrett G. Carlson, Sr., G. Richard
Dunnells and Robert F. Tardio, are neither affiliates of CRI or the CRI Mortgage
Businesses nor officers or employees of CRIIMI MAE.
The consideration to be paid by CRIIMI MAE pursuant to the Merger Proposal
was determined by negotiations between 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 ("Merrill Lynch"), the financial adviser to
CRIIMI MAE with respect to the Merger Proposal. See "The Merger Proposal --
Considerations and Events Leading to the Merger" concerning the negotiations and
"The Merger Proposal -- Opinion of Duff & Phelps -- Description of Analyses"
concerning the analyses used in evaluating the consideration payable by CRIIMI
MAE.
As discussed under "The Merger Proposal -- Alternatives to the Merger
Proposal," the Special Committee considered alternatives to the Merger Proposal,
including allowing the Advisory Agreement to expire in November 1995, and
concluded that the Merger Proposal will better serve the interests of CRIIMI MAE
and the Public Stockholders than any of these alternatives. See also "The Merger
Proposal -- Considerations and Events Leading to the Merger" and " -- Opinion of
Duff & Phelps." In evaluating the Merger Proposal, the Special Committee and the
Board have given careful consideration to, among other things, the opinion of
Duff & Phelps to the effect that the Merger Proposal is fair to CRIIMI MAE and
the Public Stockholders, from a financial point of view.
After considering all the factors that the Special Committee deemed
relevant, the Special Committee unanimously recommended the Merger Proposal to
the Board.
THE BOARD (WITH THE PRINCIPALS ABSTAINING) HAS UNANIMOUSLY APPROVED THE
MERGER PROPOSAL AND RECOMMENDS THAT YOU VOTE FOR THE MERGER PROPOSAL.
The Merger Proposal is conditioned upon, among other things, approval of the
holders of a majority of the Common Shares voted at a meeting where a quorum is
present. The presence, in person or by properly executed proxy, of the holders
of a majority of the outstanding Common Shares at the Special Meeting is
necessary to constitute a quorum at the Special Meeting. As of the record date
for the determination of stockholders of CRIIMI MAE entitled to vote at the
Special Meeting (the "Record Date") there were 26,888,456 Common Shares
outstanding.
If a stockholder is a participant in the CRIIMI MAE Dividend Reinvestment
and Stock Purchase Plan (the "Reinvestment Plan") and Common Shares have been
allocated to such person's account in the Reinvestment Plan, the enclosed proxy
card serves as voting instructions to the agent of the Reinvestment Plan. The
agent will only vote allocated Common Shares for which it has received such
direction.
3
<PAGE>
The principal executive offices of CRIIMI MAE, CRIIMI Management and the CRI
Mortgage Businesses are located at The CRI Building, 11200 Rockville Pike,
Rockville, Maryland 20852, and their telephone number at such location is (301)
468-9200.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY CRIIMI MAE
OR ANY OTHER PERSON.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INTRODUCTION............................................................................................... 1
SUMMARY.................................................................................................... 7
THE SPECIAL MEETING........................................................................................ 13
Matters to be Considered at the Special Meeting.......................................................... 13
Record Date; Voting at the Meeting....................................................................... 13
Proxies.................................................................................................. 13
DIVIDEND POLICY............................................................................................ 14
Adjusted Pro Forma Accretion to Tax Basis Income per Share............................................... 14
SELECTED FINANCIAL DATA.................................................................................... 16
THE MERGER PROPOSAL........................................................................................ 17
Recommendation of the Board.............................................................................. 17
Benefits from the Merger Proposal........................................................................ 17
Income Earned by CRI Mortgage Businesses................................................................. 18
Considerations and Events Leading to the Merger.......................................................... 19
Alternatives to the Merger Proposal...................................................................... 22
Opinion of Duff & Phelps................................................................................. 23
Financial Adviser........................................................................................ 29
Risks of the Merger Proposal to CRIIMI MAE and Stockholders of CRIIMI MAE................................ 29
Conflicts of Interest of Certain Persons in the Merger................................................... 32
Value of Principals to CRIIMI MAE........................................................................ 33
Benefits to the Principals Resulting from the Merger Proposal............................................ 34
Common Share Ownership After the Merger.................................................................. 39
Certain Relationships and Related Party Transactions..................................................... 39
Consequences of Failure to Approve the Merger............................................................ 41
Expenses................................................................................................. 42
Accounting Treatment..................................................................................... 42
Certain Federal Income Tax Consequences.................................................................. 42
Regulatory Matters....................................................................................... 46
No Appraisal Rights...................................................................................... 46
INFORMATION CONCERNING THE CRI MORTGAGE BUSINESSES......................................................... 46
CRICO Mortgage........................................................................................... 46
CRI/AIM Management....................................................................................... 48
Transactions with Services Corporation and Services Partnership.......................................... 48
CRI Acquisition.......................................................................................... 48
General.................................................................................................. 49
CRI MORTGAGE BUSINESSES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................................................ 50
DESCRIPTION OF THE MERGER AGREEMENT........................................................................ 53
General.................................................................................................. 53
Principal Features of the Merger......................................................................... 53
MARKET PRICE DATA.......................................................................................... 55
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 56
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 56
INDEPENDENT PUBLIC ACCOUNTANTS............................................................................. 57
</TABLE>
5
<PAGE>
<TABLE>
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PAGE
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<S> <C>
STOCKHOLDER PROPOSALS...................................................................................... 57
OTHER MATTERS.............................................................................................. 57
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
FINANCIAL STATEMENTS....................................................................................... F-2
APPENDIX A. Agreement and Plan of Merger
APPENDIX B. Opinion of Duff & Phelps Capital Markets Co.
APPENDIX C. CRI Mortgage Businesses: Cash Flow Analyses
</TABLE>
6
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION. REFERENCE IS MADE TO, AND
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION
APPEARING, OR INCORPORATED BY REFERENCE, IN THIS PROXY STATEMENT AND THE
APPENDICES HERETO. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN
THIS SUMMARY HAVE THE RESPECTIVE MEANINGS SET FORTH ELSEWHERE IN THIS PROXY
STATEMENT. STOCKHOLDERS ARE URGED TO READ THIS PROXY STATEMENT AND THE
APPENDICES HERETO IN THEIR ENTIRETY.
THE SPECIAL MEETING
<TABLE>
<S> <C>
DATE, PLACE AND TIME The Special Meeting of Stockholders of CRIIMI MAE is
scheduled to be held at 10:00 A.M., local time, on June
21, 1995, at the Hyatt Regency Bethesda, One Metro
Center, Bethesda, Maryland.
PURPOSE To consider and vote upon the Merger Proposal, pursuant
to which the CRI Mortgage Businesses will be merged with
and into CRIIMI Managemeant and related transactions
will take place.
RECORD DATE April 24, 1995.
QUORUM AND VOTE REQUIRED The Merger Proposal is conditioned on the affirmative
vote of the holders of a majority of the Common Shares
voted at a meeting where a quorum is present, as
required by the NYSE. The presence, in person or by
properly executed proxy, of the holders of a majority of
the Common Shares outstanding and entitled to vote at
the Special Meeting is necessary to constitute a quorum
at the Special Meeting. On the Record Date, 26,888,456
Common Shares were outstanding.
THE MERGER PROPOSAL
RECOMMENDATION OF BOARD The Special Committee, consisting of all of the members
of the Board who are unaffiliated with CRI and its
affiliates, believes that the Merger Proposal is fair
to, and in the best interests of, CRIIMI MAE and the
Public Stockholders. The Special Committee unanimously
recommended the Merger Proposal to the Board and the
Board unanimously (with the Principals abstaining)
approved the Merger Proposal and recommends that the
stockholders approve the Merger Proposal.
BENEFITS FROM THE MERGER PROPOSAL As a result of the consummation of the Merger Proposal,
CRIIMI MAE will become a fully integrated,
self-administered and self-managed mortgage company,
engaging in not only its current activities but also in
mortgage advisory, servicing and origination activities.
The Board believes that the Merger Proposal, if con-
summated, should result in the following benefits to
CRIIMI MAE and the Public Stockholders:
- Existing conflicts of interest between CRIIMI MAE and
CRI and its affiliates will be substantially eliminated.
- CRIIMI MAE will be more attractive to institutional
and other investors, improving CRIIMI MAE's ability to
raise capital.
- CRIIMI MAE will acquire the CRI Mortgage Businesses,
including investment advisory, servicing and
origination capabilities and the Advisory Agreement,
other existing advisory
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
and servicing agreements, and certain other assets.
As a result, CRIIMI MAE will expand its lines of
business and increase its revenues over what they
would be without the Merger.
- CRIIMI MAE will have within its organization the
proven expertise and substantial experience of the
Principals and the Executive Officers, enhancing
CRIIMI MAE's ability to manage its assets, including
pursuit of its strategy of increasing holdings of
high-yielding investments, and to expand its lines of
business.
There can be no assurance, however, that these benefits
will be realized. See "The Merger Proposal."
OPINION OF FINANCIAL ADVISER On April 20, 1995, Duff & Phelps rendered a written
opinion to the Special Committee and the Board that the
Merger Proposal is fair, from a financial point of view,
to CRIIMI MAE and the Public Stockholders (the
"Opinion"). See "The Merger Proposal -- Opinion of Duff
& Phelps." Stockholders are urged to read in its
entirety the copy of the Opinion, which sets forth the
assumptions made and matters considered, attached to
this Proxy Statement as APPENDIX B.
PRINCIPAL FEATURES OF THE MERGER The Merger Proposal, if consummated, will involve a
PROPOSAL number of related transactions that will combine the
businesses and assets of the CRI Mortgage Businesses in
entities under the control of CRIIMI MAE.
In connection with the Merger, all of the activities of
the CRI Mortgage Businesses will be transferred or
merged into CRIIMI Management and its affiliates. The
agreements of the CRI Mortgage Businesses which relate
to services provided to third parties, affiliates of CRI
and the AIM Funds will be owned by CRIIMI MAE Services
Limited Partnership, a newly formed Maryland limited
partnership (the "Services Partnership"). CRIIMI Man-
agement will be the sole general partner of the Services
Partnership, with an 8% interest, and as such will have
full and complete management control over the business
and assets of the Services Partnership. The sole limited
partner of the Services Partnership, with a 92%
interest, will be CRIIMI MAE Services, Inc., a newly
formed Maryland corporation (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 interests therein. See
Note 4 to the table on the following page.
Pursuant to the Merger Proposal, CRIIMI Management will
employ the persons who were previously employed by the
CRI Mortgage Businesses.
</TABLE>
8
<PAGE>
The basic organizational structure of CRIIMI MAE following the consummation
of the Merger Proposal will be as shown in the following illustration:
[CHART]
(1) The ownership of the outstanding Common Shares before and after the Merger
is as follows:
<TABLE>
<CAPTION>
BEFORE THE AFTER THE
MERGER MERGER
----------- -----------
<S> <C> <C>
Principals........................................................................ 1.2% 10.0%
Public Stockholders............................................................... 98.8% 90.0%
</TABLE>
These percentages assume the issuance to the Principals of 2,650,838 Common
Shares. The percentages do not include 3,000,000 Common Shares issuable upon
the exercise of options to be granted to the Principals which vest in five
equal annual installments, commencing more than 60 days after the Closing
Date. See "The Merger Proposal -- Benefits to the Principals Resulting from
the Merger Proposal."
(2) CRIIMI, Inc. is the sole general partner of the AIM Funds.
(3) CRIIMI Management will be the successor by merger to the CRI Mortgage
Businesses, exclusive of the agreements of the CRI Mortgage Businesses
relating to services provided to third parties, affiliates of CRI and the
AIM Funds; these agreements will be owned by the Services Partnership.
(4) CRIIMI MAE will own 100% of the non-voting common stock (which shares are
entitled to 95% of the dividends) of the Services Corporation. All of the
voting common stock of the Services Corporation (which shares are entitled
to 5% of the dividends) will be owned as follows:
Principals 50%
Executive Officers 50%
<TABLE>
<S> <C>
In addition, the Merger Proposal will involve the
following transactions:
- 2,761,290 Common Shares will be issued to the
Principals and the Executive Officers, subject to a
maximum aggregate market value on the Closing Date of
$22,900,000. The Common Shares may not be sold or
otherwise transferred, with certain exceptions, for
three years.
- CRIIMI Management will become liable for
approximately $9,100,000 of debt of the CRI Mortgage
Businesses.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
- CRIIMI Management will enter into employment agree-
ments with the Principals and the Executive Officers,
and CRIIMI MAE will grant options for Common Shares
to the Principals and the Executive Officers. See "--
Management of CRIIMI MAE after the Merger."
- The Principals and the Executive Officers will
purchase all of the voting stock of the Services
Corporation, constituting 5% of the total common
stock of the Services Corporation, for a total of
$15,000. See "The Merger Proposal -- Benefits to the
Principals Resulting from the Merger Proposal --
Services Corporation Shares."
- The Principals will enter into deferred compensation
agreements, and receive payments thereunder, at no cost
to CRIIMI MAE. See "The Merger Proposal -- Benefits
to the Principals Resulting from the Merger Proposal
-- Deferred Compensation."
MANAGEMENT OF CRIIMI MAE AFTER THE In connection with the Merger, it is anticipated that
MERGER all of the employees of the CRI Mortgage Businesses will
be employed by CRIIMI Management. The current directors
and officers of CRIIMI MAE will retain their positions
in CRIIMI MAE. CRIIMI MAE anticipates that its current
directors and officers will be elected to corresponding
positions in CRIIMI Management.
Each of the Principals will enter into an employment
agreement with CRIIMI Management for a term of five
years with a minimum annual salary of $125,000. In
addition, CRIIMI MAE will grant options to each
Principal to purchase 1,000,000 Common Shares at $1.50
per share more than 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 and expire on the
eighth anniversary of the Closing Date.
Each of these employment agreements provides that,
following the Merger and for at least six years after
the Closing Date (unless CRIIMI Management breaches its
obligations under the agreement), the Principal will not
compete with CRIIMI MAE or CRIIMI MAE's affiliated
entities. The employment agreements will require each
Principal to devote the substantial portion of his time
to the affairs of CRIIMI MAE and CRIIMI MAE's affiliat-
ed entities, except that each of them may devote time to
his other existing business activities; provided that
the time devoted to such other business activities does
not interfere with the performance of his duties to
CRIIMI MAE and its affiliated entities. The employment
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
business of CRIIMI MAE and its affiliated entities.
CRI, through the Adviser, will continue to act as the
adviser to CRI Liquidating REIT, Inc. ("CRI
Liquidating"), which is expected to be fully liquidated
by 1997 in accordance with its business plan. Pursuant
to the Merger Proposal, the Adviser will enter into an
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
arrangement with CRIIMI Management whereby employees of
CRIIMI Management will perform such advisory function on
behalf of the Adviser and CRIIMI MAE will be reimbursed,
at cost, for the services of such employees. CRI will
continue to receive all advisory fees from CRI
Liquidating pursuant to an existing advisory agreement
between the Adviser and CRI Liquidating. See "The Merger
Proposal -- Certain Relationships and Related Party
Transactions -- CRI Liquidating Advisory Agreement" and
"The Merger Proposal -- Risks of the Merger Proposal to
Stockholders of CRIIMI MAE."
The Executive Officers will enter into three-year
employment agreements and receive options for a total of
180,000 Common Shares. See "The Merger Proposal --
Certain Relationships and Related Party Transactions --
Employment and Non-Competition Agreements; Options."
RISKS OF THE MERGER PROPOSAL TO The Merger Proposal will result in certain risks to
STOCKHOLDERS OF CRIIMI MAE CRIIMI MAE's stockholders, including the exposure of
CRIIMI MAE to risks associated with mortgage advisory,
servicing and origination businesses, the lack of
independent appraisals of the CRI Mortgage Businesses,
the influence of the Principals as senior executive
officers, directors and significant stockholders of
CRIIMI MAE, the potential impact on the price of Common
Shares, certain aspects of the Merger Proposal which may
impose additional risks on CRIIMI MAE's continued
qualification as a REIT and conflicts of interest
arising in connection with the businesses retained by
the Principals. See "The Merger Proposal -- Risks of the
Merger Proposal to CRIIMI MAE and Stockholders of
CRIIMI MAE."
BENEFITS OF THE MERGER PROPOSAL TO The Merger Proposal, if consummated, will result in the
THE PRINCIPALS following benefits to the Principals:
- ISSUANCE OF COMMON SHARES. The Principals will
receive 2,650,838 Common Shares, subject to a maximum
aggregate market value on the Closing Date of
$21,984,000.
- LIABILITY FOR DEBT. CRIIMI Management will become
liable pursuant to the Merger for aggregate indebtedness
of approximately $9,100,000 of the CRI Mortgage
Businesses, and the Principals, CRI and its
affiliated entities will be released from their
obligations with respect to that debt. See "The
Merger Proposal -- Benefits to the Principals
Resulting from the Merger Proposal -- Liabilities for
Debt; Release from Obligation."
- EMPLOYMENT AND NON-COMPETITION AGREEMENTS; OP-
TIONS.CRIIMI Management will enter into five-year
employment agreements with each of the Principals,
with non-competition provisions. Each of the
Principals' agreements will provide for a minimum
annual salary of $125,000. Each Principal will
receive options, which vest in equal installments on
the first five anniversaries of the Closing Date, to
purchase 1,500,000 Common Shares. The options expire
on the eighth anniversary of the Closing Date.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
- SHARES IN SERVICES CORPORATION. Each of the
Principals will purchase at the Closing 25% of the
voting common stock of the Services Corporation. See
"The Merger Proposal -- Benefits to the Principals
Resulting from the Merger Proposal -- Services
Corporation Shares." (The balance of the voting
common stock of the Services Corporation will be
purchased by the Executive Officers.) All of the
shares of voting common stock are entitled to a total
of 5% of the dividends of the Services Corporation.
- DEFERRED COMPENSATION. The Principals will enter into
deferred compensation agreements, and receive payments
thereunder, at no cost to CRIIMI MAE. See "The Merger
Proposal -- Benefits to the Principals Resulting from
the Merger Proposal -- Deferred Compensation."
- AVOIDANCE OF RISK OF NONRENEWAL OF ADVISORY
AGREEMENT. The Principals will not have to bear the risk
that the Advisory Agreement will not be renewed and
the resulting loss of substantial income. See "The
Merger Proposal -- Benefits to the Principals
Resulting from the Merger Proposal -- Avoidance of
Risk of Nonrenewal of Advisory Agreement."
See "The Merger Proposal -- Benefits to the Principals
Resulting from the Merger Proposal."
CONFLICTS OF INTEREST OF CERTAIN The Principals are the sole stockholders and directors
PERSONS IN THE MERGER PROPOSAL of CRI and the CRI Mortgage Businesses and are directors
and senior executive officers of CRIIMI MAE.
Substantially all of CRIIMI MAE's other executive
officers are executive officers of CRI and the CRI
Mortgage Businesses. See "The Merger Proposal --
Conflicts of Interest of Certain Persons in the Merger"
and "-- Certain Relationships and Related Party
Transactions."
CLOSING DATE OF THE MERGER If the Merger Proposal is approved by the requisite vote
of stockholders of CRIIMI MAE and the other conditions
to the Merger are satisfied or waived, it is expected
that the Merger will be consummated on or prior to June
30, 1995.
CONDITIONS OF THE MERGER; The consummation of the Merger is conditioned upon the
TERMINATION fulfillment or waiver of certain conditions set forth in
the Merger Agreement. See "Description of the Merger
Agreement -- Principal Features of the Merger --
Conditions to Closing." The Merger Agreement may be
terminated by either CRIIMI MAE or the CRI Mortgage
Businesses if the Closing does not occur on or prior to
September 15, 1995. See "The Merger Agreement --
Principal Features of the Merger -- Termination and
Amendment."
CERTAIN FEDERAL INCOME TAX Consummation of the Merger Proposal will not be a
CONSEQUENCES taxable event for federal income tax purposes for the
stockholders of CRIIMI MAE. See "The Merger Proposal --
Certain Federal Income Tax Consequences."
ACCOUNTING TREATMENT The Merger will be treated as a purchase for accounting
purposes.
NO APPRAISAL RIGHTS Under the Maryland General Corporation Law ("Maryland
Law"), holders of Common Shares will not be entitled to
rights of appraisal in connection with the Merger.
</TABLE>
12
<PAGE>
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the stockholders of CRIIMI MAE will be asked: (1) to
consider and vote upon the Merger Proposal and (2) to transact such other
business relating to the purposes for which the Special Meeting was called, or
ancillary to the conduct thereof, as may properly come before the Special
Meeting.
The Board unanimously (with the Principals abstaining) approved the Merger
Proposal and recommends a vote FOR approval of the Merger Proposal by the
stockholders of CRIIMI MAE. See "The Merger Proposal -- Recommendation of the
Board and Reasons for the Merger."
RECORD DATE; VOTING AT THE MEETING
On the Record Date, April 24, 1995, there were 26,888,456 Common Shares
outstanding. Each holder of record of Common Shares on the Record Date is
entitled to cast one vote per Common Share, exercisable in person or by properly
executed proxy, upon each matter properly submitted for the vote of the
stockholders at the Special Meeting.
The Merger Proposal is conditioned on, among other things, the affirmative
vote of the holders of a majority of the Common Shares voted at a meeting where
a quorum is present. The presence, in person or by properly executed proxy, of
the holders of a majority of the Common Shares outstanding is necessary to
constitute a quorum at the Special Meeting. Abstentions will be treated as
Common Shares that are present and entitled to vote for the purpose of
determining a quorum. Common Shares not voted by brokers but represented at the
Special Meeting will also be counted for the purpose of determining a quorum.
See "The Merger Proposal -- Conflicts of Interest of Certain Persons in the
Merger."
As of the Record Date, the Principals beneficially owned 318,594 Common
Shares (representing approximately 1.2% of the Common Shares outstanding on the
Record Date). Pursuant to the Merger Agreement, the Principals have agreed to
vote the Common Shares which they beneficially own in favor of the Merger
Proposal at the Special Meeting. It is anticipated that the Common Shares
beneficially owned and entitled to be voted by the officers and directors of
CRIIMI MAE (other than the Principals) also will be voted in favor of the Merger
Proposal. As of the Record Date, the officers and directors of CRIIMI MAE (other
than the Principals) beneficially owned 48,801 Common Shares (representing
approximately 0.2% of the Common Shares outstanding on the Record Date). See
"The Merger Proposal -- Conflicts of Interest of Certain Persons in the Merger"
and "Description of the Merger Agreement -- Principal Features of the Merger --
Additional Agreements."
PROXIES
This Proxy Statement is being furnished to stockholders of CRIIMI MAE in
connection with the solicitation of proxies by and on behalf of the Board for
use at the Special Meeting. All Common Shares that are entitled to vote and are
represented at the Special Meeting by properly executed proxies received and not
duly and timely revoked will be voted at the Special Meeting in accordance with
the instructions contained therein. IN THE ABSENCE OF CONTRARY INSTRUCTIONS,
SUCH COMMON SHARES WILL BE VOTED FOR THE APPROVAL OF THE MERGER PROPOSAL.
Any proxy given pursuant to this solicitation may be revoked at any time
prior to its exercise by the execution of a proxy card signed at a later date or
by the giving of written notice of revocation to the Secretary of CRIIMI MAE.
Furthermore, a stockholder giving a proxy may revoke such proxy by attending the
Special Meeting and voting his or her Common Shares in person. However, a
revocation during the Special Meeting will not affect any vote previously taken.
All expenses of this solicitation will be borne by CRIIMI MAE. CRIIMI MAE
will request banks, brokers and other persons holding Common Shares beneficially
owned by others to send proxy materials to the beneficial owners and to secure
their voting instructions, if any. CRIIMI MAE will reimburse such persons for
their expenses in so doing. In addition to solicitation by mail, officers and
regular employees of CRIIMI MAE may, without extra remuneration, solicit proxies
personally, by telephone or by telegram from
13
<PAGE>
some stockholders, if such proxies are not promptly received. CRIIMI MAE also
expects to retain MacKenzie Partners, Inc., a proxy soliciting firm, to assist
in the solicitation of such proxies at a cost which will not exceed $7,500 plus
reasonable expenses.
DIVIDEND POLICY
CRIIMI MAE has paid consecutive quarterly dividends since its inception. In
order to retain its status as a REIT, CRIIMI MAE is generally required to
distribute to its stockholders at least 95% of its taxable income. Quarterly
dividends for 1993 and 1994 were as follows:
<TABLE>
<CAPTION>
DIVIDENDS PAID
--------------------
QUARTER ENDED: 1993 1994
- --------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31................................................. $ 0.28 $ 0.29
June 30.................................................. 0.28 0.29
September 30............................................. 0.28 0.29
December 31.............................................. 0.28 0.29
--------- ---------
Total................................................ $ 1.12 $ 1.16
</TABLE>
For each of the years 1990 through 1994, CRIIMI MAE's dividend setting
policy was to pay quarterly dividends to stockholders, primarily based on each
year's projected tax basis earnings. Total dividends per share as a percentage
of tax basis income per share was approximately 98%, 99%, 101%, 98%, and 99%,
respectively, for 1990, 1991, 1992, 1993 and 1994. CRIIMI MAE does not expect to
change its dividend setting policy as a result of the Merger Proposal.
CRIIMI MAE's current dividend policy, like its past policy, is to pay
quarterly dividends to its stockholders, based on projected tax basis earnings.
On March 31, 1995, CRIIMI MAE paid a first quarter 1995 dividend of 22.5 cents
per share, which was primarily based on total projected tax basis earnings for
1995 and on CRIIMI MAE's intention to distribute substantially all of such
earnings in 1995. This anticipated dividend level for 1995 of 90 cents per share
includes assumptions regarding interest rates, the amount and timing of
additional investments in subordinated securities, and other factors.
CRIIMI MAE believes that its estimate of pro forma tax basis income per
share before the Merger and after the Merger, as adjusted, constitutes a
reasonable basis for establishing the accretion per share of the Merger Proposal
because tax basis income is its primary basis for paying dividends to
stockholders. CRIIMI MAE believes the Merger Proposal is not dilutive, except as
described below, and should be accretive to its stockholders because the
increase in the revenue streams from the CRI Mortgage Businesses and the
reduction in CRIIMI MAE's annual expenses, as a result of the termination of the
Advisory Agreement, result in additional tax basis income, on a per share, pro
forma basis.
As reflected on page F-4, the reduction in pro forma financial statement net
income per share for 1994 of $0.07 as compared to CRIIMI MAE's historical net
income per share is primarily the result of non-cash expenses arising from the
amortization of acquired assets from the Merger Proposal. The majority of these
expenses are not deductible for income tax purposes and are added back to
determine tax basis income per share.
The table below adjusts pro forma tax basis income before the Merger and
after the Merger for the year ended December 31, 1994 based on mortgage
investments on its balance sheet as of December 31, 1994, as annualized, for the
adjustments discussed below. This analysis is not intended to represent pro
forma tax basis income per share in accordance with generally accepted
accounting principles. Actual results of CRIIMI MAE are impacted by a variety of
factors such as economic conditions, interest rate changes and changes to its
business, such as acquisitions and dispositions of mortgage investments, and may
vary substantially from the analysis below.
ADJUSTED PRO FORMA ACCRETION TO TAX BASIS INCOME PER SHARE
The following table illustrates a comparison between CRIIMI MAE's pro forma
results from operations on a tax basis before the Merger and after the Merger as
presented on page F-12 of the unaudited pro
14
<PAGE>
forma financial statements to illustrate the impact of annualizing revenues and
expenses based on assets and liabilities as of December 31, 1994 to demonstrate
the accretion to tax basis income per share from the Merger Proposal.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------
PRO FORMA TAX PRO FORMA TAX
BASIS INCOME BASIS INCOME
BEFORE MERGER AFTER MERGER
---------------- ----------------
<S> <C> <C>
Tax Basis Income............................................................. $ 29,606,423(1) $ 33,829,065
Adjustments for impact of annualization:
(2) Increase in mortgage income
(CRIIMI MAE).............................................................. 4,728,375 4,728,375
(3) Decrease in mortgage income
(CRI Liquidating)......................................................... (1,797,109) (1,797,109)
(4) Increase in income from subordinated securities.......................... 4,687,904 4,687,904
(5) Increase in interest expense............................................. (10,682,904) (10,682,904)
(6) Increase in annual fees.................................................. (426,068) --
(7) Decrease in servicing fees............................................... -- (141,091)
---------------- ----------------
Tax Basis Income, As Adjusted............................................ $ 26,116,621 $ 30,624,240
---------------- ----------------
---------------- ----------------
(8) Weighted Average Shares Outstanding for Tax Purposes..................... 25,725,979 28,487,269
---------------- ----------------
---------------- ----------------
Tax Basis Income per Share, As Adjusted...................................... $ 1.015 $ 1.075
---------------- ----------------
---------------- ----------------
ACCRETION ON AN ADJUSTED PRO FORMA BASIS, PER SHARE FOR THE YEAR ENDED
12/31/94.................................................................... $ .060
----------------
<FN>
- ------------------------
(1) Based on actual tax basis income for the year ended December 31, 1994 as
shown in CRIIMI MAE's Form 10-K for the related period.
(2) Represents the adjustment to mortgage income to reflect the interest income
that would be earned for a year from CRIIMI MAE's mortgage investments,
with an original purchase price of approximately $709 million as of
December 31, 1994, as if those investments were made as of January 1, 1994,
as compared to the actual mortgage income for the year ended December 31,
1994.
(3) Represents the adjustment to mortgage income to reflect the interest income
that would be earned for a year from CRI Liquidating's mortgage
investments, with an original purchase price of approximately $167 million
as of December 31, 1994, as if those investments were made as of January 1,
1994, as compared to the actual mortgage income for the year ended December
31, 1994. The amounts shown represent CRIIMI MAE's interest in CRI
Liquidating's mortgage income, net of minority interest.
(4) Represents the adjustment to reflect the income from investments in
subordinated securities that would be earned for a year from CRIIMI MAE's
investment in subordinated securities with an original purchase price of
approximately $39 million as of December 31, 1994, as if those investments
were made as of January 1, 1994 as compared to the actual income from
subordinated securities, for the year ended December 31, 1994.
(5) Represents the interest expense that would have been incurred to fund the
mortgage investments referred to in (2) and (4) above for a year based on
actual debt outstanding as of December 31, 1994 as compared to the actual
interest expense for the year ended December 31, 1994. The calculation
assumes a weighted average cost of borrowing of 7.00%, reset at current
(April 20, 1995) rates.
(6) Represents the additional annual fees that CRIIMI MAE would have incurred
had the existing mortgage investments referred to in (2) and (4) above been
in place for the full year as compared to the actual annual fee incurred
for the year ended December 31, 1994. The fee is assumed at 40 basis points
per annum of the average investment balance. This is not an adjustment in
the pro forma after Merger column since the annual fee would not be paid if
CRIIMI MAE was self-administered.
(7) Reflects the decrease in servicing fee income that would be earned for a
year from contracts in place as of December 31, 1994 as compared to the
actual servicing fee income for the year ended December 31, 1994.
(8) Reflects all shares issued and outstanding as of December 31, 1994, as if
the shares were outstanding all year. The shares after the Merger include
an assumed 2,761,290 shares issued in connection with the Merger.
</TABLE>
15
<PAGE>
SELECTED FINANCIAL DATA
The following historical selected financial data have been derived from and
should be read in conjunction with the consolidated historical financial
statements of CRIIMI MAE incorporated by reference in this Proxy Statement.
The selected balance sheet data at December 31, 1994 and the selected income
statement data for the year ended December 31, 1994 have been adjusted to
reflect the impact of the Merger Proposal, as if all transactions had occurred,
for purposes of the balance sheet data, on December 31, 1994 and, for purposes
of the income statement data, on January 1, 1994 and, accordingly, are included
from the beginning of all periods shown. This data should be read in conjunction
with the "Unaudited Pro Forma Financial Information" and the related notes
thereto. This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the Merger
had been effected on the dates indicated or of the results which may be obtained
in the future.
SELECTED PRO FORMA AND HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31, 1994
---------------------------
CRIIMI MAE CRIIMI MAE
HISTORICAL PRO FORMA
------------ ------------
(UNAUDITED)
<S> <C> <C>
TAX BASIS ACCOUNTING
Tax basis income................................................................ $ 29,606,423 $ 33,829,065
------------ ------------
------------ ------------
Tax basis income per share...................................................... $1.17 $1.21
------------ ------------
------------ ------------
Weighted average shares outstanding............................................. 25,309,560 28,070,850
------------ ------------
------------ ------------
ACCOUNTING UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Total revenue................................................................... $ 71,441,800 $ 73,199,268
Total expenses.................................................................. 46,727,888 47,506,325
------------ ------------
Income before mortgage dispositions and minority interest....................... 24,713,912 25,692,943
Net gain on mortgage dispositions............................................... 12,999,308 12,999,308
Minority interest............................................................... (11,703,101) (11,703,101)
------------ ------------
Net income...................................................................... $ 26,010,119 $ 26,989,150
------------ ------------
------------ ------------
Net income per share............................................................ $1.07 $1.00
------------ ------------
------------ ------------
Weighted average shares outstanding............................................. 24,249,403 27,010,693
------------ ------------
<CAPTION>
AS OF DECEMBER 31, 1994
---------------------------
HISTORICAL PRO FORMA
------------ ------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA
Investment in mortgages......................................................... $857,589,329 $857,589,329
Total assets.................................................................... 955,050,001 990,309,808
Total liabilities............................................................... 635,390,896 649,493,079
Minority interest............................................................... 69,617,184 69,617,184
Net book value.................................................................. $250,041,921 $271,199,545
Net book value per share........................................................ $9.72 $9.52
Tangible net book value......................................................... $235,603,089 $223,439,889
Tangible net book value per share............................................... $9.16 $7.84
</TABLE>
16
<PAGE>
THE MERGER PROPOSAL
RECOMMENDATION OF THE BOARD
THE BOARD (WITH THE PRINCIPALS ABSTAINING) HAS UNANIMOUSLY APPROVED THE
MERGER PROPOSAL HAVING DETERMINED THAT THE MERGER PROPOSAL IS FAIR TO AND IN THE
BEST INTERESTS OF CRIIMI MAE AND THE PUBLIC STOCKHOLDERS. THE BOARD (WITH THE
PRINCIPALS ABSTAINING) UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
MERGER PROPOSAL.
BENEFITS FROM THE MERGER PROPOSAL
As a result of the consummation of the Merger Proposal, CRIIMI MAE will
become a fully integrated, self-administered and self-managed mortgage company,
engaging in not only its current activities but also in mortgage advisory,
servicing and origination activities.
The Board believes that the Merger Proposal, if consummated, should result
in the following specific benefits to CRIIMI MAE and the Public Stockholders:
- Existing conflicts of interest between CRIIMI MAE and CRI and its
affiliates will be substantially eliminated.
- CRIIMI MAE will be more attractive to institutional and other investors,
improving CRIIMI MAE's ability to raise capital.
- CRIIMI MAE will acquire the CRI Mortgage Businesses, including investment
advisory, servicing and origination capabilities and the Advisory
Agreement, other existing advisory and servicing agreements, and certain
other assets. As a result, CRIIMI MAE will expand its lines of business
and increase its revenues over what they would be without the Merger.
- CRIIMI MAE will have within its organization the proven expertise and
substantial experience of the Principals and the Executive Officers,
enhancing CRIIMI MAE's ability to manage its assets, including pursuit of
its strategy of increasing holdings of higher yielding investments, and to
expand its lines of business.
There can be no assurance, however, that these benefits, each of which is
discussed in the paragraphs that follow, will be realized.
As an externally-managed REIT, CRIIMI MAE may have interests that are
different from those of the Adviser, an affiliate of CRI. Though at the time
CRIIMI MAE was formed external management of REITs was common, external
management is no longer prevalent because of perceived conflicts. Some persons
in the investment community involved with REITs believe that, notwithstanding an
adviser's fiduciary obligations, an adviser which is paid primarily on the basis
of assets invested would seek to increase those assets without emphasizing the
profitability of the client. Thus, there is a belief that it is preferable to
more closely align the interests of advisers and their REIT clients. Under the
Merger Proposal, fees formerly based in part on assets invested will be replaced
by the Principals' interests as stockholders of CRIIMI MAE, aligned with the
interests of the Public Stockholders. The Board and the Special Committee
believe that the Merger Proposal is the preferable alternative for reducing
conflicts of interest. See "-- Considerations and Events Leading to the Merger"
and "-- Alternatives to the Merger Proposal."
Merrill Lynch, CRIIMI MAE's financial adviser with respect to the Merger
Proposal, advised CRIIMI MAE that self-administered and self-managed REITs are
generally more attractive to institutional and other investors than externally
advised REITs and have recently traded at higher multiples than have externally
advised REITs. Merrill Lynch and Duff & Phelps suggested that self-administered
and self-managed REITs generally have had greater access to sources of equity
capital than other REITs. Though it is not possible to quantify the benefit, the
Board and the Special Committee believe that the consummation of the Merger
Proposal will improve CRIIMI MAE's ability to raise capital. See "--
Considerations and Events Leading to the Merger."
17
<PAGE>
The CRI Mortgage Businesses have been involved in mortgage origination,
underwriting, investment and related activities for 20 years. CRIIMI MAE does
not now have any ownership interest in the CRI Mortgage Businesses. If the
Merger Proposal is consummated, CRIIMI MAE and its affiliates will obtain
contracts for rendering mortgage investment advice and providing loan servicing,
business activities in which it did not previously engage. Also, CRIIMI MAE and
its affiliates will employ the 33 people who were employees of the CRI Mortgage
Businesses, thus providing the necessary expertise for CRIIMI MAE and its
affiliates to perform and expand these activities. See "-- Considerations and
Events Leading to the Merger" and "-- Opinion of Duff & Phelps -- Description of
Analyses -- Pro Forma Merger Analysis."
Under the Merger Proposal, CRIIMI MAE will have employment and
non-competition agreements with the Principals and the Executive Officers. See
"-- Benefits to the Principals Resulting from the Merger Proposal -- Employment
and Non-Competition Agreements; Options" and "-- Certain Relationships and
Related Party Transactions -- Employment and Non-Competition Agreements;
Options." The Principals and Executive Officers are not currently subject to
employment agreements with CRIIMI MAE. The Board believes that retaining the
services of the Principals and the Executive Officers, who have expertise in
management of both insured and uninsured mortgage investments, as well as in
servicing, origination and related activities, will enhance CRIIMI MAE's ability
to achieve its business objectives. The Special Committee considered and
rejected alternatives to the Merger Proposal as discussed under "-- Alternatives
to the Merger Proposal." See "-- Considerations and Events Leading to the
Merger."
Stockholders should carefully consider each of these factors and should also
carefully consider the pro forma financial information presented under
"Unaudited Pro Forma Financial Information" and "Dividend Policy" and the
potential risks of the Merger Proposal to the stockholders discussed under " --
Risks of the Merger Proposal to Stockholders of CRIIMI MAE." The Merger Proposal
will also result in certain benefits that will inure primarily to the
Principals. See "-- Benefits of the Merger Proposal to the Principals." For
background to the Merger Proposal, see "-- Considerations and Events Leading to
the Merger."
INCOME EARNED BY CRI MORTGAGE BUSINESSES
Since CRIIMI MAE's formation in 1989, CRIIMI MAE's portfolio and day-to-day
operations have been managed by the Adviser, which is an affiliate of CRI,
pursuant to the Advisory Agreement, which has been periodically amended and
renewed. The current Advisory Agreement between CRIIMI MAE and the Adviser
expires on November 21, 1995. The Advisory Agreement, absent a notice of
termination or non-renewal, is automatically renewed for successive three-year
terms, and may be terminated solely for cause (as defined in the Advisory
Agreement) by CRIIMI MAE or the Adviser. If CRIIMI MAE terminates the Advisory
Agreement other than for cause, or if the Adviser terminates the Advisory
Agreement for cause, in addition to compensation otherwise due, CRIIMI MAE would
be required to pay the Adviser a sum equal to the annual fee payable for the
previous fiscal year. If the Advisory Agreement is not renewed, no termination
fee is payable. After the Merger, CRIIMI MAE will no longer be obligated to make
payments under the Advisory Agreement. See "The Merger Proposal -- Opinion of
Duff & Phelps -- The Opinion -- Description of Analyses."
The CRI Mortgage Businesses receive annual fees for managing CRIIMI MAE's
portfolio, including a base component equal to a percentage of average invested
assets. In addition, CRIIMI MAE pays incentive fees, if certain performance
goals are met, and mortgage selection fees. For the year ended December 31,
1993, CRIIMI MAE paid the Adviser annual fees, incentive fees and mortgage
selection fees of $1,266,494, $213,972 and $2,416,253, respectively. For the
year ended December 31, 1994, CRIIMI MAE paid the Adviser annual fees, incentive
fees and mortgage selection fees of $2,567,101, $497,675 and $1,570,415,
respectively. In addition, for the fiscal years ended December 31, 1993 and
1994, CRIIMI MAE reimbursed the Adviser $707,110 and $1,524,440, respectively,
for general and administrative expenses incurred. These general and
administrative expenses, after the Merger, will be incurred directly by CRIIMI
MAE.
Payments earned by the CRI Mortgage Businesses for performing substantially
all of the management activities for the AIM Funds will be earned, after the
Merger, by CRIIMI MAE and its affiliates. The AIM Funds own mortgage investments
which are substantially similar to those owned by CRIIMI MAE. For the
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years ended December 31, 1993 and 1994, such payments to the CRI Mortgage
Businesses amounted to $2,063,476 and $2,008,316, respectively, before deduction
of guaranty payments. See "-- Benefits to the Principals Resulting from the
Merger Proposal -- Liability for Debt; Release from Obligation."
In addition, servicing fees, consulting fees and other income earned by
CRICO Mortgage from third parties and affiliates will be earned after the Merger
by the Services Partnership. For the years ended December 31, 1993 and 1994,
such payments amounted to $761,190 and $978,590, respectively.
CONSIDERATIONS AND EVENTS LEADING TO THE MERGER
In recent years the number of REITs formed and the average size of REITs
have grown dramatically. Institutional investors, including mutual funds and
pension funds, have contributed to this growth. These investors often prefer
REITs that are self-administered and self-managed, with an experienced
management team. The Board believes that self-administered and self-managed
REITs are preferred by institutional and other investors to externally-advised
REITs having otherwise similar characteristics and that therefore self-
administered and self-managed REITs have greater access to equity capital. In
reaching this conclusion, the Board considered, among other things, statistical
analyses compiled by CRIIMI MAE's financial adviser, Merrill Lynch, which
compared the trading patterns of self-administered and self-managed REITs and
suggested that self-administered and self-managed REITs have had greater access
to sources of equity capital than externally-advised REITs, and demonstrated
that shares of self-administered and self-managed REITs have traded at a higher
multiple to funds from operations than have externally-advised REITs. The Board
was also aware that CRIIMI MAE had received similar input from institutional
investors and other equity market participants to the same effect, in connection
with CRIIMI MAE's public underwritten offering of Common Shares in March 1994
and subsequent shelf-offerings of Common Shares.
The Board believes that CRIIMI MAE's best opportunities for growth are in
expansion of its lines of business and diversification of its investments.
Accordingly, the Board decided not only to consider becoming a self-managed and
self-administered REIT, but also to consider acquiring the CRI Mortgage
Businesses. Investments in government insured multifamily mortgages and
government insured or guaranteed multifamily construction loans will continue to
constitute the majority of CRIIMI MAE's total consolidated asset base. However,
the Board previously adopted a policy which permits CRIIMI MAE to invest up to
20% of its total consolidated assets in uninsured investments, such as
investments in higher yielding, higher risk subordinated securities. CRIIMI MAE
expects that investments in subordinated securities will represent a major
component of CRIIMI MAE's new business activity during the foreseeable future
because, in the current investment climate, such subordinated securities
represent an attractive investment opportunity. As of December 31, 1994, CRIIMI
MAE owned five tranches of subordinated securities (two BB-rated tranches, two
B-rated tranches and one unrated tranche), which were purchased for a total of
approximately $38,800,000 and have an aggregate face value of approximately
$54,000,000.
The subordinated securities are generally issued by REMICs and are
collateralized by multifamily and other commercial mortgages. While the risk of
investments in subordinated securities is greater than in insured mortgage
investments, thorough due diligence and close monitoring of the performance of
the underlying mortgages can help reduce this risk. In addition, the risk of
substantial yield fluctuations resulting from unpredictable interest rate
changes can be reduced by investing in subordinated securities where the
underlying mortgages have substantial lockout periods and prepayment penalties.
CRIIMI MAE also believes that the ability to understand and deal with the
performance of the properties which secure the underlying mortgages is necessary
to effectively manage these investments, and believes that the CRI Mortgage
Businesses have such capability as a result of their experience in loan
underwriting, origination and servicing. The Board believes that the acquisition
of the CRI Mortgage Businesses will enable CRIIMI MAE to internalize these
capabilities, which CRIIMI MAE believes will become increasingly important to
the achievement of its investment objectives. Also, as a result of this
acquisition, CRIIMI MAE anticipates that the mortgage servicing business, and
the fees associated with such business, will increase as its investments in
subordinated securities increase. Thus, the Merger Proposal is consistent with
the Board's previously adopted change in CRIIMI MAE's investment policies.
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In June 1994, Mr. Dockser consulted with Merrill Lynch about the possibility
of CRIIMI MAE's becoming a self-administered and self-managed REIT. On September
29, 1994, the Board met and heard a presentation from the Principals concerning
CRIIMI MAE's becoming self-administered and self-managed through the acquisition
of the mortgage investment, advisory, servicing and originating businesses of
the CRI Mortgage Businesses in exchange for Common Shares and other
consideration (the "September 29 Proposal"). Merrill Lynch participated in such
presentation. The Board at that meeting authorized the formation of the Special
Committee, consisting of the three unaffiliated members of the Board, Messrs.
Carlson, Dunnells and Tardio, to consider whether, and on what basis, CRIIMI MAE
should become self-administered and self-managed, including consideration of the
September 29 Proposal. The Board engaged Merrill Lynch to act as CRIIMI MAE's
financial adviser in connection with the proposed transactions, and authorized
the Special Committee to retain a separate financial institution to be selected
by the Special Committee to advise it with respect to the September 29 Proposal
and to render an opinion concerning the fairness of any proposed transaction to
CRIIMI MAE and the Public Stockholders from a financial point of view.
Under the September 29 Proposal, CRIIMI MAE would acquire the CRI Mortgage
Businesses in exchange for the issuance to the Principals of a maximum of
3,200,000 Common Shares with a maximum aggregate market value at the time of
issuance of $32,000,000 and contingent shares having an aggregate market value
at the time of issuance of $8,500,000. In addition, CRIIMI Management would have
assumed debt of the CRI Mortgage Businesses in the aggregate amount of
approximately $8,000,000. The Special Committee agreed to consider the
Principals' proposal and engaged Duff & Phelps to act as its financial adviser
with a view to expressing an opinion as to whether the proposal was fair, from a
financial point of view, to CRIIMI MAE and the Public Stockholders. The Special
Committee also engaged separate counsel, Shaw, Pittman, Potts & Trowbridge, to
advise the Special Committee with respect to its deliberations.
The Special Committee was free to consider the September 29 Proposal and any
alternatives without limitation. In this regard, with the assistance of Duff &
Phelps and the participation of Merrill Lynch on behalf of CRIIMI MAE, the
Special Committee considered (1) the continued operation of CRIIMI MAE with the
services of the Adviser being provided under the existing Advisory Agreement
(and renewals thereof), (2) the replacement of CRI and its affiliates with an
alternative external advisory company, (3) the employment by CRIIMI MAE of
persons other than the Principals and the Executive Officers, (4) the September
29 Proposal, and (5) whether CRIIMI MAE should acquire all of the assets of and
types of businesses operated by the CRI Mortgage Businesses. As discussed more
fully below, after considering all of the factors it deemed relevant and after
discussions with Duff & Phelps and Merrill Lynch, the Special Committee
concluded that consummation of the Merger Proposal will better serve the
interests of CRIIMI MAE and the Public Stockholders than any of these
alternatives. See "The Merger Proposal -- Alternatives to the Merger Proposal."
The Special Committee believes that the Merger Proposal, which, if consummated,
will result in CRIIMI MAE becoming self-administered and self-managed, should
substantially eliminate existing conflicts between CRIIMI MAE and CRI and its
affiliates and make CRIIMI MAE more attractive to institutional and other
investors, improving CRIIMI MAE's ability to raise capital. The Special
Committee also believes that it is important to retain the expertise and
experience of the Principals and Executive Officers in connection with CRIIMI
MAE's becoming self-administered and self-managed, whose services have been
principally responsible for the success of CRIIMI MAE. Moreover, the Special
Committee believes that these individuals are particularly important to CRIIMI
MAE pursuing its strategy of increasing its holdings of higher-yielding
investments. After discussions with Duff & Phelps and Merrill Lynch, the Special
Committee also concluded that all of the assets and businesses of the CRI
Mortgage Businesses proposed to be acquired pursuant to the Merger Proposal were
appropriate and advisable for CRIIMI MAE and that their acquisition by CRIIMI
MAE would reduce the existing conflicts between CRIIMI MAE and CRI and its
affiliates.
From October 1994 through January 1995, the terms of the proposed
transactions, including the number of Common Shares to be issued and the maximum
aggregate value of the Common Shares, were negotiated by the Principals and the
Special Committee, with the assistance of Merrill Lynch, Duff & Phelps and
counsel. On January 3, 1995, the Special Committee and the Principals agreed in
principle on the terms
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of the Merger Proposal. Under the agreement in principle, the number of Common
Shares to be issued in the Merger Proposal is $21,400,000 divided by the
aggregate average of the high and low sale prices of the Common Shares during
the ten trading days preceding the execution of the Merger Agreement; provided
that in no event shall (1) the aggregate market value of the Common Shares
issued at the Closing exceed $22,900,000 and (2) the number of the Common Shares
to be issued at the Closing exceed 2,761,290 ($21,400,000 divided by $7.75 per
share). As part of the negotiations, the Principals requested, and the Special
Committee agreed, that CRIIMI Management would assume debt of the CRI Mortgage
Businesses in the aggregate amount of $9,100,000. The Merger Proposal also
provides for options to purchase an aggregate of 3,000,000 Common Shares to be
issued to the Principals, which the Special Committee believes better align the
interests of the Principals and CRIIMI MAE than the contingent share feature of
the September 29 Proposal. To enhance CRIIMI MAE's ability to retain the
services of the Executive Officers, at the request of the Special Committee, the
Merger Proposal provides for a total of 110,452 Common Shares and options to
purchase 180,000 Common Shares to be issued directly to the Executive Officers
for services rendered in connection with the Merger. Relying on consultations
with Duff & Phelps, the Special Committee believes that the stock options to be
issued to the Principals and the Executive Officers will have, at the time of
issuance, an aggregate value not in excess of $1,500,000.
Thus, under the Merger Proposal the total consideration to be paid by CRIIMI
MAE (measured on the day the Merger Agreement was executed) is believed by the
Board and the Special Committee to total approximately $30,300,000 (2,761,290
Common Shares with a value of $19,700,000 based on a closing price of $7.125 per
share, $9,100,000 of debt assumption, and options which the Board and the
Special Committee believe will have, at the time of issuance, a value of
approximately $1,500,000). Moreover, as of the date the Merger Proposal is
consummated, the value of the Common Shares issued on such date cannot exceed
$22,900,000, thereby capping the total value of the consideration paid on such
date by CRIIMI MAE at approximately $33,500,000. Based on consultations with
Duff & Phelps, the Special Committee believes that the value of the CRI Mortgage
Businesses is $34,000,000. See "The Merger Proposal -- Analyses of Duff &
Phelps."
On January 12, 1995 the Special Committee received the preliminary oral
opinion of Duff & Phelps that, subject to certain assumptions, the Merger
Proposal was fair to CRIIMI MAE and the Public Stockholders from a financial
point of view. The Special Committee and the Principals instructed counsel to
prepare a draft proxy statement and merger agreement that reflected the terms of
the parties' agreement in principle. On February 3, 1995, Duff & Phelps made a
presentation to the Special Committee, including certain written materials and
its form of Opinion, and gave its view that, subject to final documentation and
certain other matters, the Merger Proposal, as set forth in the draft proxy
statement and merger agreement, was fair to CRIIMI MAE and the Public
Stockholders from a financial point of view. After this presentation, and
considering all of the factors it deemed relevant, the Special Committee
recommended to the Board, and the Board (with the Principals abstaining)
approved, the filing of the draft proxy statement and merger agreement with the
Securities and Exchange Commission (the "SEC").
In connection with its consideration of the Merger Proposal and alternatives
to the Merger Proposal, the Special Committee did not seek an independent
appraisal of the assets and liabilities of the CRI Mortgage Businesses because
the Special Committee believes that it received sufficient financial advice and
consultation from Duff & Phelps and had taken into account the views of Merrill
Lynch on behalf of CRIIMI MAE, and that, as a result, such an appraisal was not
necessary. As discussed more fully below, the Special Committee believes that
the value of the CRI Mortgage Businesses to CRIIMI MAE will exceed the value of
the Common Shares and other consideration to be paid by CRIIMI MAE pursuant to
the Merger Proposal at the time of the consummation of the Merger based on
consultations with Duff & Phelps, a review of Duff & Phelps' Opinion and the
supporting materials and the limits in the Merger Proposal on the Common Shares
to be paid by CRIIMI MAE at the time of the consummation of the Merger in the
event of changes in the price of such Common Shares prior to such consummation.
As noted below, Duff & Phelps has provided the Special Committee with its
Opinion that the Merger Proposal is fair to CRIIMI MAE and the Public
Stockholders from a financial point of view. See "-- Opinion of Duff & Phelps."
Duff & Phelps also provided the Special Committee with its view as to the values
of the principal lines of business and assets of
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the CRI Mortgage Businesses, which were used by the Special Committee in
assessing alternatives to the Merger Proposal and in determining whether CRIIMI
MAE should acquire all of the assets of and businesses operated by the CRI
Mortgage Businesses. See "-- Alternatives to the Merger Proposal." Finally, to
ensure that changes in the price of Common Shares before the consummation of the
Merger would not result in too many Common Shares, or Common Shares with too
great a value, being issued by CRIIMI MAE, the Merger Proposal is structured to
limit the Common Shares issued by CRIIMI MAE at the time the Merger is
consummated to a value of not more than $22,900,000 and a number not to exceed
2,761,290.
As discussed below, although other persons could operate CRIIMI MAE, the
Special Committee believes that CRIIMI MAE should retain the expertise and
experience of the Principals to build and expand CRIIMI MAE's business. See "--
Alternatives to the Merger Proposal" and "-- Value of Principals to CRIIMI MAE."
The services of the Principals will be secured for CRIIMI MAE and its affiliates
primarily by virtue of the employment and non-competition agreements that each
Principal will execute in connection with the Merger Proposal. See "Benefits to
Principals Resulting from the Merger Proposal -- Employment and Non-Competition
Agreements; Options." The Principals' services to CRIIMI MAE were not valued
separately from the overall valuation of the CRI Mortgage Businesses by Duff &
Phelps or the Special Committee, nor was special consideration given to the
possibility that CRIIMI MAE could lose the services of a Principal due to death
or disability. However, if the Merger Proposal is consummated, the Principals
will have a significant ownership interest in CRIIMI MAE, in the form of Common
Shares and options to acquire Common Shares that vest over a five year period
and may be exercised over an eight year period. The Special Committee believes
that the restrictions on the Principals' dispositions of the Common Shares to be
received in the Merger, as well as the terms of the employment and
non-competition agreements and the vesting schedule for the options, are
substantial evidence of, and incentives for, the Principals' long-term
commitment to CRIIMI MAE. However, see "-- Risks of the Merger Proposal to
CRIIMI MAE and Stockholders of CRIIMI MAE -- Expenses of Obtaining Additional
Management" and "-- Dependence on the Principals."
ALTERNATIVES TO THE MERGER PROPOSAL
The Special Committee was free to consider the Merger Proposal and
variations thereof and alternatives thereto without limitation. In this regard,
with the assistance of Duff & Phelps and the participation of Merrill Lynch, the
Special Committee considered at various times (1) the continued operation of
CRIIMI MAE with the services of the Adviser being provided under the existing
Advisory Agreement (and renewals thereof), (2) the replacement of CRI and its
affiliates with an alternative external advisory company, (3) the employment by
CRIIMI MAE of persons other than the Principals, (4) the September 29 Proposal,
and (5) whether CRIIMI MAE should acquire all of the assets of and types of
businesses operated by the CRI Mortgage Businesses. As discussed more fully
below, after considering all of the factors it deemed relevant, including the
views of Merrill Lynch, and after consultation with Duff & Phelps, the Special
Committee concluded that consummation of the Merger Proposal will better serve
the interests of CRIIMI MAE and the Public Stockholders than any of these
alternatives.
The Special Committee believes that continuing to operate CRIIMI MAE with
the services of the Adviser under the existing Advisory Agreement (and renewals
thereof), which would not result in CRIIMI MAE becoming a self-administered and
self-managed REIT, would not resolve the existing conflicts of interest between
CRIIMI MAE and CRI and its affiliates. As indicated under "-- Benefits from the
Merger Proposal," some persons in the investment community involved with REITs
believe that an adviser paid primarily on the basis of assets invested would
seek to increase those assets without emphasizing the profitability of the
client. This perception would apply to the Adviser (an affiliate of CRI) and
CRIIMI MAE. In addition, this approach would not make CRIIMI MAE more attractive
to institutional and other investors, or improve CRIIMI MAE's ability to raise
capital. Furthermore, the Special Committee believes that as CRIIMI MAE
continues to increase its holdings of subordinated securities the costs of
purchasing the services required thereby would likely increase. Based on all of
the above, on consultation with Duff & Phelps and the views of Merrill Lynch,
the Special Committee did not believe that continuing to operate CRIIMI MAE
under the existing Advisory Agreement (and renewals thereof) was better for
CRIIMI MAE and the Public Stockholders than the Merger Proposal.
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The Special Committee also considered the option of replacing CRI and its
affiliates with an alternative external advisory company. The Special Committee
believes that this alternative, which would not result in CRIIMI MAE becoming a
self-administered and self-managed REIT, would likely result in new conflicts of
interest between CRIIMI MAE and the new outside adviser, and would not enhance
CRIIMI MAE's access to capital markets. Moreover, this alternative would not
result in CRIIMI MAE retaining the expertise and experience of the Principals
and Executive Officers, who the Special Committee believes have been principally
responsible for the success of CRIIMI MAE and are particularly important to its
business objectives, including becoming a fully-integrated mortgage company and
diversifying its investments. In addition, the Special Committee considered the
possible financial impact and other costs of a transition to another external
advisory company and the view of Duff & Phelps that, because the terms of the
existing Advisory Agreement were comparable to the contract terms of other
third-party mortgage advisory contracts, no significant cost savings would inure
to CRIIMI MAE through nonrenewal of the Advisory Agreement and the engagement of
a new adviser. Based on the above, on consultation with Duff & Phelps, and
taking into account the views of Merrill Lynch, the Special Committee did not
pursue this alternative.
The Special Committee also considered the option of CRIIMI MAE not renewing
the Advisory Agreement and directly employing persons other than the Principals
to manage CRIIMI MAE. This approach, like the engagement of a new outside
advisory company, would not retain the expertise and experience of the
Principals. Although other persons could operate CRIIMI MAE, the Special
Committee believes that CRIIMI MAE should retain the expertise and experience of
the Principals to build and expand CRIIMI MAE's business. In addition, the
Special Committee considered the financial costs and other risks of attempting
to assemble and develop an in-house management team, including whether such an
approach would be viewed credibly by institutional and other investors. Based on
all of the above, the terms of the Merger Proposal, consultation with Duff &
Phelps, and taking into account the views of Merrill Lynch, the Special
Committee believes that the Merger Proposal better serves the interests of
CRIIMI MAE and the Public Stockholders than this approach.
The Special Committee also considered the terms of the September 29
Proposal. Based on consultations with Duff & Phelps, the Special Committee
believes that the terms of the Merger Proposal better align the interests of the
Principals and the Executive Officers with CRIIMI MAE's interests and that the
Merger Proposal is, from a financial standpoint, more advantageous to CRIIMI MAE
and the Public Stockholders than the September 29 Proposal.
The Special Committee also considered whether CRIIMI MAE should acquire all
of the assets of and types of businesses operated by the CRI Mortgage
Businesses. In this regard, Duff & Phelps provided the Special Committee with
its view as to the values of the principal lines of business and assets of the
CRI Mortgage Businesses, and the Special Committee took into account the views
expressed by Merrill Lynch that these types of assets and lines of business were
appropriate for CRIIMI MAE to acquire and would enhance CRIIMI MAE's ability to
generate fee income, and that their acquisition by CRIIMI MAE through the Merger
Proposal would substantially reduce the existing conflicts between CRIIMI MAE
and CRI and its affiliates. After consultation with Duff & Phelps and taking
into consideration the views of Merrill Lynch, the Special Committee considered
the option of acquiring a portion of these assets and businesses and concluded
that acquiring all of them pursuant to the Merger Proposal would better serve
the interests of CRIIMI MAE and the Public Stockholders than acquiring only some
of them.
OPINION OF DUFF & PHELPS
BACKGROUND. The Special Committee retained Duff & Phelps to serve as
independent financial adviser to the Special Committee (the "Engagement").
Specifically, Duff & Phelps was retained to advise the Special Committee during
negotiations with the Principals regarding the terms of any proposed transaction
pursuant to which CRIIMI MAE would become a self-administered and self-managed
REIT and to provide the Opinion as to the fairness of any proposed transaction
to CRIIMI MAE and the Public Stockholders from a financial point of view. On
October 4, 1994, Duff & Phelps was orally advised that it had been selected by
the Special Committee to undertake the Engagement. Duff & Phelps then commenced
performing its services under the Engagement, which was confirmed by a letter
dated October 24, 1994.
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Before Duff & Phelps was retained, there had been no prior relationship
between CRIIMI MAE, CRI or its affiliates and Duff & Phelps, except as described
below. Arent Fox Kintner Plotkin & Kahn ("Special Counsel"), on behalf of CRIIMI
MAE, in connection with a shareholder class action that was settled in September
1993, retained Duff & Phelps to provide an analysis and expert witness testimony
relating to the fairness of the merger of the entities in the transaction that
resulted in the creation of CRIIMI MAE. In addition, a former affiliate of Duff
& Phelps has had discussions with CRICO Mortgage concerning a possible rating of
CRICO Mortgage as a qualified mortgage servicer. The Special Committee was aware
of these relationships when it retained Duff & Phelps.
Duff & Phelps, as a part of its business, regularly engages in providing
financial advisory services in connection with mergers and acquisitions,
leveraged buy-outs, restructurings, private placements, employee benefit plans,
and valuations for estate, corporate and other purposes. The Special Committee
selected Duff & Phelps as its financial adviser for the Engagement based upon
Duff & Phelps' knowledge of the businesses in which CRIIMI MAE and CRI and its
affiliates operate, in addition to Duff & Phelps' experience, ability and
reputation for providing fairness opinions for a wide variety of corporate
transactions.
Under the terms of the Engagement, CRIIMI MAE is obligated to pay a fee of
$175,000 (increased from $100,000 pursuant to a letter dated January 25, 1995)
to Duff & Phelps for its services in connection with the Engagement. CRIIMI MAE
paid $50,000 of such fee upon execution of the written confirmation of the
Engagement, and the $125,000 balance was paid upon delivery of the Opinion. No
portion of Duff & Phelps' fee was contingent upon consummation of the Merger
Proposal or on the conclusions reached by Duff & Phelps in the Opinion. CRIIMI
MAE is also obligated to reimburse Duff & Phelps for out-of- pocket expenses,
not to exceed $15,000, and to indemnify Duff & Phelps against certain
liabilities relating to services performed by Duff & Phelps.
THE OPINION. Duff & Phelps met with the Special Committee several times
during November and December of 1994 to discuss its preliminary findings. On
January 12, 1995, Duff & Phelps expressed to the Special Committee its
preliminary oral opinion that, based on the information provided as of that
date, and subject to any subsequent changes in the terms of the Merger Proposal
and assuming no material changes in the financial condition and outlook for
CRIIMI MAE and the CRI Mortgage Businesses prior to the issuance of the Opinion,
the Merger Proposal is fair to CRIIMI MAE and the Public Stockholders from a
financial point of view. On February 3, 1995, Duff & Phelps made a presentation
of its analysis and report to the Special Committee, and subsequently delivered
to the Special Committee and the Board the Opinion dated April 20, 1995, to the
effect that, as of the date of the Opinion, and based on and subject to certain
matters as stated therein, the Merger Proposal is fair to CRIIMI MAE and the
Public Stockholders from a financial point of view. The Opinion states that
unless Duff & Phelps has withdrawn its Opinion due to subsequent material
adverse changes in either market, economic, financial and other conditions or in
the business of the CRI Mortgage Businesses, the Opinion will remain effective
at the Closing, which is expected to occur on or prior to June 30, 1995.
The full text of the Opinion, which sets forth the assumptions made and
matters considered, is attached hereto as APPENDIX B. CRIIMI MAE stockholders
are urged to read the Opinion in its entirety. The Opinion is directed only to
the fairness from a financial point of view of the terms of the Merger Proposal
with respect to CRIIMI MAE and the Public Stockholders and does not constitute a
recommendation to any stockholder of CRIIMI MAE as to how such stockholder
should vote his or her Common Shares. Duff & Phelps reviewed the terms of the
Merger Proposal, which were determined by negotiation among the Special
Committee, Merrill Lynch and the Principals. The summary of the Opinion set
forth in this Proxy Statement is qualified in its entirety by reference to the
full text of the Opinion.
Duff & Phelps was authorized to undertake studies to enable it to render the
Opinion, whether favorable or not. No limitations were imposed by CRIIMI MAE or
any other party with respect to the scope of the investigation made or
procedures followed by Duff & Phelps in rendering the Opinion. In performing its
evaluation and rendering the Opinion, Duff & Phelps relied upon the accuracy and
completeness of all information provided to it, whether obtained from public or
private sources and it did not attempt to
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independently verify any such information. Duff & Phelps also took into account
its assessment of general economic, market and financial conditions as they
existed and could be evaluated as of the date of the Opinion, as well as its
experience in similar transactions and securities valuation generally. Duff &
Phelps did not make any independent appraisals of the assets or liabilities of
CRIIMI MAE or the CRI Mortgage Businesses. The analysis was prepared with
information available as of the date of the Opinion. In general, historical
financial information was analyzed for periods ended no later than December 31,
1994.
ANALYSES CONDUCTED BY DUFF & PHELPS. In conducting its analysis and
preparing the Opinion that the Merger Proposal is fair from a financial point of
view to CRIIMI MAE and the Public Stockholders, Duff & Phelps, among other
things, (1) reviewed and analyzed the terms of the Merger Proposal, as described
in this Proxy Statement, as filed with the SEC, and the Merger Agreement; (2)
analyzed certain historical, business and financial information relating to
CRIIMI MAE (including its predecessor company CRI Insured Mortgage Association,
Inc.) and the CRI Mortgage Businesses, including CRIIMI MAE's Annual Reports to
Shareholders and Form 10-Ks filed with the SEC for the fiscal years ended
December 31, 1989 through 1994, and combined financial statements for the CRI
Mortgage Businesses for the fiscal years 1992 (unaudited) and 1993 and 1994
(audited); (3) reviewed certain internal financial analyses and forecasts for
CRIIMI MAE on a stand alone basis; (4) reviewed certain internal financial
analyses and forecasts for CRIIMI MAE and the CRI Mortgage Businesses on a
combined basis (the "Combined Entity") based upon the terms of the Merger
Proposal; (5) reviewed the advisory agreements by and among CRIIMI MAE, CRI, the
AIM Funds and their respective affiliates; (6) reviewed internal operational and
financial information relating to the CRI Mortgage Businesses; (7) considered
the pro forma effect of the Merger Proposal on CRIIMI MAE's capitalization,
earnings (tax basis and under generally accepted accounting principles), cash
flow, funds from operations, dividends, book value and financial prospects; (8)
reviewed current conditions and trends with respect to the real estate industry
and REITs in general and the market for government insured and other mortgage
investments, including mortgage REITs, in particular, including interest rates
and general business and economic conditions in the markets where CRIIMI MAE
operates; (9) reviewed the reported market prices and trading volumes of the
Common Shares for recent periods; (10) reviewed publicly available information
concerning other companies deemed comparable, in whole or in part, to CRIIMI
MAE, to the CRI Mortgage Businesses and to the Combined Entity; and (11)
conducted such other financial studies, analyses and investigations as Duff &
Phelps deemed appropriate.
As background for its analyses, Duff & Phelps held extensive discussions
with the Board, the Special Committee and members of the senior management of
CRIIMI MAE and the CRI Mortgage Businesses regarding the history, current
business operations, financial condition, future prospects and strategic
objectives of CRIIMI MAE, both in its present form and on a Combined Entity
basis.
DESCRIPTION OF ANALYSES. The following is a summary of certain financial
and comparative analyses performed by Duff & Phelps in support of the Opinion.
Duff & Phelps analyzed the CRI Mortgage Businesses as a stand alone entity (the
"Stand Alone Analysis") using operating and financial information prepared by
management of the CRI Mortgage Businesses and taking into account the historical
and prospective income, operating expenses, capital requirements and resulting
cash flows of the CRI Mortgage Businesses. Duff & Phelps also analyzed the
financial impact of the Merger Proposal (with respect to, among other things,
dividends, funds from operations and aggregate and per share equity valuations)
on CRIIMI MAE on a pro forma basis after giving effect to the Merger Proposal
(the "Pro Forma Merger Analysis"). The Stand Alone Analysis and Pro Forma Merger
Analysis employed standard valuation and other analytical methodologies
generally accepted by the professional financial community, including cash flow
analysis, comparative company analysis and pro forma income analysis. It should
be noted that the summary set forth below does not purport to be a complete
description of the analyses conducted by Duff & Phelps in connection with the
preparation of the Opinion. The preparation of a fairness opinion is a complex
process and does not necessarily lend itself to partial analysis or summary
description. Duff & Phelps incorporated into its analyses numerous assumptions
regarding the future performance of the national real estate industry as well as
assumptions regarding interest rates and general business and economic
conditions and other matters, many of which are beyond CRIIMI MAE's control.
Such estimates are inherently subject to
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uncertainty, and neither Duff & Phelps, CRIIMI MAE, nor any other entity or
individual assumes responsibility for their accuracy. With respect to the Pro
Forma Merger Analysis, it was assumed that the Merger would be completed on
terms substantially in accordance with the terms contemplated by the Merger
Agreement.
In Duff & Phelps' judgment, the Stand Alone Analysis and Pro Forma Merger
Analysis, and the quantitative and qualitative methodologies employed therein,
represent the most appropriate and relevant framework for analyzing the fairness
of the Merger to CRIIMI MAE and the Public Stockholders from a financial point
of view. This judgment is based on a careful review of the facts and
circumstances of the Merger and Duff & Phelps' previous experience in situations
of a similar type.
STAND ALONE ANALYSIS. Based on the qualitative and quantitative information
referenced above, Duff & Phelps evaluated the CRI Mortgage Businesses as a stand
alone entity using the following principal methodologies: (1) cash flow analysis
using detailed financial and operational information and forecasts prepared by
management for each of the combined businesses, including the respective
contributions of CRI Acquisition, CRI/AIM Management and CRICO Mortgage; and (2)
comparative company analysis, analyzing the operating performance and pricing
multiples of the CRI Mortgage Businesses with those of comparable publicly
traded real estate and investment management companies.
Based upon the Stand Alone Analysis, Duff & Phelps concluded that the
aggregate fair market value of the CRI Mortgage Businesses as a stand alone
entity was approximately $34,000,000. Of this combined value, approximately
$21,000,000 was attributed to services performed under the Advisory Agreement,
$5,000,000 to the CRI/AIM Management submanagement contract and $8,000,000 to
the other mortgage businesses.
In performing the Stand Alone Analysis, Duff & Phelps used the cash flow
analysis to separately evaluate the services performed under the Advisory
Agreement, the CRI/AIM submanagement contracts with respect to the AIM Funds,
and the other mortgage businesses, including servicing, origination and
consulting activities. As discussed below, under the cash flow analysis,
projections of the revenues, expenses and capital requirements of each line of
business were developed for the ten-year period ending December 31, 2004 based
on historical performance and future prospects. The annual cash flows for each
line of business were then discounted back to present value at the discount rate
that, in the judgment of Duff & Phelps, was appropriate for the risk inherent in
such business. In addition, a terminal value (i.e., the estimated total value at
December 31, 2004 of all post-2004 cash flow) for each line of business was
established by applying a multiple to the final year projected cash flow that,
in the judgment of Duff & Phelps, was appropriate for the risks and growth
prospects of such business. This terminal value was then discounted back to
present value at the appropriate discount rate. The sum of the present values of
the projected annual cash flows and the terminal value is equal to the total
value of each line of business under the cash flow analysis. See the cash flow
analyses set forth in APPENDIX C.
In applying the cash flow analysis to the services performed under the
Advisory Agreement, the revenues from the annual, mortgage selection and
incentive fees were determined based on the existing fee arrangements and
historical trends. The existing fee arrangements were used because of Duff &
Phelps' conclusion that the terms of the Advisory Agreement were comparable to
other asset management agreements and reflected a commercially reasonable basis
for obtaining the services provided under the Advisory Agreement. For purposes
of calculating these revenues, CRIIMI MAE's total assets subject to management
fees were projected to grow at 5% per year for the next three years to reflect
the current plans of management, and at a more moderate rate of 2.5% per year in
periods thereafter. Duff & Phelps allocated 50% of the total projected expenses
of the CRI Mortgage Businesses (excluding reimbursed expenses) to this line of
business, which included 5% annual expense increases through 1998, a 38%
increase for 1999 (reflecting renewals of employment contracts at an anticipated
higher cost), and 5% annual increases thereafter. The annual cash flows
resulting from these revenue and expense projections were discounted back to
present value using a 17% discount rate, reflecting Duff & Phelps' assessment of
equity investments, in general, and the specific risks of the business, in
particular, including the material dependence on the Advisory Agreement as well
as the possibility that the Advisory Agreement might not be renewed. The
terminal value was established by applying a multiple of 5 to the final year
projected
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cash flow, which was then discounted back to present value at the 17% rate. In
Duff & Phelps' judgment, on the basis of this analysis, the total present value
of this line of business under the cash flow analysis is approximately $21
million.
The cash flow analysis of the CRI/AIM submanagement of the AIM Funds was
based on projections developed by the management of the CRI Mortgage Businesses,
as adjusted by Duff & Phelps to reflect the CRI Mortgage Businesses' release of
their obligation under certain financial guaranties and the additional risk
resulting from any perceived conflict of interest on the part of CRIIMI MAE as
the general partner of the AIM Fund partnerships receiving fees for managing the
assets of such partnerships. Due to the substantial overlap of the
administration of CRIIMI MAE and the AIM Funds, none of the expenses of the CRI
Mortgage Businesses were allocated to this line of business. The annual cash
flows resulting from these projections were discounted back to present value
using a 17% discount rate, reflecting Duff & Phelps' assessment of the risks of
the business, including the material dependence on the AIM contracts. The
terminal value was established by applying a multiple of 4 to the final year
projected cash flow, and the result was then discounted back to present value at
the 17% rate. In Duff & Phelps' judgment, on the basis of this analysis, the
total present value of this line of business under the cash flow analysis is
approximately $5 million.
The cash flow analysis of the other mortgage businesses, including
consulting, origination and servicing activities, was based on projections and
supporting schedules prepared by the management of the CRI Mortgage Businesses.
Duff & Phelps, while viewing the other mortgage businesses as an opportunity for
CRIIMI MAE to diversify and increase its earnings base, adjusted management's
overall projections downward to reflect Duff & Phelps' independent assessment of
the prospects for these businesses. Revenues from mortgage servicing, consulting
and origination were projected to increase at 5% per year. Fees for the
servicing of assets underlying the subordinated securities were calculated based
on the estimated mortgage asset base and the terms of actual contractual
arrangements in place. Such assets were projected to grow to $675 million over
the next three years, with growth moderating to a 5% annual rate thereafter. Due
to the staffing required to engage in the current mortgage business and to
pursue new mortgage opportunities, Duff & Phelps allocated the remaining 50% of
the total projected expenses of the CRI Mortgage Businesses (excluding
reimbursed expenses) to this line of business. The annual cash flows resulting
from these projections were discounted back to present value using a 20%
discount rate, reflecting the greater risk and uncertainty of the cash flows of
the other mortgage businesses relative to those subject to the Advisory
Agreement. The terminal value was established by applying a multiple of 5 to the
final year projected cash flow, and the result was discounted back to present
value at the 20% rate. In Duff & Phelps' judgment, on the basis of this
analysis, the total present value of this line of business under the cash flow
analysis is approximately $8 million.
Thus, under the cash flow analysis the total value of the CRI Mortgage
Businesses is approximately $34 million.
In determining the value of the CRI Mortgage Businesses under the Stand
Alone Analysis, Duff & Phelps also used the comparative company analysis method
to compare the operating performance and pricing multiples of the CRI Mortgage
Businesses (based on the $34 million value under the cash flow analysis) with
the operating performance and pricing multiples of comparable publicly traded
real estate and investment management companies. These two types of companies
were selected by Duff & Phelps because the CRI Mortgage Businesses have elements
common to both. Duff & Phelps also analyzed the significant differences between
these comparable companies and the CRI Mortgage Businesses, including that the
comparable companies (i) generally are larger and more diversified, (ii)
typically have substantial real assets resulting in significant tangible book
value, and (iii) generally are less dependent on key managers. As a result of
these differences, Duff & Phelps believes that the value of the CRI Mortgage
Businesses should generally reflect lower valuation multiples than those of the
otherwise comparable companies. The $34 million value of the CRI Mortgage
Businesses is a 5.4 multiple of their earnings before interest, taxes,
depreciation and amortization ("EBITDA") for the 12-month period ending
September 30, 1994. This is slightly higher than the 5.0 median multiple of the
comparable real estate companies and considerably lower than the 7.5 median
multiple for the comparable asset management companies reviewed by Duff &
Phelps. A similar result was obtained in comparing the multiple for the 3-year
average of the CRI Mortgage Businesses' EBITDA to the multiples of the 3-year
average of EBITDA for the comparable companies. On
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the basis of these and other comparisons, Duff & Phelps believes that the
multiples implied by the cash flow analysis of the CRI Mortgage Businesses
reflect the higher risks associated with these businesses, and therefore are
consistent with the multiples exhibited by these comparable companies.
Thus, under the Stand Alone Analysis, including both the cash flow analysis
and the comparable company analysis, Duff & Phelps concluded that the value of
the CRI Mortgage Businesses is $34 million.
PRO FORMA MERGER ANALYSIS. Based on the qualitative and quantitative
information referenced above, Duff & Phelps evaluated CRIIMI MAE on a pro forma
basis using the following principal methodologies: (1) an evaluation of the
anticipated effects of the Merger Proposal on historical and prospective future
financial reporting income, tax basis income and funds from operations, using
information provided by management; and (2) analyzing the operating performance
and pricing multiples of CRIIMI MAE with those of comparable publicly traded
REITs, including both outside-advised and self-administered and self-managed
REITs. In the process of conducting the Pro Forma Merger Analysis, Duff & Phelps
considered various factors that would influence CRIIMI MAE's operating
characteristics and its prospects following the Merger, including, but not
limited to: (a) CRIIMI MAE's status as a self-administered and self-managed
REIT; (b) the potential additional income arising from the CRI Mortgage
Businesses, including but not limited to mortgage servicing income, mortgage
origination income and outside advisory income; (c) the additional business
opportunities available to CRIIMI MAE as a result of its participation in a
variety of mortgage activities; (d) the quality and experience of management, in
addition to management's significant equity interest in CRIIMI MAE; and (e) the
state of the capital markets and the availability of equity capital to REITs
such as CRIIMI MAE.
In Duff & Phelps' judgment, the most important factors affecting shareholder
value are the cash flow generating ability of a company and the risks associated
with those cash flows, and measurements of earnings are important only to the
degree to which they measure cash generating ability. Although CRIIMI MAE's
earnings per share, prepared in accordance with generally accepted accounting
principles ("GAAP"), on a historical pro forma basis, are reduced from $1.07 to
$1.00 per share for the year ended December 31, 1994 as a result of the Merger
Proposal, this is due primarily to amortization of the acquired assets resulting
from the Merger Proposal. Because this amortization does not affect cash flow,
in Duff & Phelps' view, GAAP earnings per share are a relatively poor measure of
CRIIMI MAE's cash generating ability. In the case of the Merger Proposal, Duff &
Phelps concluded that tax basis earnings per share are a better measure of cash
generating ability than GAAP earnings and, on a pro forma historical basis, tax
basis income per share assuming the Merger Proposal has been consummated is
comparable to the actual tax basis earnings per share before giving effect to
the Merger Proposal. Moreover, after considering the growth opportunities of the
CRI Mortgage Businesses, Duff & Phelps concluded that the cash flow generating
capability, earning power, and dividend paying ability of CRIIMI MAE would
likely be enhanced by the Merger. Further, Duff & Phelps concluded that CRIIMI
MAE would benefit from becoming a self-administered and self-managed REIT, based
on evidence that self-administered and self-managed REITs trade at higher market
valuation multiples and have greater access to equity than comparable
externally-advised REITs.
In conducting its analyses, Duff & Phelps carefully evaluated the material
dependence of the CRI Mortgage Businesses on the Advisory Agreement. This
dependence contrasts with other publicly traded investment management companies,
which generally have many such contracts. Due to this lack of diversification,
the value of the CRI Mortgage Businesses as multiples of their cash flow and
income would be expected to be considerably lower than that of the publicly
traded companies. The consideration to be paid for the CRI Mortgage Businesses
as described in the Merger Proposal, representing multiples of cash flow and
income considerably lower than those of the publicly traded companies, is
consistent with this conclusion. Further, in evaluating CRIIMI MAE's option as
to whether to renew the Advisory Agreement, Duff & Phelps surveyed the terms of
the contracts of several other third-party mortgage advisers. Based on this
evaluation, it was the judgment of Duff & Phelps that the terms of the Advisory
Agreement were comparable to those contracts. Therefore, it was the judgment of
Duff & Phelps that no significant cost savings would inure to CRIIMI MAE through
nonrenewal of the Advisory Agreement. Such judgment does not take into account
the specialized capabilities of the Principals or the Executive Officers, nor
does it include any of the costs that would likely be part of a transition to
another adviser. Based upon the foregoing, as well as a review
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of the costs and risks of developing an in-house advisory capability, it is the
view of Duff & Phelps that the Merger Proposal will better serve the interests
of CRIIMI MAE and the Public Stockholders than not renewing the Advisory
Agreement.
In addition, Duff & Phelps analyzed the consideration to be paid by CRIIMI
MAE to the Principals and Executive Officers of CRIIMI MAE in connection with
the Merger and pursuant to the stock options and employment agreements included
in the Merger Proposal, as described in this Proxy Statement.
CONCLUSION. Duff & Phelps, based upon, among other things, the fair market
value of the CRI Mortgage Businesses exceeding the consideration to be paid for
such businesses, the potential for growth in the earnings and dividends of
CRIIMI MAE following the Merger, and the benefits afforded to self-administered
and self-managed REITs in the market, concluded that the Merger Proposal is fair
to CRIIMI MAE and the Public Stockholders from a financial point of view.
FINANCIAL ADVISER
Merrill Lynch was retained by CRIIMI MAE to act as its financial adviser in
connection with the Merger Proposal. Merrill Lynch is an internationally
recognized investment banking firm which in the past has provided a variety of
investment banking services for CRIIMI MAE and its affiliates and for CRI and
certain of its affiliates. Merrill Lynch was not retained to advise the Special
Committee regarding the terms of the Merger Proposal nor to provide an opinion
as to the fairness of the Merger Proposal. CRIIMI MAE has agreed to pay Merrill
Lynch a retainer of $150,000 and quarterly fees of $100,000 during the term of
its engagement. In addition, CRIIMI MAE will become obligated to pay Merrill
Lynch $1,500,000 upon the consummation of the Merger with the retainer fee and
all quarterly fees to be credited against such amount. CRIIMI MAE has also
agreed to reimburse Merrill Lynch for its reasonable out-of-pocket expenses,
including reasonable fees and expenses of its legal counsel not to exceed
$20,000, and to indemnify Merrill Lynch and certain related persons against
certain liabilities in connection with its engagement, including certain
liabilities under the federal securities laws.
RISKS OF THE MERGER PROPOSAL TO CRIIMI MAE AND STOCKHOLDERS OF CRIIMI MAE
RISKS ASSOCIATED WITH THE MORTGAGE ADVISORY BUSINESSES. The Merger will
expose CRIIMI MAE to risks to which it has not historically been exposed, such
as the risks associated with mortgage advisory, servicing and origination
operations to which CRIIMI MAE will succeed in connection with the Merger. In
particular, CRIIMI MAE and its affiliated entities will be exposed to the risk
of litigation by third parties for claims, arising prior to and after the
Merger, based on alleged failures to perform their obligations under mortgage
advisory, servicing and origination contracts. CRIIMI MAE will also be subject
to the risk that its advisory and servicing contracts will not be renewed upon
expiration or will not be renewed on terms as favorable as the current terms,
that its existing clients will be lost to competitors, and that the demand for
mortgage advisory, servicing and origination activities generally may decline.
Adverse developments could limit CRIIMI MAE's ability to realize certain
expected benefits of the Merger Proposal and impair the ability of CRIIMI MAE to
make distributions to stockholders. For historical financial information with
respect to the CRI Mortgage Businesses, see the combined financial statements of
the CRI Mortgage Businesses (including the related notes thereto) in this Proxy
Statement.
LACK OF APPRAISALS OF THE CRI MORTGAGE BUSINESSES. No independent
appraisals of the CRI Mortgage Businesses were obtained. There can be no
assurance that the value of the Common Shares and other consideration received
by the Principals in connection with the Merger will accurately reflect the
value of the CRI Mortgage Businesses to CRIIMI MAE.
INFLUENCE OF OFFICERS, DIRECTORS AND SIGNIFICANT STOCKHOLDERS. Following
the Merger, the Principals will continue to be the Chairman of the Board and the
President and Secretary of CRIIMI MAE and will continue to constitute two of
CRIIMI MAE's five directors. Upon consummation of the Merger, assuming the
issuance of 2,761,290 Common Shares pursuant to the Merger Proposal, the
Principals and the Executive Officers together will beneficially own in the
aggregate approximately 10.6% of the outstanding Common Shares. In addition, the
Principals will have options to acquire a total of 3,000,000 Common Shares and
the Executive Officers will have options to acquire a total of 180,000 Common
Shares.
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DEPENDENCE ON THE PRINCIPALS. The success of CRIIMI MAE has been
particularly dependent on the support, services and contributions of the
Principals. The loss of the services of either of the Principals through death,
disability or otherwise, after the consummation of the Merger, could have a
material adverse effect on CRIIMI MAE.
EXPENSES OF OBTAINING ADDITIONAL MANAGEMENT. In connection with the Merger,
the Principals and Executive Officers will enter into employment and
non-competition agreements with CRIIMI Management. See "-- Benefits to the
Principals Resulting from the Merger Proposal" and "-- Certain Relationships and
Related Party Transactions -- Employment and Non-Competition Agreements;
Options." If one or both of the Principals or an Executive Officer ceases to
perform management services for CRIIMI MAE or its affiliated entities, either
during the original term or upon expiration of their respective employment
agreements, or their performance is deemed by CRIIMI MAE to be unsatisfactory,
CRIIMI MAE will be required to secure management services from other personnel
or advisory companies. There can be no assurance in such instance that CRIIMI
MAE would be able to obtain qualified management or advisory services or that
such services could be obtained on terms favorable to CRIIMI MAE.
EFFECT OF THE MERGER ON PRICE OF COMMON SHARES AND COMMON SHARES AVAILABLE
FOR FUTURE SALE. Although the recent and historical trading prices of the
Common Shares were given substantial consideration in determining the terms of
the Merger Proposal, there can be no assurance that the market price of the
Common Shares following the Merger will not be less than the current market
price of the Common Shares. Sales of a substantial number of Common Shares, or
the perception that such sales could occur, could adversely affect prevailing
market prices for Common Shares. On the Closing Date, CRIIMI MAE will issue up
to 2,761,290 Common Shares to the Principals and the Executive Officers and may
issue on the exercise of options up to 3,000,000 Common Shares to the Principals
and 180,000 Common Shares to the Executive Officers. The Principals and the
Executive Officers will not be permitted to offer, sell, contract to sell or
otherwise dispose of any Common Shares received at the Closing for a period of
three years after the Closing Date, except for gifts to relatives and charitable
contributions. Each Principal is limited to gifts and charitable contributions
of 662,709 Common Shares acquired pursuant to the Merger Proposal during such
three years. On the Closing Date, the Principals, the Executive Officers and
CRIIMI MAE will enter into a Registration Rights and Lock-Up Agreement, pursuant
to which the Principals and the Executive Officers will have certain rights
after the expiration of the restrictive period to require CRIIMI MAE to register
their Common Shares for public resale. See "-- Certain Relationships and Related
Transactions -- Registration Rights and Lock-Up Agreement." No prediction can be
made about the effect that future sales of Common Shares, or the perception that
such sales could occur, will have on the market prices of Common Shares.
MODIFICATION OF FINAL TERMS OF THE MERGER PROPOSAL. If the Merger Proposal
is approved by CRIIMI MAE stockholders, CRIIMI MAE will have the authority to
consummate the Merger Proposal upon the terms generally described in this Proxy
Statement subject to such modifications as the Board (with the Principals
abstaining) determines to be fair and in the best interest of CRIIMI MAE and the
Public Stockholders. If the terms of the Merger Proposal change in any material
respect from those described in this Proxy Statement, CRIIMI MAE will be
required to resolicit stockholder approval of the Merger Proposal upon such
revised terms.
CONSENTS. The Closing is conditioned, among other things, on the receipt of
consents from the United States Department of Housing and Urban Development
("HUD"), certain lenders (including a group of banks), partners (including
partners in AIM Acquisition Partners, L.P.) of CRIIMI MAE, CRI or its
affiliates, and other parties (for which the CRI Mortgage Businesses act as
servicers). CRIIMI MAE has submitted its application to HUD. CRIIMI MAE has
initiated discussions concerning the other consents, which do not require formal
applications. Although CRIIMI MAE anticipates receiving all necessary consents,
there can be no assurance that such consents will be obtained. See "--
Regulatory Matters."
ADDITIONAL RISKS OF FAILING TO QUALIFY AS A REIT FOLLOWING THE MERGER. As a
result of the Merger Proposal certain changes to the structure and nature of
CRIIMI MAE's operations will expose CRIIMI MAE to the additional risk that it
may fail to maintain its qualification as a REIT under Section 856(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). As of the end of any
quarter of its fiscal year, a REIT may
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not own more than 10% of any one issuer's outstanding voting securities and the
value of any one issuer's securities may not exceed 5% of the value of the
REIT's gross assets. If either the debt of the Services Corporation to CRIIMI
Management or the non-voting stock of the Services Corporation was
re-characterized as voting stock or if the voting stock of the Services
Corporation was attributed to CRIIMI MAE, CRIIMI MAE might violate this rule. In
the opinion of Special Counsel, neither the non-voting stock of the Services
Corporation owned by CRIIMI MAE nor the debt from the Services Corporation to
CRIIMI Management will cause CRIIMI MAE to violate these requirements, nor will
the voting stock of the Services Corporation otherwise be attributed to CRIIMI
MAE or cause CRIIMI MAE to violate these requirements. Another REIT requirement
is that not more than 5% of its income be from various sources including the
servicing of mortgages held by third parties. The income of the Services
Partnership would constitute such disqualified income but, in the opinion of
Special Counsel, only 8% of such income will be attributed to CRIIMI MAE as an
8% partner in the Services Partnership via CRIIMI Management, a qualified REIT
subsidiary. Although CRIIMI MAE believes that it will be organized and will
continue to operate so as to maintain its status as a REIT, no assurance can be
given that CRIIMI MAE will be organized or will be able to continue to operate
in a manner so as to remain so qualified. Qualification as a REIT involves the
satisfaction of numerous requirements (some on an annual and quarterly basis)
established under highly technical and complex Code provisions for which there
are only limited judicial or administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
CRIIMI MAE's control.
If CRIIMI MAE were to fail to qualify as a REIT in any taxable year, CRIIMI
MAE would be subject to federal and state income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. Moreover,
unless entitled to relief under certain statutory provisions, CRIIMI MAE also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. This treatment would
reduce the net earnings of CRIIMI MAE available for investment or distribution
to stockholders because of the additional tax liability of CRIIMI MAE for the
years involved. In addition, CRIIMI MAE would no longer be required to make
distributions to stockholders.
Even if CRIIMI MAE maintains its qualification as a REIT, it will be subject
to certain federal, state and local taxes on its income and assets. In addition,
the Services Corporation's share of the income from the Services Partnership's
management, servicing and advisory operations generally will be subject to
federal income tax at regular corporate rates. See "-- Certain Federal Income
Tax Consequences."
DILUTION UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. CRIIMI MAE's pro
forma net income per share for the year ended December 31, 1994, was $1.00,
compared to $1.07 on a historical basis. Thus, under generally accepted
accounting principles the Merger Proposal will involve dilution of $0.07 per
share. See, however, "Dividend Policy -- Adjusted Pro Forma Accretion to Tax
Basis Income per Share," indicating that under certain specified assumptions the
Merger Proposal's effect on tax basis income per share is anti-dilutive. CRIIMI
MAE's pro forma tangible net book value per share as of December 31, 1994, was
$7.84, compared to $9.16 on a historical basis. Thus, under generally accepted
accounting principles the Merger Proposal will involve dilution in tangible net
book value of $1.32 per share.
CONFLICTS OF INTEREST. While the Merger Proposal will eliminate many
conflicts of interest between CRIIMI MAE and the Principals, after the Merger
certain conflicts of interest between CRIIMI MAE and the Principals will remain:
THE CRI RETAINED OPERATIONS. Although CRIIMI MAE is succeeding to
substantially all of the business activities of the CRI Mortgage Businesses, CRI
will retain certain operations and assets, including: (1) CRI's existing general
partnership and minority economic interests in certain partnerships which,
directly or indirectly, own equity or debt investments in multifamily and
commercial properties; (2) CRI's mortgage trading operations; and (3) the
advisory agreement (the "CRI Liquidating Advisory Agreement") between CRI
Liquidating and the Adviser, which will be the only advisory agreement of the
Adviser after the Merger (collectively, the "CRI Retained Operations"). CRIIMI
MAE will receive no advisory fees pursuant to the CRI Liquidating Advisory
Agreement, which fees will continue to be paid to the Adviser, an affiliate of
CRI; however, CRIIMI MAE will be reimbursed, at cost, for employees' time and
expenses related to services
31
<PAGE>
provided to the Adviser in connection with the CRI Liquidating Advisory
Agreement. CRIIMI MAE believes that to some extent the CRI Retained Operations
may compete with CRIIMI MAE, in connection with the activities referred to in
the first sentence of this paragraph. For a discussion of certain related
businesses of CRI not being acquired in the Merger, see "-- Certain Relationship
and Related Party Transactions."
CAPITAL STRUCTURE OF SERVICES CORPORATION. The Principals and Executive
Officers will own 100% of the voting common stock of the Services Corporation;
these shares are entitled to receive 5% of the dividends paid by the Services
Corporation. See "-- Benefits to the Principals Resulting from the Merger
Proposal -- Services Corporation Shares."
NON-ARM'S-LENGTH TRANSACTIONS. The terms of the Merger Proposal (including
the Merger Agreement) were determined by negotiations between the Principals and
other representatives of CRI, and representatives of CRIIMI MAE, including the
Special Committee and Merrill Lynch. See "-- Considerations and Events Leading
to the Merger." Nevertheless, there can be no assurance that the terms of such
agreements represent the best terms that could have been obtained or that
actions to enforce such agreements will be timely or effectively taken. Any such
failure could result in loss to CRIIMI MAE. In connection with the structuring
of the Merger Proposal, CRIIMI MAE will engage in certain transactions with
certain of its stockholders, officers, directors and their affiliates, which
have not, or may be considered as having not, occurred at arm's-length. See "--
Conflicts of Interest of Certain Persons in the Merger."
RESOLUTION OF FUTURE CONFLICTS. The directors of CRIIMI MAE, other than the
Principals, will act on behalf of CRIIMI MAE in connection with the resolution
of conflicts of interest that may arise in the future between CRIIMI MAE and the
Principals. Such directors and the Principals believe that such directors will
act appropriately in connection with such resolution. Although Messrs. Tardio
and Carlson have been directors of CRIIMI MAE since 1989 and Mr. Dunnells has
been a director of CRIIMI MAE since 1991, serving with the Principals, they are
not affiliates of CRI or the Principals.
CONFLICTS OF INTEREST OF CERTAIN PERSONS IN THE MERGER
The Common Shares are listed on the New York Stock Exchange. Under a New
York Stock Exchange policy, the approval of the stockholders of CRIIMI MAE is
required in connection with the acquisition of businesses from directors and
officers of CRIIMI MAE for the continued listing of the Common Shares. The
Principals have been directors and senior executive officers of CRIIMI MAE since
its formation in 1989. Accordingly, the stockholders of CRIIMI MAE are being
requested by the Board to approve the Merger Proposal. The Principals are all of
the stockholders and directors of CRI and the CRI Mortgage Businesses.
32
<PAGE>
The Principals are two of the five members of the Board. The following table
lists each executive officer and director of CRIIMI MAE and their respective
positions with CRI and the CRI Mortgage Businesses:
<TABLE>
<CAPTION>
POSITION WITH CRI AND
EACH
POSITION WITH OF THE MORTGAGE
NAME CRIIMI MAE BUSINESSES
- ------------------------------ -------------------------------------------- -------------------------
<S> <C> <C>
William B. Dockser Chairman of the Board Chairman
H. William Willoughby Director, President and Secretary Director, President* and
Secretary
Jay R. Cohen Executive Vice President and Treasurer Senior Vice President**
Frederick J. Burchill Executive Vice President Senior Vice President
Deborah A. Linn General Counsel Senior Vice President and
General Counsel
Cynthia O. Azzara Senior Vice President and Chief Financial Vice President
Officer
Garrett G. Carlson, Sr. Director --
G. Richard Dunnells Director --
Robert F. Tardio Director --
<FN>
- ------------------------
* Except for CRICO Mortgage, of which he is Senior Executive Vice President.
** Except for CRICO Mortgage, of which he is President.
</TABLE>
The Merger Proposal is conditioned, among other things, on the affirmative
vote of the holders of a majority of the outstanding Common Shares voted at a
meeting where a quorum is present. As of the Record Date, there were 26,888,456
Common Shares outstanding. The 367,395 Common Shares beneficially owned by the
Principals, the Executive Officers and the directors of CRIIMI MAE will be
counted for purposes of determining this majority vote, as well as the presence
of a quorum. Therefore, it is possible for the Merger Proposal to be approved
with the votes of less than a majority of the Common Shares voted by persons who
are not officers or directors of CRIIMI MAE.
Pursuant to the Merger Agreement, the Principals have agreed to vote the
Common Shares which they beneficially own in favor of the Merger Proposal. See
"The Merger Agreement -- Principal Features of the Merger -- Additional
Agreements." It is anticipated that the Common Shares beneficially owned and
entitled to be voted by the other officers and directors of CRIIMI MAE also will
be voted in favor of the Merger Proposal.
VALUE OF PRINCIPALS TO CRIIMI MAE
BACKGROUND AND EXPERIENCE OF PRINCIPALS. For more than twenty years, the
Principals have been successfully involved in all phases of the development,
construction, financing, refinancing, improvement and management of multifamily
residential properties across the United States.
Previously, Mr. Dockser served in various positions at HUD culminating in
the post of Deputy FHA Commissioner and Deputy Assistant Secretary for Housing
Production and Mortgage Credit, where he was responsible for all federally
insured housing production programs. Mr. Dockser's experience also includes
serving as President of Kaufman and Broad Asset Management, Inc., which managed
publicly held limited partnerships created to invest in low- and moderate-income
multifamily apartment complexes. Mr. Dockser formed CRI in 1974 and has been
Chairman of the CRI Board and a Director of CRI since that time.
Mr. Willoughby was Vice President of Shelter Corporation of America and a
number of its subsidiaries dealing principally with real estate development and
equity financing. Mr. Willoughby joined CRI as Senior Executive Vice President,
Secretary and a Director in 1974, and has been President of CRI since 1990.
33
<PAGE>
Since 1974, Messrs. Dockser and Willoughby built the businesses that are
owned by CRI and its affiliates, including the CRI Mortgage Businesses. For more
than 20 years, CRI and its affiliates, under the direction and control of
Messrs. Dockser and Willoughby, have been involved in mortgage origination,
underwriting, investment and related activities, and the acquisition,
development, financing and management of multifamily properties. See
"Introduction" and "Information Concerning the CRI Mortgage Businesses" with
respect to the activities of CRICO Mortgage, CRI/AIM Management and the Adviser.
CRI is a general partner for approximately 200 limited partnerships that
have invested in partnerships which own multifamily housing and office, hotel
and retail properties.
CRIIMI MAE and CRI Liquidating were formed in 1989 to effect the merger into
CRI Liquidating of three federally insured mortgage funds sponsored by CRI.
VALUE TO CRIIMI MAE. As noted above, CRIIMI MAE believes that its best
opportunities for growth are (i) the expansion of its lines of business to
include mortgage origination and servicing activities, and (ii) the
diversification of its investments, including investments in higher-yielding,
higher-risk subordinated securities. See "The Merger Proposal -- Considerations
and Events Leading to the Merger." Due to the Principals' extensive background
and experience concerning multifamily properties, and their successes in
building CRI and its affiliates, including the CRI Mortgage Businesses and
CRIIMI MAE, the Special Committee and the Board believe that, although other
individuals or entities could manage CRIIMI MAE, the Principals are the best
individuals to manage CRIIMI MAE's assets and growth strategies. This belief was
supported by the analysis of, and consultations with, Duff & Phelps and the
views of Merrill Lynch as financial adviser to CRIIMI MAE with respect to the
Merger Proposal. The Principals' personal experience in developing and building
mortgage origination and servicing businesses should allow CRIIMI MAE to
capitalize on available opportunities while limiting its risk in these new
areas. Moreover, although investments in subordinated securities generally can
carry greater risks than CRIIMI MAE's historic investments in insured mortgages,
careful due diligence and close monitoring of the underlying mortgages can help
reduce this risk. See "The Merger Proposal -- Considerations and Events Leading
to the Merger." CRIIMI MAE believes that the Principals' experience in dealing
with the performance and management of multifamily properties of a type that
secure the mortgages underlying these subordinated securities will enable CRIIMI
MAE to reduce the risks associated with these investments.
ALIGNMENT OF INCENTIVES. If the Merger Proposal is consummated, the
Principals will have a significant ownership interest in CRIIMI MAE, in the form
of Common Shares and options to acquire Common Shares, thereby aligning their
incentives with the Public Stockholders. Moreover, the restrictions on the
Principals' dispositions of the Common Shares received in the Merger, as well as
the terms of the employment and non-competition agreements and the vesting
schedule for the options, are substantial evidence of, and incentives for, the
Principals' long-term commitment to CRIIMI MAE.
BENEFITS TO THE PRINCIPALS RESULTING FROM THE MERGER PROPOSAL
The Merger Proposal, if consummated, will result in the following benefits
to the Principals:
ISSUANCE OF COMMON SHARES. The Principals will receive up to 2,650,838
Common Shares, subject to a maximum aggregate market value at the consummation
of the Merger of $21,984,000. On the Closing Date, the Principals will
beneficially own a total of 10.0% of the issued and outstanding Common Shares
(assuming the issuance of a total of 2,761,290 Common Shares and no other
issuances by CRIIMI MAE).
LIABILITY FOR DEBT; RELEASE FROM OBLIGATION. CRIIMI Management will become
liable for aggregate indebtedness of approximately $9,100,000 of the CRI
Mortgage Businesses. The $9,100,000 of indebtedness consists of two borrowings,
a working capital loan (the "WCL") and a loan to CRI/AIM Management ("CRI/ AIM
Loan"), under one credit facility with a commercial bank, with outstanding
balances of $4,097,817 and $5,002,183, respectively, at December 31, 1994. The
WCL originated in June 1989, and has been repaid in varying amounts. The
proceeds of the WCL have been used over the past several years for financing
various working capital and investment needs of CRI's businesses, including its
mortgage businesses. The CRI/AIM Loan arose when CRI/AIM Management borrowed
$7,000,000 in September, 1993, in the form of a repurchase obligation with an
unrelated party. The proceeds of the CRI/AIM Loan were used principally to
34
<PAGE>
retire subordinated debt of CRI in 1993. The WCL and CRI/AIM Loan were
guaranteed by CRICO Mortgage and other CRI affiliates. The Principals, CRI and
its affiliated entities will be released from their obligations with respect to
the $9,100,000 of debt.
CRIIMI MAE has agreed in principle with the lender to modify both the WCL
and CRI/AIM Loan to provide for aggregate quarterly principal payments of
$650,000 and interest at CRIIMI MAE's choice of one, two or three-month LIBOR
plus a spread of 125 basis points. An upfront fee will be paid based on 25 basis
points on the initial principal balance. The anticipated maturity date of the
loan is expected to be December 31, 1998.
CRI will be released from its obligations as a guarantor of the difference
between $700,000 and any lesser amount received annually from cash flow
distributions received by CRIIMI MAE with respect to its 50% limited partnership
interest in CRI/AIM Investment Limited Partnership. These guaranty payments
totalled $301,664 and $312,222 in 1993 and 1994, respectively, and could grow in
future periods. Although the benefit to the Principals of terminating this
guaranty obligation was not separately valued by Duff & Phelps, the obligation
of the CRI Mortgage Businesses to make payments pursuant to the guaranty was
taken into account by Duff & Phelps in its assessment of the value of the CRI
Mortgage Businesses and reduced such value.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS; OPTIONS. In connection with the
Merger Proposal, CRIIMI Management will enter into employment and
non-competition agreements with each of the Principals. Each Principal's
employment agreement will provide for minimum annual compensation of $125,000
and a term expiring on the fifth anniversary of the Closing Date. The agreements
will 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.
Each of the Principals will receive options to purchase (1) 1,000,000 Common
Shares at an exercise price of $1.50 per share more than the Trading Price, and
(2) 500,000 Common Shares at an exercise price of $4.00 per share more than the
Trading Price. In no event may the exercise price be less than the market value
on the date the option is granted. Such options vest in equal installments on
the first five anniversaries of the Closing Date and expire on the eighth
anniversary of the Closing Date. If a Principal voluntarily terminates his
employment with CRIIMI Management or is terminated for cause, in general (1) all
of his vested options must be exercised within 180 days following such
termination or such options will expire, and (2) his unvested options will
expire immediately. Upon the death of a Principal, any unvested options will
vest immediately.
Each of the employment agreements will 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 is terminated other than for "cause" or pursuant to an
"involuntary resignation" (as such terms are defined in the employment
agreements). Following the Merger, the Principals will 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 and 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. See "-- Certain Relationships and Related Party Transactions."
SERVICES CORPORATION SHARES. The Services Corporation will have both voting
and non-voting common stock. The shares of non-voting common stock will be
entitled to 95% of the dividends paid by the Services Corporation on its
outstanding common stock and will be owned by CRIIMI MAE. The shares of voting
common stock will be entitled to 5% of the dividends paid by the Services
Corporation on its outstanding common stock and will be purchased by the
Principals and the Executive Officers. The total consideration
35
<PAGE>
received by the Services Corporation for its common stock will be $300,000, to
provide adequate capital. Each of the Principals will pay $3,750 for one-quarter
of the voting common stock of the Services Corporation. Mr. Cohen, Mr. Burchill,
Ms. Linn and Ms. Azzara will pay $2,190, $2,190, $1,560 and $1,560,
respectively, for 14.6%, 14.6%, 10.4% and 10.4% of the voting common stock of
the Services Corporation. CRIIMI MAE will pay $285,000 for all the outstanding
non-voting common stock of the Services Corporation.
DEFERRED COMPENSATION. Pursuant to the Merger Proposal, CRIIMI Management
will acquire a note in the principal amount of $5,002,183 payable by CRI to
CRI/AIM Management (the "CRI Receivable"). Under the CRI Receivable, interest is
payable at the Applicable Federal Rate (as defined in the Code) as of the
Closing Date and level payments of principal and interest are payable quarterly
until maturity in 2005. The Applicable Federal Rate is approximately 7.5% as of
April 1995. CRIIMI Management will concurrently enter into a deferred
compensation arrangement with each of the Principals for services rendered in
connection with the Merger pursuant to which CRIIMI Management will agree to
pay, to the extent received with respect to the CRI Receivable, approximately
$2,500,000 to each of the Principals as deferred compensation. CRIIMI
Management's obligation to pay the deferred compensation is generally limited to
the creation, upon the Closing, of an irrevocable grantor trust for the benefit
of the Principals, and to the transfer to such trust of the CRI Receivable. The
deferred compensation will be paid only to the extent CRI makes principal
payments on the CRI Receivable. Interest payments received by CRIIMI Management
on the CRI Receivable will be paid to each of the Principals as additional
compensation so long as the Principal continues to be employed by CRIIMI
Management.
AVOIDANCE OF RISK OF NONRENEWAL OF ADVISORY AGREEMENT. Of the 1994 fee
revenues of the CRI Mortgage Businesses, approximately 61% was from CRIIMI MAE.
Additionally, approximately 62% of the CRI Mortgage Businesses' net income and
operating cash flow for the year ended December 31, 1994 was generated from
services provided under the Advisory Agreement. Under the Merger Proposal, one
of the assets being transferred is the Adviser's interest under the Advisory
Agreement. Thus, if the Merger Proposal is consummated the Principals will
eliminate the risk of loss of a contract that accounted for a substantial
portion of the revenues of the CRI Mortgage Businesses and would be difficult to
replace. See "-- Opinion of Duff & Phelps -- Description of Analyses."
CRITEF FUNDS -- NONPAYMENT OF SERVICING FEES. The three CRITEF funds (the
"CRITEF Funds"), which invest in tax-exempt mortgage revenue loans secured by
multifamily residential properties, have as their general partner an affiliate
of CRI. Such loans are serviced by the CRI Mortgage Businesses. The majority of
the properties at December 31, 1994 and 1993 were unable to make their full debt
service payments and were therefore restricted from paying servicing fees to the
CRI Mortgage Businesses. To the extent that the CRITEF Funds, after the
consummation of the Merger Proposal, receive services from CRIIMI MAE and its
affiliates for which payment is not made, a benefit will be received by the
Principals.
The total unpaid principal balance of the 18 CRITEF loans which are serviced
by the CRI Mortgage Businesses is approximately $207 million, and the servicing
fee on each loan ranges from 0.625% to 0.75% of the unpaid principal balance.
A summary of the uncollected and collected CRITEF servicing fees from 1989
(the first year fees were not fully collected) through December 31, 1994, is as
follows:
<TABLE>
<CAPTION>
UNCOLLECTED COLLECTED
FEES FEES
--------------- -------------
<S> <C> <C>
1989...................................................... $ 78,624 $ 346,720
1990...................................................... 144,237 996,217
1991...................................................... 624,935 693,078
1992...................................................... 915,256 428,465
1993...................................................... 1,037,553 260,858
1994...................................................... 1,098,640 154,175
--------------- -------------
Total..................................................... $ 3,899,245 $ 2,879,513
--------------- -------------
--------------- -------------
</TABLE>
36
<PAGE>
The CRI Mortgage Businesses expect to receive servicing fees of
approximately $96,000 from 2 of these 18 loans during 1995. The costs to service
the 18 loans approximate $30,000 per year, resulting in an estimated net profit
in 1995 of $66,000. CRIIMI MAE believes the average market rate to service loans
similar to the CRITEF loans ranges from 0.11% to 0.15% of the unpaid principal
balance. The estimated servicing fees of the CRITEF loans, based on these
average market rates, range from $227,700 to $310,500 per year. After estimated
costs to service the 18 loans of $30,000 per year, the net profit, assuming
payment at these market rates, would range from $197,700 to $280,500, or
$131,700 to $214,500 greater than the $66,000 estimated for 1995. Therefore, the
payment of below-market servicing fees for the aggregate portfolio is an
additional benefit to the Principals, ranging from $131,700 to $214,500 per
year. See Note 2e to the CRI Mortgage Businesses' Combined Financial Statements.
See also "Information Concerning the CRI Mortgage Businesses -- CRICO Mortgage
- -- CRITEF Servicing."
As is generally true of servicing agreements, CRIIMI MAE will be exposed to
the risk of claims against it based an alleged negligence or other failure to
perform its obligations to the CRITEF Funds, which obligations are primarily to
collect and disburse funds from borrowers. The nonpayment of fees by the CRITEF
Funds will not relieve CRIIMI MAE of its obligations as servicer. See " -- Risks
of the Merger Proposal to CRIIMI MAE and Stockholders of CRIIMI MAE -- Risks
Associated with the Mortgage Advisory Business."
In view of the experience of the CRI Mortgage Businesses with servicing for
the CRITEF Funds, CRIIMI MAE is unlikely to increase the collectibility of
servicing fees from the CRITEF Funds without substantial improvements in the
performances of the underlying properties or restructuring of the loans
involved. From time to time, the CRITEF Funds have considered, and now continue
to explore, the possibility of refunding the tax-exempt bonds issued in
connection with the loans or otherwise restructuring the CRITEF Funds, which
could include a reduction in the interest rates. Such a transaction could
provide cash flow or other funds for the payment of future servicing fees, as
well as earned but unpaid fees. There can be no assurance that any such
transaction can be achieved. Since the rights to the fees earned prior to the
consummation of the Merger will not be transferred to CRIIMI Management, any
future payment of such fees would be a benefit to the Principals.
37
<PAGE>
SUMMARY. The foregoing benefits are summarized in the following table:
<TABLE>
<CAPTION>
AGGREGATE
DESCRIPTION OF BENEFITS VALUE
- ----------------------------------------------------------- -----------
<S> <C> <C>
Issuance of Common Shares -- Maximum....................... $21,984,000 Note 1
Assumption of Debt......................................... 9,100,000 Note 2
Release from Obligation.................................... -- Note 3
Employment & Non-Competition Agreements.................... 250,000 Note 4
Options to Purchase Common Shares.......................... 1,500,000 Note 5
Services Corporation Shares................................ 7,500 Note 6
Deferred Compensation...................................... 0 Note 7
Avoidance of Risk of Nonrenewal of Advisory Agreement...... -- Note 8
CRITEF Funds -- Nonpayment of Servicing Fees............... -- Note 9
-----------
Total Aggregate Value to Principals.................... $32,841,500
-----------
-----------
</TABLE>
Note 1: Value based on maximum number of shares issued of 2,650,838, subject to
a maximum market value of $21,984,000. The value on the date the
Merger Agreement was executed was approximately $18,900,000 based on a
value of $7.125 per share, representing the closing price of the
Common Shares on the day the Merger Agreement was executed.
Note 2: Value based on the actual amount of debt outstanding that will be
assumed in the Merger.
Note 3: This value was not separately determined but was a factor considered in
arriving at the number of Common Shares to be issued, the amount of
debt to be assumed and the options to be granted. See table in
APPENDIX C entitled "Estimated Projected Cash Flows -- AIM Fund
Submanagement."
Note 4: Value based on total of Principals' minimum annual compensation
pursuant to their Employment Agreements.
Note 5: Value based on estimate (includes options to be issued to the Executive
Officers).
Note 6: Value based on aggregate amount paid by the Principals for their 50%
interest in the shares of voting common stock of the Services
Corporation. The estimated value is limited to the Principals'
contributions because after debt service is made on the 15-year
installment note (as discussed in Note 4(C) to the "Unaudited Pro
Forma Financial Information") the Services Corporation does not expect
to pay dividends to its shareholders in the foreseeable future.
Note 7: Any value of deferred compensation is offset by the CRI Receivable, in
a like amount, for which CRIIMI MAE paid no consideration.
Note 8: This value was not separately determined but was a factor considered in
arriving at the number of Common Shares to be issued, the amount of
debt to be assumed and the options to be granted. See the table in
APPENDIX C entitled "Estimated Projected Cash Flows -- Fees Under the
CRIIMI MAE Advisory Agreement."
Note 9: This value was not separately determined but was a factor considered in
arriving at the number of Common Shares to be issued, the amount of
debt to be assumed and the options to be granted. See "The Merger
Proposal -- Benefits to the Principals Resulting from the Merger
Proposal -- CRITEF Funds -- Nonpayment of Servicing Fees" and the
table in APPENDIX C entitled "Estimated Projected Cash Flows -- Other
Mortgage Businesses."
38
<PAGE>
COMMON SHARE OWNERSHIP AFTER THE MERGER
The following table presents certain information regarding the beneficial
ownership of Common Shares by the directors and executive officers of CRIIMI
MAE, including the Principals, as of the Record Date, and on a pro forma basis
after the Merger. On the Record Date there were 26,888,456 Common Shares
outstanding. After the Merger there are assumed to be 29,649,746 Common Shares
outstanding.
<TABLE>
<CAPTION>
AT APRIL 24, 1995(1) AFTER MERGER(2)
------------------------------- ------------------------------
PERCENTAGE OF PERCENTAGE OF
NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
COMMON SHARES COMMON SHARES COMMON SHARES COMMON SHARES
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
William B. Dockser (2)...................................... 231,680 * 1,557,099 5.3
H. William Willoughby (2)................................... 89,681 * 1,415,100 4.8
Garrett G. Carlson, Sr...................................... 2,000 * 2,000 *
G. Richard Dunnells......................................... 1,533 * 1,533 *
Robert F. Tardio............................................ 349 * 349 *
Jay R. Cohen................................................ 41,435 * 81,599 *
Frederick J. Burchill....................................... 2,968 * 43,132 *
Deborah A. Linn............................................. 516 * 15,578 *
Cynthia O. Azzara........................................... -- * 15,062 *
All directors and executive officers as a group (9
persons)................................................... 367,395 1.4 3,128,685 10.6
<FN>
- ------------------------
* Less than 1%.
(1) For additional information concerning the beneficial ownership of Common
Shares, see "Security Ownership of Certain Beneficial Owners and
Management."
(2) Assumes the issuance of 1,325,419 Common Shares to each of the Principals
in the Merger.
</TABLE>
The above table does not include Common Shares issuable pursuant to options
for an aggregate of 3,000,000 Common Shares to be granted in connection with the
Merger Proposal to the Principals and options for an aggregate of 230,000 Common
Shares to be granted in connection with the Merger to other officers and
employees of CRIIMI MAE. None of the options is exercisable within 60 days after
the Closing Date.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
CRI LIQUIDATING ADVISORY AGREEMENT. Under the CRI Liquidating Advisory
Agreement the Adviser is obligated to evaluate and negotiate voluntary mortgage
dispositions, provide administrative services and conduct day-to-day affairs for
CRI Liquidating. Pursuant to the CRI Liquidating Advisory Agreement, the Adviser
receives annual fees for managing the portfolio of CRI Liquidating. 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 referred to as the deferred component. The deferred
component, also calculated as a percentage of average invested assets, is
computed each quarter but paid (and expensed) only upon meeting certain
cumulative 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, incentive fees are paid by CRI Liquidating on a current basis if
certain performance goals are met. For the year ended December 31, 1993, CRI
Liquidating paid the Adviser annual fees of $1,234,291, of which $990,599 was
the base component and $243,692 was the deferred component, and incentive fees
of $256,290. For the year ended December 31, 1994, CRI Liquidating paid the
Adviser annual fees of $696,342, of which $577,683 was the base component and
$118,659 was the deferred component, and incentive fees of $394,812. In
addition, for the years ended December 31, 1993 and 1994, CRI Liquidating
reimbursed the Adviser $254,039 and $285,423, respectively, for expenses
incurred.
The annual fee is calculated separately for each of the remaining mortgage
pools from the former funds that were merged into CRI Liquidating in 1989 (the
"CRIIMI Merger"). The deferred component of the annual fee is subject to certain
cumulative performance goals, as described below.
39
<PAGE>
With respect to CRI Insured Mortgage Investment Limited Partnership ("CRIIMI
I"), the annual fee equals 0.75% of average invested assets invested in mortgage
investments transferred by CRIIMI I in the CRIIMI Merger, one-third of which is
deferred and paid on a cumulative basis only during such quarters as the
carryover CRIIMI I target yield, as discussed below, is achieved on a cumulative
basis. Any such deferred amounts are paid only out of proceeds or mortgage
dispositions attributable to CRIIMI I mortgage investments.
With respect to CRI Insured Mortgage Investments II, Inc. ("CRIIMI II"), the
annual fee equals 0.75% of average invested assets invested in existing mortgage
investments transferred by CRIIMI II in the CRIIMI Merger, one-fourth of which
is deferred and paid on a cumulative basis only during such quarters as the
carryover CRIIMI II target yield, as discussed below, is achieved on a
cumulative basis. Any such deferred amounts are paid only out of operating
income attributable to CRIIMI II mortgage investments.
With respect to CRI Insured Mortgage Investments III Limited Partnership
("CRIIMI III"), the annual fee equals 0.25% of average invested assets invested
in mortgage investments transferred by CRIIMI III in the CRIIMI Merger. As of
December 31, 1993, this fee was reduced to 0.125% for any quarter in which the
carryover CRIIMI III cumulative annual fee yield, as discussed below, is not
achieved.
The carryover CRIIMI I target yield is achieved during any quarter that the
former CRIIMI I mortgage investments transferred in the CRIIMI Merger generate a
cumulative yield (including gains or losses on mortgage dispositions) on amounts
invested in such assets of 13.33% per annum based on financial statement income.
The carryover CRIIMI II target yield is achieved during any quarter that the
former CRIIMI II mortgage investments transferred in the CRIIMI Merger generate
a cumulative yield (including gains or losses on mortgage dispositions) on
amounts invested in such assets of 11.66% per annum based on financial statement
income. The carryover CRIIMI III cumulative annual fee yield is achieved during
any quarter, commencing after December 31, 1993, in which the former CRIIMI III
mortgage investments transferred in the CRIIMI Merger generate a cumulative
yield (including gains or losses on mortgage dispositions) on amounts invested
in such assets of 10.89% per annum based on financial statement income.
CRI is the general partner of the Adviser. The Principals own the majority
of the limited partnership interests in the Adviser. An interest of 0.001% in
the Adviser is owned by Martin C. Schwartzberg as a limited partner.
After the Merger, the Adviser will continue to perform advisory services
under the CRI Liquidating Advisory Agreement. Pursuant to the CRI Liquidating
Reimbursement Agreement to be entered into between the Adviser and CRIIMI
Management in connection with the Merger Proposal, the employees of CRIIMI
Management will perform certain functions on behalf of the Adviser under the CRI
Liquidating Advisory Agreement. Neither CRIIMI Management nor CRIIMI MAE, which
owns approximately 57% of CRI Liquidating, will receive advisory fees under the
CRI Liquidating Advisory Agreement. However, CRIIMI Management will be
reimbursed, at cost, for its employees' time and expenses pursuant to the CRI
Liquidating Reimbursement Agreement. During 1994, CRI Liquidating reimbursed CRI
$285,423 for services provided on its behalf in connection with the CRI
Liquidating Advisory Agreement. It is anticipated that the reimbursement that
will be paid to CRIIMI Management from CRI Liquidating subsequent to the Merger
will not vary significantly from the amount paid to CRI during 1994.
CRI SUBLEASE. CRIIMI MAE will continue to maintain its headquarters office
at The CRI Building in Rockville, Maryland. CRIIMI MAE will sublease
approximately 11,800 square feet of office space leased by CRI in The CRI
Building for headquarters purposes, at a total annual rent of approximately
$237,000 for 1995. 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.
ADMINISTRATIVE SERVICES AGREEMENT. Pursuant to the CRI Administrative
Services Agreement, CRI will provide CRIIMI MAE and its subsidiaries 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
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services provided under the CRI Administrative Services Agreement to the extent
such services are not performed by CRIIMI MAE 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
annual charges under the CRI Administrative Services Agreement to approximate
$190,000 during 1995.
REGISTRATION RIGHTS AND LOCK-UP AGREEMENT. The Common Shares received by
the Principals and the Executive Officers pursuant to the Merger Proposal (the
"Restricted Shares") will be "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. The Principals and the Executive Officers will be required to enter into a
Registration Rights and Lock-Up Agreement with CRIIMI MAE pursuant to which
those persons will not be 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 meeting 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; OPTIONS. In connection with the
Merger Proposal, CRIIMI Management will enter into employment agreements with
each of the Principals (see "-- Benefits to the Principals Resulting from the
Merger Proposal -- Employment and Non-Competition Agreements; Options") and 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
will include provisions prohibiting the Executive Officer from competing with
CRIIMI Management, CRIIMI MAE or CRIIMI MAE's affiliated entities while employed
by CRIIMI Management. In certain circumstances, the Executive Officer's unvested
Common Shares acquired at the Closing will be forfeited to CRIIMI Management. At
the Closing, Mr. Cohen and Mr. Burchill will each receive a stock option for
65,000 Common Shares and Ms. Linn and Ms. Azzara will each receive a stock
option for 25,000 Common Shares. Nine other employees of CRIIMI MAE will
receive, at the Closing, stock options for a total of 50,000 Common Shares. The
stock options will have an exercise price of $1.50 per share more than the
Trading Price. In no event may the exercise price be less than the market value
on the date the option is granted. The Executive Officers' options vest in equal
installments on the first three anniversaries of the Closing Date and expire on
the eighth anniversary of the Closing Date.
CONSEQUENCES OF FAILURE TO APPROVE THE MERGER
If the Merger is not approved, CRIIMI MAE intends to continue to conduct its
business generally in a manner consistent with past practices. CRIIMI MAE is
unable to predict the exact consequences any rejection of the Merger Proposal
will have. The Principals and their affiliates currently provide certain
mortgage advisory, asset management and administrative services to CRIIMI MAE.
If the Merger is not completed, there is no assurance that CRIIMI MAE will be
able to continue to obtain such services from the Principals or their affiliates
or from other third parties on favorable terms, after the expiration of the
Advisory Agreement in November 1995. Even if the Merger Proposal is approved
there is no assurance that the Merger Proposal will be consummated. However, to
the knowledge of CRIIMI MAE and the Principals,
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if the Merger Proposal is approved and the conditions set forth in the Merger
Agreement are satisfied, the Merger Proposal will be consummated as indicated
herein. See "Description of the Merger Agreement -- Principal Features of the
Merger -- Conditions to Closing."
EXPENSES
CRIIMI MAE has agreed to pay the expenses of the solicitation, including the
fees and expenses of the Special Committee, Duff & Phelps and Merrill Lynch,
together with the fees and expenses of CRIIMI MAE's counsel and independent
public accountants. CRI has agreed to pay the fees and expenses of its counsel
and independent public accountants, and the costs of the employees of CRI and
its affiliates in connection with the Merger, except to the extent such costs
are attributable to services performed on CRIIMI MAE's behalf. CRIIMI MAE
estimates that its share of such expenses will total approximately $3,010,000.
For services on the Special Committee each member was paid $25,000 plus
$1,500 for each meeting attended and $750 for each telephone conference call
involving two or more members.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences in connection with the Merger Proposal to a holder of Common Shares
who is a U.S. citizen or resident or which is a tax exempt organization
(including individual retirement accounts). Special Counsel in connection with
the Merger has reviewed the following discussion and is of the opinion that it
fairly summarizes the federal income tax considerations that are likely to be
material to such holders of Common Shares. Such discussion and opinion are based
on current law. The discussion is not exhaustive of all possible tax
considerations, nor does the discussion give a detailed description of any
state, local, or foreign tax considerations. This discussion does not describe
all of the aspects of federal income taxation that may be relevant to a
stockholder in light of his or her particular circumstances or to certain types
of stockholders (including insurance companies, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) subject to special treatment under the federal
income tax laws.
EACH STOCKHOLDER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX ADVISER
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE OWNERSHIP OF COMMON
SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST,
INCLUDING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF SUCH OWNERSHIP AND
ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL. CRIIMI MAE expects to continue to be taxed as a REIT for federal
income tax purposes. Management believes that CRIIMI MAE was organized, has
operated and, assuming consummation of the Merger, will continue to operate
after the Merger in such a manner as to meet the requirements for qualification
and taxation as a REIT under the Code, and intends to continue to operate CRIIMI
MAE in such a manner. No assurance, however, can be given that CRIIMI MAE will
continue to operate in a manner so as to remain qualified as a REIT.
In the opinion of Special Counsel, assuming CRIIMI MAE was organized in
conformity with and has satisfied, prior to the Merger, the requirements for
qualification and taxation as a REIT under the Code for each of its taxable
years from and including the first year for which CRIIMI MAE made the election
to be taxed as a REIT and the assumptions and representations referred to below
are true upon and following the Merger, the Merger will be consummated in
conformity with the requirements for continued qualification and taxation of
CRIIMI MAE as a REIT, and the proposed methods of operation of CRIIMI MAE,
CRIIMI Management, the Services Partnership and the Services Corporation
following the Merger, and the ownership of assets contemplated in the Merger
Proposal, will permit CRIIMI MAE to continue to so qualify for its current and
subsequent taxable years. This opinion is based on certain assumptions relating
to the organization and operation of the Services Corporation, CRIIMI Management
and the Services Partnership
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and is conditioned upon certain representations made by CRIIMI MAE and the CRI
Mortgage Businesses' personnel and affiliates as to certain factual matters
relating to the Merger, CRIIMI MAE's operations prior to the Merger and the
intended manner of operation after the Merger of CRIIMI MAE, CRIIMI Management,
the Services Partnership and the Services Corporation. The opinion is further
conditioned upon CRIIMI MAE and the Services Corporation not otherwise being
allocated more non-qualifying income than is consistent with the 95% gross
income test. See "-- Income Tests." Special Counsel is not aware of any facts or
circumstances that are inconsistent with these assumptions and representations.
Unlike a tax ruling, an opinion of counsel is not binding on the Internal
Revenue Service ("IRS"), and no assurance can be given that the IRS will not
challenge the status of CRIIMI MAE as a REIT for federal income tax purposes.
CRIIMI MAE's qualification and taxation as a REIT has depended and will depend
upon, among other things, CRIIMI MAE's ability to meet on a continuing basis,
through ownership of assets, actual annual operating results, receipt of
qualifying real estate income, distribution levels and diversity of stock
ownership, the various qualification tests imposed under the Code discussed
below. Special Counsel has not reviewed compliance with these tests prior to the
Merger and will not review compliance with these tests on a periodic or
continuing basis after the Merger. Special Counsel can give no assurance
respecting the satisfaction of such tests. See "-- Failure to Qualify."
The following is a general summary of certain of the Code sections that
affect the Merger. These sections of the Code are highly technical and complex.
This summary is qualified in its entirety by the applicable Code provisions,
rules and regulations promulgated thereunder ("Treasury Regulations"), and
administrative and judicial interpretations thereof as currently in effect.
There is no assurance that there will not be future changes in the Code,
Treasury Regulations or administrative or judicial interpretation thereof which
could adversely affect CRIIMI MAE's ability to continue to qualify as a REIT or
adversely affect the taxation of holders of Common Shares or which could further
limit the amount of income CRIIMI MAE may derive from the mortgage advisory and
servicing activities to be performed after the Merger.
THE CONSUMMATION OF THE MERGER WILL NOT BE A TAXABLE EVENT FOR FEDERAL
INCOME TAX PURPOSES FOR THE STOCKHOLDERS OF CRIIMI MAE.
A REIT is permitted to have a wholly-owned subsidiary (also referred to as a
"qualified REIT subsidiary") provided that such subsidiary satisfies certain
conditions. A qualified REIT subsidiary is not treated as a separate entity for
federal income tax purposes. Rather, all of the assets, liabilities and items of
income, deduction and credit of a qualified REIT subsidiary are treated as if
they were those of the REIT. CRIIMI Management will be a "qualified REIT
subsidiary" of CRIIMI MAE, and the assets, liabilities and items of income of
CRIIMI Management will be treated as assets, liabilities and items of income of
CRIIMI MAE.
A REIT is deemed to own its proportionate share of the assets of a
partnership in which it is a partner and is deemed to receive its proportionate
share of the income of the partnership. Thus, CRIIMI Management's share of the
assets, liabilities and items of income of the Services Partnership will be
treated as assets, liabilities and items of income of CRIIMI MAE for purposes of
applying the requirements described herein, provided that the Services
Partnership is treated as a partnership for federal income tax purposes.
INCOME TESTS. In order for CRIIMI MAE to maintain its qualification as a
REIT, there are three gross income tests that must be satisfied annually.
(1) At least 75% of CRIIMI MAE's gross income (excluding gross income
from prohibited transactions) for each taxable year must be rents from real
property and interest and certain other income earned from mortgages on real
property, gain from the sale of real property or mortgages (other than in
prohibited transactions) or income from qualified types of temporary
investments.
(2) At least 95% of CRIIMI MAE's gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived from the
same items which qualify under the 75% gross income test or from dividends,
interest and gain from the sale or disposition of stock or securities, or
from any combination of the foregoing.
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(3) Less than 30% of CRIIMI MAE's gross income (including gross income
from prohibited transactions) must be derived from gain in connection with
the sale or other disposition of stock or securities held for less than one
year, property in a prohibited transaction, and real property held for less
than four years (other than involuntary conversions and foreclosure
property).
CRIIMI MAE will derive a portion of its income from CRIIMI Management's
interest as an 8% general partner in the Services Partnership and CRIIMI MAE's
ownership of non-voting common stock of the Services Corporation, which is the
92% limited partner in the Services Partnership. The income derived via its 8%
general partnership interest will have the same character as it does in the
hands of the Services Partnership. Such income will generally not qualify under
the 95% and 75% gross income tests. The income derived by the Services
Corporation will be subject to corporate income tax when received by the
Services Corporation. To the extent the Services Corporation pays dividends to
CRIIMI Management, such dividends will be qualified income for purposes of the
95% gross income test, but not for purposes of the 75% gross income test.
Payments of interest on certain installment notes payable by the Services
Corporation to CRIIMI Management will reduce the taxable income of the Services
Corporation and will be qualified REIT income for CRIIMI MAE for the purposes of
the 95% gross income test, but not for purposes of the 75% gross income test.
Pursuant to Treasury Regulations, a partner's capital interest in a
partnership determines its proportionate interest in the partnership's gross
income from partnership assets for purposes of the 75% and 95% gross income
tests. CRIIMI Management's capital interest in the Services Partnership is 8%
and the Services Corporation's capital interest in the Services Partnership is
92%. CRIIMI MAE believes that the amount of non-qualifying gross income
estimated to be allocated to CRIIMI MAE in the years following the Merger will
be less than 5% of CRIIMI MAE's aggregate gross income.
If CRIIMI MAE fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if CRIIMI MAE's failure to meet such
tests was due to reasonable cause and not due to willful neglect, CRIIMI MAE
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedules was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances CRIIMI
MAE would be entitled to the benefit of these relief provisions. Even if these
relief provisions apply, a tax would be imposed with respect to the excess net
income.
ASSET TESTS. In order for CRIIMI MAE to maintain its qualification as a
REIT, at the close of each quarter of its taxable year, it must also satisfy
three tests relating to the nature of its assets.
(1) At least 75% of the value of CRIIMI MAE's total assets must be
represented by cash, cash items, government securities and real estate
assets. Real estate assets include stock and debt instruments held for not
more than the one-year period from the date new cash is received by CRIIMI
MAE from a stock offering or a public offering of long-term debt (debt with
a maturity of at least five years) of CRIIMI MAE.
(2) Not more than 25% of CRIIMI MAE's total assets may be represented by
securities other than those in the 75% asset class.
(3) Of the assets held in securities other than those in the 75% asset
class, the value of any one issuer's securities owned by CRIIMI MAE may not
exceed 5% of the value of CRIIMI MAE's gross assets, and CRIIMI MAE may not
own more than 10% of any one issuer's outstanding voting securities
(excluding securities of a qualified REIT subsidiary or another REIT). The
25% test is only triggered in a quarter in which a security or other
personal property is purchased but is not triggered by the acquisition of
only real estate assets. The 5% test must generally only be met for any
quarter in which a REIT acquires securities of a particular issuer.
CRIIMI MAE will be deemed to directly hold all real estate and other assets
of CRIIMI Management including assets deemed owned by CRIIMI Management through
its ownership of partnership interests in the Services Partnership and other
partnerships. As a result, management anticipates that more than 75% of
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CRIIMI MAE's assets will be real estate assets. In addition, management does not
expect CRIIMI MAE to hold (1) any securities representing more than 10% of any
one issuer's voting securities other than CRIIMI Management and CRIIMI Inc.,
which are qualified REIT subsidiaries, and CRI Liquidating, which is a REIT, nor
(2) securities of any one issuer exceeding 5% of the value of CRIIMI MAE's gross
assets (determined in accordance with generally accepted accounting principles).
In particular, the value of CRIIMI MAE's proportionate share of the CRI
Receivable, the notes payable by the Services Corporation to CRIIMI Management
and the stock of the Services Corporation, all of which may constitute
securities for this purpose, together constitute less than 5% of the value of
CRIIMI MAE's gross assets. CRIIMI MAE would not lose its qualifying status as a
REIT under the asset tests merely by reason of changes in asset values in a
subsequent quarter. However, this requirement must be satisfied not only upon
the initial acquisition of such securities, but also each time CRIIMI MAE
increases its ownership of securities. If the failure to satisfy the asset tests
results wholly or partly from an acquisition of securities or other property
during the quarter, the failure could be cured by disposition of sufficient
non-qualifying assets within 30 days after the close of that quarter. CRIIMI MAE
expects to maintain accurate records of the value of its assets to ensure
compliance with the asset tests, and to take such other action within 30 days
after the close of any quarter as may be required to cure any noncompliance.
However, there can be no assurance that such steps will always be successful.
Similarly, CRIIMI MAE's ownership of (1) the non-voting common stock of the
Services Corporation, and (2) certain installment notes payable by the Services
Corporation should not cause it to be deemed to own more than 10% of the
outstanding voting securities of the Services Corporation.
One of the requirements for qualification as a REIT in any year is that at
the end of the year the REIT has no accumulated earnings and profits from a
prior non-REIT year. As a result of the Merger, CRIIMI MAE would succeed to any
earnings and profits of CRI Acquisition, CRICO Mortgage and CRI/AIM Management
existing at the time of the Merger. Because each of CRI Acquisition, CRICO
Mortgage and CRI/AIM Management is currently, and always has been, an "S
corporation" under the Code (meaning that the current income of each is taxable
to its stockholders such that each should have no earnings and profits), there
will be no earnings and profits of any of CRI Acquisition, CRICO Mortgage and
CRI/AIM Management which could be deemed to be earnings and profits of CRIIMI
MAE as a result of the Merger.
The CRI Receivable has a basis in the hands of CRI/AIM Management equal to
its principal amount. This basis will carryover to CRIIMI Management. Principal
payments on the CRI Receivable will therefore be non-taxable return of capital.
Interest payments on the CRI Receivable will be income to CRIIMI MAE which will
be qualified income under the 95% gross income test but not under the 75% gross
income test. Payments to the Principals will not be deductible by CRIIMI MAE to
the extent that they are based on payments of principal on the CRI Receivable
because such payments will be for services in connection with the Merger.
Payments to a Principal will be deductible by CRIIMI MAE to the extent that they
are based on payments of interest on the CRI Receivable because they will be
contingent upon the Principal continuing to render services to CRIIMI MAE.
The options held by the Principals may be incentive stock options and
non-qualified stock options. The Principals will realize ordinary income upon
the exercise of the non-qualified stock options. Such income will be equal to
the spread, if any, between the value of the Common Shares at such time and the
exercise price. CRIIMI MAE should be entitled to an equal compensation deduction
at such time. The Principals will not realize income with respect to any
incentive stock options until the disposition of the Common Shares purchased
upon the exercise of such options. If such a disposition was a "disqualified
disposition" as defined in the Code, any gain realized by the Principals would
be ordinary income and CRIIMI MAE would be entitled to an equal compensation
deduction. If such disposition was not a "disqualified disposition", the
Principals would realize capital gain and CRIIMI MAE would not be entitled to
any compensation deduction.
FAILURE TO QUALIFY. If CRIIMI MAE fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, CRIIMI MAE will be
subject to tax (including any applicable corporate alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders in
any year in which CRIIMI MAE fails to qualify will not be deductible by CRIIMI
MAE, nor will they be
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required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable to them
as ordinary income, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, CRIIMI MAE also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances CRIIMI MAE would be entitled to such statutory relief.
REGULATORY MATTERS
HUD approves mortgagees for participation in the mortgage insurance programs
authorized by HUD and recertifies such designation annually. A mortgagee must be
approved by HUD in order to originate, purchase, hold, service or sell HUD
insured multifamily mortgages. Such approval is contingent upon an undertaking
of the mortgagee to comply at all times with the general approval requirements
and the special requirements for the class of mortgagee for which approval is
granted.
A partial list of requirements for such approval follows: (1) maintenance of
net worth equal to at least $250,000; (2) maintenance of liquid assets of 20% of
net worth; (3) maintenance of fidelity bond and errors and omissions coverage;
(4) employment of trained personnel and a staff deemed competent to perform
their assigned responsibilities; (5) maintenance of facilities which satisfy
certain physical requirements; (6) adoption of a written quality control plan
for the origination and servicing of mortgages; and (7) satisfaction and
maintenance of eligibility standards to participate in government programs by
all officers, directors, partners, principals and employees. CRIIMI MAE believes
that no material requirement is omitted from this list. The Services Partnership
has sought such approval and management believes that HUD's approval will be
obtained, as management believes that at the Closing all the HUD requirements
will be satisfied by the Services Partnership. CRICO Mortgage currently is a HUD
approved mortgagee.
NO APPRAISAL RIGHTS
Under Maryland Law, holders of Common Shares will not be entitled to rights
of appraisal in connection with the Merger.
INFORMATION CONCERNING THE CRI MORTGAGE BUSINESSES
The CRI Mortgage Businesses consist of three separate corporations, CRICO
Mortgage, CRI/AIM Management and CRI Acquisition, which together provide
mortgage investment, advisory, servicing, origination and other mortgage related
services to third parties and affiliates.
CRICO MORTGAGE
CRICO Mortgage, formed in 1975 to assist CRI and its affiliates with
mortgage-related activities, currently engages in providing mortgage servicing,
origination and other mortgage related services for third parties and affiliates
and assists the Adviser in performing its mortgage investment and other advisory
services. During 1994, CRICO Mortgage recognized $736,012 in mortgage servicing
fees, consulting fees and other mortgage related income from third parties and
$242,578 in mortgage servicing fees from affiliates. Additionally, CRICO
Mortgage received $3,064,776 in annual and incentive management fees and
$1,570,415 in mortgage selection fees for its services to the Adviser. These
fees are paid in accordance with contracts, the most significant of which are
described below.
POOLING AND SERVICING AGREEMENT/SUBSERVICING AGREEMENT (MORTGAGE
PASS-THROUGH CERTIFICATES SERIES 1993-C1). CRICO Mortgage is the special
servicer for the mortgages underlying the Mortgage Capital Funding, Inc. Series
1993-C1 Certificates (the "Underlying Loans") pursuant to a Pooling and
Servicing Agreement ("PSA"). As special servicer, CRICO Mortgage is responsible
for the servicing of defaulted Underlying Loans, including without limitation,
negotiation of workouts and supervision of collection activities including
foreclosure. For its services as special servicer, CRICO Mortgage receives
0.225% per annum of the outstanding principal balance of each specially serviced
Underlying Loan, a workout fee ranging from 1 1/2% to 2% of the outstanding
principal balance of each restructured Underlying Loan, and a liquidation fee
for each liquidated Underlying Loan in the amount of 2% of the unpaid principal
balance of each liquidated Underlying Loan. The rights and obligations of CRICO
Mortgage as special servicer
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terminate upon the final payment or other resolution of the last Underlying
Loan, unless sooner terminated for a default under the terms of the PSA or upon
120 days prior notice, without cause. If the PSA is terminated without cause,
CRICO Mortgage may sell the special servicing rights and retain the proceeds.
The last maturity date of an Underlying Loan is April 1, 2002 and the weighted
average maturity is September 29, 1997. There is currently one specially
serviced Underlying Loan with an outstanding principal balance of $2,683,709.
CRICO Mortgage also acts as subservicer of the Underlying Loans under a
subservicing agreement with the master servicer. CRICO Mortgage's duties as
subservicer are to service the Underlying Loans in accordance with customary
servicing practices for commercial loans. For its services, CRICO Mortgage
receives a fee of 0.175% per annum of the outstanding principal balance of the
Underlying Loans serviced (currently $102,010,963) as well as various fees,
including but not limited to, penalty charges, assumption fees, extension fees,
and late fees on the Underlying Loans. The subservicing agreement is coterminous
with the PSA; however, it may be terminated without cause upon 120 days prior
notice, in which event CRICO Mortgage may sell the subservicing rights and
retain the proceeds thereof.
POOLING AND SERVICING AGREEMENT/SUBSERVICING AGREEMENT
(MULTIFAMILY/COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES SERIES
1994-MC1). CRICO Mortgage acts as special servicer with respect to the
mortgages underlying the Series 1994-MC1 Certificates pursuant to a pooling and
servicing agreement substantially identical to the Series 1993-C1 PSA described
above. The special servicing fee is 0.40% per annum for each specially serviced
loan and the workout fee ranges from 0.75% to 1.25%. In addition, CRICO Mortgage
is entitled to all assumption and modification fees and any penalty charges
received with respect to specially serviced loans as well as a standby fee in
those months where there are no specially serviced loans of 0.02% per annum of
the outstanding principal balances of the underlying loans. Termination of the
agreement is substantially identical to that under the Series 1993-C1 PSA. There
are currently no specially serviced loans. The last maturity date of an
underlying loan is September 1, 2003 and the weighted average maturity is
October 16, 2000.
CRICO Mortgage also acts as subservicer pursuant to a subservicing agreement
with the master servicer substantially identical to that for the Series 1993-C1
Underlying Loans as described above. For its services, CRICO Mortgage receives a
fee of 0.125% per annum of the outstanding principal balance of the serviced
loans (currently $120,552,425) and various fees including, but not limited to,
penalty charges, assumption and late fees with respect thereto.
CRITEF SERVICING. Two limited partnerships (one of which contains two
series of securities), the CRITEF Funds, were formed by CRI primarily to
purchase and hold tax exempt bonds ("Bonds") issued in connection with the
financing of 18 multifamily apartment complexes (the "CRITEF Properties"). CRICO
Mortgage is the servicer with respect to the mortgages underlying the Bonds (the
"Loans") pursuant to the loan agreements among the issuers of the Bonds, the
owners of the CRITEF Properties (the "Owners") and the CRITEF Funds. The
aggregate principal amount of such mortgages is approximately $207 million.
CRICO Mortgage also acts as escrow agent with respect to 15 of the CRITEF
Properties. As escrow agent, CRICO Mortgage holds and disburses certain reserve
funds established under the terms of the loan documents pursuant to which the
proceeds of the Bonds were loaned to the Owners. As servicer, CRICO Mortgage's
primary obligations are to collect funds from the borrowers and disburse them to
pay debt service, taxes and insurance and into reserves for replacement and
other purposes.
These loan and escrow agreements commenced at various dates from December
1986 through January 1, 1990 with agreements for half of the loans commencing in
the period from July 1988 to February 1989 and mature (on average) in the year
1999 with the last Loan maturing in the year 2000.
The documents provide that CRICO Mortgage can be replaced as servicer by the
CRITEF Funds, and that it can be replaced as escrow agent with respect to
certain of the CRITEF Properties by the issuer of the Bonds, but only with the
consent of the Owner and the CRITEF Funds. There is no specific provision in the
loan agreements for CRICO Mortgage to resign as servicer; however, the
management of CRIIMI MAE believes that CRICO Mortgage could resign if a
successor servicer were approved by the CRITEF Funds. Under the escrow
agreements, CRICO Mortgage can generally resign as escrow agent upon 60 days'
notice
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so long as a successor has been appointed. There is no prohibition against CRICO
Mortgage retaining a subservicer to assist it in performing its duties; however,
assignment of the servicing rights and obligations would require, generally
consent of the CRITEF Fund, the issuer of the Bonds and the Owner.
For its services, CRICO Mortgage receives annual fees ranging from 0.625% to
0.75% of the outstanding loan amounts. These fees are payable on a current basis
if there is sufficient cash flow available pursuant to the terms of the
underlying loan agreements. In 1994, a majority of the CRITEF Loans serviced by
CRICO Mortgage were unable to make their debt service payments and therefore did
not pay servicing fees. No additional fees accrue on deferred servicing fees.
Earned but unpaid fees are due upon the pay-off of the mortgages. The obligation
to pay deferred servicing fees is a recourse obligation of the borrower but is
not secured by a lien on the property. See Financial Statements of the CRI
Mortgage Businesses and "The Merger Proposal -- Benefits to the Principals
Resulting From the Merger Proposal -- CRITEF Funds -- Nonpayment of Servicing
Fees."
DELEGATION AGREEMENT. The AIM Funds are the beneficial owners of certain
mortgage loans which HUD has coinsured under the National Housing Act. The
coinsurer of record is Integrated Funding, Inc. ("IFI"), an affiliate of CRIIMI
MAE. IFI has entered into an agreement with CRICO Mortgage for CRICO Mortgage to
provide servicing for 10 coinsured loans with an aggregate current outstanding
principal balance of $86,891,618 at a fee of 0.10% per annum of the outstanding
principal balance of each coinsured loan. The agreement was for an initial term
of one year (expiring on January 11, 1994) and is automatically renewable for
one-year terms absent notice of nonrenewal given not less than 180 days prior to
the expiration of any one year term. However, the agreement may be terminated
with respect to any loan upon 180 days notice. The agreement expires with
respect to each loan when it is paid in full or otherwise sold or transferred.
The last maturity date is November 1, 2030, with a weighted average maturity of
November 15, 2029.
CRI/AIM MANAGEMENT
CRI/AIM Management was formed in 1991 to act as subadviser to the AIM Funds,
which hold federally insured mortgage investments. CRI/AIM Management acts as
subadviser pursuant to four identical submanagement agreements -- one for each
of the AIM Funds. Under the submanagement agreements, CRI/AIM Management
provides services at the request of the AIM adviser, AAP. Services include
assistance in acquisition of mortgages, acting as liaison with mortgagors, GNMA
and HUD, cash management, servicing of cash flow participation, disposition of
mortgages and daily management of the AIM Funds. The fee for services is 0.28%
of total invested assets (currently approximately $583 million in the aggregate
for all four AIM Funds). The submanagement agreements are coterminous with AAP's
advisory agreements which currently expire on August 16, 1996 and are
automatically renewable for successive one-year terms unless terminated by a
vote of a majority of the unitholders in the AIM Funds or for cause. During
1994, CRI/AIM Management earned $1,620,537 in subadvisory fees.
TRANSACTIONS WITH SERVICES CORPORATION AND SERVICES PARTNERSHIP
Immediately prior to the Merger, CRI/AIM Management and CRICO Mortgage will
sell substantially all of their contracts to the Services Corporation and
receive, as consideration, interest- bearing installment notes. The contracts
will then be contributed by the Services Corporation to the Services
Partnership, which will, after the Merger, provide loan servicing, advisory and
origination services and will receive the fees therefor. The Merger Proposal was
structured in this manner because the income generated from servicing, advisory
and contracts for similar services is considered non-qualifying for REIT
purposes at the CRIIMI MAE level. The contracts were therefore placed in the
Services Corporation and the Services Partnership to avoid adverse tax
consequences. See also "The Merger Proposal -- Certain Federal Income Tax
Consequences."
CRI ACQUISITION
Also, immediately prior to the Merger, the Advisory Agreement will be
transferred to CRI Acquisition, a newly formed entity owned by the Principals
which will be merged into CRIIMI Management. The Advisory Agreement currently
expires on November 21, 1995 and is automatically renewable for a three-year
term if notice of termination or nonrenewal is not given prior to August 1,
1995. The Advisory
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Agreement will be terminated upon completion of the Merger. The fees generated
by the Advisory Agreement constitute approximately 61% of the fee revenues of
the CRI Mortgage Businesses. See "The Merger Proposal -- Income Earned by CRI
Mortgage Businesses" and Financial Statements of the CRI Mortgage Businesses.
In addition, in connection with the AIM Funds, CRI and CRIIMI MAE each
purchased a 50% interest in CRI/AIM Investment Limited Partnership, which holds
a 20% limited partnership interest in AAP. Immediately before the Merger, CRI
will transfer its 50% general partnership interest in CRI/AIM Investment Limited
Partnership to CRI Acquisition. During 1994, CRI's general partnership interest
generated $387,779. This amount was offset by net guaranty payments of $312,222
from the CRI Mortgage Businesses to CRIIMI MAE. See "The Merger Proposal --
Benefits to the Principals Resulting from the Merger Proposal -- Liability for
Debt; Release from Obligation."
GENERAL
Upon the consummation of the Merger, the CRI Mortgage Businesses will be
merged into CRIIMI Management and will cease to exist. The activities related to
subadvisory, mortgage servicing and consulting will be performed by, and the
related fee streams and net income from those activities will belong to, the
Services Partnership. The fees formerly payable by CRIIMI MAE to its Adviser
pursuant to the Advisory Agreement will cease upon the consummation of the
Merger. However, the 33 people, including the Principals, employed by the CRI
Mortgage Businesses to perform the services under the agreements described
herein and other agreements will, after the Merger, be employed by CRIIMI
Management. In addition, the Merger will provide CRIIMI MAE with the ability to
expand the CRI Mortgage Businesses and actively compete in the commercial
mortgage market, including the ability to originate, underwrite or purchase
loans or commercial mortgage backed securities, to provide loan servicing and
special servicing to an expanding commercial mortgage backed security market,
and to explore additional opportunities in the asset management and advisory
services businesses. See "The Merger Proposal -- Risks of the Merger Proposal to
CRIIMI MAE and Stockholders of CRIIMI MAE" and "-- Benefits to the Principals
Resulting from the Merger Proposal."
CRIIMI Management, itself, will manage the fully-insured mortgage
investments, higher-yielding subordinated investments and other assets owned by
CRIIMI MAE and its subsidiaries.
Assets acquired (purchase price) and costs incurred in connection with the
Merger (for a total of approximately $35.2 million) are recorded using the
purchase method of accounting. As part of the Merger, CRIIMI MAE's financial
condition and liquidity will be impacted by the increase in total assets, which
increase has been allocated on the Pro Forma Balance Sheet to the acquired
assets. The acquired assets include the AIM subadvisory contracts and loan
servicing contracts (approximately $7.4 million), which assets are contained in
the Services Corporation or Services Partnership, as discussed above, the
terminated contract, work force and intellectual property of the CRI Mortgage
Businesses (approximately $23.9 million) and other assets totalling
approximately $7.2 million. The increase in assets is partially offset by a
reduction in cash and cash equivalents of approximately $3.3 million, such
reduction resulting from the payment of costs incurred in connection with the
Merger, as well as a capital contribution to the Services Corporation. See
"CRIIMI MAE Pro Forma Balance Sheet and Notes and Management's Assumptions to
Unaudited Pro Forma Financial Statements."
Also as a part of the Merger, CRIIMI MAE's total liabilities and
shareholders' equity are expected to increase by approximately $35.2 million.
Shareholders' equity is expected to increase by approximately $21.1 million as a
result of the issuance of 2,761,290 Common Shares and the issuance of options to
purchase 3,000,000 Common Shares. Additionally, total liabilities are expected
to increase by $14.1 million as a result of indebtedness of $9.1 million assumed
in the Merger and deferred compensation of $5 million. See "CRIIMI MAE Pro Forma
Balance Sheet and Notes and Management's Assumptions to Unaudited Pro Forma
Financial Statements."
CRI is not a party to the Merger and will continue to conduct those real
estate activities which are not being transferred as part of the CRI Mortgage
Businesses. See "The Merger -- Risks of the Merger Proposal to Stockholders of
CRIIMI MAE -- Conflicts of Interest -- The CRI Retained Operations."
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CRI MORTGAGE BUSINESSES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Management's discussion and analysis of financial condition and results of
operations consists of comparisons of the operating results of the CRI Mortgage
Businesses for the years ended December 31, 1994, 1993 and 1992. CRIIMI MAE's
historical management's discussion and analysis for the same periods is
incorporated herein by reference.
RESULTS OF OPERATIONS -- CRI MORTGAGE BUSINESSES
YEAR ENDED DECEMBER 31, 1994 VERSUS THE YEAR ENDED DECEMBER 31, 1993
The CRI Mortgage Businesses' combined financial statements include the
accounts of CRICO Mortgage, CRI/AIM Management and certain assets and
liabilities and income and expenses of CRI which will be assumed by CRI
Acquisition, which are affiliates of CRI and through which CRI provides
substantially all of its mortgage investment advisory, servicing and origination
services to REITs, publicly traded limited partnerships and third parties. Each
combined company is wholly owned by the Principals.
The CRI Mortgage Businesses' total revenue increased by approximately $1.2
million to approximately $8.6 million for 1994 from $7.4 million for 1993. The
increase is primarily attributable to significant increases in annual and
incentive management fees from its affiliate, CRIIMI MAE, mortgage servicing,
consulting and other mortgage related income and interest income, as discussed
below. Partially offsetting these increases was a significant decrease in
mortgage selection fees from its affiliate, CRIIMI MAE, as discussed below.
Annual and incentive management fees from CRIIMI MAE increased by
approximately $1.6 million to approximately $3.1 million for 1994 from $1.5
million for 1993 principally due to a significant increase in CRIIMI MAE's
mortgage base in 1994 and 1993 and the related fee payment during 1994.
Mortgage selection fees from CRIIMI MAE decreased by approximately $846,000
to approximately $1.6 million for 1994 from $2.4 million for 1993. The mortgage
selection fee is paid by CRIIMI MAE at the time it purchases a mortgage
investment. This significant decrease resulted from a decrease in CRIIMI MAE's
mortgage acquisition activity during 1994, when CRIIMI MAE's mortgage
acquisitions totalled $235.8 million as compared to $312.7 million in 1993.
Mortgage servicing, consulting and other mortgage related income increased
by approximately $259,000 to approximately $736,000 for 1994 from approximately
$477,000 for 1993 primarily due to the commencement of two additional mortgage
servicing contracts with unrelated third parties, effective July 1994 and
October 1993.
Interest income increased by approximately $244,000 to approximately
$932,000 for 1994 from $688,000 for 1993. This increase resulted from interest
income recognized on a loan receivable (effective September 1993) from CRI (an
affiliate of the CRI Mortgage Businesses) in the amount of $7.0 million. The
terms of the loan were identical to the terms of the $7.0 million third party
debt the CRI Mortgage Businesses incurred in September 1993, as described below.
Interest expense increased by approximately $293,000 to approximately $1.3
million for 1994 from $970,000 for 1993. This increase was primarily due to an
increase in the CRI Mortgage Businesses' incurrence of debt ($7.0 million) in
September 1993, to an unaffiliated lender, at an interest rate of approximately
25% per annum. The debt was incurred in connection with the sale by the CRI
Mortgage Businesses of their investment in the AIM subadvisory contracts
pursuant to a repurchase agreement. The CRI Mortgage Businesses were obligated
to repurchase such investment on June 1, 1994 for $7.0 million. This debt was
refinanced with a third party lender in April 1994 to a rate of approximately
8.25%. As such, interest expense for 1994 includes twelve months of interest
related to these obligations as compared to 1993
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which includes four months of interest. The additional interest expense incurred
with respect to this debt during 1994 and 1993 was offset by interest income
related to a note receivable from CRI, as discussed above. All other expenses
remained relatively constant during these two periods.
Net income for 1994 increased by approximately $1.0 million to approximately
$6.0 million for 1994 from $5.0 million for 1993 as a result of the
above-mentioned factors.
YEAR ENDED DECEMBER 31, 1993 VERSUS THE YEAR ENDED DECEMBER 31, 1992
The CRI Mortgage Businesses' total revenue increased by approximately $3.1
million to approximately $7.4 million for 1993 from approximately $4.3 million
for 1992. The increase was primarily attributable to significant increases in
mortgage selection fees from its affiliate, CRIIMI MAE, annual and incentive
fees from its affiliate, CRIIMI MAE, and interest income, as discussed below.
Annual and incentive management fees from CRIIMI MAE increased by
approximately $457,000 to approximately $1.5 million for 1993 as compared to
$1.0 million in 1992 principally due to a significant increase in CRIIMI MAE's
mortgage base in 1993 and the related fee payment during 1993.
Mortgage selection fees from CRIIMI MAE increased by approximately $2.3
million to approximately $2.4 million for 1993 from approximately $100,000 in
1992. This increase was attributable to a significant increase in CRIIMI MAE's
mortgage acquisitions during 1993.
Mortgage servicing, consulting and other mortgage related income decreased
by approximately $185,000 to approximately $477,000 for 1993 from approximately
$662,000 for 1992 primarily due to a reduction in consulting fee income.
Consulting fee income recognized in 1992 included the non-recurring sale of a
third party mortgage of approximately $481,000. Partially offsetting this
decrease was an increase in mortgage servicing fees as a result of the
commencement of an additional mortgage servicing contract with an unrelated
third party, effective October 1993.
Mortgage servicing fees from affiliates are earned in connection with the
servicing of mortgage investments owned by the AIM Funds and the CRITEF Funds,
which are affiliates of CRI. Mortgage servicing fees from affiliates decreased
approximately $144,000 to approximately $284,000 in 1993 from approximately
$428,000 in 1992. This decrease was primarily due to a decrease in servicing fee
revenue earned in connection with the CRITEF portfolio during 1993, as a result
of an increase in the number of non-performing loans in this portfolio.
Interest income increased by approximately $683,000 for 1993 to
approximately $688,000 from $5,000 for the corresponding period in 1992. This
significant increase resulted from interest income recognized on a loan
receivable from CRI, an affiliate, in the amount of $7.0 million as previously
discussed.
Interest expense increased by approximately $673,000 to approximately
$970,000 in 1993 from $297,000 for 1992. This significant increase was primarily
due to the incurrence of $7.0 million in debt in September 1993 at an interest
rate of 25% per annum, as previously discussed.
Other expenses increased approximately $135,000 to $1.4 million for 1993
from $1.3 million for 1992. This increase was primarily due to an increase in
salaries and employee benefits, resulting from additional staffing and employee
incentives during this period.
LIQUIDITY
The CRI Mortgage Businesses closely monitor their cash flow and liquidity
positions in an effort to ensure that sufficient cash is available for
operations. The CRI Mortgage Businesses' cash receipts, which are derived from
subadvisory fees earned with respect to the AIM Funds, annual and incentive
management fees and mortgage selection fees earned with respect to services
provided to CRIIMI MAE and mortgage servicing, consulting and origination
activities, were sufficient for the years ended December 31, 1994 and 1993 to
meet operating, investing and financing cash requirements. Cash flow was also
sufficient to provide for the payment of distributions to affiliates of $6.1
million and $4.8 million during the years ended December 31, 1994 and 1993,
respectively. As of December 31, 1994, there were no material commitments for
capital expenditures.
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FINANCIAL CONDITION
Total assets decreased by $1.9 million to approximately $5.7 million as of
December 31, 1994 from $7.6 million as of December 31, 1993. This significant
decrease was primarily attributable to a decrease in loan receivable from CRI,
an affiliate, partially offset by an increase in fees receivable, as discussed
below.
Loan receivable from CRI, an affiliate, decreased by approximately $2.0
million to $5.0 million as of December 31, 1994, from $7.0 million as of
December 31, 1993. This significant decrease is attributable to principal
payments received from CRI during the year ended December 31, 1994.
Total liabilities decreased $1.9 million to $9.3 million as of December 31,
1994 from $11.2 million as of December 31, 1993. This significant decrease was
primarily attributable to a decrease in commitment under repurchase agreement
arising from the repurchase of the investment in the AIM Funds, partially offset
by an increase in bank term notes payable, also arising from the repurchase of
the investment in AIM Funds, as discussed below. Also contributing to this
decrease were payments of principal made under the terms of the note payable
during 1994.
Notes payable increased $5.0 million to $9.1 million as of December 31, 1994
from $4.1 million as of December 31, 1993. This increase is attributable to an
additional bank term note in the amount of $6.0 million executed during 1994, in
connection with the repurchase of the investment in the AIM Funds. Partially
offsetting this increase was a reduction in the outstanding balance on the notes
payable in connection with principal paydowns during 1994.
Commitment under repurchase agreement decreased by $7.0 million in 1994 from
$7.0 million as of December 31, 1993. This decrease is attributable to the
repurchase of the investment in the AIM Funds, which was financed with the
proceeds of a bank term note payable during 1994, as discussed above.
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DESCRIPTION OF THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF PROVISIONS OF THE MERGER AGREEMENT NOT
DESCRIBED ELSEWHERE IN THIS PROXY STATEMENT. A COPY OF THE MERGER AGREEMENT IS
ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN IN ITS
ENTIRETY BY REFERENCE THERETO. SUCH SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE MERGER AGREEMENT.
GENERAL
The Merger Agreement provides that, subject to the approval thereof by the
holders of Common Shares, and subject to the satisfaction of certain other
conditions, the CRI Mortgage Businesses will merge with and into CRIIMI
Management, with CRIIMI Management as the surviving corporation (the "Surviving
Corporation").
The Articles of Incorporation and Bylaws of CRIIMI Management in effect
prior to the Closing Date will be the Articles of Incorporation and Bylaws of
the Surviving Corporation until later amended as provided therein and pursuant
to Maryland Law. Moreover, the officers and directors of CRIIMI Management will
be the officers and directors of the Surviving Corporation, in each case, until
their respective successors have been duly elected and qualified.
Subject to the terms and conditions set forth in the Merger Agreement, upon
consummation of the Merger, the issued and outstanding shares of the CRI
Mortgage Businesses will be converted into the right to receive newly issued
Common Shares.
PRINCIPAL FEATURES OF THE MERGER
GENERAL. The Merger will involve the transactions described in "Summary --
The Merger -- Principal Features of the Merger Proposal."
CLOSING. The Merger Agreement provides that the Closing will occur after
all of the conditions set forth in the Merger Agreement have been satisfied or
waived. It is contemplated that the Closing will occur on or prior to June 30,
1995. See "-- Conditions to Closing."
CONDUCT OF BUSINESS PRIOR TO THE CLOSING. Each of the CRI Mortgage
Businesses and the Principals have agreed, among other things, that prior to the
Closing Date, unless otherwise agreed in writing, or except as otherwise may be
necessary to effectuate the Merger Proposal, each of the CRI Mortgage Businesses
will not conduct its respective business, or take any actions, other than in the
ordinary course of business and consistent with past practices. Except as set
forth in the Merger Agreement, each of the CRI Mortgage Businesses has agreed,
among other things, not to (1) whether or not in the ordinary course of business
or consistent with past practice, pledge, encumber, sell or dispose of any
assets unless, in the case of assets sold or disposed of, such assets are
replaced with assets of equivalent or greater value; (2) amend its charter or
by-laws or similar organizational documents; (3) split, combine or reclassify
any shares of its capital stock or declare any dividend (except a cash dividend)
or distribution (except the distribution by any CRI Mortgage Business to its
stockholders or their designees of its rights to moneys earned prior to the
Closing Date); (4) redeem, purchase or otherwise acquire any of its capital
stock; (5) issue or sell shares of its capital stock of any class or any
options, warrants or rights to purchase capital stock; (6) adopt a plan of
complete or partial liquidation or resolutions providing for complete or partial
liquidation, dissolution, merger, consolidation, restructuring, recapitalization
or other reorganization; (7) acquire (by merger, consolidation or acquisition of
stock or assets) any corporation or other business organization, or make any
investment in any entity, other than in cash management transactions in the
ordinary course of business and consistent with past practice; (8) except in the
ordinary course of business and consistent with past practice, incur any
indebtedness for borrowed money or issue any debt securities or assume,
guarantee, endorse or otherwise become responsible for the obligations of any
other individual or entity, or make any loans or advances; (9) authorize,
recommend or propose any change in its capitalization (except the incurrence of
indebtedness otherwise permitted); (10) modify in any material respect any
existing material license, lease, contract or other document, other than in the
ordinary course of business consistent with past practice; or (11) authorize
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or propose any of the foregoing, or enter into any contract or commitment to do
any of the foregoing. CRI or its designees will be entitled to all net income of
the CRI Mortgage Businesses earned but not received by the CRI Mortgage
Businesses prior to the consummation of the Merger.
CONDITIONS TO CLOSING. The obligations of CRIIMI MAE and each of the CRI
Mortgage Businesses to effect the Merger are subject to the fulfillment or
waiver at or prior to the Closing of certain conditions, including the
following: (1) the approval of the Merger Proposal by the stockholders of CRIIMI
MAE, as required by the Merger Agreement; (2) the absence of litigation that
could reasonably be expected to materially negatively impact the ability of
CRIIMI MAE or any of the CRI Mortgage Businesses to consummate the Merger
Proposal or the financial condition of CRIIMI MAE or any of the CRI Mortgage
Businesses; (3) the treatment of the Merger as a purchase for accounting
purposes; (4) the performance and compliance by the CRI Mortgage Businesses and
CRIIMI MAE, respectively, in all material respects with all covenants,
agreements and obligations to be performed or complied with (including the sale
of the Advisory Agreement to CRI Acquisition); (5) the representations and
warranties of CRIIMI MAE and the CRI Mortgage Businesses being true and correct
in all material respects; (6) the conduct of the CRI Mortgage Businesses and
CRIIMI MAE, respectively, of their business in the ordinary course, in
compliance, in all material respects, with all applicable laws and regulations;
and (7) the receipt of all necessary consents and approvals from HUD, lenders,
partners and other parties in connection with the transactions contemplated by
the Merger Agreement.
REPRESENTATIONS, WARRANTIES AND INDEMNITIES. The Merger Agreement contains
representations and warranties relating to, among other things (1) the due
organization, valid existence, good standing and corporate powers of the
obligations of CRIIMI MAE and each of the CRI Mortgage Businesses; (2) the
capitalization of CRIIMI MAE and each of the CRI Mortgage Businesses; (3) the
authorization, execution, delivery, performance and enforceability of the Merger
Agreement and related matters; (4) the Merger Agreement's noncontravention of
any agreement, law or charter or bylaw provision and the absence of the need
(except as specified) for governmental or third-party consents to the Merger
Proposal; and (5) pending or threatened litigation.
Each of the CRI Mortgage Businesses and the Principals have made additional
representations and warranties relating to, among other things (1) the payment
of taxes and filing of tax returns; (2) the validity of title and leasehold
interests in assets; (3) labor contracts and employee benefits plans; (4)
patents, trademarks, franchises and formulas; (5) insurance; (6) the absence of
undisclosed liabilities; (7) the net worth of each of the Principals; and (8)
the accuracy of information supplied by each of the CRI Mortgage Businesses to
CRIIMI MAE. The representations and warranties of the CRI Mortgage Businesses
and the Principals contained in the Merger Agreement will survive the Closing
Date for a period of three years except for certain tax representations which
will survive the Closing Date for a period of four or five years, as applicable.
Accordingly, CRIIMI MAE will be entitled to indemnification by the Principals
under the Merger Agreement against losses or costs arising out of or resulting
from the inaccuracy of any of such representations and warranties. After the
Closing, the Principals will have no right of contribution from CRIIMI
Management (as the successor to the CRI Mortgage Businesses) with respect to any
claims for indemnification under the Merger Agreement. Except with respect to
tax matters, such indemnification obligation does not apply until the aggregate
amount for which indemnity would otherwise be payable exceeds $100,000, at which
point indemnification would be required with respect to all claims without
deduction of such amount.
CRIIMI MAE has also made additional representations and warranties
including, among other things, that the Common Shares to be issued will be
validly issued, fully paid and non-assessable, and free of preemptive rights.
None of the representations of CRIIMI MAE will survive the Closing.
ADDITIONAL AGREEMENTS. Under the Merger Agreement, the Principals agreed to
(1) vote their Common Shares in favor of the Merger Proposal, and (2) enter into
their respective Employment and Non-Competition Agreements and the Registration
Rights and Lock-up Agreement. The parties agreed to execute or to cause the
execution of certain other agreements required under the Merger Agreement. In
addition, the Principals and the CRI Mortgage Businesses agreed not to solicit,
initiate or encourage the submission of
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inquiries, proposals or offers from any person relating to any acquisition of
stock or assets, exchange offer, merger, consolidation, business combination,
sale of substantial securities, liquidation, dissolution or similar transactions
involving the CRI Mortgage Businesses, or to discuss, negotiate or furnish
information to any person with respect to the foregoing.
CRIIMI Management will assume the obligation of the CRI Mortgage Businesses
to indemnify each of the present and former directors and officers of the CRI
Mortgage Businesses to the extent required under the Articles of Incorporation,
Bylaws and existing indemnity agreements of the CRI Mortgage Businesses with
respect to acts or omissions on or before the Closing Date. See "-- Conditions
to Closing."
MARKET PRICE DATA
The Common Shares are listed on the NYSE. The following table sets forth,
for the calendar quarters indicated, the high and low closing prices per Common
Share as reported on the NYSE Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
CALENDAR 1993
First Quarter................................... $11 1/4 $ 9 7/8
Second Quarter.................................. 11 5/8 10 3/4
Third Quarter................................... 12 3/8 11 1/4
Fourth Quarter.................................. 12 5/8 11
CALENDAR 1994
First Quarter................................... $12 $ 9 3/8
Second Quarter.................................. 11 1/8 9 3/4
Third Quarter................................... 11 1/4 9 3/8
Fourth Quarter.................................. 9 1/2 6 5/8
CALENDAR 1995
First Quarter................................... $ 8 3/8 $ 6 3/4
Second Quarter (through April 25)............... 7 3/8 7
</TABLE>
On January 3, 1995, the last full trading day preceding the initial public
announcement by CRIIMI MAE of the Merger, the high and low sale prices of the
Common Shares as reported on the NYSE Composite Tape were $6.875 and $6.75 per
share, respectively, and the closing price of the Common Shares was $6.75.
55
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the Record Date, April 24,
1995, with respect to the Common Shares beneficially owned by all directors and
executive officers of CRIIMI MAE and its directors and executive officers as a
group:
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES PERCENTAGE OF
AND NATURE OF COMMON SHARES
NAME BENEFICIAL OWNERSHIP OUTSTANDING
- -------------------------------------------------- -------------------- -------------
<S> <C> <C>
William B. Dockser................................ 231,680(a)(b) *
H. William Willoughby............................. 89,681(a)(c) *
Garrett G. Carlson, Sr............................ 2,000(d) *
G. Richard Dunnells............................... 1,533 *
Robert F. Tardio.................................. 349 *
Jay R. Cohen...................................... 41,435(e) *
Frederick J. Burchill............................. 2,968(f) *
Deborah A. Linn................................... 516 *
Cynthia O. Azzara................................. -- --
All directors and executive officers as a group (9
persons)......................................... 367,395 1.4
<FN>
- ------------------------
* Less than 1%.
(a) Includes 2,767 Common Shares owned by CRI, of which Messrs. Dockser and
Willoughby are the sole stockholders.
(b) Includes 45,343 Common Shares held by Mr. Dockser's wife.
(c) Includes 41,700 Common Shares held by Mr. Willoughby's wife.
(d) Includes 1,000 Common Shares held by Mr. Carlson's wife.
(e) Includes 3,500 Common Shares held by Mr. Cohen's wife, and 31,207 Common
Shares held jointly by Mr. Cohen and wife.
(f) Includes 383 Common Shares held by Mr. Burchill's wife.
</TABLE>
The above table does not include Common Shares issuable pursuant to options
for an aggregate of 3,000,000 Common Shares to be granted in connection with the
Merger to the Principals and options for an aggregate of 230,000 Common Shares
to be granted in connection with the Merger to other officers and employees of
CRIIMI MAE. None of the options is exercisable within 60 days after the Record
Date.
To the knowledge of CRIIMI MAE, as of the Record Date, no person
beneficially owned more than 5% of the outstanding Common Shares.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed with the SEC by CRIIMI MAE pursuant to the
Securities Exchange Act of 1934, as amended ("Exchange Act") (File No. 1-10360),
are incorporated by reference into this Proxy Statement:
1. CRIIMI MAE's Annual Report on Form 10-K for the year ended December
31, 1994, as filed with the SEC on February 17, 1995, as amended on Form
10-K/A on March 27, 1995 and April 11, 1995.
2. All documents filed by CRIIMI MAE after the date of this Proxy
Statement pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
prior to the date of the Special Meeting.
3. The description of the Common Shares in CRIIMI MAE's Prospectus
dated July 13, 1994.
56
<PAGE>
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Proxy Statement to
the extent that a statement contained herein (or in any other subsequently filed
document which is also incorporated by reference herein) modifies or supersedes
such statement. Any such statement so modified or superseded shall not be deemed
to constitute a part hereof except as so modified or superseded.
CRIIMI MAE will provide, without charge, upon the written or oral request of
any person to whom this Proxy Statement is delivered and by first class mail or
other equally prompt means within one business day of receipt of such request, a
copy of any and all information that has been incorporated by reference in this
Proxy Statement (not including exhibits to the information that is incorporated
by reference unless such exhibits are specifically incorporated by reference
into the information that the Proxy Statement incorporates). Requests for such
information should be delivered to: CRIIMI MAE Inc., Investor Services, The CRI
Building, 11200 Rockville Pike, Rockville, Maryland 20852, or telephone (301)
468-9200 or toll-free (800) 678-1116.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of CRIIMI MAE for the year ended
December 31, 1994 incorporated by reference in this Proxy Statement have been
audited by Arthur Andersen LLP, independent public accountants, as set forth in
their report with respect thereto. Representatives of Arthur Andersen LLP, are
expected to be present at the Special Meeting to respond to questions from
stockholders and to make a statement if they so desire.
The combined financial statements of the CRI Mortgage Businesses included in
this Proxy Statement have been audited by Grant Thornton LLP, independent public
accountants, as set forth in their report with respect thereto.
STOCKHOLDER PROPOSALS
Any stockholder proposal intended to be included in the proxy materials for
presentation at the 1995 Annual Meeting of Stockholders was required to be
received by the Secretary of CRIIMI MAE not later than December 1, 1994.
OTHER MATTERS
As of the date of this Proxy Statement, neither the Board nor management
knows of other matters which will be presented for consideration at the Special
Meeting. However, if any other business should properly come before the Special
Meeting, the persons named in the enclosed proxy (or their substitutes) will
have discretionary authority to take such action as shall be in accordance with
their best judgment.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CRIIMI MAE INC. (CRIIMI MAE) PRO FORMA (UNAUDITED)
Balance Sheet, as of December 31, 1994.................................... F-3
Consolidating Statement of Operations for the year ended December 31,
1994..................................................................... F-4
Notes and Management's Assumptions to unaudited pro forma condensed
consolidating financial statements....................................... F-5
CRI MORTGAGE BUSINESSES (AUDITED)
Independent Auditors' Report.............................................. F-14
Combined Statements of Assets and Liabilities as of December 31, 1994 and
1993..................................................................... F-15
Combined Statements of Income and Expenses, years ended December 31, 1994
and 1993................................................................. F-16
Combined Statements of Cash Flows, years ended December 31, 1994 and
1993..................................................................... F-17
Notes to Combined Financial Statements.................................... F-18
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to
CRIIMI MAE gives effect to the Merger, and is based on estimates and assumptions
set forth below in the notes to such information which include pro forma
adjustments. This unaudited pro forma financial information has been prepared
utilizing the historical financial statements of CRIIMI MAE and the combined
historical financial statements of CRI Mortgage Businesses and should be read in
conjunction with the historical financial statements and accompanying notes of
those companies. The pro forma financial information is based on the purchase
method of accounting for the Merger. The pro forma balance sheet assumes that
the Merger occurred on December 31, 1994; the pro forma consolidating statement
of operations assumes that the Merger occurred on January 1, 1994.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the Merger
had been effected on the dates indicated or of the results which may be obtained
in the future. Management of CRIIMI MAE believes that the per share dilution
reflected in the pro forma consolidating statement of operations (which is
presented in accordance with generally accepted accounting principles) is
especially not indicative of the potential savings in costs under the Advisory
Agreement, and resulting increases in net income, following significant
additions to mortgage related activities that CRIIMI MAE intends to make during
each of the next several years and that, but for the Merger, would increase the
fees payable under the Advisory Agreement. For a further understanding of the
potential impact on dividends, reference is made to Note 5 to the pro forma
financial statements ("Reconciliation of Pro Forma Net Income to Pro Forma Tax
Basis Income") and to the discussion under "Dividend Policy -- Adjusted Pro
Forma Accretion to Tax Basis Earnings Per Share."
F-2
<PAGE>
CRIIMI MAE INC.
PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS CRIIMI MAE
CRIIMI MAE (NOTE 3) PRO FORMA
------------ ------------------ ------------
(A)
<S> <C> <C> <C>
Investment in mortgages, at amortized cost, net of
unamortized discount and premium................. $703,215,753 $ -- $703,215,753
Investment in mortgages, at fair value............ 154,373,576 -- 154,373,576
Investment in subordinated securities, at
amortized cost................................... 38,858,349 -- 38,858,349
Investment in insured mortgage funds and advisory
partnership...................................... 29,923,240 -- 29,923,240
Cash and cash equivalents......................... 5,143,171 (3,295,000)(B)(C) 1,848,171
Receivables and other assets...................... 9,097,080 5,233,983(D)(F) 14,331,063
Investment in Services Corporation -- 6,871,000(E) 6,871,000
Investment in Services Partnership................ -- 538,000(E) 538,000
Terminated contract and workforce................. -- 23,900,000(E) 23,900,000
Mortgage servicing assets......................... -- 881,000(E) 881,000
Goodwill.......................................... -- 1,130,824(E) 1,130,824
Deferred financing costs, net of accumulated
amortization..................................... 8,632,333 -- 8,632,333
Deferred costs, principally paid to related
parties, net of accumulated amortization......... 5,806,499 -- 5,806,499
------------ ------------------ ------------
Total assets.................................. $955,050,001 $35,259,807 $990,309,808
------------ ------------------ ------------
------------ ------------------ ------------
Obligations under financing facilities............ $627,247,930 $ 9,100,000(G) $636,347,930
Accounts payable and accrued expenses............. 1,497,290 -- 1,497,290
Interest payable.................................. 6,645,676 -- 6,645,676
Deferred compensation............................. -- 5,002,183(D) 5,002,183
------------ ------------------ ------------
Total liabilities............................. 635,390,896 14,102,183 649,493,079
------------ ------------------ ------------
Minority interests in consolidated subsidiary..... 69,617,184 -- 69,617,184
------------ ------------------ ------------
Common stock...................................... 262,272 27,613(H) 289,885
Net unrealized gains on mortgage investments of
subsidiary....................................... 10,316,768 -- 10,316,768
Additional paid-in-capital........................ 244,224,984 21,130,011(H) 265,354,995
------------ ------------------ ------------
254,804,024 21,157,624 275,961,648
Less treasury stock, at cost...................... (4,762,103) -- (4,762,103)
------------ ------------------ ------------
Total shareholders' equity.................... 250,041,921 21,157,624 271,199,545
------------ ------------------ ------------
Total liabilities and shareholders' equity.... $955,050,001 $35,259,807 $990,309,808
------------ ------------------ ------------
------------ ------------------ ------------
</TABLE>
The accompanying notes and management's assumptions are an integral part
of these pro forma financial statements.
F-3
<PAGE>
CRIIMI MAE INC.
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
CRI MORTGAGE ADJUSTMENTS CRIIMI MAE
CRIIMI MAE BUSINESSES SUBTOTAL (NOTE 4) PRO FORMA
------------- ------------ ------------ ------------------ ---------------
(A) (B)
<S> <C> <C> <C> <C> <C>
Mortgage investment income....................... $ 67,043,342 $ -- $ 67,043,342 $ -- $ 67,043,342
Income from investment in subordinated
securities...................................... 975,835 -- 975,835 -- 975,835
Income from investment in insured mortgage funds
and advisory partnership........................ 2,358,717 -- 2,358,717 -- 2,358,717
Interest income.................................. -- 932,226 932,226 (559,063)(M) 373,163
Other investment income.......................... 1,112,938 -- 1,112,938 -- 1,112,938
Loss from investment in limited partnerships..... (49,032) -- (49,032) -- (49,032)
Earnings from Services Corporation............... -- -- -- 1,106,905(C)(F) 1,106,905
Equity in the earnings of Services Partnership... -- -- -- 95,602(E) 95,602
Annual and incentive fees from affiliate (CRIIMI
MAE)............................................ -- 3,064,776 3,064,776 (3,064,776)(G) --
Mortgage selection fees from affiliate (CRIIMI
MAE)............................................ -- 1,570,415 1,570,415 (1,570,415)(H) --
Mortgage servicing fees from affiliates.......... -- 242,578 242,578 (242,578)(D) --
Mortgage servicing fees, consulting fees and
other mortgage related income................... -- 736,012 736,012 (554,214)(D) 181,798
Subadvisory fees from affiliate.................. -- 2,008,316 2,008,316 (2,008,316)(D) --
------------- ------------ ------------ ------------------ ---------------
Total income................................. 71,441,800 8,554,323 79,996,123 (6,796,855) 73,199,268
------------- ------------ ------------ ------------------ ---------------
Interest expense................................. 39,244,621 1,262,663 40,507,284 (315,825)(L) 40,191,459
Annual fee to related party...................... 3,263,443 -- 3,263,443 (2,567,101)(G) 696,342
Incentive fee to related party................... 497,675 -- 497,675 (497,675)(G) --
General and administrative....................... 3,305,323 881,867 4,187,190 (602,000)(D) 3,585,190
Adjustment to provision for settlement of
litigation...................................... (557,340) -- (557,340) -- (557,340)
Mortgage servicing fees.......................... 641,329 -- 641,329 -- 641,329
Guarantee payment to affiliate................... -- 312,222 312,222 (312,222)(D) --
Depreciation and amortization.................... 332,837 77,477 410,314 (52,347)(I) 357,967
Amortization of acquired assets.................. -- -- -- 2,591,378(J) 2,591,378
------------- ------------ ------------ ------------------ ---------------
Total expenses............................... 46,727,888 2,534,229 49,262,117 (1,755,792) 47,506,325
------------- ------------ ------------ ------------------ ---------------
Income before mortgage dispositions.............. 24,713,912 6,020,094 30,734,006 (5,041,063) 25,692,943
Mortgage Dispositions:
Gains.......................................... 13,482,665 -- 13,482,665 -- 13,482,665
Losses......................................... (483,357) -- (483,357) -- (483,357)
------------- ------------ ------------ ------------------ ---------------
Income before minority interest.................. 37,713,220 6,020,094 43,733,314 (5,041,063) 38,692,251
Minority interests in net income of consolidated
subsidiary...................................... (11,703,101) -- (11,703,101) -- (11,703,101)
------------- ------------ ------------ ------------------ ---------------
Net income....................................... $ 26,010,119 $6,020,094 $ 32,030,213 $(5,041,063) $ 26,989,150
------------- ------------ ------------ ------------------ ---------------
------------- ------------ ------------ ------------------ ---------------
Net income per share............................. $ 1.07 $ 1.00
------------- ---------------
------------- ---------------
Weighted average shares outstanding.............. 24,249,403 27,010,692(K)
------------- ---------------
------------- ---------------
</TABLE>
The accompanying notes and management's assumptions are an integral part
of these pro forma financial statements.
F-4
<PAGE>
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Pro Forma Balance Sheet as of December 31, 1994 and the Pro Forma
Consolidating Statement of Operations for the year ended December 31, 1994 have
been prepared to reflect the transactions of the Merger Proposal as set forth in
this Proxy Statement. The pro forma financial information is based on the
historical financial statements of CRIIMI MAE and CRI Mortgage Businesses and
should be read in conjunction with the notes and management's assumptions
thereto. The Pro Forma Balance Sheet was prepared as if the Merger Proposal
occurred on December 31, 1994. The Pro Forma Consolidating Statement of
Operations was prepared as if the Merger Proposal occurred as of January 1,
1994. The pro forma information is unaudited and is not necessarily indicative
of the consolidated operating results which would have occurred if the Merger
Proposal had been consummated at the beginning of the period, nor does it
purport to represent the future financial position or results of operations for
future periods. In management's opinion, all adjustments necessary to reflect
the effects of the Merger Proposal have been made. Capitalized terms have the
meanings as defined in this Proxy Statement.
THE MERGER
In connection with the Merger, substantially all of the assets of the CRI
Mortgage Businesses, with the exception of the AIM subadvisory contracts and
certain mortgage servicing contracts, will be transferred to a wholly owned
subsidiary of CRIIMI MAE, CRIIMI MAE Management Inc. ("CRIIMI Management"). The
AIM subadvisory contracts and certain mortgage servicing contracts will be sold
to CRIIMI MAE Services Inc. (the "Services Corporation") in exchange for 15-year
interest bearing installment notes (the "Installment Notes") in the aggregate
principal amount of $6,586,000. The Services Corporation will then transfer
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
originally transferred to CRIIMI Management will be contributed to the Services
Partnership in exchange for an 8% general partnership interest. Because CRIIMI
Management will be the sole general partner of the Services Partnership, CRIIMI
MAE will indirectly have management control over the business and assets of the
Services Partnership.
After the Merger is completed, CRIIMI MAE will be a self-administered,
self-managed REIT. CRIIMI MAE's portfolio of government insured multifamily
mortgages and other assets will be managed by CRIIMI Management. The Services
Partnership will provide mortgage servicing and advisory services to third
parties, affiliates of CRI and the AIM Funds on a fee basis. CRIIMI MAE, through
CRIIMI Management, will control the Services Partnership as managing general
partner. CRIIMI MAE will own 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 will own 100% of the voting common stock
(which shares are entitled to 5% of the dividends) of the Services Corporation.
CRIIMI MAE will capitalize its interest in the Services Corporation with a
$285,000 capital contribution. 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 interests therein.
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, CRIIMI MAE accounts for its investment in the Services Corporation
under the equity method. 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.
2. METHOD OF ACCOUNTING
Assets acquired and costs incurred in connection with the Merger are
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.
F-5
<PAGE>
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
2. METHOD OF ACCOUNTING (CONTINUED)
The accompanying pro forma financial statements include the mortgage
servicing contracts, mortgage origination businesses and AIM subadvisory
contracts which are expected to be acquired by CRIIMI MAE.
Because CRIIMI Management is wholly owned, its assets have been consolidated
with those of CRIIMI MAE. The AIM subadvisory contracts and the mortgage
servicing contracts transferred to the Services Partnership will be amortized on
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 on the straight-line method over 10 years.
All significant intercompany balances and transactions between consolidated
subsidiaries have been eliminated in the pro forma financial statements.
3. ADJUSTMENTS TO PRO FORMA BALANCE SHEET
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of December 31, 1994, as if the Merger was consummated on such date.
(A) Reflects CRIIMI MAE's historical balance sheet as of December 31, 1994.
(B) CRIIMI MAE expects to incur costs of approximately $3,010,000 in
connection with the Merger Proposal related to accounting, legal, filing,
printing, financial advisory services and coordination of the transaction. These
costs have been capitalized as part of the purchase price of the assets
acquired.
(C) In connection with the Merger, CRIIMI MAE will make a capital
contribution to the Services Corporation of $285,000 in return for 100% of the
Services Corporation's non-voting common stock.
(D) In connection with the Merger, CRIIMI MAE will acquire a $5,002,183 note
receivable (the "CRI Receivable") evidencing an obligation of the CRI Mortgage
Businesses. CRIIMI MAE will enter into a deferred compensation arrangement with
the Principals in the aggregate amount of $5,002,183 pursuant to which CRIIMI
MAE will agree 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, upon
the consummation of the Merger, of an irrevocable grantor trust for the benefit
of the Principals, and to the transfer to such trust of the CRI Receivable as
discussed above. The deferred compensation will vest immediately and will be
payable only to the extent that CRI continues to make principal payments on the
CRI 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 CRI Receivable and the deferred compensation are expected to
be paid quarterly and terminate in ten years. Both the CRI Receivable and
deferred compensation obligation will bear interest at the Applicable Federal
Rate ("AFR") as of the date of the Merger. As of April 1995, the AFR is
approximately 7.5%.
F-6
<PAGE>
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
3. ADJUSTMENTS TO PRO FORMA BALANCE SHEET (CONTINUED)
(E) CRIIMI MAE has allocated the purchase price to the fair value of the
assets acquired and the excess of the purchase price over the fair value of the
net assets acquired is allocated to goodwill. Management determined the fair
values based on the present value of the cash flow streams discounted at a rate
commensurate with the associated risk of investing in and owning those assets.
The allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
NOTE AMOUNT (YEARS)
----- ----------- ------------
<S> <C> <C> <C>
AIM subadvisory contract and certain mortgage
servicing contracts.............................. 1 $ 7,409,000 10
Mortgage servicing assets......................... 2 881,000 10
Terminated contract and workforce................. 3 23,900,000 10
Goodwill.......................................... 4 1,130,824 10
<FN>
------------------------
(1) The fair value of the AIM subadvisory contracts and certain mortgage
servicing contracts were determined based on the projected
discounted cash flows resulting from the estimated life of the
assets. These assets have been contributed to the Services
Corporation and the Services Partnership as follows:
Services Corporation -- CRIIMI MAE made an investment in the
Services Corporation which is represented by 100% of the
non-voting common stock. Services Corporation issued installment
notes to purchase certain intangible assets. Services
Corporation contributed those intangible assets to Services
Partnership for a 92% limited partnership interest. These
intangible assets consisted of the AIM subadvisory agreements
and certain other mortgage servicing contracts valued at
$6,871,000.
Services Partnership -- CRIIMI MAE also made an investment
in the Services Partnership by contributing certain mortgage
servicing contracts valued at $538,000 for an 8% general
partnership interest.
(2) Represents the fair value of the remaining intangible assets CRIIMI
MAE acquired from the CRI Mortgage Businesses.
(3) Represents CRIIMI MAE's acquisition of the workforce and
intellectual property of the CRI Mortgage Businesses. The benefits
of these services were previously provided to CRIIMI MAE through the
Adviser. The expected future benefit of such services was the basis
for the determination of the fair value.
(4) Reflects the allocation of the purchase price to goodwill. Goodwill
is represented by the excess of purchase price over the fair value
of the net assets acquired.
</TABLE>
(F) In connection with the Merger, CRIIMI MAE will acquire approximately
$231,800 of fixed assets from the CRI Mortgage Businesses. The fixed assets
acquired by CRIIMI MAE from the CRI Mortgage Businesses are recorded at
historical cost, which approximates fair value.
(G) CRIIMI MAE will succeed in the Merger to aggregate indebtedness of
approximately $9,100,000 of the CRI Mortgage Businesses.
As discussed in Note 4(L), below, the historical interest expense of the CRI
Mortgage Businesses was adjusted, based on terms specified in an agreement in
principle by the lender to refinance the debt subsequent to the Merger, to
represent such interest expense as if CRIIMI MAE had owed this debt under the
refinancing terms during the year ended December 31, 1994. Under the proposed
refinancing terms, interest will be calculated based on CRIIMI MAE's choice of
one, two, or three-month LIBOR, plus 1.25% per annum.
F-7
<PAGE>
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
3. ADJUSTMENTS TO PRO FORMA BALANCE SHEET (CONTINUED)
(H) Reflects the increase in par value and additional paid-in-capital of
2,761,290 common shares issued in connection with the Merger at a share price of
$7.119 ($.01 per share par value) and options for 3,000,000 Common Shares
granted with a fair market value of $1,500,000. The Merger Proposal provides
that the stock consideration will consist of up to 2,761,290 Common Shares,
subject to a maximum market value at the consummation of the Merger Proposal of
$22.9 million.
<TABLE>
<S> <C>
2,761,290 shares X $7.109 per share............... $19,630,011
Fair Market Value of options for 3,000,000
shares........................................... 1,500,000
-----------
Additional Paid-In-Capital...................... $21,130,011
-----------
-----------
</TABLE>
4. ADJUSTMENTS TO PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
The following describes the pro forma adjustments to the Pro Forma
Consolidating Statement of Operations for the year ended December 31, 1994 as if
the Merger was consummated on January 1, 1994.
(A) Reflects CRIIMI MAE's historical Statement of Operations for the year
ended December 31, 1994.
(B) Reflects the CRI Mortgage Businesses' historical Statement of Operations
for the year ended December 31, 1994.
(C) In connection with the Merger, the CRI Mortgage Businesses will sell the
AIM subadvisory contracts and certain of the mortgage servicing assets to the
Services Corporation in exchange for 15-year installment notes in the aggregate
principal amount of $6,586,000 and bearing interest at 14% per annum. The
installment notes will be amortizable over 15 years. As described in Note 4(F),
CRIIMI MAE will also recognize equity in the net earnings of the Services
Corporation. The following is a summary of CRIIMI MAE's pro forma earnings from
the Services Corporation:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Interest income on installment notes.............. $ 922,035
Equity in earnings of the Services Corporation.... 184,870
------------
Earnings from the Services Corporation............ $1,106,905
------------
------------
</TABLE>
(D) Since the AIM subadvisory contracts and certain mortgage servicing
assets will be acquired by the Services Partnership, which is not consolidated,
the income and related expenses of these contracts will be accounted for in the
Services Partnership, not in CRIIMI MAE. Therefore, the operating results of
these assets will be reflected on the equity method (see adjustment (E) below)
and therefore must be eliminated in the CRIIMI MAE Pro Forma Consolidating
Statement of Operations.
F-8
<PAGE>
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
4. ADJUSTMENTS TO PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS (CONTINUED)
(E) CRIIMI MAE, through CRIIMI Management, will own an 8% general partner
interest in the Services Partnership after the consummation of the Merger. In
connection with this ownership, CRIIMI MAE will receive its equity in the
earnings from this investment. The following is a summary of the Services
Partnership Pro Forma Income Statement for the year ended December 31, 1994:
SERVICES PARTNERSHIP
PRO FORMA CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
AIM subadvisory fees.............................. $1,696,094
Mortgage servicing fees from affiliates........... 242,578
Mortgage servicing fees........................... 554,214
------------
Total income.................................. 2,492,886
------------
General and administrative expenses............... 602,000
Amortization expense.............................. 695,867
------------
Total expenses................................ 1,297,867
------------
Pro Forma net income.......................... $1,195,019
------------
------------
CRIIMI MAE's general partner interest............. 8%
------------
CRIIMI MAE's equity in earnings of Services
Partnership...................................... $ 95,602
------------
------------
Services Corporation limited partnership
interest......................................... 92%
------------
Services Corporation equity in earnings of
Services Partnership............................. $1,099,417
------------
------------
</TABLE>
(F) As discussed in Note 1, CRIIMI MAE will account for its investment in
the Services Corporation on the equity method calculated as follows:
SERVICES CORPORATION
PRO FORMA CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Equity in earnings of the Services Partnership and
total revenue.................................... $1,099,417
------------
Interest expense on installment notes payable..... 922,035
Current tax expense............................... 35,724
Deferred tax benefit.............................. (52,942)
------------
Total expenses................................ 904,817
------------
Pro forma net income.............................. $ 194,600
------------
------------
CRIIMI MAE's economic interest.................... 95%
------------
CRIIMI MAE's equity in earnings of Services
Corporation...................................... $ 184,870
------------
------------
</TABLE>
(G) CRIIMI MAE is obligated to pay to the CRI Mortgage Businesses incentive
fees and annual fees in connection with the management of CRIIMI MAE's
operations. These fees are based upon the amount of
F-9
<PAGE>
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
4. ADJUSTMENTS TO PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS (CONTINUED)
mortgage investments held by CRIIMI MAE and the achievement of certain specified
performance levels. Specifically, CRIIMI MAE currently pays .025% of the average
face balance of mortgage investments and .375% of the average carrying value of
mortgage investments. This adjustment represents the elimination of these fees
paid to the CRI Mortgage Businesses and recognized as revenue by the CRI
Mortgage Businesses, as this contract will be cancelled.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Annual Fee........................................ $2,567,101
Incentive Fee..................................... 497,675
------------
Total......................................... $3,064,776
------------
------------
</TABLE>
(H) CRIIMI MAE is obligated to pay to the CRI Mortgage Businesses mortgage
selection fees in connection with the CRIIMI MAE advisory contract. These fees
are payable up-front, subject to certain performance levels, and are based upon
.75% of the purchase price of CRIIMI MAE's mortgage investments. This adjustment
represents the elimination of these fees paid to the CRI Mortgage Businesses, as
this contract will be cancelled.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Mortgage Selection Fee............................ $1,570,415
------------
------------
</TABLE>
(I) CRIIMI MAE amortizes the mortgage selection fee as described in
adjustment (H) above, over the life of the mortgage investments. Due to the
cancellation of the advisory contract, the amortization of fees paid during 1994
is eliminated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Mortgage Selection Fee Amortization............... $ 52,347
------------
------------
</TABLE>
(J) This adjustment represents amortization of the assets acquired by CRIIMI
MAE, including goodwill, on the straight line method over the 10 year estimated
life of the assets.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Amortization...................................... $2,591,378
------------
------------
</TABLE>
F-10
<PAGE>
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
4. ADJUSTMENTS TO PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS (CONTINUED)
(K) Weighted average shares outstanding is based on the actual number of
days outstanding and is calculated as follows:
20,183,533 shares outstanding at December 31, 1993
2,761,290 shares issued in connection with the Merger
----------
<TABLE>
<C> <S> <C> <C>
22,944,823 X 365 days/365 days = 22,944,823
5,000,000 (1) X 291 days/365 days = 3,986,301
500,000 (2) X 58 days/365 days = 79,452
42,446 (3) X 1 day /365 days = 116
----------
27,010,692
----------
----------
<FN>
------------------------
(1) Represents Common Shares issued in an equity offering in March of
1994.
(2) Represents Common Shares issued in November of 1994.
(3) Represents Common Shares issued in connection with the Dividend
Reinvestment Plan in December of 1994.
</TABLE>
(L) The following adjustments are made to interest expense:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Interest expense-CRIIMI MAE pro forma (1)................... $ 521,830
Interest expense-CRI Mortgage Businesses (1)................ (1,262,663)
Interest expense-corporate tax (2).......................... 51,845
Interest expense-deferred compensation arrangement (3)...... 373,163
------------
Adjustment.................................................. $ (315,825)
------------
------------
<FN>
------------------------
(1) CRIIMI MAE will succeed in the Merger to aggregate indebtedness of
approximately $9,100,000 currently owed by the CRI Mortgage
Businesses. CRIIMI MAE intends to refinance this debt and has an
agreement in principle from the lender to refinance the outstanding
balance at an annual interest rate based on CRIIMI MAE's choice of
one, two or three-month LIBOR, plus 1.25%. Interest expense in the
Pro Forma Consolidating Statement of Operations is based on the
average one-month LIBOR of 4.48%, during the year ended December 31,
1994, plus 1.25%. The Pro Forma Balance Sheet reflects this
additional aggregate indebtedness of $9,100,000 as of December 31,
1994.
(2) CRIIMI MAE is obligated to pay interest expense to the Federal
Government with respect to unrecognized gain related to its
installment notes receivable from Services Corporation on the excess
of the installment notes greater than $5,000,000.
(3) CRIIMI MAE will pay interest expense on the liability related to the
deferred compensation arrangement discussed in adjustment 3(D)
above. Interest on the deferred compensation obligation will be
based on the AFR as of the date of the Merger. As of April 1995, the
AFR is approximately 7.5%.
</TABLE>
(M) This adjustment to interest income ($559,063) reflects paydowns on the
CRI Receivable balance during 1994 so that interest income on a pro forma basis
is recognized as though the CRI Receivable balance discussed above in 3(D) had
been $5,002,183 since the beginning of the period presented. Interest on the CRI
Receivable will be based on the AFR as of the date of the Merger. As of April
1995, the AFR is approximately 7.5%.
F-11
<PAGE>
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
5. RECONCILIATION OF PRO FORMA NET INCOME TO PRO FORMA TAX BASIS INCOME
A reconciliation of pro forma net income to pro forma tax basis income for
the year ended December 31, 1994 is as follows. Tax basis income is the primary
basis for dividend payments to shareholders:
<TABLE>
<CAPTION>
RECONCILIATION
TO
PRO FORMA
TAX BASIS INCOME
DECEMBER 31,
1994
----------------
<S> <C>
Pro forma net income for financial reporting purposes....................... $ 26,989,150
Adjustments to tax basis income:
HISTORICAL ADJUSTMENTS
Adjustment due to accounting for subsidiary as a pooling for financial
statement purposes and a purchase for tax purposes..................... 3,610,806
Income from investment in insured mortgage funds and advisory
partnership............................................................ (7,462)
Mortgage dispositions................................................... 200,195
Amortization of original issue discount................................. 187,305
Interest expense........................................................ 167,631
Provision for settlement of litigation.................................. (557,340)
Other................................................................... (4,831)
----------------
Pro forma tax basis income.............................................. 30,585,454
PRO FORMA ADJUSTMENTS
Amortization............................................................ 2,591,378
Capital gain on installment sale........................................ 781,434
Equity in earnings in subsidiaries...................................... (129,201)
----------------
Pro forma tax basis income, as adjusted..................................... $ 33,829,065
----------------
----------------
Common shares outstanding for tax purposes.................................. 28,070,850(1)
----------------
----------------
Tax basis income per share.................................................. $ 1.21
----------------
----------------
<FN>
(1) Common shares outstanding for the year ended December 31, 1994 is
calculated as follows for tax purposes (for tax purposes, shares held as
of the record date are considered to be outstanding throughout the
respective periods):
20,183,533 shares outstanding at December 31, 1993
2,761,290 shares issued in connection with the Merger
22,944,823 X 365 days/365 days = 22,944,823
5,000,000 (a) X 365 days/365 days = 5,000,000
500,000(b) X 92 days/365 days = 126,027
42,446 (c) X 0 days/365 days = --
-------------------------------------------------------
28,070,850
-------------------------------------------------------
-------------------------------------------------------
------------------------
(a) Represents Common Shares issued in an equity offering in
March of 1994.
(b) Represents Common Shares issued in November of 1994.
(c) Represents Common Shares issued pursuant to the Dividend
Reinvestment Plan in December of 1994, after the record date
for the fourth quarter distribution.
</TABLE>
F-12
<PAGE>
CRI MORTGAGE BUSINESSES
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994 AND 1993
F-13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
CRI, Inc., CRICO Mortgage Company, Inc., and
CRI/AIM Management, Inc.
and
The Board of Directors
CRIIMI MAE Inc.
We have audited the accompanying combined statements of assets and
liabilities comprised of certain assets and liabilities of CRI, Inc. to be
assumed by CRI Acquisition, Inc., CRICO Mortgage Company, Inc., and CRI/AIM
Management, Inc. ("CRI Mortgage Businesses") as of December 31, 1994 and 1993
and the related combined statements of income and expenses and cash flows for
the years then ended. These combined financial statements are the responsibility
of the management of CRI Mortgage Businesses. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined statements referred to above present fairly, in
all material respects, the combined assets and liabilities of CRI Mortgage
Businesses as of December 31, 1994 and 1993, and the combined income and
expenses and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Washington, D. C.
February 17, 1995
F-14
<PAGE>
CRI MORTGAGE BUSINESSES
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Cash and cash equivalents............................................................. $ 380,747 $ 288,287
Certificate of deposit................................................................ 12,500 12,500
Fees receivable....................................................................... 38,876 --
Fees receivable from affiliates....................................................... 833 49,138
Loan receivable from affiliate........................................................ 5,002,183 7,000,000
Fixed assets, net..................................................................... 231,801 204,245
Other assets.......................................................................... 14,404 9,466
------------ ------------
Total assets...................................................................... 5,681,344 7,563,636
------------ ------------
------------ ------------
LIABILITIES
Notes payable......................................................................... 9,100,000 4,097,817
Commitment under repurchase agreement................................................. -- 7,000,000
Accounts payable to affiliates........................................................ 15,168 38,301
Accounts payable and accrued expenses................................................. 160,704 42,494
------------ ------------
Total liabilities................................................................. 9,275,872 11,178,612
------------ ------------
Commitments and contingencies......................................................... -- --
------------ ------------
Net liabilities................................................................... $ 3,594,528 $ 3,614,976
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-15
<PAGE>
CRI MORTGAGE BUSINESSES
COMBINED STATEMENTS OF INCOME AND EXPENSES
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Income:
Subadvisory fees from affiliates.................................................... $ 2,008,316 $ 2,063,476
Annual and incentive management fees from CRIIMI MAE................................ 3,064,776 1,480,466
Mortgage selection fees from CRIIMI MAE............................................. 1,570,415 2,416,253
Mortgage servicing fees from affiliates............................................. 242,578 284,259
Mortgage servicing fees, consulting fees and other mortgage related income.......... 736,012 476,931
Interest............................................................................ 932,226 687,861
------------ ------------
8,554,323 7,409,246
------------ ------------
------------ ------------
Expenses:
Interest expense.................................................................... 1,262,663 969,758
Salaries and employee benefits...................................................... 431,349 636,278
General and administrative.......................................................... 428,215 388,272
Guarantee payment to CRIIMI MAE..................................................... 312,222 301,664
Professional fees................................................................... 22,303 40,376
Depreciation and amortization....................................................... 77,477 78,111
------------ ------------
2,534,229 2,414,459
------------ ------------
Net income............................................................................ $ 6,020,094 $ 4,994,787
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-16
<PAGE>
CRI MORTGAGE BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income.......................................................................... $ 6,020,094 $ 4,994,787
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 77,477 78,111
Changes in assets and liabilities:
Decrease (increase) in fees receivable............................................ (38,876) 25,795
Decrease (increase) in fees receivable from affiliates............................ 48,305 (29,726)
Increase in other assets.......................................................... (4,938) (9,466)
Increase (decrease) in accounts payable to affiliates............................. (23,133) 25,068
Increase (decrease) in accounts payable and accrued expenses...................... 118,210 (561,284)
------------ ------------
Net cash provided by operating activities....................................... 6,197,139 4,523,285
------------ ------------
------------ ------------
Cash flows provided by (used in) investing activities:
Decrease (increase) in loan receivable from affiliate............................... 1,997,817 (7,000,000)
Purchase of fixed assets............................................................ (27,556) (20,353)
------------ ------------
Net cash provided by (used in) investing activities............................. 1,970,261 (7,020,353)
------------ ------------
------------ ------------
Cash flows provided by (used in) financing activities:
(Decrease) increase of commitment under repurchase agreement........................ (7,000,000) 7,000,000
Proceeds from notes payable......................................................... 6,000,000 --
Repayment of notes payable.......................................................... (997,817) --
Distributions to affiliate.......................................................... (6,077,123) (4,798,110)
------------ ------------
Net cash (used in) provided by financing activities............................. (8,074,940) 2,201,890
------------ ------------
Net increase (decrease) in cash and cash equivalents............................ 92,460 (295,178)
Cash and cash equivalents, beginning of period........................................ 288,287 583,465
------------ ------------
Cash and cash equivalents, end of period.............................................. $ 380,747 $ 288,287
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-17
<PAGE>
CRI MORTGAGE BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined financial statements include the accounts of CRICO Mortgage
Company, Inc., CRI/AIM Management, Inc., certain assets and liabilities and
income and expenses of C.R.I., Inc., a Delaware corporation ("CRI"), to be
assumed by CRI Acquisition, Inc. (collectively, the "CRI Mortgage Businesses")
and through which CRI provides substantially all of its mortgage investment
advisory, servicing and origination services to REITs, publicly traded limited
partnerships and third parties. Each combined company is 100 percent owned by
the same stockholders. All significant intercompany transactions have been
eliminated.
Under a proposed Agreement and Plan of Merger, the CRI Mortgage Businesses
will be merged with and into CRIIMI MAE Management, Inc. ("CRIIMI Management"),
a Maryland corporation and a wholly owned subsidiary of CRIIMI MAE Inc. ("CRIIMI
MAE"), an affiliate of CRI (the "Merger"). Once the Merger is completed, CRIIMI
MAE will be a fully integrated, self-administered and self-managed mortgage
investment advisory, servicing, and originating real estate investment trust.
CRI Acquisition, Inc., an entity formed for the purpose of completing the
Merger with CRIIMI Management, will assume the following assets and liability of
CRI: CRI's 50 percent interest in the CRI/ AIM Investment Limited Partnership,
the CRIIMI MAE advisory agreement, certain personnel and work force in place
associated with the management of CRIIMI MAE and the fixed assets, related
depreciation and related intangible assets associated therewith, net of certain
senior debt equal to $4,097,817.
CRICO Mortgage Company, Inc. will be merged with CRIIMI Management, and
CRIIMI Management or its affiliates will assume the servicing agreements and
other business lines of CRICO Mortgage Company, Inc. along with certain accounts
payable and accrued expenses. However, CRICO Mortgage Company, Inc.'s cash and
cash equivalents, certificate of deposit and fees receivable, net of certain
accounts payable and accrued expenses, will not be merged with CRIIMI Management
but will be distributed to its stockholders at the time of the Merger.
CRI/AIM Management, Inc. (CRI/AIM) will also be merged with CRIIMI
Management, and CRIIMI Management or its affiliates will assume the AIM funds
subadvisory agreements, along with CRI/AIM's receivable from CRI for $5,002,183
("CRI Receivable"). CRIIMI Management will also enter into a deferred
compensation arrangement with each of CRI Mortgage Businesses' stockholders
("Principals") for services rendered in connection with the Merger pursuant to
which CRIIMI Management will agree to pay $2,501,092 to each of the Principals
as deferred compensation. The deferred compensation will be paid only to the
extent CRI makes principal payments on the CRI Receivable. Interest payments
received by CRIIMI Management on the CRI Receivable will be paid to each of the
Principals as additional compensation so long as the Principal continues to be
employed by CRIIMI Management, subject to certain exceptions. However, CRI/AIM's
cash and cash equivalents and fees receivable, net of certain accounts payable
and accrued expenses, will not be merged with CRIIMI Management but will be
distributed to its stockholders at the time of the Merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. METHOD OF ACCOUNTING
The combined financial statements of the CRI Mortgage Businesses are
prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles.
b. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all demand deposits and certificates of
deposit with original maturities of three months or less.
F-18
<PAGE>
CRI MORTGAGE BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c. CERTIFICATE OF DEPOSIT
This certificate of deposit matures on December 15, 1995 and is pledged as
collateral on the CRI Mortgage Businesses' letter of credit required for the CRI
Mortgage Businesses to conduct their business in the State of Maryland.
d. FIXED ASSETS
Fixed assets 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.
e. SERVICE REVENUES
The CRI Mortgage Businesses receive various fees for services provided to
publicly traded limited partnerships, REITs and third parties. The CRI Mortgage
Businesses' annual and incentive management fees are earned through payments
from the adviser of CRIIMI MAE (the "Adviser") for managing the affairs and/or
assets of CRIIMI MAE. Mortgage selection fees are earned through the Adviser for
reviewing, investigating and selecting mortgages for investment for CRIIMI MAE.
The aggregate management and selection fees earned for such services were
$4,635,191 and $3,896,719 for the years ended December 31, 1994 and 1993,
respectively.
Subadvisory fees are earned pursuant to subadvisory agreements with AIM
Acquisition Partners, L.P. ("AAP") and payments are received in connection with
the CRI Mortgage Businesses' 10 percent interest in CRI/AIM Investment Limited
Partnership. The CRI Mortgage Businesses perform substantially all of the
management activities on behalf of AAP for the AIM Funds -- four federally
insured mortgage investment partnerships currently traded on the American Stock
Exchange. In connection with the CRI Mortgage Businesses' acquisition of the AAP
subadvisory contracts, the CRI Mortgage Businesses guaranteed an annual cash
distribution of $700,000 to CRIIMI MAE on its interest in AAP. The required
guarantee payments to CRIIMI MAE were $312,222 and $301,664 for the years ended
December 31, 1994 and 1993, respectively.
Mortgage servicing fees are earned on a monthly basis as mortgage principal
and interest collections are due. The CRI Mortgage Businesses serviced
approximately 117 loans aggregating approximately $604.5 million in outstanding
principal balances at December 31, 1994. This portfolio is comprised of
approximately $332.1 million in third party loans, $65.1 million in AIM Funds
loans and $207.3 million in CRITEF funds loans. The CRITEF funds are affiliated
with CRI.
As of December 31, 1994 and 1993, a majority of the CRITEF loans serviced by
the CRI Mortgage Businesses were unable to make their full debt service payments
and were therefore restricted from paying their servicing fees to the CRI
Mortgage Businesses. As such, during 1994 and 1993, respectively, the CRI
Mortgage Businesses performed $1,098,640 and $1,037,553 of servicing for the
CRITEF loans without payment and, as such, are not reflected in the combined
financial statements. The CRITEF loans provide, however, that past due servicing
fees are payable once full debt service has been paid.
f. INCOME TAXES
The CRI Mortgage Businesses have elected to be treated as S Corporations
pursuant to Section 1362(a) of the Internal Revenue Code. This election results
in the stockholders reporting directly on their personal income tax returns the
earnings or losses of the CRI Mortgage Businesses. Therefore, no provision or
benefit for income taxes has been provided in the combined financial statements.
F-19
<PAGE>
CRI MORTGAGE BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
g. STATEMENTS OF CASH FLOWS
The combined statements of cash flows are intended to reflect only cash
receipt and cash payment activity and do not reflect investing and financing
activity that affect recognized assets or liabilities which do not result in or
arise from cash receipts or cash payments.
h. EXPENSES
CRI Mortgage Businesses receive reimbursement from the limited partnerships
and REITs (including CRIIMI MAE and the AIM Funds) for expenses such as
salaries, travel and postage incurred on their behalf. The total amounts of
reimbursed expenses were $1,821,761 and $1,369,249 for the years ended December
31, 1994 and 1993, respectively.
i. ALLOCATED COSTS
Included in the accompanying Combined Statements of Income and Expenses are
allocations of expenses incurred by the CRI Mortgage Businesses in performing
their duties. As CRI Acquisition, Inc. has not historically operated
independently of CRI, the expenses shown represent allocations made by CRI to
CRI Acquisition, Inc. These allocations consisted of two types: (i) the
apportionment of direct executive and finance costs between the CRI Mortgage
Businesses and all other business activities of CRI which are not part of the
CRI Mortgage Businesses and (ii) the apportionment of related corporate
overhead. In management's opinion, the allocation methodologies are reasonable
estimations of the costs that would have been incurred had CRI Acquisition, Inc.
been operating as a separate entity.
3. LOAN RECEIVABLE FROM AFFILIATE
In September 1993, the CRI Mortgage Businesses loaned CRI $7,000,000 funded
from the proceeds of a sale under a repurchase agreement (see Note 5). CRI was
to repay the CRI Mortgage Businesses for the use of the proceeds of the debt on
similar terms as the repurchase agreement. The initial $7,000,000 was
repurchased on April 15, 1994 with financing provided by a commercial bank.
CRI's obligation to the CRI Mortgage Businesses was modified to recognize CRI's
$1,000,000 repayment and the $6,000,000 remaining due. Such amount is amortized
similarly to the debt to the bank with the balance of $5,002,183 remaining at
December 31, 1994 (see Note 5). This amount is allocable to the CRI Mortgage
Businesses upon the Merger as described in Note 1.
4. FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------- ------------
<S> <C> <C>
Furniture and equipment...................................... $ 924,054 $ 698,792
Leasehold improvements....................................... 474,172 363,351
------------- ------------
1,398,226 1,062,143
Less accumulated depreciation and amortization............... (1,166,425) (857,898)
------------- ------------
$ 231,801 $ 204,245
------------- ------------
------------- ------------
</TABLE>
The value of the fixed assets allocated to the CRI Mortgage Businesses was
based upon the number of employees and the square footage of office space
occupied at December 31, 1994 and 1993. In management's opinion, this basis is a
fair measure of the value of the fixed assets and associated depreciation and
amortization of the CRI Mortgage Businesses.
5. NOTES PAYABLE AND COMMITMENT UNDER REPURCHASE AGREEMENT
The $9,100,000 of notes payable is comprised of two existing borrowings, the
working capital loan (the "WCL") and the CRI/AIM Loan, under one credit facility
with a commercial bank, with outstanding
F-20
<PAGE>
CRI MORTGAGE BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE AND COMMITMENT UNDER REPURCHASE AGREEMENT (CONTINUED)
balances of $4,097,817 and $5,002,183, respectively, at December 31, 1994. The
WCL originated in June 1989, and has subsequently been repaid in varying
amounts. The proceeds of the WCL have been used over the past several years for
financing various working capital needs and investments of CRI's businesses,
including its mortgage businesses. Further, it is secured in large part by the
CRIIMI MAE management fees. The CRI/AIM Loan arose when CRI/AIM Management, Inc.
borrowed $7,000,000 in September, 1993, in the form of a repurchase obligation
with an unrelated party as more fully described below. CRI/AIM Loan proceeds
were used principally to retire subordinated debt of CRI in 1993. The
subordinated debt was guaranteed by CRICO Mortgage Company, Inc. and other CRI
affiliates.
As of December 31, 1994 and 1993, the CRI Mortgage Businesses were jointly
and severally liable with other affiliates on $4,097,817 and $7,528,131 of the
WCL, respectively. The WCL matured on June 30, 1994 and was renewed to March 31,
1997. Interest is due monthly at the bank's prime rate plus one percent (9.50
percent as of December 31, 1994). Principal payments are required quarterly in
the amount of $227,657 based on a five year amortization schedule. On January 3,
1995, the bank agreed to defer the December, 1994 and the March and June, 1995
principal repayments. The loan is secured by certain management and advisory fee
proceeds and general accounts of the CRI Mortgage Businesses and other
affiliates and is guaranteed by the stockholders of CRI.
In September 1993, the CRI Mortgage Businesses borrowed $7,000,000 from a
third party by selling, subject to a repurchase agreement, its investment in the
subadvisory contracts with AAP and the interest CRI owned in partnership
distributions from CRI/AIM Investment Limited Partnership (collectively "the AIM
Proceeds"). The CRI Mortgage Businesses assigned their rights to the AIM
Proceeds and were obligated to repurchase them on June 1, 1994 for $7,000,000.
The CRI Mortgage Businesses, in turn, loaned the funds on similar terms to CRI
(see Note 3). The repurchase obligation has been reflected as a loan for
financial reporting purposes. All AIM Proceeds paid during the period of the
repurchase agreement have been recorded as fee income and expensed as interest
in the amounts of $578,842 and $682,911 for the years ended December 31, 1994
and 1993, respectively.
On April 15, 1994, the CRI Mortgage Businesses repurchased their investment
in the AIM Proceeds. To finance the repurchase, CRI and the CRI Mortgage
Businesses borrowed $6,000,000 from a bank with the remaining $1,000,000 being
funded with available cash of CRI. The CRI/AIM Loan provides for quarterly
interest payments at the bank's prime rate plus two percent (10.50 percent as of
December 31, 1994). The CRI/AIM Loan provides for quarterly principal reductions
and interest payments for the first two years of the greater of $450,000 or 100
percent of the AIM Proceeds and $375,000 or 100 percent of the AIM Proceeds in
the last year of the three-year loan (which matures on March 31, 1997). On
January 3, 1995, the bank agreed to the deferral of the March and June, 1995
quarterly principal reductions. In addition, the bank agreed to reduce the
December, 1994 quarterly principal reduction to $237,333. The loan is
collateralized by the AIM Proceeds and is guaranteed by the stockholders of CRI.
6. COMMITMENTS AND CONTINGENCIES
The CRI Mortgage Businesses are jointly and severally liable with other
affiliates on $5,000,000 in principal of subordinated debt. In 1988, CRI, the
CRI Mortgage Businesses and other affiliates raised $5,000,000 by issuing
convertible subordinated debentures to an offshore financial institution. The
debenture agreement provides for an interest-only loan, payable quarterly with a
balloon payment in January 1999. The debentures are convertible, at the lender's
option, into five percent of the outstanding common stock of CRI and its
combined real estate affiliates. Upon conversion, the loan is extinguished and,
similarly, the interest payments stop. CRI has not been notified of any intent
to convert. On January 23, 1995, the CRI Mortgage Businesses were released from
any claim associated with this subordinated debt. As a result, no liability or
associated debt service related to these debentures is included in the
accompanying financial statements.
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<PAGE>
APPENDIX A
<PAGE>
------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
CRIIMI MAE INC.
CRIIMI MAE MANAGEMENT, INC.
AND
CRICO MORTGAGE COMPANY, INC.
CRI/AIM MANAGEMENT, INC.
CRI ACQUISITION, INC.
AND
WILLIAM B. DOCKSER
H. WILLIAM WILLOUGHBY
DATED AS OF APRIL 20, 1995
------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I -- THE MERGER......................................................................... A-1
1.1 Merger................................................................................ A-1
1.2 Effective Time........................................................................ A-1
1.3 Effects of the Merger................................................................. A-2
1.4 Special Committee..................................................................... A-2
ARTICLE II -- CONVERSION AND EXCHANGE OF STOCK.................................................. A-2
2.1 Merger Consideration.................................................................. A-2
2.2 Exchange Provisions................................................................... A-3
ARTICLE III -- REPRESENTATIONS AND WARRANTIES................................................... A-3
3.1 Representations and Warranties of the CRI Mortgage Businesses and the Principals...... A-3
(a) Organization; Standing and Power................................................. A-3
(b) Subsidiaries..................................................................... A-3
(c) Capitalization................................................................... A-4
(d) Authority........................................................................ A-4
(e) Noncontravention................................................................. A-4
(f) Government Approval; Consents.................................................... A-5
(g) Financial Statements............................................................. A-5
(h) Absence of Certain Changes or Events............................................. A-5
(i) Compliance with Law.............................................................. A-5
(j) Brokers.......................................................................... A-6
(k) Litigation....................................................................... A-6
(l) Taxes and Tax Returns............................................................ A-6
(m) Title to Assets; Encumbrances.................................................... A-7
(n) Licenses, Permits and Authorizations............................................. A-7
(o) ERISA and Employee Matters....................................................... A-7
(p) Labor Relations.................................................................. A-7
(q) Patents, Franchises and Formulas................................................. A-7
(r) Insurance........................................................................ A-8
(s) Contracts........................................................................ A-8
(t) Powers of Attorney............................................................... A-8
(u) Guaranties....................................................................... A-8
(v) Books and Records................................................................ A-8
(w) Corporate Status................................................................. A-8
(x) Net Worth........................................................................ A-8
(y) Undisclosed Liabilities.......................................................... A-9
(z) Disclosure....................................................................... A-9
3.2 Representations and Warranties of CRIIMI MAE and CRIIMI Management.................... A-9
(a) Organization; Standing and Power................................................. A-9
(b) Authority........................................................................ A-9
(c) Common Shares.................................................................... A-9
(d) Capitalization................................................................... A-9
(e) Noncontravention................................................................. A-10
(f) Government Approval; Consents.................................................... A-10
(g) Litigation....................................................................... A-10
ARTICLE IV -- CONDUCT OF BUSINESS PENDING THE MERGER............................................ A-10
4.1 Conduct of Business by the CRI Mortgage Businesses Pending the Merger................. A-10
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
ARTICLE V -- ADDITIONAL AGREEMENTS.............................................................. A-12
5.1 Proxy Statement; Other Filings........................................................ A-12
5.2 Meeting of Stockholders of CRIIMI MAE................................................. A-12
5.3 Legal Requirements for Merger Proposal................................................ A-12
5.4 Sale of Assets by CRI to CRI Acquisition.............................................. A-12
5.5 Sale of Assets by CRICO Mortgage...................................................... A-13
5.6 Sale of Assets by CRI/AIM Management.................................................. A-13
5.7 Deferred Compensation Agreement....................................................... A-13
5.8 Reimbursement Agreement............................................................... A-13
5.9 Sublease Agreement.................................................................... A-13
5.10 Administrative Services Agreement..................................................... A-13
5.11 Employment and Non-Competition Agreements............................................. A-13
5.12 Option Agreements..................................................................... A-13
5.13 Registration Rights and Lock-Up Agreement............................................. A-13
5.14 Stock Restriction Agreement........................................................... A-13
5.15 Stock Issuance Agreements............................................................. A-13
5.16 Benefits.............................................................................. A-14
5.17 Additional Agreements and Provisions.................................................. A-14
5.18 Other Acquisition Proposals........................................................... A-14
5.19 Tax Matters........................................................................... A-14
ARTICLE VI -- CONDITIONS PRECEDENT.............................................................. A-14
6.1 Conditions to the Obligations of Each Party to Effect the Merger...................... A-14
(a) Approval of Holders of the Common Shares......................................... A-14
(b) Litigation....................................................................... A-14
(c) Accounting Treatment............................................................. A-14
6.2 Additional Conditions to the Obligation of the CRI Mortgage Businesses and the
Principals............................................................................ A-14
(a) Agreements....................................................................... A-14
(b) Representations and Warranties................................................... A-15
(c) Officer's Certificate............................................................ A-15
(d) NYSE Listing..................................................................... A-15
(e) Consents from Third Parties...................................................... A-15
(f) Opinion of Counsel............................................................... A-15
6.3 Additional Conditions to the Obligations of CRIIMI MAE and CRIIMI Management.......... A-15
(a) Agreements....................................................................... A-15
(b) Representations and Warranties................................................... A-15
(c) Officer's Certificate............................................................ A-15
(d) Lack of Adverse Change........................................................... A-15
(e) Consents from Third Parties...................................................... A-15
(f) Opinion of Financial Adviser..................................................... A-15
(g) Opinion of Counsel............................................................... A-15
(h) Tax Opinion...................................................................... A-16
ARTICLE VII -- REMEDIES FOR BREACHES OF THIS AGREEMENT.......................................... A-16
7.1 Investigations; Survival of Representations and Warranties............................ A-16
7.2 Indemnification by the CRI Mortgage Businesses and the Principals..................... A-16
7.3 Defense............................................................................... A-16
7.4 Indemnification Threshold............................................................. A-16
7.5 Limitation on Indemnification......................................................... A-17
7.6 No Contribution....................................................................... A-17
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
ARTICLE VIII -- TERMINATION, AMENDMENT AND WAIVER............................................... A-17
8.1 Termination........................................................................... A-17
8.2 Effect of Termination................................................................. A-17
8.3 Amendment............................................................................. A-17
8.4 Waiver................................................................................ A-17
ARTICLE IX -- GENERAL PROVISIONS................................................................ A-18
9.1 Public Statements..................................................................... A-18
9.2 Notices............................................................................... A-18
9.3 Interpretation........................................................................ A-19
9.4 Counterparts.......................................................................... A-19
9.5 Entire Agreement...................................................................... A-19
9.6 Governing Law......................................................................... A-19
9.7 Validity.............................................................................. A-19
9.8 Assignment............................................................................ A-19
9.9 Expenses.............................................................................. A-19
9.10 Knowledge............................................................................. A-19
9.11 Material Adverse Effect............................................................... A-20
</TABLE>
<TABLE>
<S> <C>
EXHIBITS
Exhibit 1 Form of Asset Purchase Agreement
Exhibit 2 Form of Asset Purchase Agreement
Exhibit 3 Form of Asset Purchase Agreement
Exhibit 4 Form of Deferred Compensation Agreement
Exhibit 5 Form of CRI Liquidating Reimbursement Agreement
Exhibit 6 Form of Sublease Agreement
Exhibit 7 Form of Administrative Services Agreement
Exhibit 8 Form of Employment and Non-Competition Agreement
Exhibit 9 Form of Employment and Non-Competition Agreement
Exhibit 10 Form of Employment and Non-Competition Agreement
Exhibit 11 Form of Employment and Non-Competition Agreement
Exhibit 12 Form of Employment and Non-Competition Agreement
Exhibit 13 Form of Option Agreement
Exhibit 14 Form of Option Agreement
Exhibit 15 Form of Option Agreement
Exhibit 16 Form of Option Agreement
Exhibit 17 Form of Option Agreement
Exhibit 18 Form of Registration Rights and Lock-Up Agreement
Exhibit 19 Form of Stock Restriction Agreement
Exhibit 20 Form of Stock Issuance Agreement
Exhibit 21 Form of Opinion of Counsel
Exhibit 22 Form of Opinion of Counsel
Exhibit 23 Form of Tax Opinion
SCHEDULES
Schedule 3.1(c) Capitalization
Schedule 3.1(e) Noncontravention; Government Approval; Consents
Schedule 3.1(k) Litigation
Schedule 3.1(l) Taxes and Tax Returns
Schedule 3.1(m) Assets; Encumbrances
Schedule 3.1(r) Insurance
Schedule 3.1(s) Contracts
Schedule 3.1(z) Projections
Schedule 3.2(d) Capitalization
Schedule 3.2(e) Noncontravention
Schedule 3.2(f) Government Approval; Consents
Schedule 3.2(g) Litigation
</TABLE>
A-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of April 20, 1995,
among CRIIMI MAE Inc., a Maryland corporation ("CRIIMI MAE"), CRIIMI MAE
Management, Inc., a newly formed Maryland corporation and a wholly owned
subsidiary of CRIIMI MAE ("CRIIMI Management"), CRICO Mortgage Company, Inc., a
Delaware corporation ("CRICO Mortgage"), CRI/AIM Management, Inc., a Delaware
corporation ("CRI/AIM Management"), CRI Acquisition, Inc., a Maryland
corporation ("CRI Acquisition"), William B. Dockser and H. William Willoughby.
WHEREAS, CRICO Mortgage, CRI/AIM Management and CRI Acquisition
(collectively, the CRI Mortgage Businesses, and each individually, a "CRI
Mortgage Business") are affiliates of C.R.I., Inc., a Delaware corporation
("CRI"), through which CRI conducts its mortgage investment advisory, servicing
and origination businesses, including the advisory services currently performed
on CRIIMI MAE's behalf by its adviser; and William B. Dockser and H. William
Willoughby, who are directors and senior executive officers of CRIIMI MAE (the
"Principals"), are the sole stockholders and directors of CRI and the CRI
Mortgage Businesses.
WHEREAS, the parties hereto desire to consummate a merger (the "Merger")
whereby each of the CRI Mortgage Businesses will be merged with and into CRIIMI
Management and CRIIMI Management will be the surviving corporation in the
Merger, all upon the terms and conditions set forth herein and in accordance
with the Maryland General Corporation Law ("Maryland Law") and the Delaware
General Corporation Law ("Delaware Law");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of CRIIMI MAE, consisting of Garrett G.
Carlson, Sr., G. Richard Dunnells and Robert F. Tardio (the "Unaffiliated
Directors"), has engaged Duff & Phelps Capital Markets Co. ("Duff & Phelps") to
provide an opinion (the "Fairness Opinion") as to the fairness of the Merger and
related transactions, including the consideration to be paid in connection
therewith and the related employment and compensation arrangements contemplated
thereby (the "Merger Proposal"), to CRIIMI MAE and its stockholders other than
the Principals (the "Public Stockholders") from a financial point of view;
WHEREAS, the Special Committee has recommended the Merger Proposal to the
Board of Directors of CRIIMI MAE (the "Board") and the Board (with the
Principals abstaining) has approved the Merger Proposal and has resolved to
recommend that the holders of CRIIMI MAE's Common Stock, par value $.01 per
share (the "Common Shares"), approve the Merger Proposal;
WHEREAS, the respective Boards of Directors and stockholders of each of the
CRI Mortgage Businesses have unanimously approved the Merger Proposal; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1.1 MERGER. At the Effective Time (as hereinafter defined), in accordance
with this Agreement, Maryland Law and Delaware Law, each of the CRI Mortgage
Businesses shall be merged with and into CRIIMI Management and CRIIMI Management
shall continue its corporate existence under the laws of the State of Maryland
as the surviving corporation.
1.2 EFFECTIVE TIME. Subject to the provisions of this Agreement, the
parties agree to cause to be duly executed (a) Articles of Merger (the "Articles
of Merger"), which shall be duly delivered to the State Department of
Assessments and Taxation of the State of Maryland (the "Department") for filing,
as
A-1
<PAGE>
provided by Maryland Law, and (b) a Certificate of Merger (the "Certificate of
Merger"), which shall be duly delivered to the Secretary of State for the State
of Delaware for filing, as provided by Delaware Law. The Merger shall become
effective at 5:00 p.m. on the later of the date of filing of the Articles of
Merger with the Department and the Certificate of Merger with the Secretary of
State of the State of Delaware (the "Effective Time"). Prior to the filing of
the Articles of Merger and the Certificate of Merger, a closing (the "Closing")
will be held at the offices of CRIIMI MAE, 11200 Rockville Pike, Rockville,
Maryland (or such other place as the parties may agree) upon the satisfaction or
waiver of the conditions set forth in Article VI hereof. The date of the Closing
shall be referred to herein as the "Closing Date." CRIIMI MAE and the CRI
Mortgage Businesses shall use their reasonable efforts to have the Effective
Time occur on the Closing Date.
1.3 EFFECTS OF THE MERGER. At the Effective Time, the effect of the Merger
shall be as provided under all applicable provisions of Maryland Law and
Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, (a) the separate existence of the CRI Mortgage
Businesses shall cease and the CRI Mortgage Businesses shall be merged with and
into CRIIMI Management (CRIIMI Management and the CRI Mortgage Businesses are
sometimes referred to herein as the "Constituent Corporations," and CRIIMI
Management as the surviving corporation in the Merger is sometimes referred to
herein as the "Surviving Corporation"), all assets, rights, privileges, powers
and franchises of the Constituent Corporations, individually and collectively,
shall vest in the Surviving Corporation provided that CRI or its designees shall
be entitled to all net income earned but not received by the CRI Mortgage
Businesses prior to the Effective Time), and all liabilities of the Constituent
Corporations, including without limitation the approximately $9.1 million of
indebtedness of the CRI Mortgage Businesses (the "Signet Debt") and accrued
vacation and sick leave, shall become liabilities of the Surviving Corporation,
(b) the Articles of Incorporation of CRIIMI Management as in effect immediately
prior to the Effective Time shall be the Articles of Incorporation of the
Surviving Corporation until thereafter amended as provided therein and in
accordance with Maryland Law, (c) the By-Laws of CRIIMI Management as in effect
immediately prior to the Effective Time shall be the By-Laws of the Surviving
Corporation until thereafter amended as provided therein and in accordance with
Maryland Law, (d) the officers of CRIIMI Management immediately prior to the
Effective Time shall be the officers of the Surviving Corporation until their
successors have been duly elected and qualified in accordance with the Articles
of Incorporation and By-Laws of the Surviving Corporation, and (e) the directors
of CRIIMI Management immediately prior to the Effective Time shall be the
directors of the Surviving Corporation.
1.4 SPECIAL COMMITTEE. The Special Committee has received the Fairness
Opinion of Duff & Phelps stating that, based on the assumptions and subject to
the qualifications set forth therein, the Merger Proposal is fair to CRIIMI MAE
and the Public Stockholders from a financial point of view. On the basis of the
Fairness Opinion, the Special Committee's own deliberations and the advice of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), CRIIMI
MAE's financial adviser, the Special Committee has determined that the Merger
Proposal is fair to CRIIMI MAE and its Public Stockholders. Based on the Special
Committee's recommendation to the Board, the Board (with the Principals
abstaining) has approved and adopted the Merger Proposal and has resolved to
recommend approval of the Merger Proposal to the holders of the Common Shares.
ARTICLE II
CONVERSION AND EXCHANGE OF STOCK
2.1 MERGER CONSIDERATION. At the Effective Time, by virtue of the Merger
and without any action on the part of the holders of any common stock of the CRI
Mortgage Businesses ("CRI Mortgage Business Common Shares"), all of the issued
and outstanding CRI Mortgage Business Common Shares shall be deemed to be
converted into the number of fully paid and non-assessable, unregistered Common
Shares (the "Share Consideration") equal to the lesser of (i) 2,650,838 or (ii)
the quotient obtained by dividing $21,984,000 by the average of the high and low
sales prices of one Common Share as reported on the New York Stock Exchange
("NYSE") on the trading day immediately preceding the Closing Date. No
fractional Common Shares shall be issued in the Merger. In lieu of any such
fractional shares, each holder of CRI
A-2
<PAGE>
Mortgage Business Common Shares who would otherwise have been entitled to a
fraction of a Common Share upon surrender of certificates for exchange pursuant
to this Section 2.1 will receive one Common Share.
2.2 EXCHANGE PROVISIONS.
(a) On the Closing Date, each holder of certificates representing CRI
Mortgage Business Common Shares shall surrender the same to CRIIMI MAE and such
holders (the "Holders") shall be entitled upon such surrender to receive in
exchange therefor certificates representing the number of Common Shares into
which the CRI Mortgage Business Common Shares theretofore represented by the
certificates so surrendered shall have been converted pursuant to Section 2.1.
(b) Until so surrendered, each certificate representing CRI Mortgage
Business Common Shares shall represent, after the Effective Time, solely the
right to receive Common Shares. All Common Shares issued upon the surrender of
CRI Mortgage Business Common Shares in accordance with the terms hereof shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
CRI Mortgage Business Common Shares.
(c) As a condition to the Surviving Corporation's obligation to deliver
Common Shares pursuant to Section 2.1, each such Holder shall have made an
undertaking in writing that such Holder (i) is acquiring the Common Shares
issued pursuant to Section 2.1 hereof for investment purposes only, for such
Holder's own account and with no present intention to distribute any of such
Common Shares, except for transfers of such shares that are registered, or
exempt from registration, under the Securities Act of 1933, as amended (the
"Securities Act"), and (ii) acknowledges that the Common Shares to be received
pursuant to Section 2.1 (A) have not been registered under the Securities Act
and may not be sold by such Holder absent an effective registration statement or
the availability of an exemption from registration with respect to such shares
under the Securities Act and (B) are subject to the terms of the Registration
Rights and Lock-Up Agreement referenced in Section 5.13 hereof. The Holders
agree that any certificates representing the Common Shares to be received
pursuant to Section 2.1 may bear an appropriate legend as to resales of such
shares under the Securities Act, any applicable "blue sky" laws and such
Registration Rights and Lock-Up Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE CRI MORTGAGE BUSINESSES AND THE
PRINCIPALS. The following representations and warranties are given severally,
and not jointly, by each of the CRI Mortgage Businesses with respect to such CRI
Mortgage Business only, and all of the representations are given jointly and
severally by the Principals:
(a) ORGANIZATION; STANDING AND POWER. CRICO Mortgage and CRI/AIM
Management are corporations duly organized, validly existing and in good
standing under the laws of the State of Delaware. CRI Acquisition is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Maryland. Each of the CRI Mortgage Businesses has all
requisite power and authority to own, lease and operate its assets and to
carry on its business as now being conducted. Each of the CRI Mortgage
Businesses is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its assets
owned or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified or in good standing which
would not, in the aggregate, have a Material Adverse Effect (as defined in
Section 9.11). Copies of the Articles of Incorporation and By-Laws of each
of the CRI Mortgage Businesses heretofore delivered to CRIIMI MAE are
accurate and complete.
(b) SUBSIDIARIES. There are no, and have never been any, subsidiaries
of any of the CRI Mortgage Businesses. None of the CRI Mortgage Businesses
owns any stock of any company or options to acquire stock in any company.
A-3
<PAGE>
(c) CAPITALIZATION. All of the authorized capital stock and all of the
duly authorized, validly issued and outstanding, fully paid and
nonassessable shares of the capital stock of each of the CRI Mortgage
Businesses are as set forth on Schedule 3.1(c) hereto. Each of the
Principals owns one-half of the issued and outstanding capital stock of each
of the CRI Mortgage Businesses. No shares of common stock of any of the CRI
Mortgage Businesses are held in its treasury. Except for the right of Nippon
Housing Loan Co., Ltd. ("Nippon") to acquire CRI Mortgage Business Common
Shares as set forth in the Amended and Restated Convertible Subordinated
Debenture Purchase Agreement dated April 1989, as amended, between Nippon,
CRI and certain CRI affiliates, and except as set forth on Schedule 3.1(c),
there are as of the date of this Agreement no shares of capital stock or
equity securities of any of the CRI Mortgage Businesses outstanding or
authorized and no outstanding or authorized options, warrants, rights to
subscribe (including any preemptive rights), calls or commitments of any
character whatsoever requiring the issuance, sale or transfer by any CRI
Mortgage Business of any shares of its capital stock or any securities
convertible into or exchangeable or exercisable for, or rights to purchase
or otherwise acquire, any shares of capital stock of any CRI Mortgage
Business (collectively, "Other Securities"). Except as set forth on Schedule
3.1(c), as of the Closing Date, there will be no shares of capital stock or
other equity securities of any of the CRI Mortgage Businesses outstanding
and no outstanding or authorized Other Securities. There are no outstanding
or authorized stock appreciation, phantom stock, profit participation or
similar rights with respect to any of the CRI Mortgage Businesses. Since
December 31, 1994 (with respect to CRICO Mortgage and CRI/AIM Management)
and since the initial issuance of shares of capital stock of CRI
Acquisition, no shares of the capital stock of any CRI Mortgage Business
have been issued or retired or, in the case of treasury shares, reissued.
(d) AUTHORITY. Subject to the qualifications in Sections 3.1(e) and
3.1(f), each of the CRI Mortgage Businesses and the Principals has the
requisite power (including corporate power with respect to the CRI Mortgage
Businesses) and authority to enter into this Agreement, and to perform its
or his obligations hereunder. The execution and delivery of this Agreement
by the CRI Mortgage Businesses and the Principals and the consummation of
the Merger Proposal, as applicable, have been duly authorized by the
respective Boards of Directors of the CRI Mortgage Businesses and approved
by the Principals. No other corporate proceedings on the part of any CRI
Mortgage Business are necessary as of the date of this Agreement to
authorize the execution and delivery of this Agreement and the agreements
attached hereto as Exhibits 1, 2 and 3 (the "CRI Mortgage Business
Agreements"). As of the Closing Date, no other corporate proceedings on the
part of any CRI Mortgage Business will be necessary to authorize the
performance of this Agreement and the CRI Mortgage Business Agreements. This
Agreement has been duly executed and delivered by each of the CRI Mortgage
Businesses and the Principals and constitutes a valid and binding obligation
of each of the CRI Mortgage Businesses and the Principals, enforceable
against each of the CRI Mortgage Businesses and the Principals in accordance
with its terms.
(e) NONCONTRAVENTION. Neither the execution and delivery of this
Agreement by the CRI Mortgage Businesses and the Principals nor the
consummation of the Merger Proposal nor compliance by the CRI Mortgage
Businesses and the Principals with any of the provisions hereof will (i)
violate, conflict with, or result in a breach of any provisions of, or
constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or
suspension of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of any
Lien (as hereinafter defined) upon any of the properties or assets of any of
the CRI Mortgage Businesses or the Principals under, any of the terms,
conditions or provisions of (x) the respective Articles of Incorporation or
By-Laws of the CRI Mortgage Businesses, or (y) except as set forth on
Schedule 3.1(e) hereto, any note, bond, mortgage, indenture, deed of trust,
license, Permit (as hereinafter defined), authorization, lease, agreement or
instrument or obligation to which any of the CRI Mortgage Businesses or the
Principals is party or by which they are bound or to which they or any of
their respective assets may be subject, or (ii) subject to statutes and
regulations to be complied with on or before the Closing Date, violate any
judgment, ruling, order, writ, injunction, decree, or, to the best knowledge
of the CRI Mortgage Businesses and the Principals,
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statute, rule or regulation applicable to any of the CRI Mortgage Businesses
or the Principals or any of their respective assets, except, in the case of
each of clauses (i)(y) and (ii) above, for such violations, conflicts,
breaches, defaults, terminations, accelerations or creations of Liens (as
hereinafter defined), which would not, in the aggregate, have a Material
Adverse Effect or affect the ability of any of the CRI Mortgage Businesses
or the Principals to consummate the Merger Proposal. As of the Closing Date,
the exceptions set forth in Schedule 3.1(e) and referenced in clauses (i)(y)
and (ii) above will not exist.
(f) GOVERNMENT APPROVAL; CONSENTS. The third party and governmental
consents and approvals required to be obtained by the CRI Mortgage
Businesses and the Principals for the consummation of the Merger Proposal
are set forth on Schedule 3.1(e). Other than as set forth on Schedule
3.1(e), no notice to, filing with, or authorization, consent or approval of,
any domestic or foreign public body or authority is necessary for the
execution and delivery of this Agreement by any of the CRI Mortgage
Businesses or the Principals or the consummation of the Merger Proposal or
compliance by any of the CRI Mortgage Businesses or the Principals with any
of the provisions hereof, except where failures to give such notices, make
such filings, or obtain authorizations, consents or approvals would not, in
the aggregate, have a Material Adverse Effect or affect the ability of any
of the CRI Mortgage Businesses or the Principals to consummate the Merger
Proposal.
(g) FINANCIAL STATEMENTS. The combined statements of assets and
liabilities, comprised of (i) certain assets and liabilities of CRI to be
sold to CRI Acquisition and (ii) the assets and liabilities of CRICO
Mortgage and CRI/AIM Management, dated December 31, 1994 (the "Company
Financial Statements") previously delivered to CRIIMI MAE have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods covered thereby (except as may be
indicated in the notes thereto), and fairly present the financial position
of such assets and liabilities as of the dates thereof and their results of
operations and cash flow for the periods then ended. Any unaudited interim
statements of such assets and liabilities prepared on or before the Closing
Date and pertaining to a period or periods (no more frequent than quarterly)
commencing on or after January 1, 1995 through a date prior to the Closing
Date will be delivered to CRIIMI MAE no later than 45 days after the end of
the period to which such statements apply, and will be prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods covered thereby (except as may be
indicated in the notes thereto) and will fairly present the financial
position of such assets and liabilities as of the dates thereof and their
results of operation and cash flow for the periods then ended (subject to
normal year-end adjustments and to the extent they may not include footnotes
or may be condensed or summary statements).
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as provided for in
this Agreement and the agreements attached hereto as Exhibits 1 through 20
(collectively, the "Merger Proposal Agreements") or as specifically
reflected in the Company Financial Statements, since December 31, 1994 there
has not been (i) any change or any event which would result in a Material
Adverse Effect; (ii) any entry by any of the CRI Mortgage Businesses into
any material commitment or transaction which is not in the ordinary course
of business; (iii) any change by any of the CRI Mortgage Businesses in
accounting principles or methods except insofar as may have been required by
a change in generally accepted accounting principles; (iv) any declaration,
payment or setting aside for payment of any dividend (except for cash
dividends or distributions by any CRI Mortgage Business to its stockholders
or their designees of its rights to monies earned prior to the Closing Date)
by any of the CRI Mortgage Businesses; (v) any action taken by any of the
CRI Mortgage Businesses of the type referred to in Section 4.1 hereof; or
(vi) any agreement by any of the CRI Mortgage Businesses to (A) do any of
the things described in the preceding clauses (i) through (v) other than as
provided for in the Merger Proposal Agreements or (B) take, whether in
writing or otherwise, any action which, if taken prior to the date of this
Agreement, would have made any representation or warranty in this Section
3.1 untrue or incorrect.
(i) COMPLIANCE WITH LAW. None of the CRI Mortgage Businesses has, to
the best knowledge of the Principals and the CRI Mortgage Businesses,
violated or failed to comply with any statute, law, ordinance, regulation,
rule, order or other legal requirement of any foreign, federal, state or
local
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government, authority or any other governmental department or agency, or any
judgment, decree or order of any court, applicable to its business or
operations, except where any such violations or failures to comply would
not, individually or in the aggregate, have a Material Adverse Effect.
(j) BROKERS. None of the CRI Mortgage Businesses has retained any
broker, finder, adviser or investment banker which is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger
Proposal. To the best knowledge of the CRI Mortgage Businesses and the
Principals, no broker, finder, adviser or investment banker, other than
Merrill Lynch and Duff & Phelps (each of whose fees have been described to
CRIIMI MAE in writing prior to the date hereof), is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger
Proposal.
(k) LITIGATION. Except as set forth on Schedule 3.1(k) hereto, there
is no claim, action, proceeding or investigation pending or, to the best
knowledge of the Principals and the CRI Mortgage Businesses, threatened
against or relating to any of the CRI Mortgage Businesses before any court
or governmental or regulatory authority or body which, if determined
adversely, individually or in the aggregate, would have a Material Adverse
Effect. None of the CRI Mortgage Businesses is subject to any outstanding
order, writ, injunction or decree.
(l) TAXES AND TAX RETURNS. Each of the CRI Mortgage Businesses has
duly and timely filed all United States federal and state income tax returns
and all other returns and reports required to be filed by it with respect to
any taxes, and each such return and report is complete and accurate in all
material respects. Each of the CRI Mortgage Businesses has paid or made
adequate provision for the payment of all federal and other taxes
(including, if any, interest, penalties or additions to tax in respect
hereof) (whether or not shown on any tax return) whether disputed or not,
for all periods ended on or before the date of this Agreement and will have
done so as of the Closing Date for all periods ending on or before the
Closing Date. Any deficiencies or assessments asserted in writing by the
appropriate taxing authorities have either been paid, settled or fully
provided for. There are no claims or assessments (not provided for) pending
against any of the CRI Mortgage Businesses for any alleged federal or state
income or other tax deficiency and no material issue has been raised in
writing by any federal or state income taxing authority or representative
thereof. No consent has been filed relating to any CRI Mortgage Business
pursuant to Section 341 of the Code. No claim has ever been made by an
authority in a jurisdiction where any of the CRI Mortgage Businesses does
not file tax returns that any of them are or may be subject to taxation by
that jurisdiction. Each of the CRI Mortgage Businesses has withheld and paid
all taxes required to have been withheld and paid in connection with amounts
paid or owing to any employee, independent contractor, creditor, stockholder
or other third party. Schedule 3.1(l) lists all federal, state and local
income tax returns filed with respect to CRICO Mortgage and CRI/AIM
Management for taxable periods ended on or after December 31, 1991, and
indicates those income tax returns that have been audited and those that
currently are the subject of audit. None of the CRI Mortgage Businesses has
consented to an extension of the statute of limitations which is still in
effect with respect to a tax period ended before December 31, 1991. None of
the CRI Mortgage Businesses is a party to any tax allocation or sharing
agreement. None of the CRI Mortgage Businesses (i) has been a member of an
affiliated group (within the meaning of Code Section 1504) filing a
consolidated federal income tax return or (ii) has any liability for the
taxes of any Person (other than a CRI Mortgage Business) under Treasury
Regulation Section 1.1502-6 (or any similar provision of state, local or
foreign law), as a transferee or successor, by contract, or otherwise. There
is and will be no valid basis to require an extension of the statute of
limitations with respect to any required federal income tax returns of the
CRI Mortgage Businesses beyond the limitations period which expires three
years after the filing of any such return as a result of a 25% or greater
understatement of gross income or fraud in connection with such returns. For
the tax years ended on or after December 31, 1988, none of the CRI Mortgage
Businesses was a personal holding company as defined in the Code.
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(m) TITLE TO ASSETS; ENCUMBRANCES. As of the Closing Date, each of the
CRI Mortgage Businesses will have good and marketable title to all assets
(personal and mixed, tangible and intangible) owned by it, except for such
assets held pursuant to leases, in which event the lessee will have a valid
leasehold interest. All of such assets are listed in Schedule 3.1(m) hereto.
Except (i) for the Signet Debt as such may be modified in a manner mutually
acceptable to CRIIMI MAE and the CRI Mortgage Businesses or (ii) as
otherwise listed on Schedule 3.1(m), none of such assets will as of the
Closing Date be subject to any Lien (as hereinafter defined). None of the
CRI Mortgage Businesses owns, leases or operates, or has ever owned, leased
or operated, any real property.
"Lien" means any mortgage, pledge, encumbrance, security interest,
charge, or other lien, except (i) statutory liens not yet delinquent, (ii)
liens that do not materially detract from or materially interfere with the
present use of the assets subject thereto or affected thereby, or otherwise
materially impair present business operations with respect to such assets,
(iii) liens for taxes not yet due and owing, and (iv) liens reflected in the
Company Financial Statements.
(n) LICENSES, PERMITS AND AUTHORIZATIONS. To the best knowledge of the
CRI Mortgage Businesses and the Principals, each of the CRI Mortgage
Businesses has all material approvals, authorizations, qualifications,
consents, licenses, franchises, orders and other permits of all governmental
or regulatory agencies, whether federal, state or local, domestic or foreign
(the "Permits"), necessary to enable the CRI Mortgage Businesses to continue
to conduct their respective businesses as currently being conducted. To the
best knowledge of the CRI Mortgage Businesses and the Principals, each
Permit is in full force and effect and each of the CRI Mortgage Businesses
is in material compliance with all obligations with respect thereto, and no
event has occurred which permits, or upon the giving of notice or the lapse
of time or otherwise would permit, revocation, nonrenewal, modification,
suspension or termination of any Permit. To the best knowledge of the CRI
Mortgage Businesses and the Principals, no Permit will remain in full force
and effect after the consummation of the Merger Proposal.
(o) ERISA AND EMPLOYEE MATTERS. Each of the CRI Mortgage Businesses is
in compliance in all material respects with all presently applicable
provisions of the Employee Retirement Income Security Act of 1974, as
amended, including the regulations and published interpretations thereunder
("ERISA"); no "reportable event" (as defined in ERISA) has occurred with
respect to any "pension plan" (as defined in ERISA) for which any of the CRI
Mortgage Businesses would have any liability under (i) Title IV of ERISA
with respect to termination of, or withdraw from, any "pension plan" or (ii)
Section 412 or 4971 of the Code, including the regulations and published
interpretations thereunder.
(p) LABOR RELATIONS. There is (i) no unfair labor practice complaint
pending against any of the CRI Mortgage Businesses or, to the best knowledge
of the CRI Mortgage Businesses and the Principals, threatened against any of
the CRI Mortgage Businesses, before the National Labor Relations Board or
other governmental or regulatory authority, and no grievance or arbitration
proceeding arising out of or under any collective bargaining agreement is so
pending against any of the CRI Mortgage Businesses or, to the best knowledge
of the CRI Mortgage Businesses and the Principals, threatened against any of
the CRI Mortgage Businesses, and, to the best knowledge of the CRI Mortgage
Businesses and the Principals, no basis for an unfair labor practice finding
against any of the CRI Mortgage Businesses; (ii) no strike, labor dispute,
slowdown or stoppage pending against any of the CRI Mortgage Businesses or,
to the best knowledge of the CRI Mortgage Businesses and the Principals,
threatened against any of the CRI Mortgage Businesses; and (iii) to the best
knowledge of the CRI Mortgage Businesses and the Principals, no union
representation question existing with respect to the employees of any of the
CRI Mortgage Businesses.
(q) PATENTS, FRANCHISES AND FORMULAS. To the best knowledge of the CRI
Mortgage Businesses and the Principals, except with respect to any rights
concerning the use of the CRI Mortgage Business names and those items
covered by the Administrative Services Agreement attached hereto as Exhibit
7, the CRI Mortgage Businesses have the right to use any patents,
trademarks, permits, service marks, trade names, copyrights, licenses,
franchises and formulas, or rights with respect to the foregoing
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("Intellectual Property"), and has obtained assignments of all leases and
other rights of whatever nature, necessary for the present conduct of the
CRI Mortgage Businesses. No proceedings have been instituted or are pending
or, to the best knowledge of the CRI Mortgage Businesses and the Principals,
threatened that challenge the validity of the ownership of any Intellectual
Property. To the best knowledge of the CRI Mortgage Businesses and the
Principals, the present employment of Intellectual Property by a CRI
Mortgage Business, if any, does not infringe any rights of any person. To
the best knowledge of the CRI Mortgage Businesses and the Principals, no
patent, trademark, permit, service mark, trade name, copyright, license,
franchise or formula, product, process, method, substance, part or other
material currently being sold or employed by any person infringes any rights
of any of the CRI Mortgage Businesses with respect to the Intellectual
Property.
(r) INSURANCE. Each of the CRI Mortgage Businesses maintains the
insurance described on Schedule 3.1(r) hereto and such insurance is in full
force and effect.
(s) CONTRACTS. Schedule 3.1(s) hereto lists all contracts and other
agreements to which any of the CRI Mortgage Businesses will be a party as of
the Closing Date (absent termination in accordance with their terms other
than as a result of breach by a CRI Mortgage Business and excluding any
contracts or other assets being conveyed under the asset purchase agreements
attached hereto as Exhibits 2 and 3). The CRI Mortgage Businesses have
delivered to CRIIMI MAE a correct and complete copy of each written
agreement listed in Schedule 3.1(s) (as amended to date) and a written
summary setting forth the terms and conditions of each oral agreement
referred to in Schedule 3.1(s). With respect to each such agreement, as far
as the CRI Mortgage Businesses and the Principals are aware: (A) the
agreement is valid, binding, enforceable, and in full force and effect; (B)
no party is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default, or permit
termination, modification, or acceleration, under the agreement; (C) no
party has repudiated any material provision of the agreement; and (D) the
agreement will continue to be valid, binding, enforceable, and in full force
and effect in all material respects following the consummation of the Merger
Proposal.
(t) POWERS OF ATTORNEY. Except for powers of attorney which the
Principals may execute to each other to facilitate the execution of
documents when one of them is unavailable, or as may be contained in the
agreements listed on Schedule 3.1(s), there are no outstanding powers of
attorney executed on behalf of any of the CRI Mortgage Businesses, including
powers of attorney executed by either of the Principals affecting any of the
CRI Mortgage Businesses.
(u) GUARANTIES. As of the Closing Date, none of the CRI Mortgage
Businesses will be a guarantor or otherwise liable for any obligation to any
other Person, except in connection with endorsement of checks and other
instruments in the ordinary course of business.
(v) BOOKS AND RECORDS. (i) The books of account and other financial
records of the CRI Mortgage Businesses are in all material respects true,
complete and correct, and accurately reflect in all material respects the
assets and liabilities of (a) CRI to be sold to CRI Acquisition and (b)
CRICO Mortgage and CRI/AIM Management as set forth in the Company Financial
Statements.
(ii) The minute books and other records of the CRI Mortgage
Businesses have been made available to CRIIMI MAE, contain in all material
respects accurate records of all meetings and accurately reflect in all
material respects all other corporate action of the shareholders and
directors and any committees of the Board of Directors of the CRI Mortgage
Businesses.
(w) CORPORATE STATUS. Each of the CRI Mortgage Businesses has been an
S corporation since its inception and has no accumulated or current earnings
or profits.
(x) NET WORTH. The net worth of each of the Principals (i.e., with
respect to each Principal, the sum of the current value of his assets
(excluding jointly owned assets, his interest in the CRI Mortgage Businesses
and the Common Shares and options to purchase Common Shares to be issued to
him on the Closing Date) less the sum of the current amount of his
liabilities) is at least $5 million.
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(y) UNDISCLOSED LIABILITIES. None of the CRI Mortgage Businesses or
either Principal is aware of (i) any liability of the CRI Mortgage
Businesses, whether asserted or unasserted, absolute or contingent, accrued
or nonaccrued, liquidated or unliquidated, due or to become due, of any
nature (a "Liability"), or (ii) any past or present fact, situation,
circumstance, status, condition, activity, practice, event, action, failure
to act or transaction that could reasonably be expected to form the basis of
any present or future action, or demand against any of them giving rise to
any Liability, except for (A) Liabilities set forth on the Company Financial
Statements and (B) Liabilities which have arisen after December 31, 1994 in
the ordinary course of business (none of which results from, arises out of,
relates to, is in the nature of, or was caused by any breach of contract,
breach of warranty, tort, infringement, or violation of law).
(z) DISCLOSURE. To the best knowledge of each of the CRI Mortgage
Businesses and the Principals, no certificate, schedule, list or other
information furnished in writing by or on behalf of any of the CRI Mortgage
Businesses or the Principals to CRIIMI MAE prior to the date hereof in
connection herewith (excluding projections) contains (after giving effect to
any correction thereof furnished in writing to CRIIMI MAE prior to the date
hereof), and no certificate, schedule, list or other information furnished
in writing by or on behalf of any of the CRI Mortgage Businesses or the
Principals after the date hereof until the Closing Date will contain, any
untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements herein or therein,
in light of the circumstances under which they were made, not misleading.
The projections (attached as Schedule 3.1(z)) were prepared in good faith
and each of the CRI Mortgage Businesses and the Principals believes there
was a reasonable basis for such projections when they were prepared;
provided, how-ever, that such projections are based on a number of
assumptions that are subject to significant uncertainties and contingencies,
many of which are beyond the control of the CRI Mortgage Businesses or the
Principals. No representation is made with respect to the actual attainment
of the projected results, which may vary significantly from those shown, or
as to the completeness thereof.
3.2 REPRESENTATIONS AND WARRANTIES OF CRIIMI MAE AND CRIIMI
MANAGEMENT. CRIIMI MAE and CRIIMI Management jointly and severally represent
and warrant to each of the CRI Mortgage Businesses and the Principals as
follows:
(a) ORGANIZATION; STANDING AND POWER. Each of CRIIMI MAE and CRIIMI
Management is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland.
(b) AUTHORITY. Each of CRIIMI MAE and CRIIMI Management has the
requisite corporate power and authority to enter into this Agreement, and to
perform its respective obligations hereunder. The execution and delivery of
this Agreement by each of CRIIMI MAE and CRIIMI Management and the
consummation by each of CRIIMI MAE and CRIIMI Management of the Merger
Proposal have been duly authorized by the respective Boards of Directors of
CRIIMI MAE and CRIIMI Management (with the Principals abstaining in each
instance) and by CRIIMI MAE as the sole stockholder of CRIIMI Management
and, except for the approval of the holders of the Common Shares as set
forth in Section 5.2 hereof, no other corporate proceedings on the part of
CRIIMI MAE or CRIIMI Management are necessary to authorize the execution,
delivery and performance of this Agreement and the Merger Proposal. This
Agreement has been duly executed and delivered by CRIIMI MAE and CRIIMI
Management and constitutes a valid and binding obligation of CRIIMI MAE and
CRIIMI Management, enforceable in accordance with its terms.
(c) COMMON SHARES. The Common Shares to be issued in connection with
the Merger as provided in Article II hereof will, upon issuance, be validly
issued, fully paid and nonassessable, and be free of preemptive rights.
(d) CAPITALIZATION. All of the authorized capital stock and all of the
validly issued and outstanding, fully paid and nonassessable shares of the
capital stock of each of CRIIMI MAE and CRIIMI Management are as set forth
on Schedule 3.2(d) hereto. No shares of common stock of either of CRIIMI MAE
or CRIIMI Management are held in its treasury, except for 501,274 Common
Shares.
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Except as set forth on Schedule 3.2(d) hereto, there are no other shares of
capital stock or other equity securities of either of CRIIMI MAE or CRIIMI
Management outstanding and no outstanding options, warrants, rights to
subscribe (including any preemptive rights), calls or commitments of any
character whatsoever requiring the issuance, sale or transfer by either of
CRIIMI MAE or CRIIMI Management of any shares of its capital stock or any
shares convertible into or exchangeable or exercisable for, or rights to
purchase or otherwise acquire, any shares of capital stock of either CRIIMI
MAE or CRIIMI Management.
(e) NONCONTRAVENTION. Neither the execution and delivery of this
Agreement by CRIIMI MAE or CRIIMI Management nor the consummation of the
Merger Proposal nor compliance by CRIIMI MAE or CRIIMI Management with any
of the provisions hereof will (i) violate, conflict with, or result in a
breach of any provisions of, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) under, or
result in the termination or suspension of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any Lien upon any of the properties or assets of
CRIIMI MAE or CRIIMI Management under, any of the terms, conditions or
provisions of (x) the Articles of Incorporation or By-Laws of CRIIMI MAE or
CRIIMI Management, or (y) except as set forth on Schedule 3.2(e) hereto, any
note, bond, mortgage, indenture, deed of trust, license, permit,
authorization, lease, agreement or instrument or obligation to which CRIIMI
MAE or CRIIMI Management is party or to which it or any of its properties or
assets may be subject, or (ii) subject to compliance with the statutes and
regulations referred to on Schedule 3.2(f) below, violate any judgment,
ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to CRIIMI MAE or CRIIMI Management or any of its properties or
assets, except, in the case of each of clauses (i)(y) and (ii) above, for
such violations, conflicts, breaches, defaults, terminations, accelerations
or creations of Liens, which would not, in the aggregate, have a material
adverse effect on the business, property, assets, liabilities, condition
(financial or otherwise) or prospects of CRIIMI MAE or CRIIMI Management,
individually or taken as a whole, or affect the ability of CRIIMI MAE or
CRIIMI Management to consummate the transactions contemplated hereby.
(f) GOVERNMENT APPROVAL; CONSENTS. The third party and governmental
consents and approvals required to be obtained by CRIIMI MAE and CRIIMI
Management for the consummation of the Merger Proposal are set forth on
Schedule 3.2(f). Other than as set forth on Schedule 3.2(f), no notice to,
filing with, or authorization, consent or approval of, any domestic or
foreign public body or authority is necessary for the execution and delivery
of this Agreement by CRIIMI MAE or CRIIMI Management or the consummation of
the Merger Proposal or compliance by CRIIMI MAE or CRIIMI Management with
any of the provisions hereof, except where failures to give such notices,
make such filings, or obtain authorizations, consents or approvals would
not, in the aggregate, have a material adverse effect on the business,
property, assets, liabilities, condition (financial or otherwise) or
prospects of CRIIMI MAE or CRIIMI Management, individually or taken as a
whole, or affect the ability of CRIIMI MAE or CRIIMI Management to
consummate the transactions contemplated hereby.
(g) LITIGATION. Except as set forth on Schedule 3.2(g) hereto, there
is no claim, action, proceeding or investigation pending or, to the best
knowledge of CRIIMI MAE and CRIIMI Management, threatened against or
relating to CRIIMI MAE or CRIIMI Management before any court or governmental
or regulatory authority or body which, if determined adversely, individually
or in the aggregate, would have a material adverse effect on the business,
property, assets, liabilities, condition (financial or otherwise) or
prospects of CRIIMI MAE or CRIIMI Management. Neither CRIIMI MAE nor
CRIIMI Management is subject to any outstanding order, writ, injunction or
decree.
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
4.1 CONDUCT OF BUSINESS BY THE CRI MORTGAGE BUSINESSES PENDING THE
MERGER. Except as expressly provided for in this Agreement or the Merger
Proposal Agreements, each of the CRI Mortgage Businesses
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severally and not jointly covenant and agree, with respect to such CRI Mortgage
Business, and the Principals jointly and severally covenant and agree, that,
prior to the Effective Time, unless CRIIMI MAE shall first otherwise agree in
writing:
(a) Except as may otherwise be necessary to effectuate the Merger
Proposal, each of the CRI Mortgage Businesses shall conduct its businesses
only in the ordinary course and consistent with past practices, and each of
the CRI Mortgage Businesses shall use its best efforts to maintain and
preserve its business organization, assets, employees and advantageous
business relationships, to maintain all of their properties in useful and
good condition, and to continue to be covered to the fullest extent under
the insurance policies carried by each of the CRI Mortgage Businesses,
including, without limitation, public liability and property damage
insurance in effect with financially sound and reputable insurance companies
in at least such amounts and against such risks as are currently covered by
such policies;
(b) Each of the CRI Mortgage Businesses shall (i) use its best efforts
to comply with all applicable statutes, laws, ordinances, regulations,
rules, orders and other legal requirements of any foreign, federal, state or
local government, authority or any other governmental department or agency,
and any judgments, decrees or orders of any court, applicable to its
business or operations, and (ii) comply with all contracts, commitments and
other agreements to which it is a party, except where any such violations or
failures to comply with respect to clauses (i) or (ii) will not,
individually or in the aggregate, have a Material Adverse Effect;
(c) Except as set forth in this Agreement, none of the CRI Mortgage
Businesses shall directly or indirectly do any of the following: (i) whether
or not in the ordinary course of business or consistent with past practice,
pledge, encumber, sell or dispose of assets of any of the CRI Mortgage
Businesses listed in Schedule 3.1(m) unless, in the case of assets sold or
disposed of, such assets are replaced with assets of equivalent or greater
value; (ii) amend its articles of incorporation or by-laws or similar
organizational documents; (iii) split, combine or reclassify any shares of
its capital stock or declare, set aside or pay any dividend or distribution,
payable in stock, property or otherwise (except cash or distributions by any
CRI Mortgage Business to its stockholders or their designees of its rights
to monies earned prior to the Closing Date) with respect to any of its
capital stock; (iv) redeem, purchase or otherwise acquire any of its capital
stock; (v) adopt a plan of complete or partial liquidation or resolutions
providing for complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization; or
(vi) authorize or propose any of the foregoing, or enter into any contract,
agreement, commitment, understanding or arrangement to do any of the
foregoing;
(d) Except as otherwise provided in this Agreement, none of the CRI
Mortgage Businesses shall, directly or indirectly, (i) issue, sell, pledge
or dispose of, or authorize, propose or agree to the issuance, sale, pledge
or disposition of, any shares of, or any options, warrants or rights of any
kind to acquire any shares of, or any securities convertible into or
exchangeable or exercisable for any shares of, its capital stock of any
class or any other securities in respect of, in lieu of, or in substitution
for, shares of its common stock outstanding on the date hereof; (ii) acquire
(by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or entity or
division thereof, or make any investment in any entity, either by purchase
of stock or securities, contributions to capital, property transfer or
purchase of any property or assets, other than in cash management
transactions in the ordinary course of business and consistent with past
practice; (iii) except in the ordinary course of business and consistent
with past practice, incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee, endorse or otherwise as an
accommodation become responsible for, the obligations of any other
individual or entity, or make any loans or advances; (iv) authorize,
recommend or propose any change in its capitalization (other than the
incurrence of indebtedness otherwise permitted hereunder); (v) modify or
change in any material respect any existing material license, lease,
contract or other document, other than in the ordinary course of business
and consistent with past practice; or (vi) authorize or propose any of the
foregoing, or enter into or modify any contract, agreement, commitment or
arrangement to do any of the foregoing; and
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(e) None of the CRI Mortgage Businesses shall take, or agree, in writing
or otherwise, to take any of the foregoing actions or any action which would
make any representation or warranty in Section 3.1 hereof untrue or
incorrect in any material respect.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 PROXY STATEMENT; OTHER FILINGS. CRIIMI MAE shall use its best efforts
to have cleared by the Securities and Exchange Commission (the "Commission"),
and promptly thereafter shall mail to its stockholders, the proxy statement and
form of proxy filed with the Commission with respect to the meeting of holders
of the Common Shares referred to in Section 5.2 hereof. The term "Proxy
Statement" shall mean such proxy statement at the time it initially is mailed to
holders of the Common Shares and all amendments or supplements thereto, if any,
similarly filed and mailed. As soon as practicable after the date hereof CRIIMI
MAE and each of the CRI Mortgage Businesses shall promptly prepare and file any
other filings required under the Exchange Act or any other federal or state
securities law relating to the Merger Proposal ("Other Filings"). CRIIMI MAE and
each of the Principals and the CRI Mortgage Businesses shall use their best
efforts to obtain and furnish the information required to be included in the
Proxy Statement and any Other Filings and to respond promptly to any comments
made by the Commission or any other governmental official with respect to the
Proxy Statement and any Other Filing and any preliminary version thereof. The
information provided and to be provided by CRIIMI MAE, the Principals and the
CRI Mortgage Businesses, respectively, for use in the Proxy Statement and any
Other Filings shall not, on the date the Proxy Statement is first mailed to
holders of the Common Shares or any Other Filing is filed with the appropriate
governmental official and, in the case of the Proxy Statement, on the date of
the meeting of CRIIMI MAE's stockholders referred to in Section 5.2 hereof,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein in light of the
circumstances under which they were made not misleading. The Proxy Statement
shall comply in all material respects with all applicable requirements of
federal securities laws.
5.2 MEETING OF STOCKHOLDERS OF CRIIMI MAE. Promptly after the date hereof,
CRIIMI MAE shall take all action necessary, in accordance with Maryland Law, its
Articles of Incorporation and By-Laws and the requirements of the NYSE, to
convene a meeting of its stockholders as promptly as practicable to consider and
vote upon the approval of the Merger Proposal. Subject to the fiduciary
obligations of the Board of CRIIMI MAE under applicable law as advised by
outside counsel, the Proxy Statement shall contain the determinations of the
Special Committee and the recommendation of the Board (with the Principals
abstaining) that the holders of the Common Shares vote to approve the Merger
Proposal. The Principals agree to vote their Common Shares in favor of the
Merger Proposal.
5.3 LEGAL REQUIREMENTS FOR MERGER PROPOSAL.
(a) Each of the CRI Mortgage Businesses will take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed on
the CRI Mortgage Businesses with respect to the Merger Proposal and will
promptly cooperate with and furnish information to CRIIMI MAE in connection with
any such requirements imposed upon CRIIMI MAE or any other subsidiary of CRIIMI
MAE in connection with the Merger Proposal.
(b) Each of CRIIMI MAE and CRIIMI Management will take all reasonable
actions necessary to comply promptly with all legal requirements which may be
imposed on them with respect to the Merger Proposal and will promptly cooperate
with and furnish information to the CRI Mortgage Businesses in connection with
any such requirements imposed upon the CRI Mortgage Businesses in connection
with the Merger Proposal.
5.4 SALE OF ASSETS BY CRI TO CRI ACQUISITION. On or before the Closing
Date, CRI Acquisition and the Principals shall enter into, and the Principals
shall cause CRI to enter into, an Asset Purchase Agreement substantially in the
form attached hereto as Exhibit 1, pursuant to which CRI will sell its limited
partnership interest in CRI/AIM Investment Limited Partnership, along with
certain other assets described
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in such Asset Purchase Agreement related to its mortgage investment advisory
businesses and the right to employ certain individuals engaged in the CRI
Mortgage Businesses currently employed by CRI and/or its affiliates, to CRI
Acquisition.
5.5 SALE OF ASSETS BY CRICO MORTGAGE. On or before the Closing Date, CRICO
Mortgage and the Principals shall enter into, and the Principals shall cause
CRIIMI MAE Services, Inc. (the "Services Corporation") to enter into, an Asset
Purchase Agreement substantially in the form attached hereto as Exhibit 2,
pursuant to which the CRICO Mortgage will sell to the Services Corporation the
assets described in such Asset Purchase Agreement.
5.6 SALE OF ASSETS BY CRI/AIM MANAGEMENT. On or before the Closing Date,
CRI/AIM Management and the Principals shall enter into, and the principals shall
cause the Services Corporation to enter into, an Asset Purchase Agreement
substantially in the form attached hereto as Exhibit 3, pursuant to which CRI/
AIM Management will sell to the Services Corporation the assets described in
such Asset Purchase Agreement.
5.7 DEFERRED COMPENSATION AGREEMENT. On or before the Closing Date, CRIIMI
Management and each of the Principals shall enter into the Deferred Compensation
Agreement substantially in the form attached hereto as Exhibit 4.
5.8 REIMBURSEMENT AGREEMENT. On or before the Closing Date, CRIIMI
Management shall enter into, and the Principals shall cause CRI Insured Mortgage
Associates Adviser Limited Partnership (the "Adviser") to enter into, the CRI
Liquidating Reimbursement Agreement substantially in the form attached hereto as
Exhibit 5.
5.9 SUBLEASE AGREEMENT. On or before the Closing Date, CRIIMI MAE shall
enter into, and the Principals shall cause CRI to enter into, the Sublease
Agreement substantially in the form attached hereto as Exhibit 6.
5.10 ADMINISTRATIVE SERVICES AGREEMENT. On or before the Closing Date,
CRIIMI MAE shall enter into, and the Principals shall cause CRI to enter into,
the Administrative Services Agreement substantially in the form attached hereto
as Exhibit 7.
5.11 EMPLOYMENT AND NON-COMPETITION AGREEMENTS. On the date of this
Agreement, (a) CRIIMI Management and each of the Principals shall enter into
Employment and Non-Competition Agreements substantially in the form attached
hereto as Exhibit 8, and (b) CRIIMI Management shall enter into Employment and
Non-Competition Agreements with respect to Frederick J. Burchill, Jay R. Cohen,
Cynthia O. Azzara and Deborah A. Linn (the "Other Officers"), substantially in
the form attached hereto as Exhibits 9, 10, 11 and 12, respectively.
5.12 OPTION AGREEMENTS. On the Closing Date, (a) CRIIMI MAE and each of
the Principals shall enter into Option Agreements substantially in the form
attached hereto as Exhibit 13, and (b) CRIIMI MAE shall enter into Option
Agreements with respect to the Other Officers substantially in the form attached
hereto as Exhibits 14, 15, 16 and 17, respectively.
5.13 REGISTRATION RIGHTS AND LOCK-UP AGREEMENT. On the Closing Date, (a)
CRIIMI MAE and each of the Principals shall enter into a Registration Rights and
Lock-up Agreement substantially in the form attached hereto as Exhibit 18, and
(b) CRIIMI MAE shall enter into a Registration Rights and Lock-up Agreement with
respect to each of the Other Officers substantially in the form attached hereto
as Exhibit 18.
5.14 STOCK RESTRICTION AGREEMENT. On the Closing Date, CRIIMI MAE and each
of the Principals shall enter into the Stock Restriction Agreement substantially
in the form attached hereto as Exhibit 19.
5.15 STOCK ISSUANCE AGREEMENTS. On the Closing Date, CRIIMI MAE and each
of the Other Officers shall enter into a Stock Issuance Agreement substantially
in the form attached hereto as Exhibit 20.
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5.16 BENEFITS. After the Effective Time, CRIIMI Management agrees to
provide to its employees who were employees of the CRI Mortgage Businesses prior
to the Effective Time at least the same level of benefits provided by the CRI
Mortgage Businesses without exclusion for preexisting conditions.
5.17 ADDITIONAL AGREEMENTS AND PROVISIONS. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use his or
its best efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement. The parties hereto agree to use their respective reasonable
efforts to challenge any action, including using all reasonable efforts to have
any order or injunction vacated or reversed, brought against any of the parties
hereto seeking a temporary restraining order or preliminary or permanent
injunctive relief which would prohibit, or materially interfere with, the
consummation of the Merger Proposal. If any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement or the Merger Proposal or to vest the Surviving Corporation with full
title to all properties, assets, rights, approvals, immunities and franchises of
either of the Constituent Corporations, the proper officers and directors of
each corporation that is a party to this Agreement shall take all such necessary
action.
5.18 OTHER ACQUISITION PROPOSALS. None of the CRI Mortgage Businesses, the
Principals or their representatives shall, either directly or indirectly, (a)
solicit, initiate or encourage the submission of inquiries, proposals or offers
from any Person relating to any acquisition of stock or assets, exchange offer,
merger, consolidation, business combination, sale of substantial securities,
liquidation, dissolution or similar transactions involving the CRI Mortgage
Businesses, or (b) enter into or participate in any discussions or negotiations
regarding any of the foregoing, or furnish to any other Person any information
with respect to the business or assets of the CRI Mortgage Businesses, or (c)
otherwise cooperate in any way with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other Person to do or seek any of the
foregoing.
5.19 TAX MATTERS. The Principals shall cause to be prepared and filed on a
timely basis all federal, state and local income and other tax returns for the
CRI Mortgage Businesses for the periods ending on or before the Effective Time.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each of the parties to effect the Merger shall be
subject to the satisfaction or waiver of each of the following conditions at or
prior to the Closing:
(a) APPROVAL OF HOLDERS OF THE COMMON SHARES. The Merger Proposal
shall have been approved by the affirmative vote of the holders of a
majority of the Common Shares voted at a meeting in which a quorum is
present.
(b) LITIGATION. No suit, action, investigation or other proceeding
shall be pending or threatened before any court or governmental agency which
could reasonably be expected to materially negatively impact the ability of
CRIIMI MAE or any of the CRI Mortgage Businesses to consummate the Merger
Proposal.
(c) ACCOUNTING TREATMENT. The final Proxy Statement mailed to the
holders of the Common Shares shall reflect the Merger as a purchase.
6.2 ADDITIONAL CONDITIONS TO THE OBLIGATION OF THE CRI MORTGAGE BUSINESSES
AND THE PRINCIPALS. The obligation of the CRI Mortgage Businesses and the
Principals to effect the Merger is also subject to the satisfaction or waiver of
each of the following conditions at or prior to Closing:
(a) AGREEMENTS. Each of CRIIMI MAE and CRIIMI Management shall have
performed in all material respects each covenant, agreement and obligation
to be performed or complied with by it hereunder on or prior to the Closing
Date.
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(b) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of CRIIMI MAE and CRIIMI Management set forth in this Agreement shall be
true and correct in all material respects at and as of the Closing Date as
if made at and as of such time and to the extent any schedule must be
updated at the Closing to maintain the accuracy of any representation and
warranty in all material respects, such updated schedule shall be
satisfactory to the CRI Mortgage Businesses and the Principals in their sole
discretion.
(c) OFFICER'S CERTIFICATE. Each of the CRI Mortgage Businesses and the
Principals shall have received a certificate, dated the Closing Date, of the
President or a Vice President of CRIIMI MAE to the effect that, to the best
knowledge of such officer, the conditions specified in paragraphs (a) and
(b) above have been fulfilled.
(d) NYSE LISTING. The Common Shares required to be issued hereunder
shall have been approved for listing on the NYSE, subject to official notice
of issuance.
(e) CONSENTS FROM THIRD PARTIES. All necessary consents and approvals
in connection with the Merger Proposal, as set forth in Schedule 3.2(f)
hereto, shall have been received.
(f) OPINION OF COUNSEL. The Principals and each of the CRI Mortgage
Businesses shall have received the opinion of Arent Fox Kintner Plotkin &
Kahn ("Arent Fox") substantially in the form attached hereto as Exhibit 21.
6.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF CRIIMI MAE AND CRIIMI
MANAGEMENT. The obligations of CRIIMI MAE and CRIIMI Management to effect the
Merger are also subject to the satisfaction or waiver of each of the following
conditions at or prior to the Closing:
(a) AGREEMENTS. Each of the CRI Mortgage Businesses and the Principals
shall have performed in all material respects each covenant, agreement and
obligation to be performed or complied with by it or him hereunder on or
prior to the Closing Date and the Other Officers shall have executed and
delivered to CRIIMI MAE or CRIIMI Management, as applicable, the Employment
and Non-Competition Agreements, Option Agreements, Registration Rights and
Lock-Up Agreement and Stock Issuance Agreements referenced in Sections 5.11,
5.12, 5.13 and 5.15.
(b) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each of the CRI Mortgage Businesses and each of the Principals set forth
in this Agreement shall be true and correct in all material respects at and
as of the Closing Date as if made at and as of such time and to the extent
any schedule must be updated at Closing to maintain the accuracy of any
representation and warranty in all material respects, such updated schedule
shall be satisfactory to CRIIMI MAE and CRIIMI Management in their sole
discretion.
(c) OFFICER'S CERTIFICATE. CRIIMI MAE and CRIIMI Management shall have
received a certificate, dated the date of the Closing, of each of the
Principals to the effect that, to the best knowledge of such person, (i) the
conditions specified in paragraphs (a) and (b) above have been fulfilled and
(ii) describing any changes, since the execution of this Agreement, by any
of the CRI Mortgage Businesses in accounting principles or methods and
certifying that any such changes were required by changes in generally
accepted accounting principles.
(d) LACK OF ADVERSE CHANGE. There shall have been no change since
December 31, 1994 relating to any of the CRI Mortgage Businesses, which has
a Material Adverse Effect.
(e) CONSENTS FROM THIRD PARTIES. All necessary consents and approvals
in connection with the Merger Proposal, as set forth on Schedule 3.1(e)
hereto, shall have been received.
(f) OPINION OF FINANCIAL ADVISER. Prior to the date on which the Proxy
Statement is first mailed to the holders of the Common Shares, the Special
Committee shall have received the Fairness Opinion from Duff & Phelps, and
such opinion shall not have been withdrawn.
(g) OPINION OF COUNSEL. CRIIMI MAE and CRIIMI Management shall have
received the opinion of Peabody & Brown substantially in the form attached
hereto as Exhibit 22.
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(h) TAX OPINION. CRIIMI MAE shall have received the opinion of Arent
Fox with respect to tax matters, substantially in the form attached hereto
as Exhibit 23.
ARTICLE VII
REMEDIES FOR BREACHES OF THIS AGREEMENT
7.1 INVESTIGATIONS; SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the CRI Mortgage Businesses and the Principals
(collectively, the "Indemnifying Parties") contained in Section 3.1 hereof (the
"Representations and Warranties") shall not be deemed waived or otherwise
affected by any investigation by CRIIMI MAE and shall survive the Closing Date
for a period of three (3) years; provided that the Representation and Warranty
set forth in Section 3.1(l) shall survive the Closing Date for a period of four
(4) years, except for the Representation and Warranty in the last sentence of
Section 3.1(l) which shall survive the Closing Date for a period five (5) years
(each period is referred to respectively as the "Warranty Period"). None of the
representations and warranties of CRIIMI MAE or CRIIMI Management in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Closing. This Section 7.1 shall not limit any covenant or agreement
of the parties hereto which by its terms contemplates performance after the
Effective Time.
7.2 INDEMNIFICATION BY THE CRI MORTGAGE BUSINESSES AND THE PRINCIPALS. The
Indemnifying Parties, jointly and severally, shall indemnify, defend and hold
harmless CRIIMI MAE, CRIIMI Management and each of their respective
subsidiaries, affiliates, directors, officers, employees and attorneys
(collectively, the "Indemnified Persons"), and reimburse the Indemnified Persons
for, from and against all demands, claims, actions or causes of action,
assessments, losses, damages, liabilities, costs and expenses, including,
without limitation, interest, penalties and reasonable attorneys' fees,
disbursements and expenses, imposed on or incurred by the Indemnified Persons,
directly or indirectly, by reason of:
(a) any breach or alleged breach by any of the Indemnifying Parties of
any of the Representations and Warranties; or
(b) any failure or alleged failure by the Indemnifying Parties to
perform any material covenant, undertaking or obligation hereunder.
7.3 DEFENSE. If any action or claim shall be brought or asserted against
any Indemnified Person under this Article VII, or any successor thereto (the
"Indemnified Party") in respect of which indemnity may be sought from the
Indemnifying Parties under this Article VII, the Indemnified Party shall
immediately notify the Indemnifying Parties who shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to said
Indemnified Party and the payment of all expenses; EXCEPT that any delay or
failure to so notify said Indemnifying Parties shall only relieve the
Indemnifying Parties of its or his obligations hereunder to the extent, if at
all, that such Indemnifying Parties are materially prejudiced by reason of such
delay or failure. The Indemnified Party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the Indemnified Party
unless:
(a) the employment thereof shall have been specifically directed and
required by said Indemnifying Parties; or
(b) The Indemnifying Parties shall have elected not to assume the
defense and employ counsel.
Without the express prior written consent of said Indemnified Party, the
Indemnifying Parties shall have no right to settle or compromise any matter.
7.4 INDEMNIFICATION THRESHOLD. The Indemnifying Parties shall not be
required to indemnify the Indemnified Persons unless the sum of the amounts for
which indemnity would otherwise be payable under this Agreement and under the
Asset Purchase Agreements attached hereto as Exhibits 1, 2 and 3 exceeds
$100,000, at which time and at all times thereafter the Indemnified Persons
shall be entitled to the full amount of all claims without deduction of
$100,000; provided, however, that this threshold shall not apply to
indemnification with respect to Section 3.1(l) and amounts payable with respect
thereto shall not be counted toward the $100,000 threshold provided for herein.
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7.5 LIMITATION ON INDEMNIFICATION. CRIIMI MAE shall not be entitled to
seek indemnification hereunder at any time subsequent to the expiration of the
Warranty Period; provided, however, that CRIIMI MAE may seek indemnification
hereunder with respect to any claims of which CRIIMI MAE first receives notice
during the Warranty Period up to 14 days after such notice is received. For
purposes of this Article VII, receipt of notice of a tax audit shall be deemed
to be receipt of notice of a claim relating to a breach of Section 3.1(l).
7.6 NO CONTRIBUTION. The parties agree that after the Effective Time the
Principals shall have no right of contribution from CRIIMI MAE or CRIIMI
Management (as the successor to the CRI Mortgage Businesses) with respect to any
claims brought under this Article VII.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time:
(a) by mutual consent of the Board of Directors of each of the CRI
Mortgage Businesses and the Board of CRIIMI MAE (with the Principals
abstaining) upon the recommendation of the Special Committee;
(b) by either the Board of Directors of any of the CRI Mortgage
Businesses, or the Board of CRIIMI MAE (with the Principals abstaining) upon
the recommendation of the Special Committee, if the Effective Time shall not
have occurred on or before September 15, 1995;
(c) by the Board of Directors of any of the CRI Mortgage Businesses, or
the Board of CRIIMI MAE (with the Principals abstaining) upon the
recommendation of the Special Committee, if at the meeting of the holders of
the Common Shares referred to in Section 5.2 hereof (including any
adjournment thereof), the Merger Proposal shall fail to be approved by the
votes referred to in Section 6.1.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by any of the CRI Mortgage Businesses or CRIIMI MAE as provided in Section 8.1
hereof, this Agreement shall forthwith become void and there shall be no
liability or obligation on the part of CRIIMI MAE, CRIIMI Management, or any of
the CRI Mortgage Businesses or their respective officers or directors or the
Principals.
8.3 AMENDMENT. This Agreement may be amended by an instrument in writing
approved by the Board of CRIIMI MAE (with the Principals abstaining), by the
Board of Directors of each of the CRI Mortgage Businesses and by the Principals
and signed on behalf of each of the parties hereto; provided, however, that
after adoption of the Merger Proposal by the stockholders of CRIIMI MAE no such
amendment may be made without the further approval of the stockholders of CRIIMI
MAE except to the extent permitted by Maryland Law. Notwithstanding the
foregoing, any amendment of this Agreement on behalf of CRIIMI MAE shall be
subject to the approval of the Board of CRIIMI MAE (with the Principals
abstaining) upon the recommendation of the Special Committee.
8.4 WAIVER. At any time prior to the Effective Time, whether before or
after the meeting of holders of the Common Shares referred to in Section 5.2
hereof, the CRI Mortgage Businesses, by action taken by the Board of Directors
of each CRI Mortgage Business, or CRIIMI MAE, by action taken by its Board (with
the Principals abstaining) upon the recommendation of the Special Committee, may
(a) extend the time for the performance of any of the obligations or other acts
of any other party hereto or (b) waive compliance with any of the agreements of
any other party or with any conditions to its own obligations. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid only
if set forth in an instrument in writing signed on behalf of such party by a
duly authorized officer.
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ARTICLE IX
GENERAL PROVISIONS
9.1 PUBLIC STATEMENTS. Each of CRIIMI MAE and CRIIMI Management, on the
one hand, and each of the CRI Mortgage Businesses and the Principals, on the
other hand, agree that neither they nor their respective directors, officers,
employees or agents shall disclose to any third party (other than to their
professional advisers) or publicly issue any press release or other statement to
the press or any third party with respect to the Merger Proposal, except as may
be required by law, until such time as any such public announcement is approved
in advance by the CRI Mortgage Businesses and the Principals and by the Special
Committee on behalf of CRIIMI MAE.
9.2 NOTICES. All notices and other communications hereunder shall be in
writing (including telex or similar writing) and shall be deemed given if
delivered in person or by messenger, cable, telegram or telex or facsimile
transmission or by a reputable overnight delivery service which provides for
evidence of receipt to the parties at the following addresses or telecopier
numbers (or at such other address or telecopy number for a party as shall be
specified by like notice):
(a) if to CRIIMI MAE, to:
CRIIMI MAE Inc.
11200 Rockville Pike
Rockville, Maryland 20852
(301) 468-9200/(800) 678-1116
Telecopy: (301) 231-0334
Attention: William B. Dockser
with a copy to:
Robert B. Hirsch
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
(202) 857-6000
Telecopy: (202) 857-6395
(b) if to the Special Committee, to:
G. Richard Dunnells
Holland & Knight
2100 Pennsylvania Ave., N.W., Suite 400
Washington, D.C.
(202) 955-3000
Telecopy: (202) 955-5564
with a copy to:
Richard C. Donaldson
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
(202) 663-8000
Telecopy: (202) 663-8007
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(c) if to the Principals or to the CRI Mortgage Businesses, to:
William B. Dockser
H. William Willoughby
C.R.I., Inc.
The CRI Building
11200 Rockville Pike
Rockville, MD 20852
(301) 468-9200
Telecopy: (301) 231-0396
with a copy to:
Debra D. Yogodzinski
Peabody & Brown
1255 23rd Street, N.W.
Suite 800
Washington, D.C. 20037
(202) 973-7700
Telecopy: (202) 973-7750
9.3 INTERPRETATION. When reference is made in this Agreement to Exhibits,
Schedules or Sections, such reference shall be to an Exhibit, Schedule or
Section of this Agreement unless otherwise indicated. The headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
9.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.5 ENTIRE AGREEMENT. This Agreement and the Merger Proposal Agreements
(including the documents and instruments referred to herein), constitute the
entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
9.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland, without regard to the
principles of conflicts of law of such state.
9.7 VALIDITY. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
9.8 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any party hereto, whether by
operation of law or otherwise, without the express prior written consent of each
of the other parties hereto. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors, heirs, legal representatives and assigns.
9.9 EXPENSES. CRIIMI MAE shall pay the expenses of the solicitation
pursuant to the Proxy Statement and the fees and expenses of the Special
Committee, Duff & Phelps, Merrill Lynch, and CRIIMI MAE's attorneys and
accountants incurred in connection with the Merger Proposal. The Principals
shall cause CRI to pay the fees and expenses of its attorneys and accountants
and the costs of the employees of CRI and its affiliates in connection with the
Merger Proposal, except to the extent such costs are attributable in accordance
with past practice to services performed on CRIIMI MAE's behalf. Except as
otherwise provided herein, each party shall bear its own expenses incurred in
connection with the Merger Proposal.
9.10 KNOWLEDGE. Statements herein made "to the best knowledge" of a party
are made after exercising reasonable care in the ascertainment of relevant
facts.
9.11 MATERIAL ADVERSE EFFECT. "Material Adverse Effect" as used herein
means a material adverse effect on the business, assets, liabilities,
operations, condition (financial or otherwise) of (i) the CRI
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Mortgage Businesses individually or taken as a whole or (ii) CRIIMI MAE, CRIIMI
Management, Services Corporation or CRIIMI MAE Services Limited Partnership,
assuming the Merger Proposal were consummated.
IN WITNESS WHEREOF, CRIIMI MAE, CRIIMI Management and each of the CRI
Mortgage Businesses have caused this Agreement to be signed by their respective
officers thereunto duly authorized, and each of the Principals has signed this
Agreement, all as of the date first above written.
CRIIMI MAE Inc.
By /s/________________________________
Name:
Title:
CRIIMI MAE Management, Inc.
By /s/________________________________
Name:
Title:
CRICO Mortgage Company, Inc.
By /s/________________________________
Name:
Title:
CRI/AIM Management, Inc.
By /s/________________________________
Name:
Title:
CRI Acquisition, Inc.
By /s/________________________________
Name:
Title:
THE PRINCIPALS:
/s/___________________________________
William B. Dockser
/s/___________________________________
H. William Willoughby
A-20
<PAGE>
APPENDIX B
<PAGE>
DUFF & PHELPS CAPITAL MARKETS CO.
April 20, 1995
Board of Directors and the Special Committee
of the Unaffiliated Directors
CRIIMI MAE Inc.
11200 Rockville Pike
Rockville, MD 20852
Gentlemen:
You have asked Duff & Phelps Capital Markets Co. ("Duff & Phelps"), as
independent financial advisor to the Special Committee of the unaffiliated
directors of the Board of Directors (the "Special Committee") of CRIIMI MAE Inc.
("CRIIMI" or the "Company"), to provide an opinion (the "Opinion") as to the
fairness, from a financial point of view, of the Merger Proposal, as described
below, whereby the Company would, among other things, become a self-administered
Real Estate Investment Trust ("REIT"). The Merger Proposal consists of the
transfer of certain assets and liabilities of CRI, Inc. ("CRI") to CRIIMI
Acquisition, Inc. ("Acquisition"); the subsequent merger of Acquisition, CRI/AIM
Management, Inc. ("CRI/AIM") and CRICO Mortgage Company, Inc. ("CRICO") with and
into CRIIMI MAE Management Corp., a wholly owned subsidiary of the Company (the
"Merger"); employment arrangements and other related transactions, all as more
fully described in CRIIMI's Proxy Statement filed with the Securities and
Exchange Commission (the "SEC") on February 6, 1995, as amended through the date
hereof (the "Proxy Statement"); and the Agreement and Plan of Merger among
CRIIMI, CRIIMI MAE Management Corp., CRICO, CRI/AIM, Acquisition and William B.
Dockser and H. William Willoughby (the "Principals"), dated as of April 20, 1995
(the "Merger Agreement"). Specifically, Duff & Phelps has been asked to
determine whether the Merger Proposal is fair to the Company and to the
stockholders of the Company other than the Principals (the "Public
Stockholders"), from a financial point of view.
QUALIFICATIONS AND INDEPENDENCE
Duff & Phelps, in the course of its regular business, advises boards of
directors, corporate managements, and other fiduciaries on financial and
fairness issues in connection with mergers and acquisitions, leveraged buy-outs,
restructurings, private placements, and employee benefit plans, among other
situations. Previously, Duff & Phelps has not provided any financial advisory or
other services to the Company or to CRI, except that Duff & Phelps provided
financial advisory services to Arent Fox Kintner Plotkin & Kahn on behalf of the
Company in connection with certain litigation which was settled in September
1993. In addition, a former affiliate of Duff & Phelps has had discussions with
CRICO concerning a possible rating of CRICO as a qualified mortgage servicer.
Duff & Phelps is receiving a fee for providing the Opinion. Such fee is not
contingent upon either the issuance of a favorable opinion or the consummation
of the Merger Proposal.
SCOPE OF ANALYSIS
In conducting its analysis and in preparing the Opinion that the Merger
Proposal is fair from a financial point of view to CRIIMI MAE and to the Public
Stockholders; Duff & Phelps, among other things, (1) reviewed and analyzed the
terms of the Merger Proposal as described in the Proxy Statement and the Merger
Agreement; (2) analyzed certain historical, business and financial information
relating to CRIIMI MAE (including its predecessor company CRI Insured Mortgage
Association, Inc.) and CRI, CRI/AIM and CRICO (collectively, the "CRI Mortgage
Businesses"), including but not limited to CRIIMI MAE's Annual Reports to
Shareholders and Form 10-Ks filed with the SEC for the fiscal years ended
December 31, 1989 through 1994, and combined financial statements for the CRI
Mortgage Businesses for the fiscal years ended December 31, 1992 (unaudited) and
December 31, 1993 and 1994 (audited); (3) reviewed certain internal
B-1
<PAGE>
Board of Directors and Special Committee
of the Unaffiliated Directors
CRIIMI MAE Inc.
April 20, 1995
Page 2
financial analyses and forecasts for CRIIMI MAE on a stand alone basis; (4)
reviewed certain internal financial analyses and forecasts for CRIIMI MAE and
the CRI Mortgage Businesses on a combined basis (the "Combined Entity") based
upon the terms of the Merger; (5) reviewed the advisory agreements by and among
CRIIMI MAE, CRI, the AIM Funds and their respective affiliates; (6) reviewed
internal operational and financial information relating to the CRI Mortgage
Businesses; (7) considered the pro forma effect of the Merger on CRIIMI MAE's
capitalization, earnings (on both a tax basis and according to generally
accepted accounting principles), cash flow, funds from operations, dividends,
book value and financial prospects; (8) reviewed current conditions and trends
with respect to the real estate industry and REITs, in general, and the market
for government insured and other mortgage investments, such as mortgage REITS,
in particular, including interest rates and general business and economic
conditions in the markets where the Company operates; (9) reviewed the reported
market prices and trading volumes of CRIIMI MAE's common stock for recent
periods; (10) reviewed publicly available information concerning other companies
deemed comparable, in whole or in part, to CRIIMI MAE, to the CRI Mortgage
Businesses and to the Combined Entity; and (11) conducted such other financial
studies, analyses and investigations as it deemed appropriate.
As background for its analysis, Duff & Phelps held extensive discussions
with the Board of Directors, the Special Committee, and members of the senior
management of CRIIMI MAE and the CRI Mortgage Businesses regarding the history,
current business operations, financial condition, future prospects and strategic
objectives of CRIIMI MAE, both in its present form and on a Combined Entity
basis.
ASSUMPTIONS AND RELIANCES
In performing its analysis and rendering its Opinion, Duff & Phelps relied
upon the accuracy and completeness of all information provided to it, whether
obtained from public or private sources, and has not assumed any responsibility
for the independent verification of such information. With respect to financial
forecasts, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates of the management of the
Company and the CRI Mortgage Businesses. Notwithstanding the foregoing, Duff &
Phelps used procedures deemed appropriate in order to analyze the reasonableness
of the assumptions underlying the Company's financial projections. Duff & Phelps
did not make any independent appraisals of the assets or liabilities of the
Company nor those of the CRI Mortgage Businesses.
Duff & Phelps has prepared its Opinion effective as of April 20, 1995. Its
Opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of such date. Unless Duff &
Phelps has withdrawn its Opinion due to subsequent material adverse changes in
either such market, economic, financial and other conditions, or in the business
of the CRI Mortgage Businesses, this Opinion will remain effective at the
closing of the Merger Proposal, which is expected to occur on or about June 30,
1995.
We understand that the Company may refer to, summarize and/or publish the
Opinion in whole or in part, in connection with certain filings to be made with
the SEC and in certain materials to be distributed to the Company's shareholders
and to prospective investors in the Company. Duff & Phelps shall have the right
to review and to comment on that portion of any such materials that refer to its
Opinion.
CONCLUSION
Based upon and subject to the foregoing, Duff & Phelps is of the opinion
that the Merger Proposal is fair to the Company and to the Public Stockholders
from a financial point of view.
Respectfully submitted,
Duff & Phelps Capital Markets Co.
B-2
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APPENDIX C
<PAGE>
CRI MORTGAGE BUSINESSES
CASH FLOW ANALYSES
The following is a summary of the cash flow analyses performed by Duff &
Phelps in support of the Opinion. The assumptions underlying the analyses are
dependent upon future events and may be significantly affected by changes in
economic and business conditions and other circumstances. Therefore, there is no
assurance that any of the projected results will be realized or that actual
results will not be higher or lower than those projected. The inclusion of the
analyses should not be regarded as an indication that Duff & Phelps or CRIIMI
MAE considers them to be other than an estimated projection of future results.
Such assumptions and projections are inherently subject to uncertainty, and
neither Duff & Phelps, CRIIMI MAE, nor any other entity or individual assumes
responsibility for their accuracy.
CRIIMI MAE ADVISORY AGREEMENT. In applying the cash flow analysis to the
services performed under the Advisory Agreement, the revenues from the annual,
mortgage selection and incentive fees were determined based on the existing fee
arrangements and historical trends. The existing fee arrangements were used
because of Duff & Phelps' conclusion that the terms of the Advisory Agreement
were comparable to other asset management agreements and reflected a
commercially reasonable basis for obtaining the services provided under the
Advisory Agreement. For purposes of calculating these revenues, CRIIMI MAE's
total assets subject to management fees were projected to grow at 5% per year
for the next three years to reflect the current plans of management, and at a
more moderate rate of 2.5% per year in periods thereafter. Duff & Phelps
allocated 50% of the total projected expenses of the CRI Mortgage Businesses
(excluding reimbursed expenses) to this line of business, which included 5%
annual expense increases through 1998, a 38% increase for 1999 (reflecting
renewals of employment contracts at an anticipated higher cost), and 5% annual
increases thereafter. The annual cash flows resulting from these revenue and
expense projections were discounted back to present value using a 17% discount
rate, reflecting Duff & Phelps' assessment of equity investments, in general,
and the specific risks of the business, in particular, including the material
dependence on the Advisory Agreement as well as the possibility that the
Advisory Agreement might not be renewed. The discount rate includes a risk-free
component of approximately 7%. The terminal value was established by applying a
multiple of 5 to the final year projected cash flow, which was then discounted
back to present value at the 17% rate. In Duff & Phelps' judgment, on the basis
of this analysis, the total present value of this line of business under the
cash flow analysis is approximately $21 million, as shown below:
ESTIMATED PROJECTED CASH FLOWS
FEES UNDER THE CRIIMI MAE ADVISORY AGREEMENT
(000S)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
------ ------ ------ ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Fees..................................... $2,992 $3,142 $3,299 $3,464 $3,550 $3,639 $3,730 $3,823 $ 3,919 $ 4,017
Mortgage Selection Fees......................... 750 701 736 773 649 666 682 699 717 735
Incentive Fees.................................. 0 175 184 193 202 213 223 234 246 258
Additional Costs Incurred....................... (518) (544) (571) (599) (825) (867) (910) (956) (1,003) (1,054)
------ ------ ------ ------ ------ ------ ------ ------ ------- -------
Net Cash Flow................................. $3,224 $3,474 $3,648 $3,830 $3,577 $3,651 $3,726 $3,802 $ 3,879 $ 3,957
Terminal Value in 2004 (based on a 5.0 multiple of estimated 2004 cash flow): $19,783
Present value of 1995-2004 cash flows and Terminal Value @ 17% discount rate: $20,877
<FN>
NOTE: TOTALS MAY NOT ADD DUE TO ROUNDING
</TABLE>
AIM FUND SUBMANAGEMENT. The cash flow analysis of the CRI/AIM submanagement
of the AIM Funds was based on projections developed by the management of the CRI
Mortgage Businesses, as adjusted by Duff & Phelps to reflect the release of the
CRI Mortgage Businesses' obligation under certain financial guarantees and the
additional risk resulting from any perceived conflict of interest on the part of
CRIIMI MAE as the general partner of the AIM Fund partnerships receiving fees
for managing the assets of such partnerships. Due to the substantial overlap of
the administration of CRIIMI MAE and the AIM Funds, none of the expenses of the
CRI Mortgage Businesses were allocated to this line of business. The annual cash
flows resulting from these projections were discounted back to present value
using a 17% discount rate, reflecting Duff & Phelps' assessment of the risks of
the business, including the material dependence on the
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<PAGE>
AIM contracts. The discount rate includes a risk-free component of approximately
7%. The terminal value was established by applying a multiple of 4 to the final
year projected cash flow, and the result was then discounted back to present
value at the 17% rate. In Duff & Phelps' judgment, on the basis of this
analysis, the total present value of this line of business under the cash flow
analysis is approximately $5 million, as shown below:
ESTIMATED PROJECTED CASH FLOWS
AIM FUND SUBMANAGEMENT
(000S)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
------ ------ ------ ------ ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Fees........................................... $1,596 $1,441 $1,294 $1,144 $1,010 $ 888 $ 779 $ 681 $ 592 $ 511
50% G.P. Interest in CRI/AIM Investment, L.P.......... 381 344 284 252 201 177 155 136 118 102
Guaranteed Payment.................................... (319) (321) (347) (343) (359) (348) (335) (319) (302) (283)
Additional Costs Incurred............................. 0 0 0 0 0 0 0 0 0 0
------ ------ ------ ------ ----- ----- ----- ----- ----- -----
Net Cash Flow $1,658 $1,464 $1,231 $1,052 $ 851 $ 717 $ 600 $ 497 $ 408 $ 331
Terminal Value in 2004 (based on a 4.0 multiple of estimated 2004 cash flow): $1,322
Present value of 1995-2004 cash flows and Terminal Value @ 17% discount rate: $5,269
<FN>
NOTE: TOTALS MAY NOT ADD DUE TO ROUNDING
</TABLE>
OTHER MORTGAGE BUSINESSES. The cash flow analysis of the other mortgage
businesses, including servicing, consulting and origination activities, was
based on projections and supporting schedules prepared by the management of the
CRI Mortgage Businesses. Duff & Phelps, while viewing the other mortgage
businesses as an opportunity for CRIIMI MAE to diversify and increase its
earnings base, adjusted management's overall projections downward to reflect
Duff & Phelps' independent assessment of the prospects for these businesses.
Revenues from mortgage servicing, consulting and origination were projected to
increase at 5% per year. Fees for the servicing of assets underlying the
subordinated securities were calculated based on the estimated mortgage asset
base and the terms of actual contractual arrangements in place. Such assets were
projected to grow to $675 million over the next three years, with growth
moderating to a 5% annual rate thereafter. Due to the staffing required to
engage in the current mortgage business and to pursue new mortgage
opportunities, Duff & Phelps allocated the remaining 50% of the total projected
expenses of the CRI Mortgage Businesses (excluding reimbursed expenses) to this
line of business. The annual cash flows resulting from these projections were
discounted back to present value using a 20% discount rate, reflecting the
greater risk and uncertainty of the cash flows of the other mortgage businesses
relative to those subject to the Advisory Agreement. The discount rate includes
a risk-free component of approximately 7%. The terminal value was established by
applying a multiple of 5 to the final year projected cash flow, and the result
was discounted back to present value at the 20% rate. In Duff & Phelps'
judgment, on the basis of this analysis, the total present value of this line of
business under the cash flow analysis is approximately $8 million, as shown
below:
ESTIMATED PROJECTED CASH FLOWS
OTHER MORTGAGE BUSINESSES
(000S)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
------ ------ ------ ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Servicing, Consulting and Origination
Fees......................................... $1,100 $1,155 $1,213 $1,273 $1,337 $1,404 $1,474 $1,548 $ 1,625 $ 1,706
Other Servicing Fees (For Assets Underlying
Subordinated Securities)..................... 508 728 882 1,003 1,062 1,121 1,180 1,242 1,304 1,370
Additional Costs Incurred..................... (518) (544) (571) (599) (825) (867) (910) (956) (1,003) (1,054)
------ ------ ------ ------ ------ ------ ------ ------ ------- -------
Net Cash Flow............................... $1,090 $1,339 $1,524 $1,677 $1,573 $1,658 $1,744 $1,834 $ 1,926 $ 2,022
Terminal Value in 2004 (based on a 5.0 multiple of estimated 2004 cash flow): $10,112
Present value of 1995-2004 cash flows and Terminal Value @ 20% discount rate: $7,963
<FN>
NOTE: TOTALS MAY NOT ADD DUE TO ROUNDING
</TABLE>
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APPENDIX
On page 9 of the printed document, a chart appears that indicates that
under the existing structure, CRIIMI MAE Inc. owns 57% of CRI Liquidating
REIT, Inc. and 100% of CRIIMI, Inc. The chart indicates that under the Merger
Proposal, the following are added:
1. CRIIMI MAE Management, Inc. ("CRIIMI Management"), which will employ
the work force and own the physical assets of the CRI Mortgage Businesses.
CRIIMI Management will be 100% owned by CRIIMI MAE Inc.
2. CRIIMI MAE Services Limited Partnership (the "Services
Partnership"), which will acquire the contracts of the CRI Mortgage
Businesses. CRIIMI Management will have an 8% general partner interest in the
Services Partnership.
3. CRIIMI MAE Services, Inc., which will own a 92% limited partner
interest in the Services Partnership.
<PAGE>
PROXY/VOTING INSTRUCTION CARD
CRIIMI MAE INC.
Proxy for Special Meeting of Stockholders on June 21, 1995
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of CRIIMI MAE Inc. appoints Garrett G. Carlson, Sr.,
G. Richard Dunnells and Robert F. Tardio, and each of them, with full power of
substitution, as proxy to vote all shares of the undersigned in CRIIMI MAE Inc.
at the Special Meeting of Stockholders to be held on June 21, 1995 and at any
adjournment thereof, with like effect and as if the undersigned were personally
present and voting, upon the matters set forth below. This card also provides
voting instructions for shares held in the CRIIMI MAE Inc. dividend reinvestment
and stock purchase plan.
The Board of Directors (with William B. Dockser and H. William Willoughby
abstaining) recommends a vote FOR the Merger Proposal.
1. To approve the Merger Proposal as described in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
2. Such other matters as may properly come before the meeting at the
discretion of the proxy holders.
<PAGE>
PROXIES WILL BE VOTED AS DIRECTED OR SPECIFIED. IF NO CHOICE IS SPECIFIED, THIS
PROXY WILL BE VOTED (1) FOR THE MERGER PROPOSAL AND (2) FOR OR AGAINST ANY OTHER
MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING AT THE DISCRETION OF THE PROXY
HOLDERS.
Dated , 1995
-----------------------
----------------------------------
Signature of Stockholder
----------------------------------
Signature of Stockholder
SIGNATURE(S) MUST CORRESPOND EXACTLY
WITH NAME(S) AS IMPRINTED HEREON.
When signing as attorney, executor,
administrator, trustee or guardian,
please give the full title as such;
if the signer is a corporation,
please sign with the full corporate
name if more than one person, all
named holders must sign the proxy.
PLEASE VOTE AT ONCE. IT IS IMPORTANT.
