<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
June 30, 1995
CRIIMI MAE Inc.
-------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Maryland 1-10360 52-1622022
-------- ------- ----------
(State or Other (Commission (IRS Employer
Jurisdiction of File No.) Identification
Incorporation) No.)
11200 Rockville Pike
Rockville, Maryland 20852
-------------------- ---------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code:
301/816-2300
Not Applicable
-----------------------------------------------------------
(Former Name or Former Address, if Changed since Last Report
<PAGE>2
Item 2. Acquisition or Disposition of Assets.
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") among
CRIIMI MAE Inc. ("CRIIMI MAE"), CRIIMI MAE Management, Inc. ("CRIIMI
Management"), CRICO Mortgage Company, Inc., CRI/AIM Management, Inc., CRI
Acquisition, Inc., William B. Dockser and H. William Willoughby, dated April 20,
1995, the CRI Mortgage Businesses (defined below) were merged into CRIIMI
Management, a wholly-owned subsidiary of CRIIMI MAE (the "Merger"). The "CRI
Mortgage Businesses" means CRICO Mortgage Company, Inc., CRI/AIM Management,
Inc. and CRI Acquisition, Inc. Prior to the Merger, Messrs. Dockser and
Willoughby (the "Principals") were the sole stockholders and directors of each
of the CRI Mortgage Businesses. Since before the Merger, the Principals have
been directors and senior executive officers of CRIIMI MAE.
The Merger became effective at 11:59 p.m. on June 30, 1995 (the "Closing
Date"). The CRI Mortgage Businesses were engaged in mortgage servicing,
origination, underwriting, investment and related activities for over 20 years.
As a result of the Merger, CRIIMI MAE became a fully integrated, self-managed
and self-administered real estate investment trust. The "Merger Proposal" means
the Merger and the related transactions described and referred to in CRIIMI
MAE's proxy statement dated April 28, 1995 (the "Proxy Statement").
The consideration paid by CRIIMI MAE (measured on the Closing Date) was
approximately $32,900,000. As part of the consideration paid in the Merger,
CRIIMI MAE issued on the Closing Date 1,325,419 shares of common stock ("Common
Shares"), which vest immediately, to each of the Principals. On the Closing
Date, CRIIMI MAE issued, for services rendered in connection with the Merger, to
Jay R. Cohen, Frederick J. Burchill, Deborah A. Linn and Cynthia O. Azzara (the
"Executive Officers") a total of 110,452 Common Shares. The Common Shares
issued to the Executive Officers will vest in three equal installments on the
first three anniversaries of the Closing Date.
The aforementioned Common Shares issued to the Principals and the Executive
Officers may not be sold or otherwise transferred, with certain exceptions,
until the third anniversary of the Closing Date.
Pursuant to the Merger Agreement, CRIIMI Management became liable for
certain debt of the CRI Mortgage Businesses in the principal amount of
$9,100,000.
The Principals and the Executive Officers entered into employment
agreements with CRIIMI Management for terms of five years and three years,
respectively. In addition, each of the Principals received from CRIIMI MAE
options to purchase one million Common Shares at $1.50 per share more than the
aggregate average of the high and low sale prices of Common Shares on the New
York Stock Exchange during the ten trading days preceding the Closing Date which
price was calculated at $8.27 per share (the "Trading Price") and 500,000 Common
Shares at $4.00 per share more than the Trading Price. The options vest in
equal installments on the first five anniversaries of the Closing Date. The
Executive Officers received from CRIIMI MAE options to purchase a total of
180,000 Common Shares at $1.50 per share more than the Trading Price of $8.27
per share. 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.
On September 29, 1994, a Special Committee of the Board of Directors of
CRIIMI MAE (the "Special Committee") was appointed by the Board of Directors of
CRIIMI MAE (the "Board") to consider whether, and on what basis, CRIIMI MAE
should become self-administered and self-managed. The members of the Special
Committee, Garrett G. Carlson, Sr., G. Richard Dunnells and Robert F. Tardio are
not and have not been affiliates of CRI or the CRI Mortgage Businesses nor
officers or employees of CRIIMI MAE.
<PAGE>3
The consideration paid by CRIIMI MAE in connection with the Merger was
determined by negotiations between the Principals and the Special Committee. In
the negotiations, the Special Committee was assisted by Duff & Phelps Capital
Markets Co. ("Duff & Phelps") and took into account the views of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, the financial adviser to CRIIMI MAE with
respect to the Merger Proposal. Duff & Phelps rendered an opinion to the effect
that the Merger Proposal was fair to CRIIMI MAE and its stockholders other than
the Principals, from a financial point of view.
The Special Committee unanimously recommended the Merger Proposal to the
Board. The Board (with the Principals abstaining) unanimously approved the
Merger Proposal and recommended that the stockholders of CRIIMI MAE vote for the
Merger Proposal. The Merger Proposal was approved by the stockholders of CRIIMI
MAE at a meeting held on June 21, 1995. Holders of approximately fifty six
percent of the 26,888,456 shares outstanding as of the April 24, 1995 record
date voted in favor of the Merger. Of the shares voted, the margin was 8.5 to 1
in favor of the Merger.
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.
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 and June 30, 1995, CRIIMI MAE paid a first and second quarter
dividend of 22.5 cents and 22.5 cents per share, respectively, which were
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 because
tax basis income is its primary basis for paying dividends to stockholders.
<PAGE>4
The table below adjusts pro forma tax basis income before the Merger and
after the Merger for the quarter ended March 31, 1995 based on the assets and
liabilities on its balance sheet as of March 31, 1995, 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 to
illustrate the impact of annualizing revenues and expenses based on assets and
liabilities as of March 31, 1995 to demonstrate the accretion to tax basis
income per share from the Merger.
Quarter Ended March 31, 1995,
as annualized
-----------------------------------
Pro Forma Pro Forma
Tax Basis Income Tax Basis Income
Before Merger After Merger
----------------- -----------------
Tax Basis Income $ 19,621,787(1) $ 23,464,231(2)
Adjustments for impact of
annualization:
(3) Decrease in mortgage income
(CRIIMI MAE) (385,983) (385,983)
(4) Decrease in mortgage income
(CRI Liquidating) (1,034,623) (1,034,623)
(5) Decrease in interest expense 620,572 620,572
(6) Increase in annual fees (9,125) --
(7) Decrease in servicing fee income -- (74,265)
------------- -------------
Tax Basis Income, As Adjusted $ 18,812,628 $ 22,589,932
============= =============
(8) Weighted Average Shares
Outstanding for Tax Purposes 26,350,979 29,112,269
============= =============
Tax Basis Income per Share,
As Adjusted $ 0.714 $ 0.776
============= =============
Accretion on an adjusted pro forma
basis, per share for the quarter
ended March 31, 1995, as annualized $ 0.062
=============
(1) Based on actual tax basis income for the quarter ended March 31, 1995 as
shown in CRIIMI MAE's Form 10-Q for the related period, as annualized after
adjusting for nonrecurring gains of $5,389,984 ($9,456,113 tax basis gains
multiplied by CRIIMI MAE's portion) on dispositions from CRI Liquidating
REIT, Inc. ("CRI Liquidating").
(2) Based on pro forma tax basis income after the Merger for the quarter ended
March 31, 1995 as shown on page 32 of the unaudited pro forma financial
<PAGE>5
statements, as annualized after adjusting for nonrecurring gains of
$5,389,984 ($9,456,113 tax basis gains multiplied by CRIIMI MAE's portion)
on dispositions from CRI Liquidating.
(3) 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 a carrying value of approximately $706 million as of March 31, 1995,
as if those investments were made as of January 1, 1995, as compared to the
actual mortgage income for the quarter ended March 31, 1995, as annualized.
(4) 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 a carrying value of approximately $109 million as of
March 31, 1995, as if those investments were made as of January 1, 1995, as
compared to the actual mortgage income for the quarter ended March 31,
1995, as annualized. The amounts shown represent CRIIMI MAE's interest in
CRI Liquidating's mortgage income, net of minority interest.
(5) Represents the adjustment to interest expense based on actual debt
outstanding as of March 31, 1995 at June 30, 1995 rates as compared to the
actual interest expense for the quarter ended March 31, 1995, as
annualized. The calculation assumes a weighted average cost of borrowing
at June 30, 1995 of approximately 6.7%.
(6) Represents the additional annual fees that CRIIMI MAE would have incurred
had the existing mortgage investments referred to in (3) above been in
place for a full year as compared to the actual annual fee incurred for the
quarter ended March 31, 1995, as annualized. 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 were self-administered.
(7) Reflects the decrease in servicing fee income that would be earned for a
year from contracts in place as of March 31, 1995 as compared to the actual
servicing fee income for the quarter ended March 31, 1995, as annualized.
(8) Reflects all shares issued and outstanding as of March 31, 1995, as if the
shares were outstanding for a full year. The shares after the Merger
include 2,761,290 shares issued in connection with the Merger.
Item 5. Other Events
On June 20, 1995, Edge Partners, L.P. filed in the United States District
Court for the District of Maryland a complaint against CRIIMI MAE's directors.
The complaint purports to be on behalf of CRIIMI MAE and alleges breach of
fiduciary duty and a misleading proxy statement in connection with the Merger.
The plaintiff seeks unspecified damages, a determination that the stockholder
vote should be set aside and other relief. Management of CRIIMI MAE and the
defendants believe that the suit is without merit.
<PAGE>6
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired Appendix A
(b) Pro Forma Financial Information Appendix B
(c) Exhibit
2. Merger Agreement (included as Appendix A to the
Proxy Statement and incorporated herein by
reference).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CRIIMI MAE Inc.
/s/ Cynthia O. Azzara
By: ------------------------------
Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer
Date: July 14, 1995
<PAGE>7
APPENDIX A
CRI MORTGAGE BUSINESSES
COMBINED FINANCIAL STATEMENTS
<PAGE>8
INDEX TO FINANCIAL STATEMENTS
Page
----
CRI Mortgage Businesses Financial Statements
Independent Auditor's Report . . . . . . . . . . . . . 9
Combined Statements of Assets and
Liabilities as of March 31, 1995
(unaudited) and December 31, 1994
and 1993 (audited) . . . . . . . . . . . . . . . . . 10
Combined Statements of Income and
Expenses for the three months
ended March 31, 1995 and 1994
(unaudited) and the years ended
December 31, 1994 and 1993 (audited) . . . . . . . . 11
Combined Statements of Cash Flows
for the three months ended March
31, 1995 and 1994 (unaudited)
and the years ended December 31,
1994 and 1993 (audited) . . . . . . . . . . . . . . . 12
Notes to Combined Financial
Statements . . . . . . . . . . . . . . . . . . . . . 13
CRIIMI MAE Inc. Pro Forma Financial Information (unaudited)
Pro Forma Balance Sheet as of March 31, 1995 . . . . . 20
Pro Forma Consolidating Statement of Operations
for the three months ended March 31,
1995 . . . . . . . . . . . . . . . . . . . . . . . . 21
Pro Forma Consolidating Statement of Operations
for the year ended December 31,
1994 . . . . . . . . . . . . . . . . . . . . . . . . 22
Notes and management's assumptions to unaudited
pro forma financial statements . . . . . . . . . . . 23
<PAGE>9
Report of Independent Certified Public Accountants
The Board of Directors
C.R.I., 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 C.R.I., 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
<PAGE>10
CRI MORTGAGE BUSINESSES
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1995 1994 1993
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Assets:
Cash and cash equivalents $ 359,092 $ 380,747 $ 288,287
Certificate of deposit 12,500 12,500 12,500
Fees receivable 32,378 38,876 --
Fees receivable from affiliates 534,088 833 49,138
Loan receivable from affiliate 5,002,183 5,002,183 7,000,000
Fixed assets, net 212,484 231,801 204,245
Other assets 4,232 14,404 9,466
------------ ------------ ------------
Total assets 6,156,957 5,681,344 7,563,636
============ ============ ============
Liabilities:
Notes payable 9,100,000 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 251,109 160,704 42,494
------------ ------------ ------------
Total liabilities 9,351,109 9,275,872 11,178,612
------------ ------------ ------------
Commitments and contingencies -- -- --
Net liabilities $ 3,194,152 $ 3,594,528 $ 3,614,976
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
<PAGE>11
CRI MORTGAGE BUSINESSES
COMBINED STATEMENTS OF INCOME AND EXPENSES
<TABLE>
<CAPTION>
For the three months ended For the year ended
March 31, December 31,
1995 1994 1994 1993
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Income:
Subadvisory fees from affiliates $ 504,916 $ 494,651 $ 2,008,316 $ 2,063,476
Annual and incentive management fees
from CRIIMI MAE 732,385 714,046 3,064,776 1,480,466
Mortgage selection fees from CRIIMI MAE -- 103,566 1,570,415 2,416,253
Mortgage servicing fees from affiliates 59,383 92,854 242,578 284,259
Mortgage servicing fees, consulting
fees and other mortgage related
income 214,920 176,700 736,012 476,931
Interest 136,823 496,455 932,226 687,861
------------ ------------ ------------ ------------
1,648,427 2,078,272 8,554,323 7,409,246
------------ ------------ ------------ ------------
Expenses:
Interest expense 235,765 566,562 1,262,663 969,758
Salaries and employee benefits 141,821 138,836 431,349 636,278
General and administrative 121,664 70,973 428,215 388,272
Guarantee payment to CRIIMI MAE 77,507 79,490 312,222 301,664
Professional fees 2,486 3,236 22,303 40,376
Depreciation and amortization 19,317 16,033 77,477 78,111
------------ ------------ ------------ ------------
598,560 875,130 2,534,229 2,414,459
------------ ------------ ------------ ------------
Net income $ 1,049,867 $ 1,203,142 $ 6,020,094 $ 4,994,787
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
<PAGE>12
CRI MORTGAGE BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended For the year ended
March 31, December 31,
1995 1994 1994 1993
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows provided by operating activities:
Net income $ 1,049,867 $ 1,203,142 $ 6,020,094 $ 4,994,787
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 19,317 16,033 77,477 78,111
Changes in assets and liabilities:
Decrease (increase) in fees receivable 6,498 (80,175) (38,876) 25,795
(Increase) decrease in fees receivable
from affiliates (533,255) 29,726 48,305 (29,726)
(Decrease) increase in accounts payable to
affiliates (15,168) (38,301) (23,133) 25,068
Decrease (increase) in other assets 10,172 9,310 (4,938) (9,466)
Increase (decrease) in accounts payable and
accrued expenses 90,405 86,452 118,210 (561,284)
------------ ------------ ------------ ------------
Net cash provided by operating
activities 627,836 1,226,187 6,197,139 4,523,285
------------ ------------ ------------ ------------
Cash flows (used in) provided by investing
activities:
Decrease (increase) in loan receivable from
affiliate -- -- 1,997,817 (7,000,000)
Purchase of fixed assets -- (12,445) (27,556) (20,353)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing
activities -- (12,445) 1,970,261 ( 7,020,353)
------------ ------------ ------------ ------------
Cash flows provided by (used in) financing
activities:
Decrease 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 (649,491) (1,202,424) (6,077,123) (4,798,110)
------------ ------------ ------------ ------------
Net cash used in financing activities (649,491) (1,202,424) (8,074,940) 2,201,890
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (21,655) 11,318 92,460 (295,178)
Cash and cash equivalents, beginning of period 380,747 288,287 288,287 583,465
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 359,092 $ 299,605 $ 380,747 $ 288,287
============ ============ ============ ============
The accompanying notes are an integral part
of these combined financial statements.
</TABLE>
<PAGE>13
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 real estate investment trusts
("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 an agreement and plan of merger ("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") as of 11:59
p.m. on June 30, 1995. Once the Merger is completed, CRIIMI MAE will be a fully
integrated, self-administered and self-managed mortgage investment advisory,
servicing, and originating REIT.
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% 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 American
Insured Mortgage Investors funds ("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
the CRI Mortgage Businesses' stockholders (the "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.
<PAGE>14
2. Summary of Significant Accounting Policies - Continued
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.
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 $732,385, $817,612, $4,635,191
and $3,896,719 for the three months ended March 31, 1995 and 1994 and 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
$77,507, $79,490, $312,222 and $301,664 for the three months ended March
31, 1995 and 1994 and 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 113 loans aggregating approximately $582.5 million
in outstanding principal balances at March 31, 1995. This portfolio is
comprised of approximately $288.5 million in third party loans, $86.7
million in AIM
Funds loans and $207.3 million in CRITEF funds loans. The CRITEF funds are
affiliated with CRI.
<PAGE>15
2. Summary of Significant Accounting Policies - Continued
As of March 31, 1995 and 1994 and 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, for the three months ended March 31, 1995 and 1994
and for the years ended December 31, 1994 and 1993, the CRI Mortgage
Businesses performed $294,171, $263,697, $1,098,640 and $1,037,553,
respectively, of servicing for the CRITEF loans without payment and such
servicing fees 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. However, under the terms of the
Merger Agreement, any past due servicing fees received subsequent to the
Merger, but earned prior to June 30, 1995, will be payable to CRI.
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.
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 $528,612, $164,027,
$1,821,761 and $1,369,249 for the three months ended March 31, 1995 and
1994 and 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.
<PAGE>16
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
terms similar to 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
March 31, 1995 (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:
As of As of
March 31, December 31,
1995 1994 1993
------------ ------------ -----------
(unaudited)
Furniture and equipment $ 924,054 $ 924,054 $ 698,792
Leasehold improvements 474,172 474,172 363,351
------------ ------------ -----------
1,398,226 1,398,226 1,062,143
Less accumulated depreciation
and amortization (1,185,742) (1,166,425) (857,898)
------------ ------------ -----------
$ 212,484 $ 231,801 $ 204,245
============ ============ ===========
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 March 31, 1995, December 31, 1994 and December 31, 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 balances of $4,097,817 and
$5,002,183, respectively, at March 31, 1995. 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 March 31, 1995, December 31, 1994 and December 31, 1993, the CRI
Mortgage Businesses were jointly and severally liable with other affiliates on
$4,097,817, $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 (10.00 percent as of March 31, 1995).
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
<PAGE>17
5. Notes payable and commitment under repurchase agreement - Continued
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 $0, $496,455, $578,842 and $682,911 for the three months ended
March 31, 1995 and 1994 and 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 (11.00 percent as of
March 31, 1995). 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%
of the AIM Proceeds and $375,000 or 100% 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.
<PAGE>18
APPENDIX B
CRIIMI MAE INC.
PRO FORMA FINANCIAL STATEMENTS
<PAGE>19
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 March 31, 1995; the pro forma consolidating statements 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 statements 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 the discussion in Item 2, under "Adjusted Pro Forma Accretion
to Tax Basis Income Per Share".
<PAGE>20
CRIIMI MAE INC.
PRO FORMA BALANCE SHEET
As of March 31, 1995
(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 $702,836,121 $ -- $702,836,121
Investment in mortgages, at fair value 112,330,832 -- 112,330,832
Investment in subordinated securities,
at amortized cost 39,039,043 -- 39,039,043
Investment in insured mortgage
funds and advisory partnership 29,761,453 -- 29,761,453
Cash and cash equivalents 18,761,502 (3,385,000) (B)(C) 15,376,502
Receivables and other assets 8,316,594 5,214,667 (D)(F) 13,531,261
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 -- 3,845,417 (E) 3,845,417
Deferred financing costs, net
of accumulated amortization 7,715,690 -- 7,715,690
Deferred costs, principally
paid to related parties, net
of accumulated amortization 6,241,909 -- 6,241,909
------------ ------------ ------------
Total assets $925,003,144 $ 37,865,084 $962,868,228
============ ============ ============
Obligations under financing facilities $612,784,777 $ 9,100,000 (G) $621,884,777
Accounts payable and accrued expenses 1,540,054 -- 1,540,054
Interest payable 5,324,382 -- 5,324,382
Deferred compensation -- 5,002,183 (D) 5,002,183
------------ ------------ ------------
Total liabilities 619,649,213 14,102,183 633,751,396
------------ ------------ ------------
Minority interests in consolidated
subsidiary 49,976,041 -- 49,976,041
------------ ------------ ------------
Common stock 268,897 27,613 (H) 296,510
Net unrealized gains on mortgage
investments of subsidiary 12,170,570 -- 12,170,570
Additional paid-in-capital 247,700,526 23,735,288 (H) 271,435,814
------------ ------------ ------------
260,139,993 23,762,901 283,902,894
Less treasury stock, at cost (4,762,103) -- (4,762,103)
------------ ------------ ------------
Total shareholders' equity 255,377,890 23,762,901 279,140,791
------------ ------------ ------------
Total liabilities and
shareholders' equity $925,003,144 $ 37,865,084 $962,868,228
============ ============ ============ <PAGE>
<PAGE>22
</TABLE>
The accompanying notes and management's assumptions
are an integral part of these pro forma
financial statements.
<PAGE>21
CRIIMI MAE INC.
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1995
(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 $ 16,815,867 $ -- $ 16,815,867 $ -- $ 16,815,867
Income from investment in
subordinated securities 1,351,917 -- 1,351,917 -- 1,351,917
Income from investment in
insured mortgage funds and
advisory partnership 564,100 -- 564,100 -- 564,100
Interest income -- 136,823 136,823 737 (M) 137,560
Other investment income 769,562 -- 769,562 -- 769,562
Earnings from Services Corporation -- -- -- 338,924 (C)(F) 338,924
Equity in the earnings of
Services Partnership -- -- -- 29,594 (E) 29,594
Annual fees from affiliate
(CRIIMI MAE) -- 732,385 732,385 (732,385)(G) --
Mortgage selection fees from
affiliate (CRIIMI MAE) -- -- -- -- (H) --
Mortgage servicing fees from
affiliates -- 59,383 59,383 (59,383)(D) --
Mortgage servicing fees, consulting
fees and other mortgage
related income -- 214,920 214,920 (207,594)(D) 7,326
Subadvisory fees from affiliate -- 504,916 504,916 (504,916)(D) --
------------ ------------ ------------- ------------ --
Total income 19,501,446 1,648,427 21,149,873 (1,135,023) 20,014,850
------------ ------------ ------------ ------------ ------------
Interest expense 12,149,403 235,765 12,385,168 80,958 (L) 12,466,126
Annual fee to related party 862,259 -- 862,259 (732,385)(G) 129,874
General and administrative 952,743 265,971 1,218,714 (150,500)(D) 1,068,214
Mortgage servicing fees 146,120 -- 146,120 -- 146,120
Guarantee payment to affiliate -- 77,507 77,507 (77,507)(D) --
Depreciation and amortization 70,290 19,317 89,607 -- (I) 89,607
Amortization of acquired assets -- -- -- 715,710 (J) 715,710
------------ ------------ ------------ ------------ ------------
Total expenses 14,180,815 598,560 14,779,375 (163,724) 14,615,651
------------ ------------ ------------ ------------ ------------
Income before mortgage dispositions 5,320,631 1,049,867 6,370,498 (971,299) 5,399,199
Mortgage Dispositions:
Gains 1,752,243 -- 1,752,243 -- 1,752,243
Losses (184,897) -- (184,897) -- (184,897)
------------ ------------ ------------ ------------ ------------
Income before minority interest 6,887,977 1,049,867 7,937,844 (971,299) 6,966,545
Minority interests in net income
of consolidated subsidiary (1,972,580) -- (1,972,580) -- ( 1,972,580)
------------ ------------ ------------ ------------ -------------
Net income $ 4,915,397 $ 1,049,867 $ 5,965,264 $ (971,299) $ 4,993,965
============ ============ ============ ============ =============
Net income per share $ .19 $ .17
============ ============= <PAGE>
<PAGE>24
Weighted average shares
outstanding 26,267,646 29,028,936(K)
============ =============
The accompanying notes and management's assumptions are an integral
part of these pro forma financial statements.
<PAGE>22
CRIIMI MAE INC.
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1994
(Unaudited)
</TABLE>
<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 (381,986)(M) 550,240
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 (6,619,778) 73,376,345
------------ ------------ ------------ ------------ ------------
Interest expense 39,244,621 1,262,663 40,507,284 (138,748)(L) 40,368,536
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 -- -- -- 2,862,838 (J) 2,862,838
------------ ------------ ------------ ------------ ------------
Total expenses 46,727,888 2,534,229 49,262,117 (1,307,255) 47,954,862
------------ ------------ ------------ ------------ ------------
Income before mortgage dispositions 24,713,912 6,020,094 30,734,006 (5,312,523) 25,421,483
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 (5,312,523) 38,420,791
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 $ (5,312,523) $ 26,717,690
============ ============ ============ ============ ============ <PAGE>
<PAGE>26
Net income per share $ 1.07 $ .99
============ ============
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.
<PAGE>23
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 March 31, 1995 and the Pro Forma
Consolidating Statements of Operations for the three months ended March 31, 1995
and the year ended December 31, 1994 have been prepared to reflect the
transactions of the Merger Proposal. 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 March 31, 1995. The Pro Forma Consolidating Statements of
Operations were 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 periods, 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 the Proxy Statement dated April 28, 1995.
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, were transferred to a wholly owned
subsidiary of CRIIMI MAE, CRIIMI MAE Management, Inc. ("CRIIMI Management").
The AIM subadvisory contracts and certain mortgage servicing contracts were 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 transferred
these assets to CRIIMI MAE Services Limited Partnership, a newly formed Maryland
limited partnership (the "Services Partnership") in exchange for a 92 percent
sole limited partnership interest. The remaining mortgage servicing contracts
originally transferred to CRIIMI Management were contributed to the Services
Partnership in exchange for an 8 percent general partnership interest. Because
CRIIMI Management is the sole general partner of the Services Partnership,
CRIIMI MAE has indirect management control over the business and assets of the
Services Partnership.
After the Merger, CRIIMI MAE is a self-administered, self-managed REIT.
CRIIMI MAE's portfolio of government insured multifamily mortgages and other
assets are managed by CRIIMI Management. The Services Partnership provides
mortgage servicing and advisory services to third parties, affiliates of CRI and
the AIM Funds on a fee basis. CRIIMI MAE, through CRIIMI Management, controls
the Services Partnership as managing general partner. CRIIMI MAE owns 100
percent of the non-voting common stock (which shares are entitled to 95 percent
of the dividends) of the Services Corporation and certain directors and officers
of CRIIMI MAE own 100 percent of the voting common stock (which shares are
entitled to 5 percent of the dividends) of the Services Corporation. CRIIMI MAE
capitalized 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
<PAGE>24
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
1. Basis of presentation - Continued
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.
The accompanying pro forma financial statements include the mortgage
servicing contracts, mortgage origination businesses and AIM subadvisory
contracts which were 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 March 31, 1995, as if the Merger was consummated on such date.
(A) Reflects CRIIMI MAE's historical balance sheet as of March 31, 1995.
(B) CRIIMI MAE expects to incur costs of approximately $3,100,000 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
percent of the Services Corporation's non-voting common stock.
(D) In connection with the Merger, CRIIMI MAE will acquire the CRI
Receivable evidencing an obligation of the CRI Mortgage Businesses of
$5,002,183. 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
<PAGE>25
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
3. Adjustments to Pro Forma Balance Sheet - Continued
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 10 years. Both the CRI
Receivable and deferred compensation obligation will bear interest at
the bank's prime rate (9% as of the date of the Merger) plus 2.0
percent.
(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:
Amortization
Period
Note Amount (Years)
---- ---------- ------------
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 3,845,417 10
(1) The fair values of the AIM subadvisory contracts and certain
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 percent 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 percent 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 percent 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
<PAGE>26
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
3. Adjustments to Pro Forma Balance Sheet - Continued
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.
(F) In connection with the Merger, CRIIMI MAE will acquire $212,484 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 three months ended March 31, 1995 and 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 percent per annum.
(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 $8.0625 ($.01 per share par value) and options for
3,000,000 Common Shares granted with a fair market value of
$1,500,000. The share price was calculated as the average of the high
and low sales prices of one common share as reported on the New York
Stock Exchange on the Closing Date, pursuant to terms of the Merger
Agreement.
2,761,290 shares x $8.0525 per share........ $ 22,235,288
Fair Market Value of options for 3,000,000
shares..................................... 1,500,000
------------
Additional Paid-In-Capital............. $ 23,735,288
============
4. Adjustments to Pro Forma Consolidating Statements of Operations
The following describes the pro forma adjustments to the Pro Forma
Consolidating Statements of Operations for the three months ended March 31, 1995
and the year ended December 31, 1994 as if the Merger was consummated on January
1, 1994.
(A) Reflects CRIIMI MAE's historical Statements of Operations for the
three months ended March 31, 1995 and the year ended December 31,
1994.
(B) Reflects the CRI Mortgage Businesses' historical Statements of
Operations for the three months ended March 31, 1995 and the year
ended December 31, 1994.
<PAGE>27
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
4. Adjustments to Pro Forma Consolidating Statements of Operations -
Continued
(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 percent 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:
Three Months Year
Ended Ended
March 31, December 31,
1995 1994
------------ ------------
Interest income on installment note $ 230,509 $ 922,035
Equity in earnings of the Services
Corporation 108,415 184,870
------------ ------------
Earnings from the Services
Corporation $ 338,924 $ 1,106,905
============ ============
(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 Statements of
Operations.
(E) CRIIMI MAE, through CRIIMI Management, will own an 8 percent 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 Condensed
Income Statements for the three months ended March 31, 1995 and the
year ended December 31, 1994:
<PAGE>28
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
4. Adjustments to Pro Forma Consolidating Statements of Operations -
Continued
Services Partnership
PRO FORMA CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
Three Months Year
Ended Ended
March 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
AIM subadvisory fees $ 427,409 $ 1,696,094
Mortgage servicing fees from
affiliates 59,383 242,578
Mortgage servicing fees 207,594 554,214
------------ ------------
Total income 694,386 2,492,886
------------ ------------
General and administrative expenses 150,500 602,000
Amortization expense 173,967 695,867
------------ ------------
Total expenses 324,467 1,297,867
------------ ------------
Pro Forma net income $ 369,919 $ 1,195,019
============ ============
CRIIMI MAE's general partner interest 8% 8%
------------ ------------
CRIIMI MAE's equity in earnings of
Services Partnership $ 29,594 $ 95,602
============ ============
Services Corporation limited
partnership interest 92% 92%
------------ ------------
Services Corporation equity in earnings
of Services Partnership $ 340,325 $ 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:
<PAGE>29
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
4. Adjustments to Pro Forma Consolidating Statements of Operations -
Continued
Services Corporation
PRO FORMA CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
Three Months Year
Ended Ended
March 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Equity in earnings of the
Services Partnership and
total revenue $ 340,325 $ 1,099,417
------------ ------------
Interest expense on installment
note payable 230,509 922,035
Current tax expense 8,931 35,724
Deferred tax benefit (13,236) (52,942)
------------ ------------
Total expenses 226,204 904,817
------------ ------------
Pro forma net income $ 114,121 $ 194,600
============ ============
CRIIMI MAE's economic interest 95% 95%
------------ ------------
CRIIMI MAE's equity in earnings
of Services Corporation $ 108,415 $ 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
mortgage investments held by CRIIMI MAE and the achievement of certain
specified performance levels. Specifically, CRIIMI MAE currently pays
.025 percent of the average face balance of mortgage investments and
.375 percent of the average carrying value of mortgage investments.
These adjustments represent 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.
Three Months Year
Ended Ended
March 31, December 31,
1995 1994
------------ ------------
Annual Fee $ 732,385 $ 2,567,101
Incentive Fee -- 497,675
------------ ------------
Total $ 732,385 $ 3,064,776
============ ============ <PAGE>
<PAGE>34
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
4. Adjustments to Pro Forma Consolidating Statements of Operations -
Continued
(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 percent of the purchase price of CRIIMI
MAE's mortgage investments. These adjustments represent the
elimination of these fees paid to the CRI Mortgage Businesses, as this
contract will be cancelled:
Three Months Year
Ended Ended
March 31, December 31,
1995 1994
------------ ------------
Mortgage Selection Fee $ -- $ 1,570,415
============ ============
(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 the three months ended March 31, 1995 and the year ended
December 31, 1994 are eliminated as follows:
Three Months Year
Ended Ended
March 31, December 31,
1995 1994
------------ ------------
Mortgage Selection Fee
Amortization $ -- $ 52,347
============ ============
(J) These adjustments represent amortization of the assets acquired by
CRIIMI MAE, including goodwill, on the straight line method over the
10 year estimated life of the assets.
Three Months Year
Ended Ended
March 31, December 31,
1995 1994
------------ ------------
Amortization $ 715,710 $ 2,862,838
============ ============
(K) Weighted average shares outstanding is based on the actual number of
days outstanding and is calculated as follows:
<PAGE>30
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
4. Adjustments to Pro Forma Consolidating Statements of Operations -
Continued
1995 25,725,979 shares outstanding at December 31, 1994
2,761,290 shares issued in connection with the Merger
----------
28,487,269 x 90 days/90 days = 28,487,269
625,000(1) x 78 days/90 days = 541,667
37,477(2) x 0 days/90 days = --
----------
29,028,936
==========
(1) Represents common shares issued in 1995.
(2) Represents common shares issued in connection with the Dividend
Reinvestment Plan in March of 1995.
1994 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(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
==========
(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.
(L) The following adjustments are made to interest expense:
Three Months Year
Ended Ended
March 31, December 31,
1995 1994
------------ ------------
Interest expense-CRIIMI MAE
pro forma (1) $ 166,202 $ 521,830
Interest expense-CRI Mortgage
Businesses (1) (235,765) (1,262,663)
Interest expense-corporate tax (2) 12,961 51,845
Interest expense-deferred
compensation arrangement (3) 137,560 550,240
------------ ------------
Adjustment $ 80,958 $ (138,748)
============ ============
(1) CRIIMI MAE will succeed in the Merger to aggregate indebtedness
of $9,100,000 currently owed by the CRI Mortgage Businesses. CRIIMI
MAE refinanced this debt at an annual interest rate based on CRIIMI
MAE's choice of one, two or three-month LIBOR, plus 1.25 percent on
June 30, 1995. Interest expense in the Pro Forma Consolidating
Statements of Operations is based on the average one-month LIBOR of
<PAGE>31
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
4. Adjustments to Pro Forma Consolidating Statements of Operations -
Continued
6.0556 percent, during the three months ended March 31, 1995, plus
1.25 percent and the average one-month LIBOR of 4.4844 percent, during
the year ended December 31, 1994, plus 1.25 percent. The Pro Forma
Balance Sheet reflects this additional aggregate indebtedness of
$9,100,000 as of March 31, 1995.
(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 bank's prime rate (9% as of the date of the Merger) plus 2.0
percent.
(M) These adjustments to interest income ($737 and ($381,986) for the
three months ended March 31, 1995 and the year ended December 31,
1994, respectively) reflect 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 bank's prime rate (9% as of
the date of the Merger) plus 2.0 percent.
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 three months ended March 31, 1995 and the year ended December 31, 1994 is as
follows. Tax basis income is the primary basis for dividend payments to
shareholders:
<PAGE>32
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
5. Reconciliation of Pro Forma Net Income to Pro Forma
Taxable Income - Continued
<TABLE>
<CAPTION>
Reconciliation to
Pro Forma
Tax Basis Income
Three months ending Year ending
March 31, December 31,
1995 1994
---------------- -------------
<S> <C> <C>
Pro forma net income for financial
reporting purposes $ 4,993,965 $ 26,717,690
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 4,460,425 3,610,806
Income from investment in insured
mortgage funds and advisory
partnership 32,945 (7,462)
Mortgage dispositions 11,518 200,195
Amortization of original issue discount 119,634 187,305
Interest expense (594,919) 167,631
Provision for settlement of litigation -- (557,340)
Other 2,935 (4,831)
---------------- -------------
Pro forma tax basis income 9,026,503 30,313,994
Pro Forma Adjustments
Amortization 715,710 2,862,838
Capital gain on installment sale 260,831 781,434
Equity in earnings in subsidiaries (94,498) (129,201)
---------------- -------------
Pro forma tax basis income, as adjusted $ 9,908,546 33,829,065
Common shares outstanding for tax purposes 29,112,269(1) 28,070,850(1)
---------------- -------------
Tax basis income per share $ .34 $ 1.21
================ =============
</TABLE>
(1) Common shares outstanding for the three months ended March 31, 1995 and 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):
1995 25,725,979 shares outstanding at December 31, 1994
2,761,290 shares issued in connection with the Merger
----------
28,487,269 x 90 days/90 days = 28,487,269
625,000(a) x 90 days/90 days = 625,000
37,477(b) x 0 days/90 days = --
----------
<PAGE>33
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
5. Reconciliation of Pro Forma Net Income to Pro Forma
Taxable Income - Continued
29,112,269
==========
(a) Represents common shares issued in 1995
(b) Represents common shares issued pursuant to the Dividend Reinvestment
Plan in March of 1995 after the record date for the first quarter
distribution.
<PAGE>34
CRIIMI MAE INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
5. Reconciliation of Pro Forma Net Income to Pro Forma
Taxable Income - Continued
1994 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.
