<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 September 30, 1997
------------------
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 October 24, 1997
- ---------------------------- ----------------------------------
Common Stock, $.01 par value 39,965,284
<PAGE>2
CRIIMI MAE INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - as of September 30, 1997
(unaudited) and December 31, 1996 . . . . . . . 3
Consolidated Statements of Income - for the
three and nine months ended September 30, 1997
and 1996 (unaudited) . . . . . . . . . . . . . 4
Consolidated Statement of Changes in
Shareholders' Equity - for the nine months
ended September 30, 1997 (unaudited) . . . . . 5
Consolidated Statements of Cash Flows -
for the nine months ended September 30, 1997
and 1996 (unaudited) . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . .
(unaudited) . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 31
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 41
Item 2. Changes in Securities . . . . . . . . . . . . . . 42
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 43
Signature . . . . . . . . . . . . . . . . . . . . . . . . 44
<PAGE>3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- --------------
(unaudited)
<S> <C> <C>
Assets:
Mortgage Assets:
Mortgage security collateral, at
amortized cost $ 592,237,895 $ 618,133,219
Subordinated CMBS,
($739,646,057 at amortized cost) 774,462,279 564,335,400
Mortgages, at fair value 18,748,240 72,976,503
Equity Investments 46,916,618 35,059,648
Receivables and Other Assets 74,012,943 65,774,174
Cash and cash equivalents 13,476,334 10,966,354
-------------- --------------
Total assets $1,519,854,309 $1,367,245,298
============== ==============
Liabilities:
Securitized Mortgage Obligations:
Mortgage security collateral $ 566,367,594 $ 590,222,369
Subordinated CMBS 142,000,000 142,000,000
Repurchase Agreements-Subordinated CMBS 365,569,055 241,137,588
Bank Term Loans 3,900,000 8,897,880
Payables and accrued expenses 12,510,346 11,798,073
-------------- --------------
Total liabilities 1,090,346,995 994,055,910
-------------- --------------
Minority interests in
consolidated subsidiaries 2,944,168 26,518,125
-------------- --------------
Shareholders' equity:
Convertible Preferred stock 19,280 24,900
Common stock 391,226 319,128
Net unrealized gains on
mortgage assets and IO strips 196,371 8,916,228
Additional paid-in capital 431,007,642 342,462,380
-------------- --------------
431,614,519 351,722,636
Less treasury stock, at cost-
538,635 and 538,635 shares, respectively (5,051,373) (5,051,373)
-------------- --------------
Total shareholders' equity 426,563,146 346,671,263
-------------- --------------
Total liabilities and shareholders'
equity $1,519,854,309 $1,367,245,298
============== ==============
</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 nine months ended
September 30, September 30,
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Mortgage investment income $12,169,026 $14,043,539 $37,081,104 $43,098,767
Income from Subordinated CMBS 20,414,449 9,926,577 54,694,269 27,913,058
Equity in earnings from investments 1,172,089 807,422 2,717,551 2,409,578
Other investment income 491,838 570,645 1,760,934 2,268,670
----------- ----------- ----------- -----------
34,247,402 25,348,183 96,253,858 75,690,073
----------- ----------- ----------- -----------
Expenses:
Interest expense 19,335,054 15,173,966 54,723,054 46,610,765
General and administrative 2,640,125 2,111,626 7,661,898 5,468,716
Fees to related party -- 70,569 11,468 311,604
Amortization of assets acquired in the Merger 719,391 719,391 2,158,173 2,162,433
Adjustment to hedges for valuation
and sales -- 163,795 28,250 34,456
----------- ----------- ----------- -----------
22,694,570 18,239,347 64,582,843 54,587,974
----------- ----------- ----------- -----------
Income before mortgage dispositions and 11,552,832 7,108,836 31,671,015 21,102,099
minority interest
Mortgage dispositions:
Gains 18,192 13,423 17,427,745 9,738,346
Losses (108,800) (133,862) (284,403) (470,336)
----------- ----------- ----------- -----------
Income before minority interests 11,462,224 6,988,397 48,814,357 30,370,109
Minority interests in net income of
consolidated subsidiaries (45,200) (475,245) (7,885,607) (5,922,307)
----------- ----------- ----------- -----------
Net income $11,417,024 $ 6,513,152 $40,928,750 $24,447,802
=========== =========== ==========- ===========
Preferred Dividends $ 1,417,071 $ 1,727,718 $ 4,783,936 $ 1,727,718
----------- ----------- ----------- -----------
Net income available to common shareholders $ 9,999,953 $ 4,785,434 $36,144,814 $22,720,084
==========- =========== ==========- ===========
Earnings per share:
Primary $ 0.25 $ 0.16 $ 0.98 $ 0.74
=========== =========== ========== ===========
Shares used in computing primary
earnings per share, exclusive of
shares held in treasury 39,430,142 30,818,139 37,041,282 30,604,838
=========== =========== =========== ===========
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 nine months ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Preferred Common Stock Gains on Additional Total
Stock Par Par Mortgage Paid-in Undistributed Treasury Shareholders'
Value Value Investments Capital Net Income Stock Equity
---------- ------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 24,900 $ 319,128 $ 8,916,228 $ 342,462,380 $ -- $ (5,051,373) $346,671,263
Net income -- -- -- -- 40,928,750 -- 40,928,750
Dividends paid on preferred
shares -- -- -- -- (4,783,936) -- (4,783,936)
Dividends paid on common
shares -- -- -- (2,042,140) (36,144,814) -- (38,186,954)
Conversion of preferred stock
into common stock (7,120) 20,149 -- (13,029) -- -- --
Stock options exercised -- 416 -- 413,806 -- -- 414,222
Adjustment to net unrealized gains
on mortgage investments
and IO strips -- -- (8,719,857) -- -- -- (8,719,857)
Shares issued 1,500 51,533 -- 90,186,625 -- -- 90,239,658
---------- ------------ ------------- ------------- ------------- ------------ ------------
Balance, September 30, 1997 $ 19,280 $ 391,226 $ 196,371 $ 431,007,642 $ -- $ (5,051,373) $426,563,146
========== ============ ============= ============= ============= ============ ============
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 nine months ended
September 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 40,928,750 $ 24,447,802
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of discount and deferred financing
costs on debt 2,794,541 2,090,568
Amortization of assets acquired in the Merger 2,158,173 2,162,433
Depreciation and other amortization 678,792 660,857
Discount/Premium amortization on mortgage assets 372,269 (1,816,521)
Net gains on mortgage dispositions (17,143,342) (9,268,010)
Equity in earnings from investments (812,445) (396,203)
Valuation adjustment to hedges 28,250 34,456
Minority interests in earnings of consolidated subsidiary 7,885,607 5,922,307
Changes in assets and liabilities:
Increase in receivables and other assets (6,308,685) (5,023,339)
Increase (Decrease) in payables and accrued expenses 150,835 (194,985)
Increase (Decrease) in interest payable 936,603 (872,690)
------------ ------------
Net cash provided by operating activities 31,669,348 17,746,675
------------ ------------
Cash flows from investing activities:
Purchase of Subordinated CMBS (210,521,015) (57,378,058)
Proceeds from mortgage dispositions 78,534,735 102,143,420
Servicing rights acquired and contributed to
Services Partnership (12,673,089) (1,558,017)
Receipt of principal payments 5,274,064 6,371,926
Purchase of Real Estate Owned Property (4,085,109) --
(Payment of) Decrease in deferred costs (402,003) 54,443
Purchase of mortgages and advances on construction loans (285,430) (260,916)
Distributions from Services Partnership 195,800 349,967
Other investing activities -- 189,969
------------ ------------
Net cash (used in) provided by investing activities (143,962,047) 49,912,734
------------ ------------
Cash flows from financing activities:
Proceeds from debt 280,922,714 72,160,934
Principal payments on debt obligations (186,414,743) (150,107,485)
Increase in deferred financing costs (2,587,829) (903,691)
Dividends (including return of capital) paid to shareholders,
including minority interests (67,771,342) (55,822,856)
Proceeds from the issuance of preferred stock 15,000,000 64,469,016
Proceeds from the issuance of common stock 75,653,879 71,653
------------ ------------
Net cash provided by (used in) financing activities 114,802,679 (70,132,429)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,509,980 (2,473,020)
Cash and cash equivalents, beginning of period 10,966,354 16,577,407
------------ ------------
Cash and cash equivalents, end of period $ 13,476,334 $ 14,104,387
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>7
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
CRIIMI MAE Inc. ("CRIIMI MAE or the Company") is a full service commercial
mortgage company structured as a self-administered real estate investment trust
(REIT). CRIIMI MAE's portfolio of assets consists primarily of non-investment
grade subordinated securities backed by first mortgage loans on multifamily and
other commercial real estate ("Subordinated CMBS") and interests in government
insured or guaranteed mortgages secured by multifamily housing complexes located
throughout the United States ("Government Insured Mortgage Assets").
CRIIMI MAE believes that its concentration on acquiring Subordinated CMBS
and originating commercial mortgage loans for its own securitization program,
together with its expertise as an underwriter and servicer of commercial
mortgage loans, enables the Company to take advantage of the rapid growth in the
securitization of debt backed by income-producing commercial real estate.
Before purchasing Subordinated CMBS, CRIIMI MAE and its affiliates utilize their
multifamily and commercial real estate expertise to perform due diligence on the
underlying collateral and require that certain control mechanisms, such as the
ability to monitor the performance of the underlying mortgage loans and control
of workout/foreclosure proceedings, are in place. CRIIMI MAE's principal
objectives are to enhance the value of CRIIMI MAE's capital stock and to provide
increasing dividends to its shareholders.
CRIIMI MAE owns 100% of multiple financing and operating subsidiaries
(discussed in Notes 5 and 10), and various interests in other entities which
either own or service mortgage assets.
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 and distribution requirements. CRIIMI MAE
closely monitors its activities, its income and its assets in an effort to
ensure that it maintains its qualification as a REIT.
The Company intends to conduct its business so as not to become regulated
as an investment company under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). 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"), to qualify for this exemption, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests.
The Company will generally acquire Subordinated CMBS only when such mortgage
assets are collateralized by pools of first mortgage loans, when the Company can
monitor the performance of the underlying mortgage loans through loan management
and servicing rights, and when the Company has appropriate workout/foreclosure
rights with respect to the underlying mortgage loans. When such arrangements
exist, CRIIMI MAE believes that the related Subordinated CMBS constitute
Qualifying Interests for purposes of the Investment Company Act. Therefore,
CRIIMI MAE believes that it should not be required to register as an "investment
company" under the Investment Company Act as long as it continues to invest
primarily in such Subordinated CMBS and/or in other Qualifying Interests.
However, if the SEC or its staff were to take a different position with respect
to whether CRIIMI MAE's Subordinated CMBS constitute Qualifying Interests, the
Company could be required to modify its business plan so that it would not meet
the requirements for registering as an investment company or to register as an
investment company, either of which may adversely affect the Company.
<PAGE>8
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 REIT, Inc. ("CRI
Liquidating"), CRIIMI MAE Management Inc. ("CRIIMI Management"), CRIIMI MAE
Financial Corporation, CRIIMI MAE Financial Corporation II, CRIIMI MAE Financial
Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI MAE Holdings Inc., CRIIMI MAE
Holdings L.P. 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 September 30,
1997 and December 31, 1996, the consolidated results of its operations for the
three and nine months ended September 30, 1997 and 1996 and its cash flows for
the nine months ended September 30, 1997 and 1996.
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 recommended 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, 1996.
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.
<PAGE>9
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
Reclassifications
-----------------
Certain amounts in the consolidated financial statements as of and for
the three and nine months ended September 30, 1996 have been reclassified
to conform to the 1997 presentation.
Subordinated CMBS
-----------------
CRIIMI MAE has the intent and ability to hold its Subordinated CMBS
until maturity. Consequently, these mortgage assets are classified as Held
to Maturity and are carried at amortized cost (except for Interest Only
(IO) strips, discussed below). For GAAP purposes, CRIIMI MAE recognizes
income from Subordinated CMBS using the effective interest method, using
the anticipated yield over the projected life of the investment. Changes
in estimated yields are due to revisions in estimates of future credit
losses, losses incurred and actual prepayment speeds. Changes in estimated
yield resulting from prepayments are recognized over the remaining life of
the investment with recognition of a cumulative catch-up at the date of
change from the original investment date. CRIIMI MAE recognizes impairment
on its Subordinated CMBS whenever it determines that the current estimate
of expected future credit losses, exceeds future credit losses as
originally projected. Impairment losses are determined by comparing the
fair value of a Subordinated CMBS to its current carrying amount, the
difference being recognized as a loss in the current period in the
consolidated statement of income if the fair value is less than amortized
cost. If future credit loss estimates are increased and the fair value of
the related Subordinated CMBS is in excess of its carrying amount then the
yield is adjusted to reflect the revised losses on a prospective basis.
Reduced estimates of credit losses are recognized as an adjustment to the
estimated yield over the remaining life of the Subordinated CMBS.
CRIIMI MAE also holds commercial mortgage backed securities which pay
interest only and are treated for financial statement purposes as
Subordinated CMBS. The IO strips are classified as Available for Sale and
are therefore carried at fair value. For GAAP purposes, CRIIMI MAE
recognizes income using the effective interest method, using the
anticipated yield over the projected life of the investment. The amortized
cost basis is then marked to market with any gain or loss accounted for
through the equity section. CRIIMI MAE recognizes impairment whenever it
determines that the present value of the expected cash flow stream
discounted at the risk free rate for an instrument with comparable duration
is less than the amortized cost basis. Impairment losses are recognized as
a loss in the current period in the consolidated statement of income
thereby establishing a new cost basis in the IO strip.
<PAGE>10
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
Receivables and Other Assets
----------------------------
Receivables and Other Assets primarily include merger related costs,
deferred financing costs and interest receivables. Additionally, included
in Receivables and Other Assets is Real Estate Owned (REO) property
acquired through foreclosure that will be held for the long-term. In June
1997, CRIIMI MAE acquired a real estate property in a foreclosure sale from
a CMBS trust. CRIIMI MAE also serves as the special servicer and owns a
portion of the subordinated tranches in the same trust. As of September
30, 1997, CRIIMI MAE's investment in REO property totaled approximately
$4.1 million. REO property acquired through foreclosure is recorded at
fair value on the date of foreclosure. Such assets will be evaluated for
impairment by the Company when events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. At such
time, if the expected future undiscounted cash flows from the property are
less than the cost basis, the assets will be marked down to fair value.
Costs relating to development and improvement of property are capitalized,
provided that the resulting carrying value does not exceed fair value.
Costs relating to holding the assets are expensed.
Interest Rate Protection Agreements
-----------------------------------
CRIIMI MAE acquires interest rate protection agreements to reduce its
exposure to interest rate risk. The costs of such agreements which qualify
for hedge accounting are amortized over the interest rate agreement term.
To qualify for hedge accounting, the interest rate protection agreement
must meet two criteria: (1) the debt to be hedged exposes CRIIMI MAE to
interest rate risk and (2) the interest rate protection agreement reduces
CRIIMI MAE's exposure to interest rate risk. In the event that interest
rate protection agreements are terminated, the associated gain or loss is
deferred over the remaining term of the agreement, provided that the
underlying hedged asset or liability still exists. Amounts to be paid or
received under interest rate protection agreements are accrued currently
and are netted with interest expense for financial statement presentation
purposes. Additionally, in the event that interest rate protection
agreements do not qualify as hedges, such agreements are reclassified to be
investments accounted for at fair value, with any gain or loss included as
a component of income.
Consolidated Statements of Cash Flows
-------------------------------------
Cash payments made for interest during the nine months ended September
30, 1997 and 1996 were $50,991,910 and $46,142,510, respectively.
Earnings per Share
------------------
Primary earnings per share is computed by deducting preferred
dividends from net income in order to determine net income available to
common shareholders. This amount is then divided by the weighted average
common stock shares and dilutive common stock equivalents outstanding
during the period. The common stock equivalents arise from the Company's
stock options which were assumed to be exercised at the average common
stock market price during the period.
New Accounting Statements
-------------------------
During 1996, the Financial Accounting Standards Board (FASB) issued
SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB
<PAGE>11
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
Statement No. 125" ("FAS 125"). This statement defers the applicability of
FAS 125 to repurchase agreements, dollar rolls, securities lending and
certain other transactions that occur after December 31, 1997. CRIIMI MAE
believes the deferral of this aspect of FAS 125 will have no material
impact on its financial statements.
In February 1997, FASB issued SFAS No. 128 "Earnings per Share" ("FAS
128"). FAS 128 changes the requirements for calculation and disclosure of
earnings per share. This statement eliminates the calculation of primary
earnings per share and requires the disclosure of basic earnings per share
and diluted earnings per share. Under these provisions, CRIIMI MAE would
have basic earnings per share of $0.26 and $0.16 for the three months ended
September 30, 1997 and 1996, respectively; and $1.00 and $0.75 for the nine
months ended September 30, 1997 and 1996, respectively. Diluted earnings
per share would reflect $0.26 and $0.19 for the three months ended
September 30, 1997 and 1996, respectively, and $0.97 and $0.77 for the nine
months ended September 30, 1997 and 1996, respectively.
During 1997, FASB issued SFAS No. 129 "Disclosure of Information about
Capital Structure" ("FAS 129"). FAS 129 continues the existing
requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. CRIIMI MAE does not
anticipate a significant impact to its current disclosures.
During 1997, FASB Issued SFAS No. 130 "Reporting Comprehensive Income"
("FAS 130"). FAS 130 states that all items that are required to be
recognized under accounting standards as components of comprehensive income
are to be reported in the statement of income. This would include net
income as currently reported by CRIIMI MAE adjusted for unrealized gains
and losses related to CRIIMI MAE mortgages and IO strips accounted for as
"available for sale". Net unrealized gains and losses on mortgage assets
and IO strips are currently reported in the shareholders' equity section of
the balance sheet. FAS 130 is effective beginning January 1, 1998.
4. Transactions with Related Parties
Below is a summary of the related party transactions which occurred during
the three and nine months ended September 30, 1997 and 1996. These items are
described further in the text which follows:
<PAGE>12
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
<TABLE><CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AMOUNTS RECEIVED OR ACCRUED FROM RELATED PARTIES
- ------------------------------------------------
CRIIMI,Inc.
- -----------
Income (c) $ 407,647 $ 435,617 $ 1,214,932 $ 1,327,647
Return of capital (d) 614,332 75,232 1,064,428 584,720
------------ ------------ ------------ ------------
Total $ 1,021,979 $ 510,849 $ 2,279,360 $ 1,912,367
============ ============ ============ ============
CRI/AIM Investment Limited
Partnership (d) $ 165,797 $ 185,637 $ 501,628 $ 571,925
============ ============ ============ ============
Capital Hotel Group(h) $ 20,826 $ -- $ 20,826 $ --
============ ============ ============ ============
Expense Reimbursements to CRIIMI Management(b)
- -------------------------------------------
CRI Liquidating and the AIM Funds $ 70,858 174,415 $ 220,477 $ 324,415
CRIIMI MAE Services Limited Partnership -- 704,442 -- 1,554,442
------------ ------------- ------------ ------------
$ 70,858 $ 878,857 $ 220,477 $ 1,878,857
============ ============= ============ ============
PAYMENTS TO CRI:
- --------------------
Expense reimbursement - CRIIMI MAE
Management Inc. (g) $ 90,483 $ 142,389 $ 294,662 $ 529,845
============ ============ ============ ============
PAYMENTS TO THE ADVISER
- -----------------------
Annual fee - CRI Liquidating (a)(f) $ -- $ 70,569 $ 11,468 $ 311,604
Incentive fee - CRI Liquidating (e) -- -- 958,081 568,638
------------ ------------ ------------ ------------
Total $ -- $ 70,569 $ 969,549 $ 880,242
============ ============ ============ ============
<FN>
(a) Included in the accompanying consolidated statements of income as fees to related party.
(b) Included as general and administrative expenses on the accompanying consolidated statements of income.
(c) Included as equity in earnings from investments on the accompanying consolidated statements of income.
(d) Included as a reduction of equity investments on the accompanying consolidated balance sheets.
(e) Netted with gains on mortgage dispositions on the accompanying consolidated statements of income.
(f) As a result of reaching the carryover CRIIMI I target yield during the third quarter of 1996, CRI Liquidating paid
deferred annual fees of $19,905 during the three months ended September 30, 1996. Liquidating paid deferred annual fees
of $12,726 and $148,435, during the nine months ended September 30, 1997 and 1996, respectively. The amount paid for the
nine months ended September 30, 1996 included $86,739 paid for the last three quarters of 1995. Due to the disposition of
the remaining CRI Liquidating mortgages during the first quarter of 1997, no annual fees were paid during the second or
third quarters of 1997.
(g) 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.
(h) Included as a reduction of net income earned from Real Estate Owned property which is included in other investment income
<PAGE>13
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
on the accompanying consolidated statements of income.
</FN>
</TABLE>
CRIIMI MAE Services Limited Partnership ("Services Partnership") provides
certain servicing functions for approximately $11 billion of commercial mortgage
assets as of October 10, 1997. These arrangements provide fee income to
Services Partnership, and CRIIMI MAE believes these servicing arrangements
enable the Company to better monitor the pool of mortgage loans securing its
Subordinated CMBS and control workout or foreclosure proceedings, thereby
partially mitigating the risk of owning Subordinated CMBS. The servicing rights
are contributed to the Services Partnership and increase CRIIMI MAE's interest
in that partnership. As of September 30, 1997, the general partnership interest
represented a 62% interest in the Services Partnership. CRIIMI MAE, through
CRIIMI Management, manages the Services Partnership as general partner.
5. Mortgage Assets - Mortgage Security Collateral and Mortgages
CRIIMI MAE's consolidated portfolio of mortgage security collateral and
mortgages is comprised of FHA-Insured Loans and GNMA Mortgage-Backed Securities.
Additionally, mortgage security collateral includes Federal Home Loan Mortgage
Corporation (Freddie Mac) participation certificates which are collateralized by
GNMA Mortgage-Backed Securities, as discussed below. As of September 30, 1997,
approximately 21% of CRIIMI MAE's investment in mortgage security collateral and
mortgages were FHA-Insured Loans and approximately 79% were GNMA Mortgage-Backed
Securities (including loans which collateralize Freddie Mac participation
certificates). FHA-Insured Loans and GNMA Mortgage-Backed Securities are
collectively referred to herein as mortgages.
Through its wholly owned subsidiaries and CRI Liquidating, CRIIMI MAE owns
the following mortgages directly and indirectly:
<PAGE>14
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Mortgage Assets - Mortgage Security Collateral and Mortgages -
Continued
<TABLE><CAPTION>
As of September 30, 1997
-------------------------
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 (b) 5 $ 18,748,240 $ 18,748,240 8.02% 35 years
CRIIMI MAE Financial Corporation(b) 51 194,889,122 199,753,986 8.39% 31 years
CRIIMI MAE Financial Corporation II(b) 59 248,220,044 250,270,436 7.21% 30 years
CRIIMI MAE Financial Corporation III(b) 37 149,128,729 153,171,421 8.06% 32 years
--------- ------------ ------------
152 $610,986,135 $621,944,083
========= ============ ============
As of December 31, 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 5 $ 18,527,970 $ 18,527,970 8.09% 35 years
CRIIMI MAE Financial Corporation 55 206,803,142 209,693,241 8.41% 31 years
CRIIMI MAE Financial Corporation II 59 249,969,567 247,126,393 7.19% 30 years
CRIIMI MAE Financial Corporation III 39 161,360,510 162,003,486 8.08% 32 years
CRI Liquidating(c) 11 54,448,533 54,448,533 11.3% 25 years
--------- ------------ ------------
169 $691,109,722 $691,799,623
========= ============ ============
(a) The estimated fair values of CRIIMI MAE's 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 nine months ended September 30, 1997, there were six prepayments of mortgages held by CRIIMI MAE and its financing
subsidiaries. These prepayments generated net proceeds of approximately $22 million and resulted in net financial statement losses
of approximately $252,000, which are included in losses on mortgage dispositions on the accompanying consolidated statement of
income for the nine months ended September 30, 1997.
(c) In January 1997, the Liquidating Company sold its remaining 11 mortgages, generating net proceeds of approximately $54 million
which resulted in financial statement and tax basis gains of approximately $14 million.
</TABLE>
6. Mortgage Assets - Subordinated CMBS
In addition to holding Government Insured Mortgage Assets, CRIIMI MAE has
also purchased other mortgage assets which are not federally insured or
guaranteed.
<PAGE>15
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
The following table summarizes information related to these other mortgage
assets on an aggregate basis by pool:
<TABLE><CAPTION>
Original Current
Estimated Estimated
Unleveraged Unleveraged
Yield to Yield to
Pool(5) Maturity (1) Maturity (2)
- ------------ ------------ ------------
<S> <C> <C>
Mortgage Capital Funding, Inc.
Series 1993-C1(4) 13.0% 13.9%
Series 1994-MC1 13.9% 13.9%
Series 1995-MC1 12.2% 12.1%
Series 1997-MC1 10.2% 10.2%
Nomura Asset Securities Corp.
Series 1994-C3 12.1% 12.2%
Lehman Pass-Through Securities Inc.
Series 1994-A 13.4% 13.4%
Structured Mortgage Securities Corp.
Series 1995-M1 12.4% 12.5%
Fannie Mae Multifamily REMIC
Series 1996-M1 11.7% 11.7%
LB Commercial Conduit
Series 1995-C2 11.2% 11.2%
Series 1996-C2 11.8% 11.8%
DLJ Mortgage Acceptance Corp.
Series 1995-CF2 11.0% 11.0%
Series 1996-CF2 11.8% 11.8%
Asset Securitization Corp.
Series 1995-D1 11.5% 11.5%
Series 1995 - MDIV 9.6% 9.6%
Series 1996-D2 12.4% 12.4%
Series 1996-D3 11.9% 11.8%
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C3 11.1% 11.1%
Series 1996-C2 11.9% 11.9%
Series 1997-C1 9.5% 9.5%
First Union-Lehman Brothers Commercial
Series 1997-C1 11.3% 11.3%
Morgan - Wells Fargo
Series 1997 - WFI 10.2% 10.2%
Weighted Average 11.4%(3) 11.4%(3)
(1) Represents the original estimated unleveraged yield over the expected life
<PAGE>16
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
(calculated as of the acquisition date) of the related Subordinated CMBS, based
on management's estimate of the timing and amount of future credit losses and
prepayments of the underlying mortgage loans.
(2) Unless otherwise noted, changes in the current estimated yield to maturity
from that originally estimated are primarily the result of changes in payoff
assumptions relating to mortgage collateral. As of September 30, 1997, CRIIMI
MAE has not incurred any losses on Subordinated CMBS, nor has the performance of
the underlying collateral caused CRIIMI MAE to adjust its original loss
estimates.
(3) Represents the estimated weighted average unleveraged yield over the
expected average life of the Company's Subordinated CMBS portfolio as of the
date of acquisition and September 30, 1997, respectively.
(4) In July 1997, Fitch Investor Services upgraded the ratings of Mortgage
Capital Funding Inc's Series 1993-C1 Class D and Class E from BBB and BB to AA-
and BB+, respectively.
(5) As of October 10, 1997, CRIIMI MAE serviced a total CMBS pool of $11
billion. Approximately 1% of the total CMBS pool is specially serviced by
CRIIMI MAE, of which, .5% of the loans are specially serviced due to payment
default and the remainder is specially serviced due to non-payment default.
</TABLE>
The aggregate investment by the underlying rating of the Subordinated CMBS
(except for IO strips shown below) is as follows:
<PAGE>17
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
<TABLE>
<CAPTION>
Face Amount Fair Value
as of as of Amortized Cost as of
September 30, 1997 September 30, 1997(a) (in millions)
Security Rating(c) (in millions) % (in millions) September 30, 1997 December 31, 1996
- --------------- ------------------- -------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
AA- $ 10.6 1.0 $ 10.6 $ 10.5 $ --
BBB 4.0 0.3 4.3 4.0 14.2
BB 476.2 41.8 425.7 368.0 307.8
BB+ 9.0 0.8 9.0 8.7 --
BB- 32.0 2.8 27.1 25.7 --
B 345.2 30.4 261.4 223.3 175.0
B- 42.6 3.7 24.5 20.7 8.3
Unrated 218.6 19.2 87.7 78.7 59.0
-------- ------ --------- -------- ---------
Total $1,138.2 100.0 $ 850.3 $ 739.6 (b) $ 564.3
======== ====== ========= ======== =========
</TABLE>
(a) The estimated fair values of Subordinated CMBS are based on dealer quoted
market prices or an average of market quotes.
(b) During the nine months ended September 30, 1997, CRIIMI MAE purchased a
portion of Subordinated Tranches from five separate pools (excluding IO strips)
that have a combined face value of approximately $342 million, and purchase
price aggregating approximately $176 million. Additionally, through October
20,1997, CRIIMI MAE purchased approximately $42 million face value of
Subordinated CMBS for a purchase price of approximately $48 million. By early
November 1997, the Company expects to close on the purchases of additional CMBS,
at a purchase price of approximately $80 million and a face value of
approximately $100 million.
The aggregate investment by the underlying rating of the IO strips of
Subordinated CMBS held by CRIIMI MAE is as follows:
<PAGE>18
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
<TABLE><CAPTION>
Current
Notional Amount Fair Value Estimated
as of as of Amortized Cost as of Unleveraged
September 30, 1997(a) September 30, 1997(b) (in millions) Yield to
Security Rating (in millions) (in millions) September 30, 1997 December 31, 1996 Maturity
- --------------- ------------------ ---------------- ------------------ ----------------- -----------
<S> <C> <C> <C> <C> <C>
AAA $ 40.6 $ 7.2 $ 7.3 $ -- 7.6%
B 38.7 27.6 27.6 -- 10.4%
------ ------ ------ -----
$ 79.3 $ 34.8 $ 34.9(c) $ --
====== ====== ====== =====
</TABLE>
(a) The notional amounts of IO strips are calculated based on the principal
amount from which the pass-through rates are allocated.
(b) The estimated fair values of IO strips are based on dealer quoted market
prices.
(c) During the nine months ended September 30, 1997, CRIIMI MAE purchased IO
strips for approximately $35 million.
The Subordinated CMBS tranches owned by CRIIMI MAE provide credit support
to the more senior tranches of the related commercial securitization. Cash flow
from the underlying mortgages generally is allocated first to the senior
tranches, with the most senior tranche having a priority right to cash flow.
Then, any remaining cash flow is allocated generally 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 most subordinate tranche will be the first to bear this loss. To the
extent there are losses in excess of the most subordinate tranche's stated right
to principal and interest, then the remaining tranches will bear such losses in
order of their relative subordination.
The accounting treatment required under generally accepted accounting
principles requires that the income on Subordinated CMBS be recorded based on
the effective interest method using the anticipated yield over the expected life
of these mortgage assets. This currently results in income which is lower for
financial statement purposes than for tax purposes. Based on the timing and
amount of future credit losses and prepayments estimated by management, the
estimated weighted average unleveraged yield over the expected average life of
CRIIMI MAE's Subordinated CMBS for financial statement purposes as of September
30, 1997 was approximately 11.4%.
CRIIMI MAE's estimated returns on its Subordinated CMBS are based upon a
number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples of these include the prevailing
interest rates on that portion of the Subordinated CMBS which has been financed
with floating rate debt, interest payment shortfalls due to delinquencies on the
underlying mortgage loans, the ability to renew repurchase agreements and the
terms of any such renewed agreements and the availability of alternative
financing. Further examples include the timing and magnitude of credit losses
on the mortgage loans underlying the Subordinated CMBS that are a result of the
general condition of the real estate market (including competition for tenants
and their related credit quality) and changes in market rental rates.
In making acquisitions of Subordinated CMBS, CRIIMI MAE applies its
experience in underwriting multifamily and other commercial real estate to
<PAGE>19
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
perform extensive due diligence on the properties collateralizing the loans
underlying the Subordinated CMBS. The Company's employees have broad experience
in underwriting and servicing various types of performing and nonperforming
income-producing real estate, including multifamily, retail and hotel
properties. CRIIMI MAE "re-underwrites" or reviews a significant portion of the
mortgage loans in a prospective pool by reviewing historical and current
operating records of the underlying real estate assets, appraisals,
environmental studies, market studies and architectural and engineering studies,
all to independently assess the stabilized performance level of the underlying
properties. In addition, the Company conducts site visits at the properties
that represent significant properties in a pool. Other site visits are
conducted by third parties to ensure that all the properties are visited. The
Company stresses the adjusted net operating incomes of the properties to
simulate certain recessionary scenarios and applies market or greater
capitalization rates to assess loan quality. Further, CRIIMI MAE will generally
purchase Subordinated CMBS only when satisfactory arrangements exist which
enable it to closely monitor the underlying mortgage loans and provide CRIIMI
MAE with appropriate workout/foreclosure rights with respect to the underlying
mortgage loans due to Services Partnership's status as special servicer. CRIIMI
MAE believes that all transactions entered into have had such satisfactory
arrangements.
As of October 10, 1997, the mortgage loans underlying CRIIMI MAE's
Subordinated CMBS portfolio were secured by properties of the types and at the
locations identified below:
Property Type Percentage(3) Geographic(1) Percentage(3)
- ------------- ------------ ------------ -------------
Multifamily 40% Texas 17%
Retail 25% California 14%
Hotel 15% Florida 8%
Office 9% Georgia 5%
Other 11% Other(2) 56%
(1) No significant concentration by region.
(2) No other individual state makes up more than 5% of the total.
(3) Based on a percentage of the total unpaid principal balance of the
underlying loans.
Uninsured mortgage and mortgage-related assets, such as Subordinated CMBS,
are expected to represent a significant component of CRIIMI MAE's new business
activity for the foreseeable future. Upon closing on the purchase of the
Subordinated CMBS, CRIIMI MAE, generally, enters into repurchase agreements
which provide financing to purchase the rated tranches of the Subordinated CMBS
(the unrated tranches are purchased with cash), until such time as CRIIMI MAE is
able to refinance the short-term, floating-rate debt with longer-term, fixed-
rate debt (see Note 10 for a discussion of financing). Generally, when
purchasing Subordinated CMBS, approximately 75% and 70% of the respective fair
values of the BB and B rated tranches are financed through repurchase
agreements. As of September 30, 1997, repurchase agreements in the amount of
approximately $366 million were outstanding related to the Subordinated CMBS.
Additionally, as of September 30, 1997, securitized mortgage obligations related
to Subordinated CMBS were outstanding in the amount of $142 million, which were
issued as a result of refinancing a portion of repurchase agreements on
Subordinated CMBS (see also Note 10 for a discussion of this refinancing).
<PAGE>20
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 nine months ended September 30, 1997 and 1996 are as follows:
<PAGE>21
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 nine months ended
September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Consolidated financial statement net income $ 11,417,024 $ 6,513,152 $ 40,928,750 $ 24,447,802
Adjustment due to accounting for subsidiary
as a pooling for financial statement
purposes and a purchase for tax purposes -- (52,346) (2,132,614) 2,575,295
Mortgage dispositions 62,338 104,644 154,188 304,351
Reamortization of Subordinated CMBS 1,640,613 481,761 4,278,965 1,296,908
Amortization and other interest expense adjustments (237,927) (103,679) (1,177,085) (1,025,818)
Equity in earnings from investments (90,760) 159,320 351,529 413,949
Capital gain on installment sale -- 179,954 -- 499,442
Amortization of assets acquired in the Merger 719,391 719,391 2,158,173 2,162,433
Other (8,977) 156,179 1,447 (122,670)
------------ ------------ ------------ ------------
Tax basis income $ 13,501,702 $ 8,158,376 $ 44,563,353 $ 30,551,692
============ ============ ============ ============
Dividends paid on preferred shares (1,417,071) (1,727,718) (4,783,936) (1,727,718)
------------ ------------ ------------ ------------
Tax basis income available to
common shareholders $ 12,084,631 $ 6,430,658 $ 39,779,417 $ 28,823,974
============ ============ ============ ============
Tax basis income per share:
Recurring income before gains from CFR -
primary $ 0.31 $ 0.21 $ 0.88 $ 0.67
Capital gain from CFR - Primary -- -- 0.21 0.27
------------ ------------ ------------ ------------
Total tax basis income per share - Primary $ 0.31 $ 0.21 $ 1.09 $ 0.94
============ ============ ============ ============
Weighted Average Shares - Primary 38,583,857 30,906,271 36,391,281 30,574,654
============ ============ ============ ============
</TABLE>
Differences in the financial statement net income and the tax basis income
available to common shares principally relate to differences in the methods of
accounting for the merger of the CRI Mortgage Businesses, Subordinated CMBS,
amortization of certain deferred costs and the merger of the CRIIMI Funds.
<PAGE>22
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Dividends to Common Shareholders
For the nine months ended September 30, 1997, dividends of $1.05 per share
were paid to common shareholders. These dividends, which included long-term
capital gains, are as follows:
Dividend Record Date
-------- --------------
Quarter ended March 31, 1997 $ 0.35 March 20, 1997
Quarter ended June 30, 1997 $ 0.35 June 20, 1997
Quarter ended September 30, 1997 $ 0.35 September 19, 1997
--------
$ 1.05
========
In March 1997, CRIIMI MAE completed an underwritten public offering of
5.069 million common shares at a price to the public of $15 5/8 per share. The
net offering proceeds were approximately $75 million. These proceeds were used
to temporarily reduce repurchase agreement financing pending the purchase of
additional Subordinated CMBS (as discussed in Note 6).
In October 1997, CRIIMI MAE successfully completed an offering of 1.236
million common shares at an offering price of $16 1/4 per share, which resulted
in net offering proceeds of approximately $20 million. These proceeds were used
to temporarily reduce repurchase agreement financing pending the purchase of
Subordinated CMBS (as discussed in Note 6).
9. Preferred Stock
CRIIMI MAE's charter authorizes the issuance of up to 25,000,000 shares of
preferred stock, of which 150,000 shares have been classified as Series A
Preferred Shares, 3,000,000 shares have been classified as Series B Preferred
Shares and 300,000 shares have been classified as Series C as of September 30,
1997.
As of March 31, 1997, the holder of the Series A Preferred Shares had
converted all the Series A Preferred Shares into shares of common stock and no
Series A Shares were outstanding. Dividends paid on the Series A Preferred
Shares totaled $50,848 for the three months ended March 31, 1997. No dividends
were paid on the Series A Preferred Shares for the subsequent periods.
During the nine months ended September 30, 1997, 636,994 Series B Preferred
Shares were converted into 1,455,137 shares of common stock, resulting in
1,778,006 Series B Preferred Shares outstanding as of September 30, 1997.
Dividends paid and accrued on Series B Preferred Shares totaled $4,733,088 for
the nine months ended September 30, 1997.
In March 1997, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company has the right to sell, and such investor
is obligated to purchase, up to 300,000 shares of a Series C cumulative
convertible preferred stock through June 1998 at a price of $100 per share. The
preferred stock will be convertible into shares of common stock at the option of
the holders and is subject to redemption by CRIIMI MAE. On September 23, 1997,
150,000 shares were issued under this agreement, resulting in gross proceeds of
approximately $15 million. These proceeds were used to fund purchases of
Subordinated CMBS (as discussed in Note 6).
<PAGE>23
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities
The following table summarizes CRIIMI MAE's debt outstanding as of
September 30, 1997 and December 31, 1996:
<PAGE>24
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
<TABLE><CAPTION>
Nine months ended September 30, 1997
-----------------------------------------------------------------------------
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>
Securitized Mortgage Obligations:
FHLMC Funding Note (1) $ 236,271,402 7.4% 236,995,688 7.4% Sept 2031
FNMA Funding Note (2) 145,735,125 7.3% 152,031,256 7.3% March 2035
CMOs (3) 184,361,067 7.3% 190,244,710 7.3% Jan 2033
Subordinated CMBS(4) 142,000,000 7.7% 142,000,000 7.7% May 1998 -
March 2016
Repurchase Agreements -
Subordinated CMBS 365,569,055 7.0% 229,842,021 6.9% December 1997 -
Sept 2000
Bank Term Loan 3,900,000 1.7%(5) 5,589,083 2.3% Dec 1998
--------------
Total $1,077,836,649
==============
</TABLE>
<TABLE><CAPTION>
Year ended December 31, 1996
--------------------------------------------------------
Balance Eff. Rate Average Average
Type of Debt at year end at year end Balance Eff. Rate
- ------------ ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Securitized Mortgage Obligations:
FHLMC Funding Note (1) $237,708,781 7.4% $238,700,000 7.4%
FNMA Funding Note (2) 157,607,340 7.3% 169,500,000 7.4%
CMOs (3) 194,906,248 7.3% 207,800,000 7.3%
Subordinated CMBS (4) 142,000,000 7.6% 4,300,000 7.6%
Repurchase Agreements -
Subordinated CMBS 241,137,588 6.8% 193,500,000 6.8%
Bank Term Loans 8,897,880 3.1%(5) 12,300,000 3.9%
------------
Total $982,257,837
============
<PAGE>25
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
(1) As of September 30, 1997 and December 31, 1996, the face amount of the note was $245,015,755 and $246,708,610, respectively,
with unamortized discount of $8,744,353 and $8,999,829, respectively. During the nine months ended September 30, 1997 and 1996,
discount amortization of $255,476 and $249,831, respectively, were recorded as interest expense.
(2) As of September 30, 1997 and December 31, 1996, the face amount of the note was $148,201,031 and $160,250,349, respectively,
with unamortized discount of $2,465,906 and $2,643,009, respectively. During the nine months ended September 30, 1997 and 1996,
discount amortization of $177,103 and $338,864, respectively, were recorded as interest expense. Additionally, as a result of two
mortgage prepayments, principal of approximately $11.2 million was paid down through September 1997.
(3) As of September 30, 1997 and December 31, 1996, the face amount of the note was $189,227,481 and $200,035,759, respectively,
with unamortized discount of $4,866,414 and $5,129,511, respectively. During the nine months ended September 30, 1997 and 1996,
discount amortization of $263,097 and $160,927, respectively, were recorded as interest expense. Additionally, as a result of four
mortgage prepayments, principal of approximately $10.8 million was paid down through September 1997.
(4) Balance represents face amount of notes, as the issuance did not include any bond discount.
(5) The effective interest rate as of September 30, 1997 and December 31, 1996 includes the impact of a rate reduction agreement
which was in place from July 1995 through September 30,1997, providing for a reduction in the rate on a portion of the loan based on
balances maintained at the bank.
</TABLE>
Securitized Mortgage Obligations - Subordinated CMBS
- ----------------------------------------------------
In December 1996, CRIIMI MAE, through a wholly owned financing subsidiary,
issued three classes of fixed-rate bonds in an aggregate principal amount of
$142 million to refinance short-term, floating-rate debt which had been used to
finance the acquisition of Subordinated CMBS. The three classes of bonds issued
are collateralized by $449 million in aggregate face amount of Subordinated CMBS
evidencing direct or indirect interests in 12 separate segregated pools of
commercial and multifamily mortgage loans and/or participations and other
certificated interests in individual commercial and multifamily mortgage loans.
A portion of the remaining bonds issued in connection with the refinancing, with
an aggregate face amount of $307 million, were retained by affiliates of CRIIMI
MAE. These bonds have maturities matching those of the underlying collateral.
Through this transaction, CRIIMI MAE obtained a higher overall weighted
average credit rating for its securitized mortgage obligations than the weighted
average credit rating on the individual Subordinated CMBS that collateralize
this debt. Also, in conjunction with this refinancing, CRIIMI MAE obtained
repurchase agreement financing from two lenders in the aggregate amount of up to
$99 million. Proceeds from the issuance of these bonds and the additional
repurchase agreements were applied as follows: approximately $215 million was
used to pay down short-term, floating-rate repurchase agreements, approximately
$4 million was used to pay transaction costs and approximately $22 million was
made available for other corporate purposes.
Securitized Mortgage Obligations - Mortgage Security Collateral
- ---------------------------------------------------------------
During late 1995, 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. 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 originally applied as follows:
approximately $557 million was used to pay down short-term, floating-rate debt
facilities, approximately $8 million was used to pay transaction costs and
approximately $80 million was used to purchase Subordinated CMBS.
<PAGE>26
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
As discussed further in Note 5, the refinancings were completed through
three separate transactions. GNMA Mortgage-Backed Securities with a fair value
of approximately $250.3 million as of September 30, 1997 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
$199.8 million as of September 30, 1997. GNMA Mortgage-Backed Securities with a
fair value of approximately $153.2 million as of September 30, 1997 are pledged
as security for a funding note payable to the Federal National Mortgage
Association (the FNMA Funding Note and, together with the FHLMC Funding Note,
the Funding Notes).
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 are 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
September 30, 1997 and December 31, 1996.
Repurchase Agreements-Subordinated CMBS
- -----------------------------------------
As previously discussed, when purchasing Subordinated CMBS, CRIIMI MAE
generally finances, through repurchase agreements, approximately 75% and 70% of
the respective fair values of the BB and B rated tranches of Subordinated CMBS.
These repurchase agreements are either provided by the issuer or depositor of
the CMBS pool or through master repurchase agreements, as discussed below. As
of September 30, 1997, the repurchase agreements on Subordinated CMBS have
maturity dates ranging from December 1997 to September 2000 and have interest
rates that are generally based on the one-month London Interbank Offered Rate
(LIBOR), plus a spread ranging from 1.0% to 1.5%.
In September 1997, CRIIMI MAE entered into a three-year master assignment
agreement with a lender to finance up to $200 million ($100 million of which is
committed) 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. As of September 30, 1997, approximately
$31.9 million in borrowings were outstanding under this facility.
In addition, in early 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. As of September 30, 1997 and December 31, 1996,
approximately $116 million and $168 million, respectively, in borrowings were
outstanding under this facility. During the fourth quarter 1997, CRIIMI MAE
expects to amend this agreement to provide for up to $300 million in secured
borrowings and to extend the term to December 2000.
The aforementioned repurchase agreements are secured by the rated tranches
with an aggregate fair value of approximately $596 million as of September 30,
1997 and $348 million as of December 31, 1996. The repurchase agreements are
generally executed through a sale of securities with a simultaneous agreement to
repurchase them in the future at the same price plus a contracted rate of
interest. If the counterparty to the repurchase agreement defaults on its
obligation to sell the securities back to CRIIMI MAE, then CRIIMI MAE could
suffer an economic loss. At September 30, 1997, CRIIMI MAE had repurchase
agreements with German American Capital Corporation, Lehman Brothers Commercial
Paper, First Union National Bank of North Carolina and Nomura Bermuda, Ltd.
<PAGE>27
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
which have such counterparty credit risk.
Repurchase Agreements and Revolving Credit Facility -
Government Insured Mortgages
- -----------------------------------------------------
In May 1996, CRIIMI MAE renewed a financing facility with a lender 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. No amounts were borrowed
during 1996 or the nine months ending September 30, 1997 under this facility.
Bank Term Loans
- ---------------
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. The current borrowing as of September 30, 1997 is
$3.9 million. 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 Line of Credit
- ------------------------------
In December 1996, CRIIMI MAE entered into a $30 million unsecured working
capital line of credit provided by two lenders with a termination date of
December 31, 1998, and was increased by an additional $10 million in September
1997 (for a three month period). Outstanding borrowings under this line of
credit bear interest at one-month LIBOR, plus a spread of 1.30%. No amounts
were outstanding under the line of credit as of September 30, 1997 and December
31, 1996.
Loan Origination Program Agreement
- ----------------------------------
In July 1996, CRIIMI MAE entered into a $200 million mortgage loan
origination program agreement with Citicorp Real Estate, Inc. ("Citicorp"). The
origination program is designed to create pools of multifamily and commercial
mortgage loans, either through origination or acquisition, of requisite size and
composition to facilitate the securitization of such pools through the issuance
of commercial mortgage obligations (CMO). Citicorp will fund a substantial
portion of the mortgage loans under the origination program. CRIIMI MAE will
service the mortgage loans and will facilitate any securitization of the loans.
In connection with any such securitization, CRIIMI MAE anticipates retaining the
Subordinated CMBS backed by these pools and an interest-only strip of the
underlying mortgage loan payments, placing the senior tranches with other
investors and additionally retaining the right to act as master and special
servicer with respect to substantially all of the pool of underlying mortgage
loans.
Other Debt Related Information
- ------------------------------
In June 1997, CRIIMI MAE's management adopted and the Board of Directors
approved a change in CRIIMI MAE's mortgage asset acquisition policy requiring,
among other things: (1) maximum overall debt-to-equity ratio of 5.0 to 1.0, (2)
changes to the maximum debt-to-equity ratios for specific asset types based on
<PAGE>28
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
management's perceived risk of those assets and the related funding, (3)
interest rate protection agreements in a notional amount of at least 75% of the
outstanding floating-rate debt and (4)a new asset class for real estate assets.
This policy enables CRIIMI MAE to continue to utilize leverage in taking
advantage of mortgage asset acquisition opportunities while directing and
monitoring how CRIIMI MAE funds its purchases of Subordinated CMBS and other
mortgage assets.
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 66% of CRIIMI MAE's consolidated debt as of September 30,
1997. Fluctuations in interest rates will continue to impact the value on that
portion of CRIIMI MAE's mortgage assets 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 CRIIMI MAE's cap
agreements expire, CRIIMI MAE will have interest rate risk to the extent
interest rates increase on any 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. 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, changes in market spreads, or decreases in credit
quality of underlying assets, CRIIMI MAE would be required to provide additional
collateral in connection with its short-term, floating-rate borrowing
facilities. From time to time, the Company has been required to fund such
additional collateral needs. In each instance and currently, the Company 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. As previously discussed, in September
1997 and in early 1996, CRIIMI MAE entered into master repurchase agreements
with two different lenders to finance investments in rated Subordinated CMBS.
Management intends to utilize these facilities 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 rated Subordinated
CMBS. 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 nine months ended September 30, 1997, CRIIMI MAE's weighted average
cost of borrowing, including amortization of discounts and deferred financing
fees of approximately $2.8 million, was approximately 7.58%. As of September
30, 1997, CRIIMI MAE's debt-to-equity ratio was approximately 2.5 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.
11. Interest Rate Hedge Agreements
CRIIMI MAE has entered into interest rate protection ("Caps") agreements to
partially limit the adverse effects of rising interest rates on its floating-
<PAGE>29
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Interest Rate Hedge Agreements - Continued
rate 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. None of
CRIIMI MAE's Caps are held for trading purposes. As of September 30, 1997,
CRIIMI MAE held Caps with a notional amount of approximately $435 million ($50
million of which will expire in the fourth quarter of 1997). The remaining $385
million of Caps are used to hedge current variable rate debt and variable rate
debt expected to be incurred throughout the year to fund the Company's planned
acquisition of Subordinated CMBS.
<PAGE>30
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Interest Rate Hedge Agreements - Continued
<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 November 10, 1993 November 10, 1997 6.0000% 3M LIBOR
100,000,000 April 8, 1997 April 10, 2000 6.6875% 1M LIBOR
100,000,000 September 22, 1997 September 22, 2000 6.6563% 1M LiBOR
- ------------
$435,000,000(a)
============
(a) CRIIMI MAE's designated interest rate protection agreements hedge CRIIMI MAE's floating-rate borrowing costs. As of September
30, 1997 total borrowings of approximately $369 million are hedged by the interest rate cap agreements.
(b) The weighted average remaining term for these interest rate cap agreements is approximately 1.6 years.
</TABLE>
CRIIMI MAE is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate protection 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 Caps are highly liquid. The Cap 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 Caps 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.
12. Litigation
In June 1995, Edge Partners, L.P. (the Plaintiff), derivatively on behalf
of CRIIMI MAE, filed a Derivative Complaint in the District Court of Maryland,
Southern Division. This complaint was dismissed in December 1995. The
Plaintiff filed a First Amended Class and Derivative Complaint (the Complaint)
in February 1996. The Complaint names as defendants each of the Directors who
served on the board at the time of the Merger and CRIIMI MAE as a nominal
defendant. Each of the Directors has an indemnity from CRIIMI MAE.
On October 6, 1997, the Company and the individual defendants reached a
tentative agreement with the plaintiff to settle the case. The terms of the
settlement require court approval, which has not been obtained. Under the terms
of the proposed settlement, the Company will neither make or receive any
payments as a result of the settlement, but will make, upon court approval,
certain disclosures and adopt a non-binding policy sought by the plaintiff.
<PAGE>31
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 or the Company") 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 other reports
filed with the Securities and Exchange Commission that could cause actual
results to differ materially.
General
- -------
CRIIMI MAE is a full service commercial mortgage company structured as a
self-administered real estate investment trust (REIT). CRIIMI MAE's portfolio of
assets consists primarily of non-investment grade subordinated securities backed
by first mortgage loans on multifamily and other commercial real estate
("Subordinated CMBS") and interests in government insured or guaranteed
mortgages secured by multifamily housing complexes located throughout the United
States ("Government Insured Mortgage Assets"). CRIIMI MAE believes that its
concentration on acquiring Subordinated CMBS, together with its expertise as an
underwriter and servicer of commercial mortgage loans, enables the Company to
take advantage of the rapid growth in the securitization of debt backed by
income-producing commercial real estate. Before purchasing Subordinated CMBS,
CRIIMI MAE and its affiliates utilize their multifamily and commercial real
estate expertise to perform due diligence on the underlying collateral and
require that certain control mechanisms, such as the ability to monitor the
performance of the underlying mortgage loans, and control of workout/foreclosure
proceedings, are in place. CRIIMI MAE's principal objectives are to provide
increasing dividends to its shareholders and to enhance the value of CRIIMI
MAE's capital 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 real estate and financial professionals to take advantage of the
opportunities available for expanded acquisition of uninsured mortgage and
mortgage-related products and services.
CRIIMI MAE conducts its mortgage loan servicing and advisory operations
through its affiliate, CRIIMI MAE Services Limited Partnership (the "Services
Partnership"). As of October 10, 1997, the Services Partnership was responsible
for certain servicing functions on a mortgage loan portfolio of approximately
$11 billion, as compared to approximately $4.0 billion as of September 30, 1996.
CRIIMI MAE has increased its mortgage advisory and servicing activities through
its purchases of Subordinated CMBS by acquiring certain servicing rights for the
mortgage loans collateralizing the Subordinated CMBS. CRIIMI MAE has been
awarded Master Servicing assignments this year on three CMBS portfolios totaling
2.2 billion. The addition of Master Servicing to the Company's portfolio
administration program provides an additional revenue stream and gives the
Company greater supervision over the mortgage loans that back a securitization.
CRIIMI MAE will generally purchase Subordinated CMBS only when satisfactory
arrangements exist which enable it to closely monitor the underlying mortgage
loans and provide CRIIMI MAE with appropriate workout/foreclosure rights with
respect to the underlying mortgage loans due to its status as Special Servicer
or Master Servicer. CRIIMI MAE believes that all transactions entered into to
date have had such satisfactory arrangements.
<PAGE>32
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
1997 Strategies
- ---------------
For the remainder of 1997 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 since 1995 -- with
mortgage servicing and loan origination capabilities -- has strengthened CRIIMI
MAE's opportunities for continued growth.
Specific strategies adopted for 1997, and for the future are summarized
below:
o Raise additional capital and use the proceeds primarily to purchase
additional Subordinated CMBS:
-----------------------------------------------------------
From March 1997 through early October 1997, the Company raised a total
of $110 million, the proceeds of which have primarily been used to
purchase Subordinated CMBS. During March 1997, CRIIMI MAE completed a
public offering of common stock resulting in net equity proceeds of
approximately $75 million. In September 1997, CRIIMI MAE issued a
cumulative convertible preferred stock resulting in net equity
proceeds of approximately $15 million. Additionally, in October 1997,
CRIIMI MAE completed an offering of common stock which resulted in net
proceeds of approximately $20 million. Proceeds from these offerings
were used temporarily to pay-down repurchase agreement financing
pending the purchase of additional Subordinated CMBS.
During the fourth quarter of 1997, CRIIMI MAE anticipates raising
additional financing, the proceeds of which are expected to be
utilized for the purchase of Subordinated CMBS and/or to sponsor or
participate in collateralized mortgage obligation programs.
o Purchase additional Subordinated CMBS:
-------------------------------------
Initially, CRIIMI MAE expected to purchase at least $250 million of
Subordinated CMBS during 1997 using a combination of debt and equity.
However, due to an increase in acquisition opportunities, CRIIMI MAE
increased its anticipated Subordinated CMBS purchases for the year
1997 to at least $400 million. Through October 1997, the Company has
purchased Subordinated CMBS with an aggregate face value of
approximately $384 million and an aggregate purchase price of
approximately $259 million using a combination of debt and equity.
o Increase CRIIMI MAE's mortgage servicing portfolio and
responsibilities:
------------------------------------------------------
CRIIMI MAE has increased its mortgage servicing portfolio primarily
through the purchase of additional Subordinated CMBS. Additionally,
as previously discussed, CRIIMI MAE has been awarded Master Servicing
assignments this year on three CMBS portfolios aggregating $2.2
billion and expects to continue to grow this line of business through
CMBS acquisitions and its own loan origination program.
o Expand CRIIMI MAE's commercial mortgage origination program:
-----------------------------------------------------------
In June 1997, CRIIMI MAE expanded its commercial mortgage origination
capabilities with the launch of its "no-lock" loan program. The
fixed-rate program allows borrowers the flexibility to prepay loans at
any time. As part of this program, at the time of securitization, the
Company expects to retain the Subordinated CMBS portion of these pools
and the interest-only tranche of the underlying mortgage loan
<PAGE>33
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
payments, as well as retain the right to act as master and special
servicer with respect to the entire pool of underlying mortgage loans,
thereby further increasing its servicing portfolio. The first
securitization is expected to occur in early 1998. As of October
1997, CRIIMI MAE has closed loans totaling approximately $44 million
and locked interest rates on loans of approximately $130 million in
conjunction with the Citicorp loan origination program. Additionally,
CRIIMI MAE has opened four origination offices to facilitate the
program growth.
o Continue to explore alternatives that provide the Company
with more financial flexibility:
---------------------------------------------------------
During September 1997, the Company entered into a new three-year
master assignment agreement with a lender to finance up to $200
million of additional and/or existing lower rated subordinated CMBS.
During the fourth quarter of 1997, CRIIMI MAE expects to amend its
existing master repurchase agreement, entered into in September 1996,
to provide for up to $300 million in secured borrowings and extend its
term to December 2000. Additionally, during mid-1998, the Company
intends to enter into a refinancing similar to the transaction
completed in December 1996 which match funded a significant portion of
floating-rate debt and generated excess capital for mortgage asset
purchases.
CRIIMI MAE believes that these strategies will result in continued growth
in income from uninsured mortgage assets, particularly Subordinated CMBS, as
well as growth from its mortgage servicing and origination operations. As
future events may alter these assumptions, no assurance can be given that these
strategies will succeed.
Results of Operations
- ---------------------
1997 versus 1996
- ----------------
Tax Basis Income
----------------
CRIIMI MAE earned approximately $12.1 million in tax basis income available
to common shareholders for the three months ended September 30, 1997, an 88%
increase from approximately $6.4 million for the corresponding period in 1996.
CRIIMI MAE earned approximately $39.8 million in tax basis income for the nine
months ended September 30, 1997, a 38% increase from approximately $28.8 million
for the corresponding period in 1996. On a primary share basis, income before
gains from dispositions from CRI Liquidating ("recurring income") for the three
months ended September 30, 1997 increased to $0.31 per share from $0.21 per
share for the corresponding period in 1996. On a primary share basis, tax basis
income for the nine months ended September 30, 1997 increased to $1.09 per
weighted average share from $0.94 for the corresponding period in 1996, of which
$0.88 and $0.67 per share, respectively, represented recurring income.
The primary factor resulting in the net increase in tax basis recurring
income during the three and nine months ended September 30, 1997 as compared to
the corresponding periods in 1996 was the net earnings associated with CRIIMI
MAE's growing portfolio of Subordinated CMBS. Partially offsetting this
increase to tax basis income was increases in general and administrative
expenses as further discussed under Financial Statement Net Income and a
decrease in mortgage interest earned due to the prepayment of certain CRIIMI MAE
mortgages during 1997 and 1996 and the sale of CRI Liquidating's mortgage
investments pursuant to its business plan.
<PAGE>34
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 $11.4 million
for the three months ended September 30, 1997, a 75% increase from approximately
$6.5 million for the corresponding period in 1996. Net income for financial
statement purposes was approximately $40.9 million for the nine months ended
September 30, 1997, a 67% increase from approximately $24.4 million for the
corresponding period in 1996. On a primary earnings per share basis, financial
statement net income for the three months ended September 30, 1997 increased to
$0.25 per weighted average common share from $0.16 per weighted average common
share for the corresponding period in 1996, all of which was recurring income.
On a per share basis, financial statement net income for the nine months ended
September 30, 1997 increased to $0.98 per weighted average common share from
$0.74 per weighted average common share for the corresponding period in 1996, of
which $0.71 and $0.56 per share, respectively, was recurring income.
Descriptions of the significant changes in financial statement net income are
discussed below.
Mortgage Income
- ---------------
Mortgage income decreased by approximately $1.8 million or 13% to $12.2
million for the three months ended September 30, 1997 from $14.0 million for the
corresponding period in 1996. Mortgage investment income decreased by
approximately $6.0 million or 14% to $37.1 million for the nine months ended
September 30, 1997 from $43.1 million for the corresponding period in 1996.
These decreases were principally due to the disposition of CRI Liquidating's
mortgages (according to its business plan) in 1996 and 1997. Also contributing
to the decrease in mortgage income was the prepayment of mortgages held by
CRIIMI MAE and its wholly owned subsidiaries. The prepayments aggregated
approximately $22 million and $51.9 million of amortized cost for the nine
months ended September 30, 1997 and the year ended December 31, 1996,
respectively.
While CRIIMI MAE and its financing subsidiaries do not intend to sell any
of their mortgages, 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 1997, its remaining 11 mortgages were
disposed of generating net proceeds of approximately $54 million. On April 23,
1997, CRI Liquidating Shareholders approved the adoption of a plan of complete
liquidation and dissolution of CRI Liquidating, which is intended to be
completed by mid-1998.
Income from Subordinated CMBS
- -----------------------------
Income from Subordinated CMBS increased by approximately $10.5 million or
106% to $20.4 million for the three months ended September 30, 1997 from $9.9
million for the corresponding period in 1996. Income from Subordinated CMBS
increased by approximately $26.8 million or 96% to $54.7 million for the nine
months ended September 30, 1997 from $27.9 million for the corresponding period
in 1996. These increases were the result of the acquisition of Subordinated
CMBS at purchase prices aggregating approximately $211 million during the second
and third quarters of 1997 and $285 million during 1996, $228 million of which
were purchased during the fourth quarter of 1996.
Generally accepted accounting principles requires that the income on
Subordinated CMBS be recorded based on the effective interest method using the
anticipated yield over the expected life of these mortgage assets. This
currently results in income which is lower for financial statement purposes than
for tax purposes. Based on the timing and amount of future credit losses and
certain other assumptions estimated by management, as discussed below, the
<PAGE>35
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
estimated weighted average unleveraged yield over the expected average life of
CRIIMI MAE's Subordinated CMBS for financial statement purposes as of September
30, 1997 was approximately 11.4%. Although there can be no assurance, the
estimated weighted average leveraged yield over the expected life of CRIIMI
MAE's existing Subordinated CMBS for financial statement purposes as of
September 30, 1997 is approximately 20%. 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.
CRIIMI MAE's estimated returns on its Subordinated CMBS are based upon a
number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples of these uncertainties and
contingencies include the prevailing interest rates on that portion of the
Subordinated CMBS which has been financed with floating rate debt, interest
payment shortfalls due to delinquencies on the underlying mortgage loans, the
ability to renew repurchase agreements and the terms of any such renewed
agreements and the availability of alternative financing. Further examples of
these uncertainties and contingencies include the timing and magnitude of credit
losses on the mortgage loans underlying the Subordinated CMBS that are a result
of the general condition of the real estate market (including competition for
tenants and their related credit quality) and changes in market rental rates.
As these uncertainties and contingencies are difficult to predict and are
subject to future events which may alter these assumptions, no assurance can be
given that the estimated yields, discussed above and elsewhere herein, will be
achieved.
In making acquisitions of Subordinated CMBS, CRIIMI MAE applies its
experience in underwriting multifamily and other commercial real estate to
perform extensive due diligence on the properties collateralizing the loans
underlying the Subordinated CMBS. The Company's employees have broad experience
underwriting and servicing various types of performing and nonperforming income-
producing real estate, including multifamily, retail and hotel properties.
CRIIMI MAE "re-underwrites" or reviews, a significant portion of the mortgage
loans in a prospective pool by reviewing historical and current operating
records of the underlying real estate assets, appraisals, environmental studies,
market studies and architectural and engineering studies, all to independently
assess the stabilized performance level of the underlying properties. In
addition, the Company conducts site visits at a substantial number of the
properties. The Company stresses the adjusted net operating incomes of the
properties to simulate certain recessionary scenarios and applies market or
greater capitalization rates to assess loan quality.
Equity In Earnings From Investments
- -----------------------------------
Equity in earnings from investments increased by approximately $365,000 or
45% to approximately $1.2 million for the three months ended September 30, 1997
as compared to $807,000 for the corresponding period in 1996. Equity in
earnings from investments increased by approximately $300,000 or 13% to
approximately $2.7 million for the nine months ended September 30, 1997 as
compared to $2.4 million for the corresponding period in 1996. These increases
are due to higher net income from Services Partnership, which resulted from
additional servicing fee streams derived from the steadily expanding servicing
portfolio, which has grown to approximately $11 billion as of October 10, 1997
as compared to approximately $4 billion as of September 30, 1996. The increased
servicing fee revenue was partially offset by increased general and
administrative expenses associated with the growth in the servicing portfolio,
as well as amortization of certain purchased servicing rights.
<PAGE>36
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Other Investment Income
- -----------------------
Other investment income decreased by approximately $79,000 or 14% to
approximately $492,000 for the three months ended September 30, 1997 as compared
to approximately $571,000 for the corresponding period in 1996. Other
investment income decreased by approximately $500,000 or 22% to approximately
$1.8 million for the nine months ended September 30, 1997 as compared to
approximately $2.3 million for the corresponding period in 1996. These
decreases were primarily attributable to decreases in short-term interest
income earned by CRIIMI MAE Financial Corporation III during 1997 as compared to
1996 due to higher prepayment proceeds received and invested during 1996.
Interest Expense
- ----------------
Interest expense increased by approximately $4.1 million or 27% to
approximately $19.3 million for the three months ended September 30, 1997 from
approximately $15.2 million for the corresponding period in 1996. Interest
expense increased by approximately $8.1 million or 17% to $54.7 million for the
nine months ended September 30, 1997 as compared to $46.6 million for the
corresponding period in 1996. These increases were principally a result of
additional amounts borrowed in connection with the acquisition of Subordinated
CMBS during the last quarter of 1996 and the first nine months of 1997, and, to
a lesser extent, the marginally higher cost of debt on the $142 million fixed-
rate financing of December 1996. These increases were partially mitigated by
temporary paydowns of repurchase agreements during the second and third quarters
of 1997 pending the purchase of additional Subordinated CMBS.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased by approximately $500,000 or
25% to approximately $2.6 million for the three months ended September 30, 1997
as compared to approximately $2.1 million for the corresponding period in 1996.
General and administrative expenses increased by approximately $2.2 million or
40% to $7.7 million for the nine months ended September 30, 1997 as compared to
$5.5 million for the corresponding period in 1996. The increase in general and
administrative during these periods is primarily the result of the continual
growth of CRIIMI MAE's commercial mortgage operations, particularly in late 1996
throughout 1997.
Fees to Related Party
- ---------------------
Total fees to related party decreased by approximately $71,000 or 100% to
$0 for the three months ended September 30, 1997. Total fees to related party
decreased by approximately $300,000 or 96% to approximately $12,000 for the nine
months ended September 30, 1997 as compared to approximately $312,000 for the
corresponding period in 1996. The decrease in fees to related party was due to
a reduction in the annual fees payable by CRI Liquidating resulting from its
reduced asset base during 1996 and 1997. As a result of the first quarter
disposition of the remaining CRI Liquidating mortgages, no annual fees were paid
during the three months ended June 30, 1997 or September 30, 1997 and no annual
fees will be paid in future periods.
Gains/Losses on Mortgage Dispositions
- -------------------------------------
During the nine months ended September 30, 1997, CRI Liquidating disposed
of 11 mortgage assets, its interest in two limited partnership participation
agreements and a portion of its interest in a third limited partnership
participation agreement resulting in net gains of approximately $17.4 million
for financial statement purposes. These net gains were partially offset by six
prepayments of mortgage assets held by CRIIMI MAE and its subsidiaries during
the nine months ended September 30, 1997 which resulted in financial statement
<PAGE>37
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
net losses of approximately $252,000. This compares to the disposition of 11
CRI Liquidating mortgage assets resulting in financial statement net gains of
approximately $9.7 million and nine CRIIMI MAE mortgage prepayments resulting in
financial statement net losses of $424,000 during the nine months ended
September 30, 1996. Gains or losses on mortgage dispositions are based on the
number, carrying amounts and proceeds of mortgages disposed of during the
period. The proceeds realized from the disposition of mortgage assets are based
on the net coupon rates of the specific mortgages disposed of in relation to
prevailing long-term interest rates at the date of disposition.
Cash Flow
- ---------
1997 versus 1996
- ----------------
Net cash provided by operating activities increased for the nine months
ended September 30, 1997 as compared to the corresponding period in 1996
primarily due to increased net income, as previously discussed. Partially
offsetting the increase to net income was a net increase in receivables and
other assets of approximately $1.3 million, the majority of which is due to
increased Subordinated CMBS interest receivable.
Net cash used in investing activities increased for the nine months ended
September 30, 1997 as compared to the corresponding period in 1996 primarily as
a result of increased purchases of Subordinated CMBS (as previously discussed),
decreased proceeds from mortgage dispositions, increased purchases of servicing
rights, and the purchase of Real Estate Owned Property.
Net cash provided by financing activities increased for the nine months
ended September 30, 1997 as compared to the corresponding period in 1996
primarily due to proceeds from equity offerings completed during 1997 (as
previously discussed) and increased proceeds from debt used to fund portions of
Subordinated CMBS purchases. Partially offsetting the increase was an increase
in dividends paid the first three quarters of 1997 as compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Financial Flexibility
- --------------------
To meet its capital requirements, CRIIMI MAE uses proceeds from long-term,
fixed-rate debt refinancings, repurchase agreements, other borrowings, unsecured
borrowings and issuances of capital stock. From March 1997 through early
October 1997, CRIIMI MAE has raised approximately $95 million from public and
private placement offerings of common stock and approximately $15 million from a
"Series C" preferred stock offering. In general, CRIIMI MAE initially funds a
significant portion of its Subordinated CMBS acquisitions with short term,
variable rate debt. CRIIMI MAE's financing strategy is to refinance a
significant portion of this short term variable rate acquisition debt with fixed
rate debt having maturities that match those of the underlying collateral
through resecuritizations of its Subordinated CMBS. In December 1996, CRIIMI
MAE completed the first resecuritization of its Subordinated CMBS portfolio,
which refinanced $142 million of short term variable rate debt with fixed rate
match-funded debt, thereby substantially reducing the impact of changing
interest rates on that portion of its debt. The Company intends to enter into a
similar resecuritization or refinancing approximately every two years after
accumulating a sufficient pool of Subordinated CMBS, with the next refinancing
expected to occur in mid-1998. Additionally, the Company replaced other
floating-rate debt with fixed rate, match-funded debt through three separate
refinancings during the second half of 1995. As of September 30, 1997,
approximately 66% of CRIIMI MAE's consolidated debt was fixed rate, match funded
<PAGE>38
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
debt.
The Company's financial flexibility is also impacted by its ability to
borrow money in sufficient amounts and on favorable terms and by its ability to
renew or replace on a continuous basis its maturing short term borrowings. As
previously discussed, in September 1997, CRIIMI MAE entered into a three year
master assignment 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 assignment agreement are secured by the
financed Subordinated CMBS. In addition, in early 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. During the fourth quarter of 1997, CRIIMI MAE expects to amend this
agreement to provide up to $300 million in secured borrowings and extend the
term to December 2000. CRIIMI MAE's business strategy relies in part on short-
term borrowings to fund acquisitions of long-term mortgage assets including
Subordinated CMBS. If CRIIMI MAE is unable to fund additional collateral needs,
as discussed below, or renew or replace maturing borrowings, the Company could
be required to sell, under adverse market conditions, a portion of its mortgage
assets, and could incur losses as a result. Also, if CRIIMI MAE is unable to
complete additional resecuritizations or other refinancings of its Subordinated
CMBS, the Company would be required to rely more heavily on short-term
borrowings, such as repurchase agreements or other sources of financing, which
may be on less favorable terms.
For the nine months ended September 30, 1997, CRIIMI MAE's weighted average
cost of borrowing (including amortization of discounts and deferred financing
fees of approximately $2.8 million) was approximately 7.58%. As of September
30, 1997, CRIIMI MAE's debt-to-equity ratio was approximately 2.5 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.
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 floating-
rate debt. When CRIIMI MAE's cap agreements expire, CRIIMI MAE will have
interest rate risk to the extent interest rates increase on any 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 and as of September
30, 1997, 100% of CRIIMI MAE's outstanding floating-rate debt is hedged with
interest rate cap agreements that have weighted average strike price of
approximately 6.5%. 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, changes in market spreads, or decreases in credit quality of
underlying assets, CRIIMI MAE would be required to provide additional collateral
in connection with its short-term, floating-rate borrowing facilities. From
time to time, the Company has been required to fund such additional collateral
needs. In each instance and currently, the Company 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 repurchase agreements are executed through a sale of
securities with a simultaneous agreement to repurchase them in the future at the
same price plus a contracted rate of interest. If the counterparty to the
repurchase agreement defaults on its obligation to sell the securities back to
CRIIMI MAE, then CRIIMI MAE could suffer an economic loss. At September 30,
1997, CRIIMI MAE had repurchase agreements with German American Capital
Corporation, Lehman Brothers Commercial Paper, First Union National Bank of
<PAGE>39
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
North Carolina, Nomura Bermuda, Ltd., Morgan Stanley International Co., Ltd.,
Merrill Lynch Mortgage Capital Inc., Citicorp Securities Inc. and DLJ Mortgage
Capital Inc.
Dividends
- ---------
CRIIMI MAE's principal objectives are to enhance the value of CRIIMI MAE's
capital stock and to provide increasing dividends to its shareholders. Tax
basis income, as well as financial statement net income and recurring earnings,
increased for the three months ended September 30, 1997 as compared to the
corresponding periods in 1996 and, as a result, total dividends increased.
Specifically, common stock dividends were $0.35 per share in each of the first
three quarters of 1997 as compared to $0.30 for the corresponding periods in
1996. Dividends paid on Series B Preferred Shares were $0.797 per share per
quarter for the first three quarters of 1997. Dividends totaling $50,848 were
paid on the Series A Preferred Shares for the quarter ended March 31, 1997.
Dividends paid on Series B Preferred Shares were $0.68 per share for the quarter
ended September 30, 1996. Dividends totaling $85,517 were paid on the Series A
Preferred Shares for the quarter ended September 30, 1996. There were no
Preferred Shares outstanding prior to the third quarter of 1996 and no Series A
Preferred Shares outstanding subsequent to March 31, 1997.
Although the mortgage assets 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. Some of the factors which impact CRIIMI MAE's dividend include (i) the
level of income earned on CRIIMI MAE's or its subsidiaries' mortgage security
collateral depending on prepayments, defaults, etc., (ii) the level of income
earned on uninsured mortgage assets, such as Subordinated CMBS and originated
loans, which varies depending on prepayments, defaults, etc. (iii) 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 CRIIMI MAE pays on its other
borrowings, (iv) the fluctuating yields in the short-term money market where the
monthly mortgage payments received are temporarily invested prior to the payment
of quarterly dividends, (v) the yield at which principal from scheduled monthly
mortgage asset payments, mortgage dispositions and distributions from its
subsidiaries can be reinvested, (vi) changes in operating expenses, (vii)
dividends paid on preferred shares and (viii) through 1997, the distributions
which CRIIMI MAE received on its CRI Liquidating shares. CRIIMI MAE's dividends
will also be impacted by the timing and amounts of cash flows attributable to
its other lines of business - mortgage servicing, advisory and origination
services.
REIT STATUS
- -----------
CRIIMI MAE has qualified and intends to continue to qualify as a REIT under
Sections 856-860 of the Internal Revenue Code. As a REIT, CRIIMI MAE does not
pay taxes at the corporate level. Qualification for treatment as a REIT
requires CRIIMI MAE to meet certain criteria, including certain requirements
regarding the nature of their ownership, assets, income and distributions of
taxable income. CRIIMI MAE however, may be subject to tax at normal corporate
rates on net income or capital gains not distributed.
Investment Company Act
- ----------------------
The Company intends to conduct its business so as not to become regulated
as an investment company under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). 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
<PAGE>40
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Interests"). Under current interpretation by the staff of the Securities and
Exchange Commission ("SEC"), to qualify for this exemption, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests.
The Company will generally acquire Subordinated CMBS only when such mortgage
assets are collateralized by pools of first mortgage loans, when the Company can
monitor the performance of the underlying mortgage loans through loan management
and servicing rights, and when the Company has appropriate workout/foreclosure
rights with respect to the underlying mortgage loans. When such arrangements
exist, CRIIMI MAE believes that the related Subordinated CMBS constitute
Qualifying Interests for purposes of the Investment Company Act. Therefore,
CRIIMI MAE believes that it should not be required to register as an "investment
company" under the Investment Company Act as long as it continues to invest
primarily in such Subordinated CMBS and/or in other Qualifying Interests.
However, if the SEC or its staff were to take a different position with respect
to whether CRIIMI MAE's Subordinated CMBS constitute Qualifying Interests, the
Company could be required to modify its business plan so that it would not meet
the requirements for registering G1 as an investment company or to register as
an investment company, both of which may adversely affect the Company.
OTHER EVENTS
- ------------
In June 1995, Edge Partners, L.P. (the Plaintiff), derivatively on behalf
of CRIIMI MAE, filed a Derivative Complaint in the District Court of Maryland,
Southern Division. This complaint was dismissed in December 1995. The
Plaintiff filed a First Amended Class and Derivative Complaint (the Complaint)
in February 1996. The Complaint names as defendants each of the Directors who
served on the board at the time of the Merger and CRIIMI MAE as a nominal
defendant. Each of the Directors has an indemnity from CRIIMI MAE.
Count I of the complaint alleges violations of Section 14(a) of the
Securities Exchange Act of 1934 for issuing a materially false and misleading
proxy in connection with the Merger and brings such count individually on its
own behalf and asks the court to certify such count as a class action. Count II
alleges a breach of fiduciary duty owed to CRIIMI MAE and its shareholders and
purports to bring such count derivatively in the right of and for the benefit of
CRIIMI MAE. Through the Complaint, the Plaintiff seeks, among other relief,
that unspecified damages be accounted to CRIIMI MAE, that the stockholder vote
in connection with the Merger be null and void, and that certain salaries and
other remuneration paid to the Directors be returned to CRIIMI MAE.
On October 6, 1997, the Company and the individual defendants reached a
tentative agreement with the plaintiff to settle the case. The terms of the
settlement require court approval, which has not bee obtained. Under the terms
of the proposed settlement, the Company will neither make or receive any
payments as a result of the settlement, but will make, upon court approval,
certain disclosures and adopt a non-binding policy sought by the plaintiff.
<PAGE>41
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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>42
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Reference is made to Note 9 of the notes to the consolidated financial
statements of CRIIMI MAE Inc., which is incorporated herein by reference.
<PAGE>43
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A report on form 8-K was filed on September 23, 1997.
The exhibits filed as part of this report are listed below:
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
<PAGE>44
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.
October 24, 1997 /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 INFORMATION EXTRACTED
FROM THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,476
<SECURITIES> 1,385,448
<RECEIVABLES> 74,013
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,519,854
<CURRENT-LIABILITIES> 12,510
<BONDS> 1,077,837
0
19
<COMMON> 391
<OTHER-SE> 426,153
<TOTAL-LIABILITY-AND-EQUITY> 1,519,854
<SALES> 0
<TOTAL-REVENUES> 113,682
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,860
<LOSS-PROVISION> 284
<INTEREST-EXPENSE> 54,723
<INCOME-PRETAX> 40,929
<INCOME-TAX> 0
<INCOME-CONTINUING> 40,929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,929
<EPS-PRIMARY> .98
<EPS-DILUTED> 0
</TABLE>
