<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
-------------
Commission file number 1-10360
-------
CRIIMI MAE INC.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 52-1622022
- ------------------------------------------ ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(301) 816-2300
- --------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of August 6, 1996
- ---------------------------- --------------------------------
Common Stock, $.01 par value 30,400,983
<PAGE>2
CRIIMI MAE INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - as of June 30, 1996
(unaudited) and December 31, 1995 . . . . . . . 3
Consolidated Statements of Income - for the
three and six months ended June 30, 1996
and 1995 (unaudited) . . . . . . . . . . . . . 4
Consolidated Statement of Changes in
Shareholders' Equity - for the six months
ended June 30, 1996 (unaudited) . . . . . . . . 5
Consolidated Statements of Cash Flows -
for the six months ended June 30, 1996
and 1995 (unaudited) . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . .
(unaudited) . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 34
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 46
Item 2. Changes in Securities . . . . . . . . . . . . . . 47
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 48
Signature . . . . . . . . . . . . . . . . . . . . . . . . 49
<PAGE>3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
June 30, December 31,
1996 1995
-------------- --------------
(unaudited)
<S> <C> <C>
Assets:
Interest Bearing Investments
Mortgage security collateral, at
amortized cost $ 641,633,565 $ 674,289,774
Subordinated CMBS, at amortized cost 335,923,410 278,400,699
Mortgages, at fair value 72,456,619 132,823,515
Equity Investments 37,834,554 37,137,786
Other Assets
Assets acquired in Merger 25,982,441 27,425,483
Deferred costs 15,704,621 16,072,517
Receivables and other assets 17,887,436 20,575,725
Cash and cash equivalents 11,446,381 16,577,407
-------------- --------------
Total assets $1,158,869,027 $1,203,302,906
============== ==============
Liabilities:
Securitized Mortgage Obligations $ 613,292,272 $ 645,260,921
Repurchase Agreements - Subordinated CMBS 218,343,242 187,947,276
Bank Term Loans 10,197,880 21,227,880
Working Capital Line of Credit 4,000,000 --
Payables and accrued expenses 9,357,950 10,929,366
-------------- --------------
Total liabilities 855,191,344 865,365,443
-------------- --------------
Minority interests in
consolidated subsidiary 25,726,940 52,233,520
-------------- --------------
Commitments and contingencies
Shareholders' equity:
Preferred stock -- --
Common stock 309,356 309,356
Net unrealized gains on mortgage
investments 8,695,013 16,138,649
Additional paid-in capital 273,916,792 274,226,356
-------------- --------------
282,921,161 290,674,361
Less treasury stock, at cost-
528,594 shares (4,970,418) (4,970,418)
-------------- --------------
Total shareholders' equity 277,950,743 285,703,943
-------------- --------------
Total liabilities and shareholders'
equity $1,158,869,027 $1,203,302,906
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE><CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1996 1995 1996 1995
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Mortgage investment income $ 14,285,082 $ 16,485,758 $29,055,228 $33,301,625
Income from investment in subordinated
CMBS 9,792,772 2,084,527 17,986,481 3,436,444
Equity in earnings from investments 913,479 613,176 1,728,802 1,207,157
Other investment income 414,620 198,472 1,571,379 938,153
------------ ------------ ----------- -----------
25,405,953 19,381,933 50,341,890 38,883,379
------------ ------------ ----------- -----------
Expenses:
Interest expense 15,761,485 11,904,387 31,436,799 24,053,790
General and administrative 1,977,245 1,109,523 3,227,751 2,278,676
Fees to related party 69,919 855,870 241,035 1,718,129
Amortization of assets acquired in the Merger 721,521 -- 1,443,042 --
------------ ------------ ----------- -----------
18,530,170 13,869,780 36,348,627 28,050,595
------------ ------------ ----------- -----------
Income before mortgage dispositions 6,875,783 5,512,153 13,993,263 10,832,784
Mortgage dispositions:
Gains 32,679 66,933 9,724,923 1,819,176
Losses (64,421) -- (336,474) (184,897)
------------ ------------ ----------- -----------
Income before minority interests 6,844,041 5,579,086 23,381,712 12,467,063
Minority interests in net income of
consolidated subsidiary (452,516) (969,674) (5,447,062) (2,942,254)
------------ ------------ ----------- -----------
Net income $ 6,391,525 $ 4,609,412 $17,934,650 $ 9,524,809
============ ============ =========== ===========
Per share data
Net income per share $ 0.21 $ 0.17 $ 0.59 $ 0.36
============ ============ =========== ===========
Weighted average shares outstanding,
exclusive of shares held in treasury 30,407,024 26,773,071 30,407,024 26,521,755
============ ============ =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Gains on Additional Total
Par Mortgage Paid-in Undistributed Treasury Shareholders'
Value Investments Capital Net Income Stock Equity
------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 309,356 $ 16,138,649 $ 274,226,356 $ -- $ (4,970,418) $285,703,943
Net income -- -- 17,934,650 -- 17,934,650
Dividends of $0.60 per weighted
average share -- -- (309,564) (17,934,650) -- (18,244,214)
Adjustment to net unrealized gains
on mortgage investments -- (7,443,636) -- -- -- (7,443,636)
------------ ------------- ------------- ------------- ------------ ------------
Balance, June 30, 1996 $ 309,356 $ 8,695,013 $ 273,916,792 $ -- $ (4,970,418) $277,950,743
============ ============= ============= ============= ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,934,650 $ 9,524,809
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of discount and deferred financing
costs on debt 1,396,901 2,019,604
Amortization of assets acquired in the Merger 1,443,042 --
Depreciation and other amortization 450,839 270,246
Discount/premium amortization on investments (1,163,850) (760,520)
Net gains on mortgage dispositions (9,388,449) (1,634,279)
Equity in earnings from investments (265,419) (59,763)
Valuation adjustment to hedges (129,339) --
Minority interests in earnings of consolidated subsidiary 5,447,062 2,942,254
Changes in assets and liabilities:
Decrease in receivables and other assets 2,398,895 631,442
Decrease in payables and accrued expenses (725,642) (58,099)
Decrease in interest payable (595,664) (1,516,676)
----------- ------------
Net cash provided by operating activities 16,803,026 11,359,018
----------- ------------
Cash flows from investing activities:
Purchase of mortgages and advances on construction loans (260,916) (5,463,466)
Purchase of Subordinated CMBS (57,378,058) (28,151,595)
Proceeds from mortgage dispositions 86,964,909 55,455,341
Receipt of principal payments 4,271,418 3,312,522
Decrease in (payment of) deferred costs 163,281 (1,091,197)
Servicing rights contributed to Services Partnership (1,558,017) --
Other investing activities 346,003 126,645
------------ -----------
Net cash provided by investing activities 32,548,620 24,188,250
------------ ------------
<PAGE>7
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cash flows from financing activities:
Proceeds from debt issuances 72,115,401 205,979,801
Principal payments on debt obligations (81,471,535) (213,319,236)
Increase in deferred financing costs (699,984) (119,863)
Dividends (including return of capital) paid to shareholders,
including minority interests (44,426,554) (36,045,470)
Proceeds from the issuance of common stock -- 8,270,921
------------ ------------
Net cash used in financing activities (54,482,672) (35,233,847)
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,131,026) 313,421
Cash and cash equivalents, beginning of period 16,577,407 5,143,171
------------ ------------
Cash and cash equivalents, end of period $ 11,446,381 $ 5,456,592
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>8
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
CRIIMI MAE Inc. (CRIIMI MAE), a full service commercial mortgage company
structured as a self-administered real estate investment trust (REIT), invests
in government insured and guaranteed mortgages secured by multifamily housing
complexes located throughout the United States (Government Insured Multifamily
Mortgages) and in uninsured mortgage and mortgage-related investments backed by
multifamily and other commercial mortgages, such as higher yielding, higher
risk, subordinated ownership interests in bonds issued in commercial mortgage
loan securitizations (Subordinated CMBS), using a combination of debt and
equity. In making investments in uninsured mortgage and mortgage-related
investments, such as Subordinated CMBS, CRIIMI MAE and its affiliates utilize
their extensive knowledge of multifamily and commercial real estate to perform
due diligence on the underlying collateral. CRIIMI MAE will generally make
investments of this type only when satisfactory arrangements exist whereby
CRIIMI MAE can proactively monitor the performance of the collateral and where
CRIIMI MAE has substantial foreclosure/modification rights with respect to the
underlying collateral. CRIIMI MAE's principal objectives are to provide
increasing dividends to its shareholders and to enhance the value of CRIIMI
MAE's common stock.
As a result of a shareholder-approved merger transaction (the Merger) with
certain mortgage businesses affiliated with C.R.I., Inc. (CRI) (the CRI Mortgage
Businesses) on June 30, 1995, CRIIMI MAE expanded its lines of business to
include mortgage advisory services, mortgage servicing and mortgage origination.
Through the Merger and as a result of employee additions, CRIIMI MAE has a team
of mortgage, real estate and financial professionals to take advantage of the
opportunities available for expanded investments in uninsured mortgage-related
products and services.
CRIIMI MAE owns 100% of CRIIMI MAE Financial Corporation, CRIIMI MAE
Financial Corporation II and CRIIMI MAE Financial Corporation III which are
wholly owned financing subsidiaries (discussed in Notes 5 and 9), 100% of CRIIMI
MAE Management, Inc. (CRIIMI Management) and approximately 57% of CRI
Liquidating REIT, Inc. (CRI Liquidating), a finite-life, self-liquidating REIT
which owns Government Insured Multifamily Mortgages. Additionally, CRIIMI,
Inc., a wholly owned subsidiary of CRIIMI MAE, owns all of the general
partnership interests in the American Insured Mortgage Investors Funds (the AIM
Funds). The AIM Funds own mortgage investments which are substantially similar
to the Government Insured Multifamily Mortgages owned by CRIIMI MAE and CRI
Liquidating. CRIIMI, Inc. receives the general partner's share of income, loss
and distributions (which ranges among the AIM Funds from 2.9% to 4.9%) from each
of the AIM Funds. In addition, CRIIMI MAE indirectly owns a limited partnership
interest in the adviser to the AIM Funds.
CRIIMI MAE has elected to qualify as a REIT for tax purposes. To qualify
for tax treatment as a REIT under the Internal Revenue Code, CRIIMI MAE must
meet certain income and asset tests. CRIIMI MAE closely monitors its
activities, its income and its assets so as to ensure that it maintains its
qualification as a REIT.
CRIIMI MAE intends to conduct its business so as not to become regulated as
an investment company under the Investment Company Act of 1940. The Investment
Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" (Qualifying Interests). Under current interpretation by the staff
of the Securities and Exchange Commission (SEC), in order to qualify for this
exemption, the Company must maintain at least 55% of its assets directly in
Qualifying Interests. CRIIMI MAE will closely monitor its compliance with this
requirement and intends to maintain its exempt status.
<PAGE>
<PAGE>9
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Basis of Presentation
In management's opinion, the accompanying unaudited consolidated financial
statements of CRIIMI MAE, including CRI Liquidating, CRIIMI Management, CRIIMI
MAE Financial Corporation, CRIIMI MAE Financial Corporation II, CRIIMI MAE
Financial Corporation III and CRIIMI, Inc., contain all adjustments (consisting
of only normal recurring adjustments and consolidating adjustments) necessary to
present fairly the consolidated financial position of CRIIMI MAE as of June 30,
1996 and December 31, 1995, the consolidated results of its operations for the
three and six months ended June 30, 1996 and 1995 and its cash flows for the six
months ended June 30, 1996 and 1995.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. While management believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in CRIIMI MAE's Annual Report filed on Form
10-K for the year ended December 31, 1995.
3. Summary of Significant Accounting Policies
Method of Accounting
--------------------
The consolidated financial statements of CRIIMI MAE are prepared on
the accrual basis of accounting in accordance with generally accepted
accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Investments in Subordinated CMBS
--------------------------------
Income from investments in Subordinated CMBS is recognized based on
the effective interest method using the anticipated yield over the expected
life of these investments. CRIIMI MAE recognizes impairment on its
investments in Subordinated CMBS whenever it determines that the projected
yield is less than it had originally projected (or less than projected the
last time an impairment was recognized). Impairment losses are determined
by comparing the current fair value of a Subordinated CMBS to its existing
carrying amount, the difference being recognized as a loss in the current
period on the consolidated statement of income.
Reclassifications
-----------------
Certain amounts in the consolidated financial statements as of and for
the three and six months ended June 30, 1995 have been reclassified to
conform to the 1996 presentation.
Consolidated Statements of Cash Flows
-------------------------------------
Cash payments made for interest during the six months ended June 30,
1996 and 1995 were $30,635,562 and $23,550,862, respectively.
<PAGE>10
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties
Below is a summary of the related party transactions which occurred during
the three and six months ended June 30, 1996, and 1995. These items are
described further in the text which follows:
<PAGE>11
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Payments to the Adviser
- -----------------------
Annual fee - CRIIMI MAE (a)(b)(h) $ -- $ 760,912 $ -- $ 1,493,297
Annual fee - CRI Liquidating (b) 69,919(g) 94,958(g) 241,035(g) 224,832(g)
Incentive fee - CRI Liquidating (f) -- -- 568,638 --
Mortgage selection fees - CRIIMI MAE (k) -- 211,137 -- 211,137
------------ ------------- ------------ ------------
Total $ 69,919 $ 1,067,007 $ 809,673 $ 1,929,266
============ ============= ============ ============
Payments to CRI (i):
- --------------------
Expense reimbursement - CRIIMI MAE (c)(i) $ 158,940 $ 435,653 $ 387,456 $ 929,416
Expense reimbursement - CRI Liquidating (c)(j) -- 42,165 -- 111,586
------------ ------------- ------------ ------------
Total $ 158,940 $ 477,818 $ 387,456 $ 1,041,002
============ ============= ============ ============
Amounts Received or Accrued from Related Parties
- ------------------------------------------------
CRIIMI,Inc.
- -----------
Income (d) $ 434,066 $ 475,872 $ 892,030 $ 932,550
Return of capital (e) 187,650 117,921 509,488 212,131
------------ ------------- ------------ ------------
Total $ 621,716 $ 593,793 $ 1,401,518 $ 1,144,681
============ ============= ============ ============
CRI/AIM Investment Limited
Partnership $ 193,606(d) $ 175,000(d)(h) $ 386,288(d) $ 350,000(d)(h)
============ ============= ============ ============
Expense Reimbursements to CRIIMI Management
- -------------------------------------------
CRI Liquidating and the AIM Funds (c)(j) $ 75,000 $ -- $ 150,000 $ --
CRIIMI MAE Services Limited Partnership (c)(j) 425,000 -- 850,000 --
------------ ------------- ------------ ------------
$ 500,000 $ -- $ 1,000,000 $ --
============ ============= ============ ============
</TABLE>
<PAGE>12
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
(a) In connection with the Merger, effective June 30, 1995, CRIIMI MAE
became a self-administered REIT, and as of that date is no longer
required to make payments to CRI Insured Mortgage Associates Adviser
Limited Partnership (the Adviser).
(b) Included in the accompanying consolidated statements of income.
(c) Included as general and administrative expenses on the accompanying
consolidated statements of income.
(d) Included as equity in earnings from investments on the accompanying
consolidated statements of income.
(e) Included as a reduction of equity investments on the accompanying
consolidated balance sheets.
(f) Netted with gains on mortgage dispositions on the accompanying
consolidated statements of income.
(g) As a result of reaching certain specified performance goals during the
second quarter of 1996, CRI Liquidating paid deferred annual fees of
$19,721 during the three months ended June 30, 1996. CRI Liquidating
paid deferred annual fees of $128,530 and $28,467, during the six
months ended June 30, 1996 and 1995, respectively. The amount paid
for the six months ended June 30, 1996 included $86,739 paid for the
last three quarters of 1995. No deferred annual fees were paid during
the three months ended June 30, 1995.
(h) As of June 1, 1993, pursuant to the First Amendment to the CRI Insured
Mortgage Association, Inc. advisory agreement (the Advisory
Agreement), CRI guaranteed that CRIIMI MAE would receive an annual
distribution from CRI/AIM Investment Limited Partnership of $700,000.
CRIIMI MAE was granted the right to reduce the amounts paid to the
Adviser by the difference between the guaranteed $700,000 distribution
and the amount actually paid to CRIIMI MAE by CRI/AIM Investment
Limited Partnership. As such, the amounts paid to the Adviser for the
three and six months ended June 30, 1995 were reduced by $77,355 and
$154,862, respectively, which represented the difference between the
guaranteed distribution for the period and the amount actually paid to
CRIIMI MAE. This guarantee was terminated effective June 30, 1995 in
connection with the transaction in which CRIIMI MAE became a self-
administered REIT.
(i) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were
paid to CRI as reimbursement for expenses incurred by the Adviser on
behalf of CRIIMI MAE. In connection with the Merger, on June 30,
1995, CRIIMI MAE was no longer required to reimburse the Adviser, as
these expenses are now directly incurred by CRIIMI MAE. However,
pursuant to an agreement between CRIIMI MAE and CRI (the CRI
Administrative Services Agreement), CRI provides CRIIMI MAE with
certain administrative and office facility services and other
services, at cost, with respect to certain aspects of CRIIMI MAE's
business. CRIIMI MAE uses the services provided under the CRI
Administrative Services Agreement to the extent such services are not
performed by CRIIMI Management or provided by another service
provider. The CRI Administrative Services Agreement is terminable on
30 days notice at any time by CRIIMI MAE.
(j) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were
paid to CRI as reimbursement for expenses incurred by the Adviser on
behalf of CRI Liquidating and the AIM Funds. The transaction in which
CRIIMI MAE became a self-administered REIT had no impact on CRI
Liquidating's or the AIM Funds' financial statements except that the
expense reimbursements previously paid to CRI, are, effective June 30,
1995, paid to CRIIMI Management. Additionally, effective June 30,
1995, CRIIMI Management is reimbursed for its employees' time and
expenses incurred on behalf of CRIIMI MAE Services Limited Partnership
<PAGE>13
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
(the Services Partnership).
(k) Included as deferred costs on the accompanying balance sheets and
amortized over the expected mortgage life.
In addition to the above transactions, CRIIMI MAE entered into agreements
with CRI after June 30, 1995 to sublease approximately 27,200 square feet of
office space leased by CRI, at a total annual rent of approximately $544,000.
All increases in lease occupancy charges, including inflation adjustments and
expense reimbursements, will be passed through to CRIIMI MAE on a per square
foot basis. The term of the sublease runs concurrently with CRI's lease, which
expires on October 31, 1997. CRIIMI MAE may lease additional space, on an as-
needed, as-available basis. During the three and six months ended June 30,
1996, CRIIMI MAE incurred rent charges of approximately $112,000 and $224,000,
respectively, which is included in general and administrative expenses on the
accompanying consolidated statements of income.
CRIIMI MAE has entered into a deferred compensation arrangement with
William B. Dockser and H. William Willoughby (collectively, the Principals) in
the aggregate amount of $5,002,183 pursuant to which CRIIMI MAE agreed to pay
each of the Principals for services performed in connection with structuring the
Merger. CRIIMI MAE's obligation to pay the deferred compensation is limited,
with certain exceptions, to the creation of an irrevocable grantor trust for the
benefit of the Principals and to the transfer to such trust of the right to
receive such deferred compensation (the Note Receivable) in the amount of
$5,002,183. The deferred compensation is fully vested and payable only to the
extent that CRI continues to make principal payments on the Note Receivable.
However, in the event of bankruptcy or a similar event affecting CRIIMI MAE, the
remaining trust corpus would revert back to CRIIMI MAE, and the Principals would
become unsecured creditors of CRIIMI MAE. Payments of principal and interest on
the Note Receivable and the deferred compensation are payable quarterly and
terminate in 10 years. Both the Note Receivable and the deferred compensation
obligation bear interest at the prime rate (8.25% as of June 30, 1996) plus 2%
per annum. During the three and six months ended June 30, 1996, CRIIMI MAE,
through CRIIMI Management, recognized interest income of approximately $119,000
and $241,000, respectively, on the Note Receivable, which is included in other
investment income on the accompanying consolidated statements of income, and
recognized interest expense of approximately $119,000 and $241,000,
respectively, on the deferred compensation obligation, which is included in
interest expense on the accompanying consolidated statements of income. The
deferred compensation obligation and the Note Receivable are included in
Payables and accrued expenses and Receivables and other assets, respectively, on
the accompanying consolidated balance sheets as of June 30, 1996 and December
31, 1995.
Since the Merger, through one of its affiliates, the Services Partnership,
CRIIMI MAE has increased its mortgage advisory and servicing activities in
conjunction with its purchases of Subordinated CMBS by acquiring servicing
rights for the mortgage loans collateralizing these investments. These
servicing rights allow CRIIMI MAE to proactively monitor the performance of its
investments in Subordinated CMBS and provide CRIIMI MAE with substantial
foreclosure/modification rights with respect to the underlying collateral. As
of July 1, 1996 and February 1, 1996, the Services Partnership provided a
variety of servicing functions on a mortgage portfolio of approximately $4.0
billion and $2.7 billion, respectively. The servicing contracts are contributed
to the Services Partnership and increase CRIIMI MAE's interest in that
partnership. As of June 30, 1996, CRIIMI MAE held a 32% general partnership
interest in the Services Partnership. The Services Partnership provides
mortgage servicing and advisory services to third parties, CRIIMI MAE, certain
<PAGE>14
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
affiliates of CRI and the AIM Funds on a fee basis. CRIIMI MAE, through CRIIMI
Management, manages the Services Partnership as general partner.
5. Mortgage Security Collateral and Mortgages
CRIIMI MAE's consolidated investment in mortgage security collateral and
mortgages is comprised of participation certificates evidencing a 100% undivided
interest in Government Insured Multifamily Mortgages issued or sold pursuant to
programs of the Federal Housing Administration (FHA) (FHA-Insured Loans),
mortgage-backed securities guaranteed by the Government National Mortgage
Association (GNMA) (GNMA Mortgage-Backed Securities) and, to a lesser extent,
FHA-Insured Loans relating to the construction of nursing homes and intermediate
care facilities (Government Insured Construction Mortgages). Government Insured
Construction Mortgages are intended to be converted to permanent, amortizing
insured loans upon final endorsement of the mortgage by HUD. Additionally,
mortgage security collateral includes Federal Home Loan Mortgage Corporation
(Freddie Mac) participation certificates which are collateralized by FHA-Insured
Loans and GNMA Mortgage-Backed Securities, as discussed below. As of June 30,
1996, 27% of CRIIMI MAE's investment in mortgage security collateral and
mortgages (including loans which collateralize Freddie Mac participation
certificates) were FHA-Insured Loans, 71% were GNMA Mortgage-Backed securities
and 2% were Government Insured Construction Mortgages. FHA-Insured Loans, GNMA
Mortgage-Backed Securities and Government Insured Construction Mortgages are
collectively referred to as mortgages herein. As of June 30, 1996, CRIIMI MAE
had committed approximately $640,000 for advances on Government Insured
Construction Mortgages.
During the six months ended June 30, 1996, CRIIMI MAE funded advances of
approximately $261,000 on Government Insured Construction Mortgages with a
weighted average net effective interest rate of approximately 8.0%. These loans
are anticipated to convert to permanent loans over the next three months with a
maturity of 39 years.
Through its wholly owned subsidiaries and CRI Liquidating, CRIIMI MAE owns
the following mortgages directly and indirectly:
<PAGE>15
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Mortgage Security Collateral and Mortgages - Continued
<TABLE>
<CAPTION>
As of June 30, 1996
---------------------
Weighted
Average
Number of Carrying Fair Effective Weighted Average
Mortgages Value Value(a) Interest Rate Remaining Term
--------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 6 $ 18,434,360 $ 18,434,360 8.16% 36 years
CRIIMI MAE Financial Corporation 57 221,801,165 223,297,942 8.45% 32 years
CRIIMI MAE Financial Corporation II 59 251,082,437 244,330,874 7.19% 31 years
CRIIMI MAE Financial Corporation III(c) 40 168,749,963 167,817,515 8.15% 32 years
CRI Liquidating(b) 11 54,022,259 54,022,259 11.34% 26 years
--------- ------------ ------------
173 $714,090,184 $707,902,950
========= ============ ============
As of December 31, 1995
-------------------------
Weighted
Average
Number of Carrying Fair Effective Weighted Average
Mortgages Value Value(a) Interest Rate Remaining Term
--------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 6 $ 18,138,311 $ 18,138,311 8.16% 36 years
CRIIMI MAE Financial Corporation 57 222,533,271 227,923,719 8.45% 33 years
CRIIMI MAE Financial Corporation II 59 252,152,518 254,137,614 7.19% 31 years
CRIIMI MAE Financial Corporation III 46 199,603,985 203,080,637 8.36% 32 years
CRI Liquidating 22 114,685,204 114,685,204 10.67% 27 years
--------- ------------ ------------
190 $807,113,289 $817,965,485
========= ============ ============
</TABLE>
(a) The estimated fair values of CRIIMI MAE's Government Insured Multifamily
Mortgages are presented in accordance with generally accepted accounting
principles which define fair value as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. These estimated fair values, however, do not
represent the liquidation value or the market value of CRIIMI MAE. The fair
value of the Government Insured Multifamily Mortgages is based on quoted market
prices.
(b) During the six months ended June 30, 1996, CRIIMI MAE, through its
subsidiary, CRI Liquidating, disposed of 11 Government Insured Multifamily
Mortgages which constituted approximately 52% of CRI Liquidating's December 31,
1995 tax basis portfolio balance. These 11 dispositions resulted in financial
statement gains of approximately $9.7 million and tax basis gains of
approximately $14.5 million.
(c) During the six months ended June 30, 1996, there were six prepayments of
<PAGE>16
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Mortgage Security Collateral and Mortgages - Continued
Government Insured Multifamily Mortgages held by CRIIMI MAE Financial
Corporation III. These six prepayments generated net proceeds of approximately
$30 million and resulted in net losses of approximately $304,000, which are
included in losses on mortgage dispositions on the accompanying consolidated
statement of income for the six months ended June 30, 1996.
6. Investment in Subordinated CMBS
In addition to investing in Government Insured Multifamily Mortgages, the
Board of Directors has authorized CRIIMI MAE to invest in other mortgage
investments which are not federally insured or guaranteed provided that certain
requirements are met, including specific equity requirements, based on
management's perceived level of risk of the investment.
The following table summarizes information related to these investments on
an aggregate basis by pool:
<PAGE>17
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Investment in Subordinated CMBS - Continued
<TABLE>
<CAPTION>
Face Current
Amount Pass-Through Weighted
Date as of 6/30/96 Rate Average
Pool Acquired (in millions) (as of 6/30/96) Remaining Life(1)
- ---- ------------ -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Mortgage Capital
Funding, Inc.
Series 1993-C1 Dec 1994 $ 19.7 8.7% 2 years
Series 1994-MC1 Jul-Dec 1994 34.4 8.7% 7 years
Series 1995-MC1 Aug 1995 33.2 9.6% 21 years
Nomura Asset Securities
Series 1994-C3 April-Aug 1995 25.2 11.74% 15 years
Structured Mortgage
Securities Corp.
Series 1995-M1 May 1995 15.2 9.0% 15 years
Asset Securitization Corp.
Series 1995-D1 Aug 1995 30.6 7.6% 20 years
Lehman Pass-Through
Securities Inc.
Series 1994-A Oct 1995 10.3 8.6% 8 years
LB Commercial Conduit 42.9
Series 1995-C2 Nov 1995 9.5% 15 years
DLJ Mortgage Acceptance
Corporation
Series 1995-CF2 Dec 1995 61.0 8.8% 12 years
Merrill Lynch Mortgage
Investors, Inc.
Series 1995-C3 Dec 1995 90.1 8.5% 15 years
Asset Securtization Corp.
Series 1996-D2 April 1996 68.6 8.7% 17 years
Fannie Mae
Multifamily REMIC
Series 1996-M1 May 1996 17.9 6.6% 18 years
--------
Total $ 449.1
========
(1) Weighted average remaining life represents the weighted average expected life of the Subordinated CMBS prior to consideration
of losses, extensions or prepayments other than those factored in the assumed constant prepayment rate used in determining the June
30, 1996 fair value.
(2) Represents the original anticipated yield to maturity of the Subordinated CMBS, based on management's estimate of the timing
and amount of future credit losses and prepayments.
</TABLE>
<PAGE>18
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Investment in Subordinated CMBS - Continued
<TABLE>
<CAPTION>
Original Current
Amortized Amortized Anticipated Anticipated
Cost Cost Unlevered Unlevered
as of 6/30/96 as of 12/31/95 Yield to Yield to
Pool (in millions) (in millions) Maturity(2) Maturity
- ---- --------------- --------------- ------------ -----------
<S> <C> <C>
Mortgage Capital
Funding, Inc.
Series 1993-C1 $ 17.7 $ 17.4 13.0% 13.0%
Series 1994-MC1 22.2 22.1 14.1% 14.1%
Series 1995-MC1 25.4 25.6 12.2% 12.2%
Nomura Asset Securities
Series 1994-C3 21.9 22.0 12.3% 12.3%
Structured Mortgage
Securities Corp.
Series 1995-M1 9.8 9.8 12.9% 12.9%
Asset Securitization Corp.
Series 1995-D1 20.2 20.2 11.6% 11.6%
Lehman Pass-Through
Securities Inc.
Series 1994-A 6.0 6.1 13.4% 13.4%
LB Commercial Conduit
Series 1995-C2 35.5 35.5 11.2% 11.2%
DLJ Mortgage Acceptance
Corporation
Series 1995-CF2 50.8 50.7 11.0% 11.0%
Merrill Lynch Mortgage
Investors, Inc.
Series 1995-C3 69.0 69.0 11.1% 11.1%
Asset Securtization Corp.
Series 1996-D2 48.3 -- 12.4% 12.4%
Fannie Mae
Multifamily REMIC
Series 1996-M1 9.1 -- 11.7% 11.7%
---------- ----------
Total $ 335.9 $ 278.4
========== ==========
<PAGE>19
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Investment in Subordinated CMBS - Continued
The aggregate investment by the underlying rating of the Subordinated CMBS is as follows:
</TABLE>
<TABLE>
Fair Value
Face Amount as as of Amortized Cost as of
of June 30, 1996 June 30, 1996(a) (in millions)
Security Rating (in millions) % (in millions) June 30, 1996 December 31, 1995
- --------------- ---------------- -------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
BBB Rated $ 14.6 3.3% $ 13.9 $ 13.8 $ 4.0
BB Rated (b) 204.5 45.5% 171.3 180.5 155.2
B Rated (b) 145.6 32.4% 103.3 108.7 91.7
Unrated 84.4 18.8% 33.0 32.9 27.5
-------- ------ --------- -------- ---------
Total $ 449.1 100.0% $ 321.50 $ 335.90 $ 278.4
======== ====== ========= ======== =========
</TABLE>
(a) The estimated fair values of Subordinated CMBS are based on quoted market
prices.
(b) In May 1996, Fitch Investor Services, one of the rating agencies for
Subordinated CMBS, announced that it had upgraded several of the Mortgage
Capital Funding, Inc. Series 1993-C1 tranches. As a result of the upgrade,
CRIIMI MAE's investment in the B rated tranche, with a face amount of $9.1
million and an amortized cost (at June 30, 1996) of $7.8 million, was
upgraded to BB rated and CRIIMI MAE's investment in the BB rated tranche,
with a face amount of $10.6 million and an amortized cost (at June 30,
1996) of $9.9 million, was upgraded to BBB rated.
CRIIMI MAE's investment in the lower rated and unrated tranches provides
credit support to the more senior bond classes of the related commercial
securitization. Cash flow from the underlying mortgages is allocated to the
securitized tranches, with the investment grade or higher rated tranches having
a priority right to the cash flow until their investment returns are met. Then,
any remaining cash flow is allocated among the other tranches in order of their
relative seniority. To the extent there are defaults and unrecoverable losses
on the underlying mortgages, resulting in reduced cash flows, the unrated
tranche will bear this loss first. To the extent there are losses in excess of
the unrated tranche's stated right to principal and interest, then the most
subordinated rated tranches will begin absorbing losses.
Based on the timing and amount of future credit losses and prepayments
estimated by management, the weighted average anticipated yield over the
expected average life for the investments in Subordinated CMBS as of June 30,
1996 is approximately 12%. The accounting treatment required under generally
accepted accounting principles requires that the income on Subordinated CMBS be
recorded on a level yield basis given the anticipated yield to maturity on these
investments. This currently results in income which is lower for financial
statement purposes than for tax purposes. CRIIMI MAE anticipates the leveraged
return on these investments will approximate 21% over the life of the
Subordinated CMBS. This return was determined based on the anticipated yield
over the expected weighted average life of the Subordinated CMBS, which
considers, among other things, anticipated losses, net of interest expense
<PAGE>20
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Investment in Subordinated CMBS - Continued
attributable to the financing of the rated tranches at current interest rates
and borrowing amounts.
Management's anticipated returns on its investments in Subordinated CMBS
are based upon a number of assumptions that are currently subject to certain
business and economic uncertainties and contingencies, including, without
limitation, the potential lack of a liquid secondary market for Subordinated
CMBS, prevailing interest rates on the current floating-rate debt financing,
renewal of the repurchase agreements (which provided financing toward the
purchase of the rated tranches of the Subordinated CMBS) at similar terms or the
availability of alternative financing, and the timing and magnitude of credit
losses on the underlying mortgages collateralizing the Subordinated CMBS that
are a result of the general condition of the real estate market, including
competition for tenants and changes in market rental rates. As these
uncertainties and contingencies are difficult to predict and are subject to
future events that may alter these assumptions, no assurance can be given that
the anticipated yields to maturity will be achieved.
In making these investments, CRIIMI MAE and its affiliates apply their
knowledge of multifamily and other commercial mortgages to perform due diligence
on the mortgage investments collateralizing the Subordinated CMBS. This
analysis may include reviewing, to the extent available, the operating records
of the underlying real estate assets, appraisals, environmental studies, market
studies and architectural and engineering studies, and where deemed necessary,
independently developing projected operating budgets. In addition, site visits
are conducted at a majority of the properties. Further, CRIIMI MAE will
generally make investments of this type only when satisfactory arrangements
exist whereby CRIIMI MAE can proactively monitor the performance of the
collateral and where CRIIMI MAE has substantial foreclosure/modification rights
with respect to the underlying collateral. CRIIMI MAE believes that all
transactions entered into to date have had such satisfactory arrangements.
The underlying mortgages collateralizing CRIIMI MAE's investment in
Subordinated CMBS (aggregate) as of July 1, 1996 are concentrated as follows:
Property Type Geographic
------------- ----------
Multifamily 55% Texas 19%
Retail 17% California 9%
Hotel 13% Florida 7%
Mobile Homes 6% Michigan 7%
Other 9% Arizona 5%
Other 53%(1)
(1) No other individual state makes up more than 5% of the total.
Investments in uninsured mortgage and mortgage-related investments, such as
Subordinated CMBS, are expected to represent a significant component of CRIIMI
MAE's new business activity for the foreseeable future. As described in Note 9,
upon closing on the purchase of the Subordinated CMBS, CRIIMI MAE entered into a
series of repurchase agreements which provided financing to purchase the rated
tranches of the Subordinated CMBS (the unrated tranches were purchased with
equity or available cash). As of June 30, 1996, on average, approximately 87%,
77% and 72% of the respective fair values of the BBB, BB and B rated tranches
were financed, resulting in aggregate borrowings of approximately $218.3
million. See Note 9 for a further discussion of these repurchase agreements.
<PAGE>21
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Reconciliation of Financial Statement Net Income to Tax
Basis Income
Reconciliations of the financial statement net income to the tax basis
income for the three and six months ended June 30, 1996 and 1995 are
as follows:
<PAGE>22
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Reconciliation of Financial Statement Net Income to Tax
Basis Income - Continued
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Consolidated financial statement net income $ 6,391,525 $ 4,609,412 $ 17,934,650 $ 9,524,809
Adjustment due to accounting for subsidiary
as a pooling for financial statement
purposes and a purchase for tax purposes (46,130) (12,572) 2,627,641 4,447,853
Mortgage dispositions 52,970 27,637 199,707 39,155
Reamortization of investments in
Subordinated CMBS 442,127 156,993 815,147 276,627
Interest income - U.S. Treasuries 152,512 182,828 314,407 371,425
Interest expense - defeased notes (209,204) (257,365) (430,449) (526,771)
Interest expense - amortization of deferred
financing and debt issue costs (8,264) (355,100) (806,097) (869,210)
Equity in earnings from investments 69,878 32,938 254,629 65,883
Amortization of assets acquired in the Merger 721,521 -- 1,443,042 --
Other 90,920 (12,820) 40,639 (9,885)
------------ ------------ ------------ ------------
Tax basis income $ 7,657,855 $ 4,371,951 $ 22,393,316 $ 13,319,886
============ ============ ============ ============
Tax basis income per share $ 0.26 $ 0.16 $ 0.74 $ 0.50
============ ============ ============ ============
Weighted average number of shares
outstanding (for tax purposes) 30,407,024 26,888,456 30,407,024 26,621,202
============ ============ ============ ============
</TABLE>
Differences in the financial statement net income and the tax basis income
principally relate to differences in the methods of accounting for the Merger,
investments in mortgage security collateral, mortgages and Subordinated CMBS,
long-term debt, deferred financing costs, U.S. Treasury Securities, partnership
investments and the merger of the CRIIMI Funds.
<PAGE>23
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Dividends to Shareholders
For the six months ended June 30, 1996, dividends of $0.60 per share were
paid to shareholders. These dividends, which include long-term capital gains,
are as follows:
Dividend Record Date
-------- ------------------
Quarter ended March 31, 1996 $ 0.30 March 18, 1996
Quarter ended June 30, 1996 $ 0.30 June 17, 1996
--------
$ 0.60
========
CRIIMI MAE's principal objectives are to provide increasing dividends to
its shareholders and to enhance the value of CRIIMI MAE's common stock. Based
on 1996's first and second quarter results and assumptions described in CRIIMI
MAE's January 29, 1996 press release, management believes a quarterly dividend
level of at least $0.30 per share will be sustainable throughout 1996, as
compared to a quarterly dividend for the fourth quarter of 1995 of $0.235 per
share.
The base dividend estimate for 1996 assumes that no losses on Subordinated
CMBS occur in 1996. However, such losses may occur in the event of defaults on
mortgage loans, although at this time no defaults resulting in losses are
anticipated. Additionally, no additional dispositions of CRIIMI MAE's
Government Insured Multifamily Mortgages (other than mortgage prepayments to-
date and dispositions of CRI Liquidating's mortgages) are assumed to occur in
1996. However, such dispositions may occur through additional prepayments, for
example, and could result in losses and a reduction in mortgage income.
Additionally, as discussed in Note 12, although CRIIMI MAE plans to issue
additional equity during 1996, for purposes of determining the 1996 base
dividend estimate, no adjustment has been made with respect to any equity raised
in 1996.
The base dividend estimate also assumes that interest rates and CRIIMI
MAE's debt levels remain constant throughout 1996. Higher short-term interest
rates would increase borrowing costs on CRIIMI MAE's floating-rate debt.
However, such increased costs of funds would be limited due to CRIIMI MAE's
interest rate cap agreements, which hedge exposure on CRIIMI MAE's short-term,
floating-rate debt.
As discussed in Note 9, CRIIMI MAE has financed a portion of its
investments in Subordinated CMBS with short-term, floating-rate debt. If the
terms of certain of this debt are not extended or alternative financing is
unavailable, CRIIMI MAE could be forced to sell assets at a loss to pay off such
debt or, if such assets were unavailable or inadequate to pay off the debt,
there could be a substantial impact on CRIIMI MAE. However, as discussed
further in Note 9, management intends to refinance a significant portion of this
short-term, floating-rate debt with longer-term, fixed-rate financing by the end
of 1996, allowing CRIIMI MAE to better match the maturities of its assets and
liabilities and to obtain a fixed interest rate on that portion of its debt.
Additionally, in order to provide CRIIMI MAE with additional financial
flexibility, in March 1996, CRIIMI MAE entered into a three-year, $200 million
master repurchase agreement to refinance existing and/or to finance additional
investments in lower rated Subordinated CMBS (see also Note 9).
<PAGE>24
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Obligations under Financing Facilities
The following table summarizes CRIIMI MAE's debt outstanding as of June
30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
Six months ended June 30, 1996
-------------------------------------------------------------------------
Balance at Eff. rate Average Average Maturity
Type of Debt quarter end at qtr. end Balance Eff. Rate Date
- ------------ ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
FHLMC Funding Note (1) $238,614,889 7.4% $239,100,000 7.4% Sept 2031
FNMA Funding Note (2) 165,017,757 7.4% 179,400,000 7.4% March 2035
CMOs (3) 209,659,626 7.3% 210,000,000 7.3% Jan 2033
Repurchase Agreements -
Subordinated CMBS 218,343,242 6.7% 203,000,000 6.7% August 1996 -
March 1999
Bank Term Loans 10,197,880 4.1%(4) 15,500,000 4.3(4) April 1997-
Dec 1998
Working Capital Lines of Credit 4,000,000(5) 6.1% 40,000 6.1% April 1997
------------
Total $845,833,394
============
(1) As of June 30, 1996 and December 31, 1995, the face amount of the note was $247,784,875 and $248,821,009, respectively, with
unamortized discount of $9,169,986 and $9,335,538, respectively. During the six months ended June 30, 1996, discount amortization
of $165,552 was recorded as interest expense.
(2) As of June 30, 1996 and December 31, 1995, the face amount of the note was $167,679,867 and $198,394,480, respectively, with
unamortized discount of $2,662,110 and $2,893,104, respectively. During the six months ended June 30, 1996, discount amortization
of $230,994 was recorded as interest expense. Additionally, as a result of six mortgage prepayments, principal of approximately $30
million was paid down during the six months ended June 30, 1996.
(3) As of June 30, 1996 and December 31, 1995, the face amount of the note was $215,045,085 and $215,766,328, respectively, with
unamortized discount of $5,385,459 and $5,492,254, respectively. During the six months ended June 30, 1996, discount amortization
of $106,795 was recorded as interest expense.
(4) The average effective interest rate as of June 30, 1996 and December 31, 1995 includes the impact of a rate reduction agreement
which was in place from July 1995 through March 1996, providing for a reduction in the rate on a portion of the loan based on
balances maintained at the bank.
(5) The outstanding balance under the working capital line of credit was repaid during July 1996.
</TABLE>
<PAGE>25
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Obligations under Financing Facilities - Continued
<TABLE>
<CAPTION>
Year ended December 31, 1995
--------------------------------------------------------
Balance Eff. Rate Average Average
Type of Debt at year end at year end Balance Eff. Rate
- ------------ ----------- ------------ ------------ ---------
<S> <C> <C> <C>
FHLMC Funding Note (1) $239,485,471 7.4% $ 66,000,000 7.4%
FNMA Funding Note (2) 195,501,376 7.4% 8,700,000 7.4%
CMOs (3) 210,274,074 7.3% 47,300,000 7.3%
Repurchase Agreements -
Mortgages -- N/A 408,700,000 6.7%
Repurchase Agreements -
Subordinated CMBS 187,947,276 7.0% 56,500,000 7.3%
Revolving Credit Facility -- N/A 49,400,000 6.6%
Bank Term Loans 21,227,880 5.2%(4) 21,600,000 6.6%(4)
Working Capital Lines of Credit -- N/A 400,000 6.6%
------------
Total $854,436,077
============
<PAGE>26
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Obligations under Financing Facilities - Continued
CRIIMI MAE's debt matures as follows:
1996 $166,221,688
1997 40,886,483
1998 3,250,000
1999 22,182,951
2000 --
Beyond 613,292,272
------------
Total $845,833,394
============
Securitized Mortgage Obligations
- --------------------------------
CRIIMI MAE, through three wholly owned financing subsidiaries, issued
approximately $664 million (face amount) of long-term, fixed-rate debt in order
to refinance short-term, floating-rate debt during the third and fourth quarters
of 1995. Changes in interest rates will have no impact on the cost of funds or
the collateral requirements on this debt. Proceeds from the issuance of this
long-term debt, net of original issue discount, were initially applied as
follows: $557 million was used to pay down short-term debt facilities,
approximately $8.0 million was used to pay transaction costs and approximately
$80 million was invested in Subordinated CMBS.
As discussed further in Note 5, the refinancings were completed through
three separate transactions. GNMA Mortgage-Backed Securities with a fair value
of approximately $244 million as of June 30, 1996 are pledged as security for a
funding note payable to Freddie Mac, (the FHLMC Funding Note). Collateralized
Mortgage Obligations (CMOs) are collateralized by FHA-Insured Loans and GNMA
Mortgage-Backed Securities with a fair value of approximately $223 million as of
June 30, 1996. GNMA Mortgage-Backed Securities with a fair value of
approximately $168 million as of June 30, 1996 are pledged as security for a
funding note payable to the Federal National Mortgage Association (the FNMA
Funding Note).
Each of the above-mentioned transactions has been accounted for as a
financing in accordance with Financial Accounting Standards Board Technical
Bulletin 85-2. The discount on the CMOs and the Funding Notes is being
amortized on a level yield basis. Transaction costs were capitalized and are
included in deferred costs on the accompanying consolidated balance sheets as of
June 30, 1996 and December 31, 1995.
Repurchase Agreements-Subordinated CMBS
- -----------------------------------------
As of June 30, 1996, CRIIMI MAE had financed through numerous repurchase
agreements, on average, 87%, 77% and 72% of the respective fair values of the
BBB, BB and B rated tranches of Subordinated CMBS. These agreements mature
between August 1996 and March 1999. The interest rates are generally based on
the one-month London Interbank Offered Rate (LIBOR), plus a spread ranging from
1.0% to 1.5%.
On March 28, 1996, CRIIMI MAE entered into a three-year master repurchase
agreement with a lender to finance up to $200 million of additional and/or
existing investments in lower rated Subordinated CMBS. Outstanding borrowings
under this master repurchase agreement are secured by the financed Subordinated
CMBS and bear interest at CRIIMI MAE's choice of one or three-month LIBOR, plus
a spread of 1.5%. This master repurchase agreement expires on March 28, 1999.
As of June 30, 1996, borrowings of approximately $22 million were outstanding
<PAGE>27
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Obligations under Financing Facilities - Continued
under this facility.
The aforementioned repurchase agreements are secured, generally, by the
rated tranches with an aggregate fair value of approximately $289 million and
$260 million as of June 30, 1996 and December 31, 1995, respectively.
Repurchase Agreements-Mortgages and Revolving Credit Facility
- ---------------------------------------------------------------
Prior to the financings described above, CRIIMI MAE financed the purchase
of FHA-Insured Loans and GNMA Mortgage-Backed Securities through the use of two
separate master repurchase facilities with two separate lenders and a revolving
credit facility. The master repurchase facility with one lender and the
revolving credit facility were both terminated upon the completion of the 1995
refinancings described above. On April 1, 1996, a commitment of $300 million,
available under another master repurchase facility, expired in accordance with
its terms. In May 1996, CRIIMI MAE renewed this facility in an amount up to
$100 million ($20 million committed and $80 million uncommitted) for a period of
three years. Any borrowings under this facility will be secured by FHA-Insured
Loans or GNMA Mortgage-Backed Securities, and will bear interest at CRIIMI MAE's
choice of one, three- or six-month LIBOR, plus a spread of 0.75% or 0.50%,
depending on whether FHA-Insured Loans or GNMA Mortgage-Backed Securities,
respectively, are pledged as collateral.
Bank Term Loans
- ---------------
CRIIMI MAE has two reducing term loans (Bank Term Loans) with a lender. As
of July 31, 1996 and December 31, 1995, Bank Term Loan I was secured by the
value of 2,447,500 and 6,950,000 CRI Liquidating shares owned by CRIIMI MAE,
respectively, based on a requirement that collateral valued at 125% and 175% of
the outstanding balance, respectively, secure the loan. Interest is based on
CRIIMI MAE's choice of one, two or three-month LIBOR. Bank Term Loan I requires
a quarterly principal payment based on the greater of (i) the return of capital
portion of the dividend received by CRIIMI MAE on its CRI Liquidating shares
securing Bank Term Loan I or (ii) the amount necessary to bring Bank Term Loan I
to its scheduled outstanding balance at the end of such quarter. Any remaining
amounts outstanding are due by April 1, 1997.
In connection with the Merger, CRIIMI Management assumed certain debt of
the CRI Mortgage Businesses in the principal amount of $9,100,000 (Bank Term
Loan II). Bank Term Loan II is secured by certain cash flows generated by
CRIIMI MAE's direct and indirect interests in the AIM Funds and is guaranteed by
CRIIMI MAE. The loan requires quarterly principal payments of $650,000 and
matures on December 31, 1998. Interest on the loan is based on CRIIMI MAE's
choice of one, two or three-month LIBOR, plus a spread of 1.25%.
Working Capital Lines of Credit
- -------------------------------
In February 1995, CRIIMI MAE executed a $10 million working capital line of
credit with a lender, which was terminated in June 1996. Outstanding borrowings
under the line of credit were secured by shares of CRI Liquidating valued at
approximately 125% of any outstanding borrowings. No amounts were outstanding
under the line of credit as of June 30, 1996 or December 31, 1995.
In June 1996, CRIIMI MAE entered into a $15 million working capital line of
credit with a maturity date of April 30, 1997. Outstanding borrowings under the
line of credit are secured by shares of CRI Liquidating valued at 125% of any
outstanding borrowings and bear interest at one- month LIBOR, plus a spread of
.65%. As of June 30, 1996, $4 million was outstanding under this line of
<PAGE>28
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Obligations under Financing Facilities - Continued
credit, which was repaid in July 1996.
Other Debt Related Information
- ------------------------------
In January 1996, CRIIMI MAE's management adopted and the Board of Directors
approved a change in its investment policy requiring, among other things,: (1) A
maximum overall debt-to-equity ratio of 5.0 to 1.0, (2) maximum debt-to-equity
ratios for specific asset types based on management's perceived risk of those
investments and the related funding, and (3) interest rate hedge agreements in a
notional amount of at least 75% of the outstanding floating-rate debt. This
policy will enable CRIIMI MAE to continue to utilize leverage in taking
advantage of investment opportunities in the marketplace while directing and
monitoring how CRIIMI MAE funds these investments.
As previously stated, changes in interest rates will have no impact on the
cost of funds or the collateral requirements on CRIIMI MAE's fixed-rate debt,
which approximates 73% of CRIIMI MAE's current consolidated debt. Fluctuations
in interest rates will continue to impact the value on that portion of CRIIMI
MAE's investments which are not match-funded and could impact potential returns
to shareholders through increased cost of funds on the floating-rate debt in
place. The flexibility in CRIIMI MAE's leverage is dependent upon, among other
things, the levels of unencumbered assets, which are inherently linked to
prevailing interest rates and changes in the credit of the underlying asset. In
certain circumstances, including, among other things, increases in interest
rates or decreases in credit quality of the underlying asset, CRIIMI MAE would
be required to provide additional collateral in connection with its short-term,
floating-rate borrowing facilities. From time to time, CRIIMI MAE has been
required to fund such additional collateral needs. In each instance and
currently, CRIIMI MAE has had adequate unencumbered assets to meet its
operating, investing and financing requirements and management continually
monitors the levels of unencumbered collateral.
CRIIMI MAE's ability to extend or refinance debt facilities upon maturity
will depend on a number of variables including, among other things, CRIIMI MAE's
financial condition and its current and projected results from operations which
are impacted by a number of variables, including changes in interest rates. As
previously discussed, in March 1996, CRIIMI MAE entered into a three-year master
repurchase agreement to finance investments in Subordinated CMBS. Management
intends to utilize this facility to replace a portion of existing floating-rate
debt on Subordinated CMBS which is scheduled to mature over the next 12 months
and/or to finance additional investments in lower rated Subordinated CMBS.
Additionally, management intends to refinance a significant portion of its short
term, floating-rate debt with longer-term, fixed-rate financing by the end of
1996. Management continuously monitors CRIIMI MAE's overall financing and
hedging strategy in an effort to ensure that CRIIMI MAE is making optimal use of
its borrowing ability based on market conditions and opportunities.
For the six months ended June 30, 1996, the weighted average cost of
borrowing on all of CRIIMI MAE's borrowings, including amortization of discounts
and deferred financing fees of approximately $1.4 million was approximately
7.4%. As of June 30, 1996, CRIIMI MAE's debt-to-equity ratio was approximately
3.0 to 1.0. Under certain of CRIIMI MAE's existing debt facilities, CRIIMI
MAE's debt-to-equity ratio, as defined, may not exceed 5.0 to 1.0.
10. Interest Rate Hedge Agreements
CRIIMI MAE has entered into interest rate hedging agreements to partially
limit the adverse effects of rising interest rates on its floating-rate
<PAGE>29
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Interest Rate Hedge Agreements - Continued
borrowings. Interest rate caps provide protection to CRIIMI MAE to the extent
interest rates, based on a readily determinable interest rate index, increase
above the stated interest rate cap, in which case, CRIIMI MAE will receive
payments based on the difference between the index and the cap. The following
hedge agreements were in place at June 30, 1996:
<PAGE>30
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Interest Rate Hedge Agreements - Continued
</TABLE>
<TABLE><CAPTION>
Notional
Amount Effective Date Maturity Date(b) Cap Index
- ------------ -------------------- ----------------- ------ -------
<S> <C> <C> <C> <C>
$ 50,000,000 June 25, 1993 June 25, 1998 6.5000% 3M LIBOR
50,000,000 July 20, 1993 July 20, 1998 6.2500% 3M LIBOR
35,000,000 February 2, 1994 February 2, 1999 6.1250% 1M LIBOR
50,000,000 March 25, 1994 March 25, 1998 6.5000% 3M LIBOR
50,000,000 August 27, 1993 August 27, 1997 6.1250% 3M LIBOR
- ------------
$235,000,000(a)
============
(a) CRIIMI MAE's designated interest rate hedge agreements hedge CRIIMI MAE's floating-rate borrowing costs. As of June 30, 1996,
total borrowings of approximately $232.5 million are hedged by the interest rate hedge agreements.
(b) The weighted average remaining term for these interest rate cap agreements is approximately 1.9 years.
</TABLE>
<PAGE>31
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Interest Rate Hedge Agreements - Continued
In addition to the above interest rate cap agreements which are treated as
hedges against rising interest rates, CRIIMI MAE holds the following additional
interest rate caps:
<PAGE>32
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Interest Rate Hedge Agreements - Continued
<TABLE>
<CAPTION>
Notional
Amount Effective Date Maturity Date Cap Index
- ------------ -------------------- ----------------- ------ -------
<S> <C> <C> <C> <C>
$ 50,000,000 November 10, 1993 November 10, 1997 6.0000% 3M LIBOR
50,000,000 August 10, 1993 August 10, 1997 6.0000% 3M LIBOR
1,875,500(a) March 31, 1993 December 31, 1996 10.500% 3M LIBOR
- ------------
$101,875,000(b)
============
<FN>
(a) The notional amount of this hedge amortizes based on the expected pay down schedule of Bank Term Loan I.
(b) Due to the refinancings completed during 1995, these interest rate cap agreements are no longer needed to hedge interest rate
changes. These agreements are accounted for at fair value. Management expects to hold these caps and continue to account for
them at fair value until their expiration dates, or until such time as they are needed to hedge against increases in interest
rates on additional floating-rate debt.
</FN>
</TABLE>
CRIIMI MAE is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate hedge agreements should interest rates
exceed the caps. However, management does not anticipate nonperformance by any
of the counterparties. All of the counterparties have long-term debt ratings of
A+ or above by Standard and Poor's and A1 or above by Moody's. Management
believes that these hedge instruments are highly liquid. The hedges could be
sold or transferred with the consent of the counterparties. Management does not
believe that this consent would be withheld. Although none of CRIIMI MAE's
hedge instruments are exchange-traded, there are a number of financial
institutions which enter into these types of transactions as part of their day-
to-day activities.
11. Litigation
In June 1995, Edge Partners, L.P. filed a complaint in the United States
District Court for the District of Maryland against CRIIMI MAE's directors. The
complaint purported to be a derivative action on behalf of CRIIMI MAE and
alleged breach of fiduciary duty by the directors and a misleading proxy
statement in connection with the Merger. The plaintiff sought unspecified
damages, a determination that the shareholder vote in favor of the Merger should
be set aside and other relief.
The defendants filed a motion to dismiss and on December 18, 1995, the case
was dismissed with leave to refile within 30 days of receipt of a transcript of
the order. The plaintiff refiled a complaint in February 1996. The revised
complaint is a class-action suit, alleging breach of fiduciary duty by the
directors and solicitation by a misleading proxy statement in connection with
the Merger. Motions to dismiss have been filed by all the defendants.
Management believes the suit is without merit and does not expect the case to
have a material adverse financial impact on CRIIMI MAE.
12. Subsequent Event
On July 1, 1996, CRIIMI MAE issued 75,000 shares of Series A Cumulative
Convertible Preferred Stock, with a par value of $0.01 per share (the Series A
<PAGE>33
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Shares), at an aggregate price of $7,500,000. The Series A Preferred
Shares pay a dividend based on a fixed premium over three-month LIBOR and,
subject to the terms of CRIIMI MAE's Articles of Incorporation, as amended and
supplemented, are (i) convertible at the option of the holders, (ii) subject to
mandatory conversion by CRIIMI MAE and (iii) subject to redemption by CRIIMI
MAE. The liquidation preference and the redemption price on the Series A
Preferred Shares equals $100 per share, together with accrued but unpaid
dividends. The Series A Preferred Shares were purchased by a single european
institutional investor. CRIIMI MAE also acquired a put option to sell up to an
additional 75,000 Series A Preferred Shares, at a price of $100 per share, to
such investor at any time prior to July 1, 1997. On August 5, 1996, the holder
of the Series A Preferred Shares elected to exercise its right to convert 25,000
Series A Preferred Shares into 251,865 shares of common stock.
Additionally, in July 1996, CRIIMI MAE filed a preliminary prospectus
supplement with the SEC for the public offering of 2,000,000 shares of Series B
Cumulative Convertible Preferred Stock with a par value of $0.01 per share. The
public offering is expected to close in August 1996 and raise approximately $50
million.
CRIIMI MAE intends to use the net proceeds from the issuance of convertible
preferred stock (i) to acquire mortgage investments, including Subordinated
CMBS, (ii) to sponsor and/or participate in collateralized mortgage obligation
programs, and (iii) for other general corporate purposes, including working
capital.
<PAGE>34
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction and Business Strategy
- ----------------------------------
Introduction
- ------------
CRIIMI MAE Inc.'s (CRIIMI MAE) Management's Discussion and Analysis of
Financial Condition and Results of Operations contains statements that may be
considered forward looking. These statements contain a number of risks and
uncertainties as discussed herein and in CRIIMI MAE's reports filed with the
Securities and Exchange Commission that could cause actual results to differ
materially.
General
- -------
CRIIMI MAE, a full service commercial mortgage company structured as a
self-administered real estate investment trust (REIT), uses a combination of
debt and equity to invest in government insured and guaranteed mortgages secured
by multifamily housing complexes located throughout the United States
(Government Insured Multifamily Mortgages) and in uninsured mortgage and
mortgage-related investments backed by multifamily and other commercial
mortgages, such as higher yielding, higher risk, subordinated ownership
interests in bonds issued in commercial loan securitizations (Subordinated
CMBS). In making investments in uninsured mortgage and mortgage-related
investments such as Subordinated CMBS, CRIIMI MAE and its affiliates utilize
their extensive knowledge of multifamily and commercial real estate to perform
due diligence on the underlying collateral. CRIIMI MAE will generally make
investments of this type only when satisfactory arrangements exist whereby
CRIIMI MAE can proactively monitor the performance of the collateral and where
CRIIMI MAE has substantial foreclosure/modification rights with respect to the
underlying collateral. CRIIMI MAE's principal objectives are to provide
increasing dividends to its shareholders and to enhance the value of CRIIMI
MAE's common stock.
As a result of a shareholder-approved merger transaction (the Merger) with
certain mortgage businesses affiliated with C.R.I., Inc. (CRI) (the CRI Mortgage
Businesses) on June 30, 1995, CRIIMI MAE expanded its lines of business to
include mortgage advisory services, mortgage servicing and mortgage origination.
Through the Merger and as a result of employee additions, CRIIMI MAE has a team
of mortgage, real estate and financial professionals to take advantage of the
opportunities available for expanded investments in uninsured mortgage-related
products and services.
Since the Merger, through one of its affiliates, CRIIMI MAE Services
Limited Partnership (the Services Partnership), CRIIMI MAE has increased its
mortgage advisory and servicing activities in conjunction with its purchases of
Subordinated CMBS by acquiring servicing rights for the mortgage loans
collateralizing these investments. These servicing rights allow CRIIMI MAE to
proactively monitor the performance of its investments in Subordinated CMBS and
the underlying assets and provide CRIIMI MAE with substantial
foreclosure/modification rights with respect to the underlying collateral. As
of July 1, 1996 and February 1, 1996, the Services Partnership provided a
variety of servicing functions on a mortgage portfolio of approximately $4.0
billion and $2.7 billion, respectively.
During the second half of 1995, CRIIMI MAE refinanced (through three
separate transactions) a significant portion of its floating-rate debt with
match-funded, fixed-rate debt that resulted in a better matching of the
maturities of the assets financed and the related liabilities and largely
reduced the impact of short-term interest rate fluctuations on earnings. In
addition to reducing floating-rate debt, the refinancings provided CRIIMI MAE
<PAGE>35
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
with additional net proceeds of approximately $80 million which were used
primarily for investments in Subordinated CMBS. As of July 1, 1996,
approximately 73% of CRIIMI MAE's total consolidated debt had long-term, fixed-
rates and 27% had short-term, floating rates. The floating-rate debt is
currently hedged with interest rate caps. As previously discussed, management
intends to refinance a significant portion of CRIIMI MAE's short-term, floating-
rate debt with longer-term, fixed rate financing by the end of 1996.
Change in Investment Policy
- ---------------------------
In order to help CRIIMI MAE increase its income and stabilize earnings, and
to allow it to take advantage of current opportunities in the marketplace,
particularly with respect to uninsured mortgage and mortgage-related
investments, the Board of Directors adopted a new investment policy in January
1996. This policy is designed to monitor and direct how CRIIMI MAE funds its
investments in order to try to minimize the risk of loss by evaluating the
perceived levels of risk associated with various investment types. The policy
is also designed to permit a broad range of types of investments by CRIIMI MAE.
The policy states that CRIIMI MAE may invest in government insured or
uninsured assets backed by multifamily and other commercial mortgages. However,
the majority of investments must remain, on an overall basis, in mortgages and
mortgage-related assets backed by multifamily housing.
Specific investment limitations include:
o CRIIMI MAE's overall debt-to-equity ratio may not exceed 5.0 to 1.0.
o Certain specific asset types will have maximum debt-to-equity ratios.
o At least 75% of CRIIMI MAE's floating-rate debt must be hedged.
As of June 30, 1996, CRIIMI MAE's overall debt-to-equity ratio was
approximately 3.0 to 1.0 and all of its floating rate debt was hedged. Total
assets approximated $1.16 billion, 80% of which was invested in mortgages and
mortgage-related assets backed by multifamily housing.
<PAGE>36
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
1996 Strategies
- ---------------
For 1996 and beyond, CRIIMI MAE's business strategies are designed to
increase recurring earnings. Management believes the development of CRIIMI MAE
into a full-service commercial mortgage company during 1995 -- with mortgage
servicing and loan origination capabilities -- has strengthened CRIIMI MAE's
ability to keep growing.
Specific strategies for 1996 are summarized below:
o Raise additional equity capital, and invest the proceeds primarily in
uninsured assets, including Subordinated CMBS. As discussed in Note
12 of the notes to the consolidated financial statements, during July
1996, CRIIMI MAE issued 75,000 shares of Series A Cumulative
Convertible Preferred Stock, resulting in net proceeds of
approximately $7.5 million. Additionally, CRIIMI MAE has filed a
preliminary prospectus supplement for a public offering of
approximately $50 million of a second series of cumulative convertible
preferred stock, which is expected to occur in August 1996. CRIIMI
MAE intends to use the proceeds from both of these offerings to
acquire mortgage investments, including Subordinated CMBS, to sponsor
and/or participate in collateralized mortgage obligation programs and
for other corporate purposes, including working capital.
o Begin originating uninsured multifamily and commercial mortgages -- a
process that is underway.
o Begin assembling loan pools for securitization, using mortgages CRIIMI
MAE originates and/or acquires. CRIIMI MAE anticipates retaining the
subordinate bond tranches backed by these pools and servicing the
underlying loans. The senior bonds would be placed with other
investors.
o Build CRIIMI MAE's servicing business as it originates, acquires, and
securitizes assets. As discussed above, the Services Partnership's
mortgage servicing portfolio has increased from $2.7 billion as of
February 1, 1996 to $4.0 billion as of July 1, 1996.
o Continue to explore alternatives to replace short-term, floating-rate
debt with longer-term financing. As discussed in Note 9 of the notes
to the consolidated financial statements, in March 1996, in order to
provide CRIIMI MAE with additional financial flexibility, CRIIMI MAE
entered into a three-year master repurchase agreement which will be
used to replace a portion of existing floating-rate debt on
Subordinated CMBS which is scheduled to mature in the next 12 months
and/or to finance additional investments in lower rated Subordinated
CMBS. Additionally, management intends to refinance a significant
portion of its short-term, floating-rate debt with longer-term, fixed-
rate financing by the end of 1996, allowing CRIIMI to better match the
maturities of its assets and liabilities and to obtain a fixed
interest rate on that portion of its debt.
CRIIMI MAE's management believes that continued growth in income from
uninsured mortgage and mortgage-related investments, such as Subordinated CMBS,
net of related interest expense, as well as growth from its other lines of
business - mortgage origination and mortgage servicing - will increase the
recurring tax basis income and financial statement net income even though the
contribution of its subsidiary, CRI Liquidating REIT, Inc. (CRI Liquidating) (as
discussed further below) will terminate after 1997 in accordance with CRI
Liquidating's business plan. This growth in income is based on CRIIMI MAE's
<PAGE>37
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
business strategies, as previously discussed. As future events may alter these
assumptions, no assurance can be given that the business plan results will be
achieved.
Results of Operations
- ---------------------
1996 versus 1995
- ----------------
Tax Basis Income
----------------
CRIIMI MAE earned approximately $7.7 million in tax basis income for the
three months ended June 30, 1996, a 75% increase from approximately $4.4 million
for the corresponding period in 1995. CRIIMI MAE earned approximately $22.4
million in tax basis income for the six months ended June 30, 1996, a 68%
increase from approximately $13.3 million for the corresponding period in 1995.
On a per share basis, tax basis income for the three months ended June 30, 1996
increased to $0.26 per weighted average share from $0.16 per weighted average
share for the corresponding period in 1995. On a per share basis, tax basis
income for the six months ended June 30, 1996 increased to $0.74 per weighted
average share from $0.50 per weighted average share for the corresponding period
in 1995. Ordinary income increased from approximately $4.3 million for the
three months ended June 30, 1995 to approximately $7.4 million for the
corresponding period in 1996, resulting in a 56% increase on a per share basis
to $0.25 per weighted average share outstanding for the three months ended June
30, 1996 from $0.16 for the corresponding period in 1995. For the six months
ended June 30, 1996, ordinary income increased by approximately $6.1 million to
$14.0 million from $7.9 million for the corresponding period in 1995,
representing an increase of 53% on a per share basis to $0.46 per weighted
average share outstanding for the six months ended June 30, 1996 from $0.30 for
the corresponding period in 1995. Net capital gains increased from
approximately $5.4 million for the six months ended June 30, 1995 to
approximately $8.4 million for the corresponding period in 1996. On a per share
basis, net capital gains increased from $0.20 per weighted average share for the
six months ended June 30, 1995 to $0.28 for the corresponding period in 1996.
Net capital gains were insignificant during the three months ended June 30, 1996
and 1995.
The primary factors resulting in the increase in tax basis income were as
follows: Recurring income increased during the three and six months ended June
30, 1996 as compared to 1995 principally as a result of additional investments
in Subordinated CMBS made during 1995 and 1996. Also contributing to the
increase in tax basis income during these periods were increases in equity in
earnings from investments and other investment income as a result of the
mortgage servicing and advisory revenue streams acquired in the Merger during
1995 (as well as in connection with additional investments in Subordinated CMBS)
and an increase in short-term investment income. Partially offsetting these
increases in tax basis income was an increase in interest expense as a result of
additional amounts borrowed under debt facilities to acquire Subordinated CMBS,
as well as the higher rate on the long-term, fixed-rate debt. Annual and
incentive fees paid to CRIIMI MAE's Adviser decreased as a result of the
termination of the CRIIMI MAE advisory agreement in connection with the Merger.
The decrease in CRIIMI MAE's annual and incentive fees was partially offset by
an increase in general and administrative expenses as a result of the Merger and
CRIIMI MAE's growth during 1995 and 1996. The non-cash purchase accounting
amortization expense described below does not impact tax basis income. The
increase in net capital gains during the six months ended June 30, 1996 as
compared to 1995 resulted from the disposition of CRI Liquidating's assets which
were made in this year's lower long-term interest rate environment, as discussed
further below.
<PAGE>38
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Financial Statement Net Income
------------------------------
Net income for financial statement purposes was approximately $6.4 million
for the three months ended June 30, 1996, a 39% increase from approximately $4.6
million for the corresponding period in 1995. Net income for financial
statement purposes was approximately $17.9 million for the six months ended June
30, 1996, an 88% increase from approximately $9.5 million for the corresponding
period in 1995. On a per share basis, financial statement net income for the
three months ended June 30, 1996 increased to $0.21 per weighted average share
from $0.17 per weighted average share for the corresponding period in 1995. On
a per share basis, financial statement net income for the six months ended June
30, 1996 increased to $0.59 per weighted average share from $0.36 per weighted
average share for the corresponding period in 1995. Net income for financial
statement purposes increased primarily for the same reasons as tax basis income:
Greater recurring earnings during the three and six months ended June 30, 1996
as compared to 1995 principally resulting from additional investments in
Subordinated CMBS during 1995 and 1996 and higher net capital gains during the
six months ended June 30, 1996 as compared to 1995 primarily resulting from the
disposition of CRI Liquidating's assets, which were made in this year's lower
long-term interest rate environment. Partially offsetting these increases to
net income, but not affecting tax basis income, was the non-cash amortization of
assets acquired in the Merger. Those items contributing to the change in
financial statement net income are discussed below.
Mortgage Investment Income
- --------------------------
Mortgage investment income decreased approximately $2.2 million or 13% to
$14.3 million for the three months ended June 30, 1996 from $16.5 million for
the corresponding period in 1995. Mortgage investment income decreased by
approximately $4.2 million or 13% to $29.1 million for the six months ended June
30, 1996 from $33.3 million for the corresponding period in 1995. These
decreases were principally due to the disposition of CRI Liquidating's mortgage
investments in 1995 and 1996 and the prepayment of approximately $30 million of
CRIIMI MAE Financial Corporation III mortgages during the first and second
quarters of 1996.
On a consolidated basis, as of June 30, 1996 and December 31, 1995, CRIIMI
MAE or its subsidiaries owned, directly or indirectly, 173 and 190 Government
Insured Multifamily Mortgages and construction loans, respectively. As of June
30, 1996, these investments had a weighted average net effective interest rate
of approximately 8.08%, a weighted average remaining term of approximately 31
years and an aggregate fair value of approximately $708 million. These amounts
compare to a weighted average net effective interest rate of approximately
8.26%, a weighted average remaining term of approximately 31 years and an
aggregate fair value of approximately $818 million as of December 31, 1995. As
of June 30, 1996, CRIIMI MAE had committed approximately $640,000 for advances
on construction loans.
While CRIIMI MAE and its financing subsidiaries do not intend to sell any
of their mortgage investments, CRI Liquidating's business plan calls for an
orderly liquidation of its portfolio by the end of 1997. In accordance with CRI
Liquidating's business plan, in January 1996, 11 mortgages were disposed of
generating net proceeds of approximately $57 million, representing approximately
52% of the December 31, 1995 tax basis portfolio balance. The remaining
portfolio is expected to be disposed of through sales during 1997 or prepayments
or other dispositions during the remainder of 1996 and 1997.
In addition, during the six months ended June 30, 1996, there were six
prepayments of Government Insured Multifamily Mortgages held by CRIIMI MAE
Financial Corporation III. The six prepayments generated net proceeds of
<PAGE>39
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
approximately $30 million and resulted in losses of approximately $304,000 which
are included in losses on mortgage dispositions on the accompanying consolidated
statement of income for the six months ended June 30, 1996.
Income from Investments in Subordinated CMBS
- --------------------------------------------
Income from investments in Subordinated CMBS increased by approximately
$7.7 million to $9.8 million for the three months ended June 30, 1996 from $2.1
million for the corresponding period in 1995. Income from investments in
Subordinated CMBS increased by approximately $14.6 million to $18.0 million for
the six months ended June 30, 1996 from $3.4 million for the corresponding
period in 1995. These increases were a result of the acquisition of
Subordinated CMBS at purchase prices aggregating approximately $297 million
during the last three quarters of 1995 and the second quarter of 1996.
In January 1996, CRIIMI MAE's Board of Directors authorized CRIIMI MAE to
invest in other mortgage investments which are not federally insured or
guaranteed provided that specific funding requirements are met based on
management's perceived level of risk of the investment. CRIIMI MAE has reviewed
opportunities for investment in other real estate securities which complement
CRIIMI MAE's existing holdings and in the current investment climate, CRIIMI
MAE's management believes that investments in uninsured mortgages and mortgage-
related investments, such as higher yielding, higher risk Subordinated CMBS,
represent attractive investment opportunities and, as such, are expected to
represent a significant component of CRIIMI MAE's new business activity for the
foreseeable future.
Based on the timing and amount of future credit losses and prepayments
estimated by management, the anticipated yield over the expected weighted
average life for the investments in Subordinated CMBS, as of June 30, 1996, is
approximately 12%. The accounting treatment required under generally accepted
accounting principles requires that the income on Subordinated CMBS be recorded
on a level yield basis given the anticipated yield on these investments. This
currently results in income which is lower for financial statement purposes than
for tax purposes. The leveraged tax basis return on the Subordinated CMBS is
expected to approximate 23% for 1996. This return was determined based on cash
basis interest income, no defaults or unrecoverable losses, net of interest
expense attributable to the financing of the rated tranches at current interest
rates and borrowing amounts and adjusted for amortization of original issue
discount related to the Subordinated CMBS. CRIIMI MAE anticipates the leveraged
return on these investments for financial statement purposes will approximate
21% over the life of the Subordinated CMBS. This return was determined based on
the anticipated yield over the expected weighted average life of the
Subordinated CMBS, which considers, among other things, anticipated losses, net
of interest expense attributable to the financing of the rated tranches at
current interest rates and borrowing amounts.
Management's anticipated returns on the Subordinated CMBS are based upon a
number of assumptions that are currently subject to certain business and
economic uncertainties and contingencies, including, without limitation, the
potential lack of a liquid secondary market for Subordinated CMBS, prevailing
interest rates on the current floating-rate debt financing, renewal of the
repurchase agreements (which provided financing toward the purchase of the rated
tranches of the Subordinated CMBS) at similar terms or the availability of
alternative financing, and the timing and magnitude of credit losses on the
underlying mortgages collateralizing the Subordinated CMBS that are a result of
the general condition of the real estate market, including competition for
tenants and changes in market rental rates. As these uncertainties and
contingencies are difficult to predict and are subject to future events that may
alter these assumptions, no assurance can be given that the anticipated yields
<PAGE>40
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
will be achieved.
In making investments in Subordinated CMBS, CRIIMI MAE and its affiliates
apply their knowledge of multifamily and other commercial mortgages to perform
due diligence on the mortgage investments collateralizing the Subordinated CMBS.
This analysis may include reviewing the operating records of the underlying real
estate assets, appraisals, environmental studies, market studies and
architectural and engineering studies, and where deemed necessary, independently
developing projected operating budgets. In addition, site visits are conducted
at a substantial portion of the properties. Further, CRIIMI MAE will generally
make investments of this type only when satisfactory arrangements exist whereby
CRIIMI MAE can closely monitor the collateral of the pool and where CRIIMI MAE
has substantial foreclosure/modification rights with respect to the underlying
collateral. CRIIMI MAE believes that all transactions entered into to date have
had such satisfactory arrangements.
Equity in Earnings from Investments
- -----------------------------------
Equity in earnings from investments increased by approximately $300,000 or
49% to approximately $913,000 for the three months ended June 30, 1996 as
compared to approximately $613,000 for the corresponding period in 1995. Equity
in earnings from investments increased by approximately $522,000 or 43% to
approximately $1.7 million for the six months ended June 30, 1996 as compared to
approximately $1.2 million for the corresponding period in 1995. These
increases were primarily due to increases in earnings from the Services
Partnership and CRIIMI MAE Services, Inc. as a result of additional revenue
streams acquired in the Merger as well as servicing fees earned in connection
with additional investments in Subordinated CMBS.
Other Investment Income
- -----------------------
Other investment income increased by approximately $216,000 or 109% to
approximately $415,000 for the three months ended June 30, 1996 as compared to
approximately $198,000 for the corresponding period in 1995. Other investment
income increased by approximately $633,000 or 68% to $1.6 million for the six
months ended June 30, 1996 as compared to approximately $938,000 for the
corresponding period in 1995. These increases were primarily attributable to
income earned on the short term investment of CRI Liquidating's mortgage
disposition proceeds received in January 1996 pending the reinvestment in
subordinated CMBS and/or distribution to shareholders. Also contributing to
these increases was the recognition of interest income on the note receivable
from CRI which was acquired by CRIIMI MAE in connection with the Merger.
Interest Expense
- ----------------
Interest expense increased by approximately $3.9 million or 32% to $15.8
million for the three months ended June 30, 1996 from $11.9 million for the
corresponding period in 1995. Interest expense increased by approximately $7.4
million or 31% to $31.4 million for the six months ended June 30, 1996 as
compared to $24.1 million for the corresponding period in 1995. These increases
were principally a result of additional amounts borrowed in connection with the
acquisition of Subordinated CMBS during 1995 and the second quarter of 1996 and
the higher rate on the long-term, fixed-rate financings. Partially offsetting
these increases was a decrease in interest expense as a result of the expiration
of CRIIMI MAE's interest rate collars during the first and third quarters of
1995.
<PAGE>41
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Fees to Related Party
- ---------------------
Total fees to related party are comprised of annual fees and incentive fees
paid to CRI Insured Mortgage Associates Adviser Limited Partnership (the
Adviser). From inception through June 30, 1995, the Adviser received certain
fees for managing CRIIMI MAE's portfolio. In connection with the Merger,
effective June 30, 1995, CRIIMI MAE was no longer required to pay any fees to
the Adviser. The Adviser continues to receive fees for managing CRI
Liquidating's portfolio.
Total fees to related party decreased by approximately $786,000 or 92% to
approximately $70,000 for the three months ended June 30, 1996 from
approximately $856,000 for the corresponding period in 1995. Total fees to
related party decreased by approximately $1.5 million or 86% to approximately
$241,000 for the six months ended June 30, 1996 as compared to $1.7 million for
the corresponding period in 1995. These decreases were primarily the result of
the termination of CRIIMI MAE's advisory agreement in connection with the
Merger. Contributing to the decrease in fees to related party was a reduction in
the annual fees payable by CRI Liquidating resulting from its reduced asset base
during 1995 and 1996. Partially offsetting the decrease in the annual fee was
the payment by CRI Liquidating in 1996 of approximately $87,000 of deferred
annual fees related to the last three quarters of 1995 as a result of achieving
certain specified performance goals.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased by approximately $868,000 or
78% to $2.0 million for the three months ended June 30, 1996 as compared to $1.1
million for the corresponding period in 1995. General and administrative
expenses increased by approximately $949,000 or 42% to $3.2 million for the six
months ended June 30, 1996 as compared to $2.3 million for the corresponding
period in 1995. These increases were primarily due to increases in payroll and
related costs, rent, professional fees and other operating expenses as a result
of the Merger and the increasing size of CRIIMI MAE's operations.
Amortization of Assets Acquired in the Merger
- ---------------------------------------------
In connection with the Merger, CRIIMI MAE acquired certain assets, $28.9
million of which are being amortized using the straight line method over 10
years beginning June 30, 1995. Since the Merger was accounted for under the
purchase method of accounting, which resulted in recording the purchased assets
at fair value, there are significant non-cash amortization expenses related to
these assets. As a result, amortization of assets acquired in the Merger was
approximately $722,000 and $1.4 million, during the three and six months ended
June 30, 1996, respectively.
Gains/Losses on Mortgage Dispositions
- -------------------------------------
Net gains on mortgage dispositions decreased to a net loss of approximately
$32,000 for the three months ended June 30, 1996 as compared to a net gain of
approximately $67,000 for the corresponding period in 1995. Net gains on
mortgage dispositions increased by approximately $7.8 million or 474% to $9.4
million for the six months ended June 30, 1996 as compared to $1.6 million for
the corresponding period in 1995. Gains or losses on mortgage dispositions are
based on the number, carrying amounts and proceeds of mortgage investments
disposed of during the period. The proceeds realized from the disposition of a
mortgage investment are based on the net coupon rates of the specific mortgage
investments disposed of in relation to prevailing long-term interest rates at
the date of disposition. During the six months ended June 30, 1996, 11 CRI
Liquidating mortgage investments, with a weighted average net coupon rate of
<PAGE>42
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
approximately 8.2%, were disposed of resulting in financial statement gains of
approximately $9.7 million and tax basis gains of approximately $14.5 million.
This compares to the disposition of 21 CRI Liquidating mortgage investments with
a weighted average net coupon rate of approximately 7.1% during the
corresponding period in 1995, that generated net financial statement gains of
approximately $1.6 million and tax basis gains of approximately $9.5 million.
These increases were partially offset by six prepayments of CRIIMI MAE Financial
Corporation III mortgage investments during the six months ended June 30, 1996,
which resulted in financial statement losses of approximately $304,000 and tax
basis losses of approximately $104,000 as compared to the disposition of four
CRIIMI MAE mortgages during the corresponding period in 1995 resulting in
financial statement gains of approximately $55,000 and tax basis gains of
approximately $95,000.
Cash Flow
- ---------
1996 versus 1995
- ----------------
Net cash provided by operating activities increased for the six months
ended June 30, 1996 as compared to the corresponding period in 1995 primarily
due to the increase in net income, as previously discussed. Also contributing
to the increase in net cash provided by operating activities was the receipt
during the first quarter of 1996 of approximately $2.2 million, representing
assignment proceeds from the United States Department of Housing and Urban
Development related to the 1995 disposition of the defaulted mortgage on Guinn
Nursing Home.
Net cash provided by investing activities increased for the six months
ended June 30, 1996 as compared to the corresponding period in 1995 primarily as
a result of an increase in net proceeds from mortgage dispositions, as
previously discussed. Partially offsetting this increase was an increase in
investments in Subordinated CMBS from $28.2 million during the six months ended
June 30, 1995 to $57.4 million during the corresponding period in 1996.
Net cash used in financing activities increased for the six months ended
June 30, 1996 as compared to the corresponding period in 1995 primarily due to
an increase in dividends paid during the first two quarters of 1996 and receipt
of approximately $8.3 million in 1995 in connection with the issuance of common
stock. Also contributing to the increase in net cash used in financing
activities was an increase in net payments on debt obligations as a result of
the prepayment of six mortgages held by CRIIMI MAE Financial Corporation III.
<PAGE>43
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Financial Flexibility
- --------------------
CRIIMI MAE uses proceeds from long-term, fixed-rate debt refinancings,
repurchase agreements, other borrowings, a working capital line of credit,
return of capital from its investment in CRI Liquidating and issuances of stock
to meet its capital requirements. As previously discussed, CRIIMI MAE
substantially reduced the impact of changing interest rates on its financial
results through three separate refinancings during the second half of 1995.
Changes in interest rates will have no impact on the cost of funds or the
collateral requirements for approximately 73% of the debt outstanding as of July
1, 1996. Fluctuations in interest rates will continue to impact the value on
that portion of CRIIMI MAE's investments which are not match-funded and could
impact potential returns to shareholders through increased cost of funds on the
floating-rate debt in place. CRIIMI MAE has a series of interest rate cap
agreements in place in order to partially limit the adverse effects of rising
interest rates on the remaining floating-rate debt. When these cap agreements
expire, CRIIMI MAE will have interest rate risk to the extent interest rates
increase on any remaining floating-rate borrowings unless the caps are replaced
or other steps are taken to mitigate this risk. However, as previously
discussed, CRIIMI MAE's investment policy requires that at least 75% of
floating-rate debt be hedged. Additionally, management intends to refinance a
significant portion of CRIIMI MAE's floating-rate debt with longer-term, fixed-
rate financing by the end of 1996, allowing CRIIMI MAE to better match the
maturities of its assets and liabilities and to obtain a fixed interest rate on
that portion of its debt.
The flexibility in CRIIMI MAE's leverage is dependent upon, among other
things, the levels of unencumbered assets, which are inherently linked to
prevailing interest rates and changes in the credit quality of the underlying
asset. In certain circumstances, including, among other things, increases in
interest rates or decreases in credit quality of the underlying asset, CRIIMI
MAE would be required to provide additional collateral in connection with its
short-term, floating-rate borrowing facilities. From time to time, CRIIMI MAE
has been required to fund such additional collateral needs. In each instance
and currently, CRIIMI MAE has had adequate unencumbered assets to meet its
operating, investing and financing requirements, and management continually
monitors the levels of unencumbered collateral. Under certain existing debt
facilities, CRIIMI MAE's debt-to-equity ratio may not exceed 5.0 to 1.0. As
previously mentioned, as of June 30, 1996, CRIIMI MAE was in compliance with
this and other contractual requirements. Management continuously monitors
CRIIMI MAE's overall financing and hedging strategy in an effort to ensure that
CRIIMI MAE is making optimal use of its borrowing ability based on market
conditions and opportunities.
Management believes that the long-term, fixed-rate refinancings previously
discussed and the Merger have created the basis for an overall return to CRIIMI
MAE's shareholders that is less interest rate sensitive. The income which has
been derived from the Merger is primarily fee-based, in the form of servicing
fees and advisory fees. While origination fees may decline in a rising interest
rate environment, servicing fees are expected to become more stable in a rising
interest rate environment as the likelihood of prepayments or refinancings
decreases with higher rates. The potential loss of servicing fees as loans
prepay or refinance in a period of declining interest rates is expected to be
partly offset by the savings CRIIMI MAE would have on its cost of borrowing on
floating-rate debt.
<PAGE>44
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Dividends
- ---------
CRIIMI MAE's principal objectives are to provide increasing dividends to
its shareholders and to enhance the value of CRIIMI MAE's common stock. Tax
basis income, as well as net income and recurring earnings, increased for the
three and six months ended June 30, 1996 as compared to the corresponding
periods in 1995 and, as a result, dividends for the first two quarters of 1996
increased. Specifically, during the first two quarters of 1996, CRIIMI MAE
increased its quarterly dividend to $0.30 per share. This compares to dividends
of $0.225 per share paid for the first two quarters of 1995 and $0.235 per share
paid for the third and fourth quarters of 1995. Based on 1996's first and
second quarter results and assumptions described in CRIIMI MAE's January 29,
1996 press release, management believes a quarterly dividend of at least $0.30
per share will be sustainable throughout 1996.
The base dividend estimate for 1996 assumes that no losses on Subordinated
CMBS occur in 1996. However, such losses may occur in the event of defaults on
mortgage loans, although at this time no defaults resulting in losses are
anticipated. Additionally, no additional dispositions of CRIIMI MAE's
Government Insured Multifamily Mortgages (other than mortgage prepayments to-
date and dispositions of CRI Liquidating's mortgages) are assumed to occur in
1996. However, such dispositions may occur through additional prepayments, for
example, and could result in losses and a reduction in mortgage income.
Additionally, as discussed in Note 12 of the notes to the consolidated financial
statements, although CRIIMI MAE plans to issue additional equity during 1996,
for purposes of determining the 1996 base dividend estimate, no adjustment has
been made with respect to any equity raised in 1996.
The base dividend estimate also assumes that interest rates and CRIIMI
MAE's debt levels remain constant throughout 1996. Higher short-term interest
rates would increase borrowing costs on CRIIMI MAE's floating-rate debt.
However, such increased costs of funds would be limited due to CRIIMI MAE's
interest rate cap agreements, which hedge exposure on CRIIMI MAE's short-term,
floating-rate debt.
As discussed in Note 9, CRIIMI MAE has financed a portion of its
investments in Subordinated CMBS with short-term, floating-rate debt. If the
terms of certain of this debt are not extended or alternative financing is
unavailable, CRIIMI MAE could be forced to sell assets at a loss to pay off such
debt or, if such assets were unavailable or inadequate to pay off the debt,
there could be a substantial impact on CRIIMI MAE. However, as discussed
further in Note 9, management intends to refinance a significant portion of this
short-term, floating-rate debt with longer-term, fixed-rate financing by the end
of 1996, allowing CRIIMI MAE to better match the maturities of its assets and
liabilities and to obtain a fixed interest rate on that portion of its debt.
Additionally, in order to provide CRIIMI MAE with additional financial
flexibility, in March 1996, CRIIMI MAE entered into a three-year, $200 million
master repurchase agreement to refinance existing and/or to finance additional
investments in lower rated Subordinated CMBS (see also Note 9).
Although the mortgage investments held by CRIIMI MAE and its subsidiaries
yield a fixed monthly mortgage payment once purchased, the cash dividends paid
by CRIIMI MAE and by its subsidiaries may vary during each period due to several
factors. The factors which impact CRIIMI MAE's dividend include (i) the
distributions which CRIIMI MAE receives on its CRI Liquidating shares, (ii) the
level of income earned on CRIIMI MAE's or its subsidiaries' mortgage investments
depending on prepayments, defaults, etc., (iii) the level of income earned on
uninsured investments, such as Subordinated CMBS, which varies depending on
prepayments, defaults, etc. (iv) the fluctuating yields on short-term debt and
the rate at which CRIIMI MAE's LIBOR-based debt is priced, as well as the rate
<PAGE>45
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
at which dividends on its Cumulative Convertible Preferred Stock are based, (v)
the fluctuating yields in the short-term money market where the monthly mortgage
payments received are temporarily invested prior to the payment of quarterly
dividends, (vi) the yield at which principal from scheduled monthly mortgage
payments, mortgage dispositions and distributions from the AIM Funds and from
CRI Liquidating can be reinvested, (vii) variations in the cash flow received
from the AIM Funds, and (viii) changes in operating expenses. CRIIMI MAE's
dividends will also be impacted by the timing and amounts of cash flows
attributable to its new lines of business - mortgage servicing, advisory and
origination services.
REIT STATUS
- -----------
CRIIMI MAE and CRI Liquidating have qualified and intend to continue to
qualify as REITs under Sections 856-860 of the Internal Revenue Code. As REITs,
CRIIMI MAE and CRI Liquidating do not pay taxes at the corporate level.
Qualification for treatment as REITs requires CRIIMI MAE and CRI Liquidating to
meet certain criteria, including certain requirements regarding the nature of
their ownership, assets, income and distributions of taxable income. CRIIMI MAE
and CRI Liquidating, however, may be subject to tax at normal corporate rates on
net income or capital gains not distributed.
CRIIMI MAE intends to conduct its business so as not to become regulated as
an investment company under the Investment Company Act of 1940. The Investment
Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" (Qualifying Interests). Under current interpretation of the staff
of the Securities and Exchange Commission, in order to qualify for this
exemption, the Company must maintain at least 55% of its assets directly in
Qualifying Interests. CRIIMI MAE will closely monitor its compliance with this
requirement and intends to maintain its exempt status.
OTHER EVENTS
- ------------
In June 1995, Edge Partners, L.P. filed a complaint in the United States
District Court for the District of Maryland against CRIIMI MAE's directors. The
complaint purported to be a derivative action on behalf of CRIIMI MAE and
alleged breach of fiduciary duty by the directors and a misleading proxy
statement in connection with the Merger. The plaintiff sought unspecified
damages, a determination that the shareholder vote in favor of the Merger should
be set aside and other relief.
The defendants filed a motion to dismiss and on December 18, 1995, the case
was dismissed with leave to refile within 30 days of receipt of a transcript of
the order. The plaintiff refiled a complaint in February 1996. The revised
complaint is a class-action suit, alleging breach of fiduciary duty by the
directors and solicitation by a misleading proxy statement in connection with
the Merger. Motions to dismiss have been filed by all the defendants.
Management believes the suit is without merit and does not expect the case to
have a material adverse financial impact on CRIIMI MAE.
<PAGE>46
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 11 of the notes to the consolidated financial
statements of CRIIMI MAE Inc., which is incorporated herein by reference.
<PAGE>47
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Reference is made to Note 12 of the notes to the consolidated financial
statements of CRIIMI MAE Inc., which is incorporated herein by reference.
<PAGE>48
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A report on Form 8-K (Item 5), dated July 1, 1996, was filed with the
Securities and Exchange Commission on July 1, 1996 with respect to the issuance
of Series A Cumulative Convertible Preferred Stock.
The exhibits filed as part of this report are listed below:
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
<PAGE>49
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CRIIMI MAE INC.
August 6, 1996 /s/ Cynthia O. Azzara
------------------------- -------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting
Officer and Chief
Financial Officer<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON
FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,446
<SECURITIES> 1,050,014
<RECEIVABLES> 17,887
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,158,869
<CURRENT-LIABILITIES> 9,358
<BONDS> 845,833
0
0
<COMMON> 309
<OTHER-SE> 277,641
<TOTAL-LIABILITY-AND-EQUITY> 1,158,869
<SALES> 0
<TOTAL-REVENUES> 60,067
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,359
<LOSS-PROVISION> 336
<INTEREST-EXPENSE> 31,437
<INCOME-PRETAX> 17,935
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,935
<EPS-PRIMARY> .59
<EPS-DILUTED> 0
</TABLE>
