<PAGE>
Pursuant to Rule 424(b)(5)
Registration No. 333-38409
PROSPECTUS SUPPLEMENT
- ---------------------
(TO PROSPECTUS DATED OCTOBER 28, 1997)
$100,000,000
CRIIMI MAE INC.
9 1/8% SENIOR NOTES DUE 2002
---------------
The 9 1/8% Senior Notes due 2002 (the "Notes") offered hereby (the
"Offering") are being issued by CRIIMI MAE Inc. ("CRIIMI MAE" or the
"Company") in an aggregate principal amount of $100,000,000. The Notes will
mature on December 1, 2002 and may be redeemed by the Company prior to
maturity, at the option of the Company, in whole or in part, at a redemption
price equal to the sum of (i) the principal amount of the Notes being redeemed
plus accrued and unpaid interest, if any, to the date of such redemption and
(ii) the Make-Whole Amount (as defined), if any. Upon the occurrence of a
Change of Control (as defined), each holder of the Notes may require the
Company to purchase all or any portion of such holder's Notes at 101% of the
principal amount thereof then outstanding, together with any accrued and
unpaid interest, if any, to the date of such purchase. The Notes are not
subject to any mandatory sinking fund. Interest on the Notes is payable semi-
annually in arrears on each June 1 and December 1, commencing June 1, 1998.
See "Description of the Notes."
The Notes will rank pari passu in right of payment with all existing and
future unsecured and unsubordinated indebtedness of the Company and senior in
right of payment to all existing and future subordinated indebtedness of the
Company. The Notes will be effectively subordinated to the claims of any
secured lender to the extent of the value of the collateral securing such
indebtedness. The Notes will also be effectively subordinated to all existing
and future indebtedness and other liabilities of the Company's subsidiaries.
As of September 30, 1997, after giving pro forma effect to this Offering and
the application of the net proceeds therefrom as described in "Use of
Proceeds," the Company and its subsidiaries had total indebtedness of
approximately $1.2 billion, of which approximately $1.1 billion was secured
indebtedness of the Company and its subsidiaries. Of the total secured
indebtedness of the Company and its subsidiaries, approximately $708.4 million
was non-recourse indebtedness of the Company's subsidiaries.
The Notes will be issued in the form of one or more global notes in book-
entry form, without coupons (the "Global Notes"), registered in the name of
the nominee of The Depository Trust Company ("DTC"). Beneficial interests in
the Global Notes will be shown on, and transfers thereof will be effected only
through, records maintained by DTC (with respect to beneficial interests of
participants) or by DTC participants or persons that hold interests, directly
or indirectly, through DTC participants (with respect to beneficial interests
of beneficial owners). Owners of beneficial interests in the Global Notes will
be entitled to physical delivery of Notes in definitive form equal in
principal amount to their respective beneficial interest only under the
limited circumstances described under "Description of the Notes--Global
Notes." Settlement for the Notes will be made in immediately available funds.
The Notes will trade in DTC's Same-Day Funds Settlement System until maturity
or until the Notes are issued in definitive form, and secondary market trading
activity in the Notes will therefore settle in immediately available funds.
All payments of principal and interest in respect of the Notes will be made by
the Company in immediately available funds. See "Description of the Notes--
Same-Day Settlement and Payment."
SEE "RISK FACTORS" BEGINNING ON PAGE S-9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT
IN THE NOTES.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH
IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
INVESTORS(1) DISCOUNT(2) THE COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.............................. 99.875% 2.250% 97.625%
- --------------------------------------------------------------------------------
Total................................. $99,875,000 $2,250,000 $97,625,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from November 21, 1997.
(2) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including certain liabilities under the Securities
Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $500,000.
---------------
The Notes are offered by the several Underwriters subject to prior sale,
when, as and if delivered to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Notes will be made in New York, New York on or about November
21, 1997.
---------------
MERRILL LYNCH & CO. LEHMAN BROTHERS
---------------
The date of this Prospectus Supplement is November 18, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF NOTES TO COVER SYNDICATE
SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH ACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference herein and in the
accompanying Prospectus constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and are subject to a number of risks and
uncertainties. Any such forward-looking statements contained or incorporated
by reference herein or in the accompanying Prospectus should not be relied
upon as predictions of future events. Certain such forward-looking statements
can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "are expected to," "will," "will allow," "will
continue," "will likely result," "should," "would be," "seeks,"
"approximately," "intends," "plans," "projects," "pro forma," "estimates" or
"anticipates" or similar expressions or the negative thereof or other
variations thereof or comparable terminology, or by discussions of strategy,
plans or intentions. In addition, all information included or incorporated by
reference herein or in the accompanying Prospectus with respect to projected
or future results of operations, financial condition, financial performance or
other financial or statistical matters constitute such forward-looking
statements. Such forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and that may
be incapable of being realized. In that regard, the following factors, among
others and in addition to the matters discussed below under "Risk Factors" and
elsewhere in this Prospectus Supplement, the accompanying Prospectus and the
documents incorporated or deemed to be incorporated by reference herein or
therein, could cause actual results and other matters to differ materially
from those in such forward-looking statements: changes in interest rates;
changes in the availability of Subordinated CMBS (as defined herein) for
acquisition, the purchase price for such assets and the extent of defaults and
unrecoverable losses on the mortgage loans underlying such Subordinated CMBS;
changes in conditions in the capital markets, including the availability of
and terms of debt financing; and changes in regional and national business and
economic conditions, including, without limitation, conditions affecting the
market for commercial real estate and inflation. As a result of the foregoing,
no assurance can be given as to future results of operations or financial
condition or as to any other matters covered by any such forward-looking
statements, and the Company wishes to caution prospective investors not to
rely on any such forward-looking statements. The Company does not undertake,
and specifically disclaims any obligation, to update any forward-looking
statements, which speak only as of the date made.
S-2
<PAGE>
SUMMARY
The following information contained in this summary is qualified in its
entirety by, and should be read in conjunction with, the detailed information
and financial statements, including the notes thereto appearing elsewhere in
this Prospectus Supplement or incorporated herein by reference. Unless the
context otherwise requires, references herein to CRIIMI MAE or the Company
include CRIIMI MAE and each of its subsidiaries.
THE COMPANY
CRIIMI MAE is a leading fully integrated commercial mortgage company and is
one of the largest publicly traded real estate investment trusts ("REITs")
focused primarily on the commercial mortgage backed securities ("CMBS") market.
CRIIMI MAE's primary activities include (i) acquiring non-investment grade
subordinated securities backed by first mortgage loans on multifamily
properties and other commercial real estate ("Subordinated CMBS") and (ii)
servicing, originating and securitizing commercial mortgage loans and CMBS.
CRIIMI MAE believes that its focus on acquiring Subordinated CMBS, together
with its expertise in underwriting, servicing and originating commercial
mortgage loans, has enabled the Company to take advantage of the rapid growth
in the securitization of debt backed by commercial mortgage loans. William B.
Dockser, the Company's Chairman of the Board, and H. William Willoughby, the
Company's President, have led CRIIMI MAE since its formation in 1989. The
Company, which is structured as a self-administered REIT, currently has over
130 employees, and the eight members of the Company's senior management average
over 20 years of experience in a wide range of real estate activities. As of
September 30, 1997, CRIIMI MAE's approximately $1.5 billion portfolio of assets
included approximately $774.5 million of Subordinated CMBS and approximately
$611.0 million of interests in government insured or guaranteed mortgages
secured by multifamily housing complexes located throughout the United States
("Government Insured Mortgage Assets").
When acquiring CMBS, CRIIMI MAE focuses on classes of CMBS that are rated
below BB+ by Standard and Poor's Rating Services ("Standard and Poor's") (or
below an equivalent rating given by another rating agency), including the most
subordinate class of the CMBS which typically is not rated. CRIIMI MAE
generally acquires Subordinated CMBS in privately negotiated transactions,
which allows CRIIMI MAE to perform due diligence on the mortgage loans
underlying the CMBS as well as the underlying real estate prior to consummating
the purchase, thus mitigating certain risks associated with purchasing
Subordinated CMBS.
CRIIMI MAE performs various servicing functions for approximately $11.2
billion of commercial mortgage loans as of October 10, 1997, including acting
as master servicer for approximately $2.2 billion of such loans, and is
authorized to act as special servicer for all of the loans underlying the
Company's CMBS. In its role as special servicer, CRIIMI MAE is responsible for
working out or foreclosing on defaulted mortgage loans backing its Subordinated
CMBS and the other classes of CMBS. CRIIMI MAE's servicing operations permit
the Company to actively monitor and manage the performance of its mortgage
assets and provide CRIIMI MAE with additional income. CRIIMI MAE believes that
its loan servicing capabilities, particularly its ability to act as master
servicer in connection with its commercial loan securitizations, enhance its
ability to compete against other originators of commercial mortgage loans. See
"CRIIMI MAE--Mortgage Loan Servicing Operations."
The Company also originates commercial mortgage loans which it intends to
securitize by issuing CMBS backed by pools of such loans. In connection with
any such securitization, CRIIMI MAE expects to retain the subordinated classes
(or "tranches") of the CMBS plus an interest only class and sell the senior
CMBS classes to third party investors. CRIIMI MAE's origination activities
generate additional income for the Company in the form of origination fees,
increase the size of the Company's servicing portfolio and increase the
Company's
S-3
<PAGE>
portfolio of mortgage assets. As of October 10, 1997, CRIIMI MAE originated
loans in the aggregate principal amount of approximately $44.3 million. See
"CRIIMI MAE--Loan Origination Activities."
BUSINESS STRATEGY
CRIIMI MAE believes that its position as a leading purchaser of Subordinated
CMBS, combined with its commercial loan servicing and origination capabilities
and its access to the capital markets, provides the Company with a competitive
advantage to capitalize on current opportunities existing in the securitized
debt market, particularly with respect to the acquisition of lower rated CMBS
tranches. Significant elements of CRIIMI MAE's current business strategy are
summarized below:
. INCREASE ITS PORTFOLIO OF SUBORDINATED CMBS. CRIIMI MAE intends to acquire
additional Subordinated CMBS, which the Company believes is and will continue
to be an attractive real estate investment opportunity for the Company. The
Company believes that its loan origination, servicing and underwriting
capabilities are competitive advantages as the Company competes against other
investors for the acquisition of Subordinated CMBS.
. EXPAND THE COMPANY'S SERVICING PORTFOLIO. The Company intends to increase its
servicing portfolio primarily by acquiring servicing rights in connection
with purchases of Subordinated CMBS and by originating mortgage loans under
its loan origination program. In addition, CRIIMI MAE intends to continue to
build on its status as an approved master servicer to increase its servicing
activities and servicing income.
. ORIGINATE COMMERCIAL MORTGAGE LOANS. The Company intends to originate
commercial loans for securitization. In connection with any such
securitization, CRIIMI MAE anticipates (i) retaining the non-investment grade
subordinated classes of the resulting CMBS issuance and an interest only
bond, (ii) placing the senior classes with other investors and (iii)
retaining the master and special servicing rights with respect to the
mortgage loans backing such CMBS. CRIIMI MAE expects to complete its first
securitization of originated commercial loans during the first half of 1998.
. RESECURITIZE SUBORDINATED CMBS. The Company plans to resecuritize
Subordinated CMBS acquired by the Company approximately every 18 to 24
months. By resecuritizing a substantial portion of the Subordinated CMBS in
its portfolio, CRIIMI MAE believes it will better match the maturities of its
liabilities and assets as such resecuritization transactions allow the
Company to refinance short term, floating rate debt with long term fixed rate
debt. During the first half of 1998, CRIIMI MAE intends to resecuritize a
significant portion of its Subordinated CMBS.
RECENT DEVELOPMENTS
On October 6, 1997, CRIIMI MAE issued and sold 1,236,000 shares of the
Company's common stock, par value $.01 per share ("Common Shares"), at $16.25
per share to four institutional investors in negotiated transactions. Net
proceeds to the Company of approximately $19.9 million were used to temporarily
pay down repurchase agreement financing pending the purchase of additional
Subordinated CMBS.
Since September 30, 1997, the Company has purchased additional Subordinated
CMBS with an aggregate face value of approximately $142.7 million for a total
purchase price of approximately $132.2 million and intends to purchase
additional Subordinated CMBS with a face value of approximately $227 million
for a purchase price of approximately $139 million by the end of the year.
S-4
<PAGE>
THE OFFERING
All capitalized terms used but not defined herein have the meanings provided
in "Description of the Notes." For a more complete description of the terms of
the Notes, see "Description of the Notes" herein and "Description of Debt
Securities" in the accompanying Prospectus.
Securities Offered............ $100,000,000 aggregate principal amount of 9
1/8% Senior Notes due 2002.
Maturity...................... The Notes will mature on December 1, 2002.
Optional Redemption........... The Notes are redeemable at any time at the
option of CRIIMI MAE, in whole or in part, at a
redemption price equal to the sum of (i) the
principal amount of the Notes being redeemed
plus accrued and unpaid interest, if any, to
the date of redemption and (ii) the Make-Whole
Amount, if any. See "Description of the Notes--
Optional Redemption."
Interest Payment Dates........ Interest on the Notes will be payable semi-
annually in arrears on each June 1 and December
1, commencing June 1, 1998.
Ranking....................... The Notes will rank pari passu in right of
payment with all existing and future unsecured
and unsubordinated indebtedness of the Company
and senior in right of payment to all existing
and future subordinated indebtedness of the
Company. The Notes will be effectively
subordinated to the claims of any secured
lender to the extent of the value of the
collateral securing such indebtedness. The
Notes also will be effectively subordinated to
all existing and future indebtedness and other
liabilities of CRIIMI MAE's subsidiaries. As of
September 30, 1997, after giving pro forma
effect to this Offering and the application of
the net proceeds therefrom as described in "Use
of Proceeds," CRIIMI MAE and its subsidiaries
had total indebtedness of approximately $1.2
billion, of which approximately $1.1 billion
was secured indebtedness of the Company and its
subsidiaries. Of the total secured indebtedness
of the Company and its subsidiaries,
approximately $708.4 million was non-recourse
indebtedness of the Company's subsidiaries.
Use of Proceeds............... The net proceeds to CRIIMI MAE from the
Offering of the Notes are estimated to be
approximately $97.1 million. The Company
expects that approximately $15.0 million will
be used to repay amounts borrowed subsequent to
September 30, 1997 and currently outstanding
under the Company's unsecured working line of
credit. The Company intends to use the
remainder of the net cash proceeds from the
Offering (i) to acquire additional mortgage
assets, primarily Subordinated CMBS, (ii) to
sponsor and/or participate in loan origination
programs and (iii) for other general corporate
purposes, including working capital. Pending
application, net proceeds from the Offering may
be invested in short term marketable securities
or used to pay down borrowings outstanding
under the Company's repurchase agreements.
S-5
<PAGE>
Change of Control............. Upon the occurrence of a Change of Control,
each holder of Notes shall have the right to
require the Company to repurchase all or any
part of such holder's Notes at a purchase price
equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to
any Change of Control Purchase Date. There can
be no assurance that the Company will have the
financial resources necessary to repurchase the
Notes upon a Change of Control. See
"Description of the Notes--Repurchase at the
Option of Holders upon a Change of Control."
Certain Covenants............. The Indenture will contain certain covenants
which, among other things, will restrict the
ability of the Company and its subsidiaries to
incur additional indebtedness, pay dividends,
or make distributions in respect of the
Company's or such subsidiaries' capital stock,
make other restricted payments, enter into
transactions with affiliates or related
persons, or consolidate, merge or sell all or
substantially all of their assets. These
covenants are subject to important exceptions
and qualifications. See "Description of the
Notes--Certain Covenants" and "Risk Factors--
Debt Restrictions; Compliance with Certain
Covenants."
Absence of Market for the
Notes........................ The Notes will be a new issue of securities for
which there currently is no market. Although
the Underwriters have informed the Company that
they each currently intend to make a market in
the Notes, they are not obligated to do so and
any such market making may be discontinued at
anytime without notice. Accordingly, there can
be no assurance as to the liquidity of or
development of any market for the Notes. The
Company does not intend to apply for listing of
the Notes on any securities exchange or for
quotation thereof through the National
Association of Securities Dealers Automated
Quotation System. See "Risk Factors--Absence of
a Public Market for the Notes."
S-6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and
for each of the years in the five year period ended December 31, 1996 have been
derived from the consolidated financial statements of the Company, which have
been audited by Arthur Andersen LLP, independent public accountants. The
following selected consolidated financial data of the Company as of and for the
nine months ended September 30, 1997 and 1996 have been derived from the
unaudited consolidated financial statements of the Company, which, in the
opinion of management of the Company, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of such
information. Data for the nine months ended September 30, 1997 does not purport
to be indicative of the results to be expected for the fiscal year ending
December 31, 1997. The following selected financial data should be read in
conjunction with, and is qualified by reference to, the Company's financial
statements and the related notes thereto which are included herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Income:
Mortgage income........ $ 37,081 $ 43,099 $ 56,912 $66,115 $67,043 $50,270 $45,931
Income from
Subordinated CMBS..... 54,694 27,913 41,713 11,105 976 -- --
Equity in earnings from
investments........... 2,718 2,410 4,685 2,704 2,310 2,534 2,561
Other income........... 1,761 2,268 2,645 2,144 1,113 3,646 2,210
-------- -------- -------- ------- ------- ------- -------
Total income........... 96,254 75,690 105,955 82,068 71,442 56,450 50,702
-------- -------- -------- ------- ------- ------- -------
Expenses:
Interest expense....... 54,723 46,611 63,079 49,853 39,245 28,008 24,392
Other operating
expenses (including
fees to related
party)................ 7,674 5,780 7,791 7,190 8,040 7,354 5,743
Amortization of assets
acquired in the
Merger................ 2,158 2,163 2,882 1,435 -- -- --
Adjustment to hedges
for valuation and
sales(a).............. 28 34 179 2,393 -- -- --
Termination of interest
rate swap............. -- -- -- -- -- 4,890 --
Provision for
settlement of
litigation............ -- -- -- (656) (557) 1,500 --
-------- -------- -------- ------- ------- ------- -------
Total expenses......... 64,583 54,588 73,931 60,215 46,728 41,752 30,135
-------- -------- -------- ------- ------- ------- -------
Operating income........ 31,671 21,102 32,024 21,853 24,714 14,698 20,567
Net gains from mortgage
dispositions........... 17,143 9,268 9,601 1,502 12,999 7,358 5,733
Gain on sale of shares
of subsidiary.......... -- -- -- -- -- 3,281 --
Loss on investment in
limited partnership.... -- -- -- -- -- -- (732)
Minority interests...... (7,885) (5,922) (6,386) (4,821) (11,703) (9,580) (9,527)
-------- -------- -------- ------- ------- ------- -------
Net income.............. 40,929 24,448 35,239 18,534 26,010 15,757 16,041
Preferred dividends..... (4,784) (1,728) (3,526) -- -- -- --
-------- -------- -------- ------- ------- ------- -------
Net income available to
common shareholders.... $36,145 $22,720 $ 31,713 $18,534 $26,010 $15,757 $16,041
======== ======== ======== ======= ======= ======= =======
Earnings per share:
primary................ $ 0.98 $ 0.74 $ 1.03 $ 0.65 $ 1.07 $ 0.78 $ 0.79
Weighted average common
shares outstanding..... 37,041 30,605 30,854 28,414 24,249 20,184 20,184
</TABLE>
(Continued on next page)
S-7
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- ------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------- --------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Mortgage Assets:
Mortgages at fair value
and mortgage security
collateral............ $ 610,986 $ 697,479 $ 691,110 $ 807,113 $ 857,589 $ 741,591 $472,963
Subordinated CMBS...... 774,462 335,960 564,335 278,401 38,858 -- --
Other Assets........... 134,406 117,364 111,800 117,789 58,603 67,110 53,704
---------- ---------- ---------- ---------- --------- --------- --------
Total Assets........... 1,519,854 1,150,803 1,367,245 1,203,303 955,050 808,701 526,667
Debt and Other
Liabilities:
Secured Debt:
Securitized Mortgage
Obligations (b)....... 708,368 605,476 732,222 645,261 -- -- --
Repurchase Agreements-
Subordinated CMBS..... 365,569 162,590 241,138 187,947 24,892 -- --
Other.................. 3,900 9,548 8,898 21,228 602,356 479,045 247,969
---------- ---------- ---------- ---------- --------- --------- --------
Total Secured Debt.... 1,077,837 777,614 982,258 854,436 627,248 479,045 247,969
Unsecured Debt......... -- -- -- -- -- -- --
Other Liabilities...... 12,510 9,487 11,798 10,929 8,143 5,967 1,193
---------- ---------- ---------- ---------- --------- --------- --------
Total Debt and Other
Liabilities.......... 1,090,347 787,101 994,056 865,365 635,391 485,012 249,162
Minority Interest....... 2,944 25,959 26,518 52,234 69,617 108,400 84,396
Shareholders' Equity
(c).................... $ 426,563 $ 337,743 $ 346,671 $ 285,704 $ 250,042 $ 215,289 $193,109
OTHER FINANCIAL DATA:
EBITDA (d).............. $ 90,128 $ 71,377 $ 100,681 $ 76,617 $ 64,538 $ 48,164 $ 44,924
Interest expense related
to Securitized Mortgage
Obligations (b)........ 39,324 34,337 45,576 9,102 -- -- --
Ratio of Adjusted
Earnings to combined
fixed charges and
preferred stock
dividends after
adjustment for interest
on securitized mortgage
obligations (b)(e)..... 2.48x 2.64x 2.60x 1.56x 1.64x 1.46x 1.87x
Ratio of earnings to
fixed charges (f)...... 1.72 1.52 1.56 1.35 1.66 1.48 1.69
Ratio of earnings to
combined fixed charges
and preferred stock
dividends (f).......... 1.61 1.47 1.47 1.35 1.66 1.48 1.69
Ratio of Secured Debt to
Shareholders' Equity... 2.53 2.30 2.83 2.99 2.51 2.23 1.28
Ratio of Secured Debt
excluding securitized
mortgage obligations to
Shareholders' Equity
(b).................... 0.87 0.51 0.72 0.73 2.51 2.23 1.28
Taxable income available
to Common
Shareholders (g)....... 39,779 28,824 39,007 25,288 29,606 23,015 21,626
CASH FLOW DATA:
Operating activities.... $ 31,669 $ 17,747 $ 34,629 $ 17,621 $ 30,654 $ 28,767 $ 24,495
Investing activities.... (143,962) 49,913 (167,309) (176,872) (174,297) (192,338) 24,414
Financing activities.... $ 114,803 $ (70,132) $ 127,070 $ 170,685 $ 135,187 $ 170,571 $(43,970)
</TABLE>
- --------
(a) In connection with the 1995 refinancing of a significant portion of CRIIMI
MAE's short term, floating rate debt with long term, fixed rate debt, two
interest rate caps with an aggregate notional amount of $100 million were
sold during 1995, resulting in a loss, certain caps were adjusted to fair
value, and a portion of the deferred financing fees were written off.
(b) Securitized Mortgage Obligations represent fixed rate debt with matched
principal amortization and maturity to a corresponding amount of assets.
However, total collateral for such fixed rate debt is approximately $929.1
million, $625.6 million, $954.4 million and $674.3 million as of September
30, 1997 and 1996 and December 31, 1996, and 1995 respectively. (See
"CRIIMI MAE--Financing Strategy--Match Funding.")
(c) Includes net unrealized gains on CRIIMI MAE's share of CRI Liquidating
REIT, Inc.'s ("CRI Liquidating") mortgage assets (net of minority
interests) of approximately $0 and $8.5 million as of September 30, 1997
and 1996, respectively, and $8.6 million in 1996, $15.8 million in 1995 and
$10.3 million in 1994 and net unrealized gains/losses on CRIIMI MAE's
mortgage assets and investment in interest-only strips, of approximately
$196,000 and $(12,000) as of September 30, 1997 and 1996, respectively, and
approximately $270,000 in 1996 and $300,000 in 1995 due to the
implementation of SFAS No. 115.
(d) EBITDA is not a measure of financial performance under generally accepted
accounting principles ("GAAP") and consists of net income before interest
expense, income taxes, depreciation and amortization (including
depreciation and amortization in equity in earnings from investments) net
gains from mortgage dispositions, gain on sale of shares of subsidiary and
minority interests. EBITDA is included because it provides information in
addition to that supplied by GAAP-based data regarding the ability of the
Company to meet its future debt service, capital expenditures and working
capital requirements, but should not be construed as an alternative either
(i) to income from operations (determined in accordance with GAAP) as a
measure of profitability or (ii) to cash flows from operating activities
(determined in accordance with GAAP). EBITDA does not take into account the
Company's debt service requirements and other commitments and, accordingly,
is not necessarily indicative of amounts that may be available for
discretionary uses, and EBITDA as measured by the Company may not be
comparable to EBITDA as measured by other companies.
(e) Ratio of operating income plus interest expense (excluding Securitized
Mortgage Obligations), income taxes, depreciation and amortization and
excluding other non-cash items to interest expense (excluding Securitized
Mortgage Obligations) and preferred dividends as further defined in the
Indenture as "Adjusted Earnings Available for Fixed Charges to Adjusted
Fixed Charges."
(f) For purposes of computing these ratios, earnings consist of CRIIMI MAE's
consolidated net income, plus fixed charges, extraordinary items, loss from
investment and adjustment to hedges for valuation and sales, and dividends
on preferred stock. Such information is qualified in its entirety by the
more detailed financial information set forth in the financial statements
and notes thereto included in or incorporated by reference into this
Prospectus Supplement and the accompanying Prospectus.
(g) As further described in "Certain United States Federal Income Tax
Consequences," distributions to common stockholders are based on taxable
income. The differences between net income determined in accordance with
GAAP and taxable income are described in the notes to the consolidated
financial statements.
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RISK FACTORS
Before investing in the Notes offered hereby, prospective investors should
give special consideration to the information set forth below, in addition to
the information set forth elsewhere in this Prospectus Supplement.
SUBSTANTIAL LEVERAGE
CRIIMI MAE has significant debt service obligations. As of September 30,
1997, after giving pro forma effect to the Offering and the application of the
estimated net proceeds therefrom as described in "Use of Proceeds," the
Company and its subsidiaries had total indebtedness of approximately $1.2
billion, of which approximately $1.1 billion was secured indebtedness of the
Company and its subsidiaries. Of the total secured indebtedness of the Company
and its subsidiaries, approximately $708.4 million was non-recourse
indebtedness of the Company's subsidiaries. See "Capitalization."
The degree to which CRIIMI MAE is leveraged could have important
consequences to holders of the Notes, including the following: (i) CRIIMI
MAE's ability to grow will depend on its ability in the future to obtain
additional financing to acquire additional Subordinated CMBS, originate loans,
invest in servicing rights, and for working capital, capital expenditures and
general corporate purposes or other purposes, and that ability may be
impaired; (ii) a substantial portion of CRIIMI MAE's cash flow from operations
must be dedicated to the payment of the principal of and interest on its
indebtedness thereby reducing the funds available to finance its business
activities; (iii) CRIIMI MAE's amount of indebtedness could limit its
flexibility in planning for, or reacting to, changes in its business; (iv)
CRIIMI MAE may be more highly leveraged than certain of its competitors, which
may place CRIIMI MAE at a competitive disadvantage and make it more vulnerable
to economic downturns; and (v) the Company's ability to refinance the Notes in
order to pay the principal of the Notes at maturity or upon a Change of
Control may be adversely affected.
CRIIMI MAE may incur additional indebtedness in the future, subject to
certain limitations contained in the instruments governing its indebtedness,
including the Indenture. CRIIMI MAE's ability to incur additional debt depends
upon, among other things, the amount of its unencumbered assets, which is
linked to prevailing interest rates, and changes in the credit quality of
encumbered assets underlying existing debt. 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 debt arrangements. 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 assets. However, no assurance can be made
that such, levels of unencumbered assets will continue to be available.
ABILITY TO SERVICE DEBT
CRIIMI MAE's ability to satisfy its interest payment obligations under its
indebtedness will depend largely on its future performance, which, in turn, is
subject to prevailing economic conditions and to financial, business and other
factors beyond its control, including levels of interest rates. Furthermore,
CRIIMI MAE does not expect to be able to repay the principal amount of the
Notes at maturity and accordingly will need to refinance the Notes, or repay
the Notes with the proceeds of an equity offering, at or prior to their
maturity. There can be no assurance that CRIIMI MAE will be able to generate
sufficient cash flow to service its interest payment obligations under its
indebtedness or that future borrowings or equity financing will be available
for the payment or refinancing of its indebtedness.
The Company's ability to achieve its strategic objectives depends not only
on its ability to borrow money in sufficient amounts and on favorable terms
but also on its ability to renew or replace on a continuous basis its maturing
short term borrowings. 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 above, 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. Furthermore, a limited
secondary market for Subordinated CMBS currently exists and there can be
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no assurance that one will fully develop, thereby limiting the Company's
ability to dispose of its Subordinated CMBS in such situations. Also, if
CRIIMI MAE is unable to complete additional resecuritizations or other
refinancings of its Subordinated CMBS, CRIIMI MAE would be required to rely
more heavily on short term borrowings, such as repurchase agreements or other
sources of financing. There can be no assurance, however, that such financing
would be available on terms acceptable to the Company, if at all.
EFFECTIVE SUBORDINATION
The Notes are unsecured and will be effectively subordinated to any secured
indebtedness of the Company to the extent of the value of the assets securing
such indebtedness. As of September 30, 1997, after giving pro forma effect to
this Offering and the application of the net proceeds therefrom as described
in "Use of Proceeds," the Company and its subsidiaries had total indebtedness
of approximately $1.2 billion, of which approximately $1.1 billion was secured
indebtedness of the Company and its subsidiaries. Of the total secured
indebtedness of the Company and its subsidiaries, approximately $708.4 million
was nonrecourse indebtedness of the Company's subsidiaries. See
"Capitalization." The Indenture will permit the Company and its subsidiaries
to incur additional secured indebtedness, including Permitted Indebtedness as
defined in the Indenture. See "Description of the Notes--Certain Definitions."
Consequently, in the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding with respect to the Company, the holders
of any secured indebtedness will be entitled to proceed against the collateral
that secures such secured indebtedness and such collateral will not be
available for satisfaction of any amounts owed under the Notes. See
"Description of the Notes--Certain Covenants."
The Notes also will be effectively subordinated to all existing and future
liabilities of CRIIMI MAE's subsidiaries. As of September 30, 1997, CRIIMI
MAE's subsidiaries had aggregate outstanding indebtedness of approximately
$708.4 million, all of which was secured by first priority liens on certain
assets of the borrowing subsidiaries and non-recourse. CRIIMI MAE and its
subsidiaries may incur additional indebtedness in the future, subject to
certain limitations contained in the instruments governing their indebtedness,
including the Indenture. Any right of the Company to participate in any
distribution of the assets of its subsidiaries upon the bankruptcy,
liquidation, reorganization, insolvency or similar proceeding of any such
subsidiary (and the consequent right of the holders of the Notes to
participate in distribution of those assets) will be subject to the prior
claims of the respective subsidiary's creditors.
DEBT RESTRICTIONS; COMPLIANCE WITH CERTAIN COVENANTS
The Indenture and the instruments governing other indebtedness of the
Company will impose restrictions that affect, and in certain cases
significantly limit or prohibit, among other things, the ability of CRIIMI MAE
and its subsidiaries to incur indebtedness, pay dividends or make
distributions with respect to the Company's or such subsidiaries' capital
stock, make other restricted payments, enter into sale and leaseback
transactions, create liens upon assets, enter into transactions with
affiliates or related persons, engage in new lines of business, sell assets,
or consolidate, merge or sell all or substantially all of their assets. There
can be no assurance that such covenants will not adversely affect CRIIMI MAE's
ability to finance its future operations or capital needs or to engage in
other business activities that may be in the interest of the Company. See
"Description of the Notes" and "Description of Other Indebtedness."
Certain agreements governing the short term indebtedness of the Company
require the Company to maintain specified financial ratios and meet certain
financial tests. Although the Company is currently in compliance with
covenants and restrictions contained in its various debt instruments, its
ability to continue to comply may be affected by events beyond its control.
See "--Risks of Owning Subordinated CMBS," "--Impact of Changes in Interest
Rates," and "--General Economic Conditions." The breach of any of these
covenants or restrictions could result in a default under such instruments and
could thereby cause a default under the Indenture. In the event of any such
default, the lenders under such instruments could elect to declare all amounts
borrowed thereunder, together with accrued interest, to be due and payable, or
cease making additional loans, or such lenders could foreclose upon the assets
pledged to secure such indebtedness. Consequently, there would be less assets
available for satisfaction of any amount owed under the Notes.
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RISKS REGARDING LIMITED COVENANTS
The holders of the Notes do not have the benefit of extensive covenants. The
covenants in the Indenture are not designed to protect holders of the Notes in
the event of a material adverse change in the Company's financial condition or
results of operations. These covenants impose only limited restrictions on the
ability of the Company to, among other things, create or incur debt, pay
dividends or make certain other restricted payments. The Indenture does not
contain covenants specifically designed to protect holders of the Notes in the
event of a highly leveraged transaction involving the Company. The provisions
of the Indenture should not be relied upon in evaluating whether the Company
will be able to comply with its obligations under the Notes. See "Description
of the Notes--Certain Covenants" in this Prospectus Supplement and
"Description of Securities--Debt Securities--Covenants" in the Prospectus.
RISKS OF OWNING SUBORDINATED CMBS
The Subordinated CMBS classes or tranches owned by CRIIMI MAE provide credit
support to the more senior tranches of the related commercial securitization.
Principal from the underlying mortgage loans generally is allocated first to
the senior tranches, with the most senior tranche having a priority right to
the cash flow from the mortgage loan until its payment requirements are
satisfied. Any remaining principal is allocated generally among the other
tranches in order of their relative seniority. In the absence of defaults or
interest shortfalls, all tranches receive interest. To the extent there are
defaults and unrecoverable losses on the underlying mortgage loans, 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.
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 the floating rate debt used to finance a portion of the
Subordinated CMBS, 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,
among other things, the general condition of the real estate market (including
competition for tenants and their related credit quality), the effect of the
rate of loan prepayments on the value of interest only strips and changes in
market rental rates.
In addition, CRIIMI MAE's ability to achieve its stated goal to increase
recurring earnings through the acquisition of additional Subordinated CMBS is
subject to a number of assumptions that are currently subject to certain
business and economic uncertainties and contingencies, including, without
limitation, continued availability of a sufficient volume of Subordinated
CMBS, the availability of financing, higher purchase prices for Subordinated
CMBS and increased competition among purchasers of Subordinated CMBS. To the
extent the Company sustains losses relating to its Subordinated CMBS or is
unable to purchase sufficient levels of Subordinated CMBS to meet its business
objectives, the Company's financial results and, thus, its ability to service
its payment obligations under the Notes may be adversely affected. See "The
Portfolio--Subordinated CMBS."
IMPACT OF CHANGES IN INTEREST RATES
Fluctuations in interest rates will affect the value of CRIIMI MAE's
mortgage assets and could affect its financial results through increased cost
of funds on CRIIMI MAE's floating rate debt. However, as of September 30,
1997, 100% of CRIIMI MAE's outstanding floating rate debt was hedged with
interest rate cap agreements that have a weighted average strike price of
approximately 6.5%, which partially limit the impact of rising interest rates
on the Company's remaining floating rate debt. When CRIIMI MAE's interest rate
cap agreements expire, it may have interest rate risk to the extent interest
rates increase on any floating rate borrowings unless the interest rate cap
agreements are replaced or other steps are taken to mitigate this risk. It is
CRIIMI MAE's
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policy to hedge at least 75% of its floating rate debt, although there can be
no assurance that it will do so. As of September 30, 1997, the weighted
average term for CRIIMI MAE's interest rate cap agreements was approximately
1.6 years.
Changes in interest rates can have a variety of effects on CRIIMI MAE's
other lines of business. In particular, changes in interest rates may affect
the volume of loan originations and acquisitions and the value of the
Company's servicing portfolio. Such changes may also affect the Company's
ability to raise capital on acceptable terms, which may affect the Company's
ability to purchase additional Subordinated CMBS. During periods of declining
interest rates, the Company may experience an increase in loan originations
because of increased commercial real estate activity and, in particular,
refinancing activity. Increases in interest rates may adversely affect
refinancing activity, which could adversely affect the Company's origination
activities. Any adverse effect on the amount of loans originated will
adversely affect the Company's ability to securitize such loans through CMBS
issuances.
In addition, the value of the Company's servicing portfolio may be adversely
affected if mortgage interest rates decline and loan prepayments increase. In
periods of declining interest rates, the economic advantages to borrowers of
refinancing mortgage loans increase, and increases in the rate of mortgage
loan prepayments reduce the period during which CRIIMI MAE receives servicing
income from such loans. Interest rate changes can also adversely affect the
Company's ability to sell servicing rights to a third party as well as the
proceeds received from such sales.
NEED FOR ADDITIONAL FINANCING
The Company's ability to execute its business strategy, including the
acquisition of additional Subordinated CMBS and the expansion of its servicing
portfolio and loan origination and securitization program, depends to a
significant degree on its ability to obtain additional indebtedness and equity
capital. Other than as described in this Prospectus, the Company has no
commitments for additional borrowings or sales of equity capital and there can
be no assurance that the Company will be successful in consummating any such
future financing transactions on terms satisfactory to the Company, if at all.
Factors which could affect the Company's access to the capital markets, or the
costs of such capital, include changes in interest rates, general economic
conditions and the perception in the capital markets of the Company's
business, results of operations, leverage, financial condition and business
prospects. Each of these factors is to a large extent subject to economic,
financial, competitive and other factors beyond the Company's control. The
Company's ability to repay its outstanding indebtedness at maturity may depend
on its ability to refinance such indebtedness, which could be adversely
affected if the Company does not have access to the capital markets for the
sale of additional debt or equity securities through public offerings or
private placements on terms reasonably satisfactory to the Company.
MANAGEMENT OF GROWTH
Key elements of CRIIMI MAE's business strategy include an expansion of its
commercial loan origination and servicing businesses and continued purchases
of Subordinated CMBS. The rapid entry by the Company into these business lines
and the growth in its portfolio of Subordinated CMBS have resulted, and will
continue to result, in increased demands on the Company's personnel and
systems. CRIIMI MAE's ability to support, manage and control continued growth
is dependent upon, among other things, its ability to hire, train, supervise
and manage its workforce and to continue to develop the skills necessary for
CRIIMI MAE to compete successfully in these areas. There can be no assurance
that the Company will be able to successfully meet these challenges. In
addition, the Company's business is substantially dependent upon certain key
members of its senior management team. The loss of any such officer may have
an adverse effect on the Company.
Moreover, although the Company plans to devote substantial resources to the
expansion of its loan origination program, there can be no assurance that the
Company will succeed in expanding its loan originations or that the program
will provide any of the benefits anticipated by the Company.
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CERTAIN COMMERCIAL LOAN ORIGINATION AND SERVICING RISKS
When borrowers are delinquent in making monthly payments on commercial
mortgage loans serviced by the Company, the Company may be required to advance
interest payments with respect to such delinquent loans to the extent that the
Company deems such advances ultimately recoverable. These advances require
funding from the Company's capital resources but have priority of repayment
from collections or recoveries on the loans in the related pool in the
succeeding month. In the ordinary course of its business, the Company may be
subject to claims made against it by borrowers and private investors arising
from, among other things, losses that are claimed to have been incurred as a
result of alleged breaches of fiduciary obligations, misrepresentations,
errors and omissions of employees and officers of the Company (including its
appraisers), incomplete documentation and failures by the Company to comply
with various laws and regulations applicable to its business.
RISKS OF SECURITIZATION
A principal element of CRIIMI MAE's business strategy is its ability to
securitize mortgage loans originated by the Company and to resecuritize
Subordinated CMBS in order to match the maturities of its commercial mortgage
assets with the liabilities secured by such assets. Adverse changes in the
secondary market for CMBS or changes in the interest rate environment could
impair CRIIMI MAE's ability to securitize its commercial mortgage assets,
which may adversely affect the Company's business and operating results.
Moreover, the Company's ability to securitize commercial mortgage assets or
resecuritize Subordinated CMBS is dependent upon, among other things, the
availability of sufficient assets for securitization. If the Company is unable
to accumulate sufficient commercial mortgage assets or Subordinated CMBS, or
if the Company is delayed in accumulating such assets, the Company's
securitization strategy may be adversely affected.
RISKS OF HEDGING TRANSACTIONS
CRIIMI MAE has in the past and may in the future enter into interest rate
protection agreements used for hedging purposes. While intended to reduce the
effects of volatility in interest rate movements, such transactions could
cause CRIIMI MAE to recognize losses depending on the terms of the instrument
and the interest rate movement. There can also be no assurance that the
Company will be able to enter into hedging transactions on terms which are
acceptable to the Company.
COMPETITION
All of the business lines in which CRIIMI MAE operates are highly
competitive. Some of the Company's principal competitors in certain business
lines are substantially larger and better capitalized than the Company.
Because of these resources, these companies may be better able than CRIIMI MAE
to increase servicing and loan origination activities, to acquire Subordinated
CMBS, to pursue new business opportunities or to survive periods of industry
consolidation.
Acquisitions of Subordinated CMBS are often based on competitive bidding,
where there are dangers of bidding too low (which generates no business), as
well as of bidding too high (which could win the Subordinated CMBS at an
economically unattractive price). In addition, the increasing competition in
this business line and the tightening of interest rate spreads has caused the
Company to experience decreasing profit margins in its Subordinated CMBS
business in order to remain a competitive bidder for such assets.
The Company also encounters significant competition in its other business
lines. The commercial mortgage banking business is highly fragmented with
certain large national competitors and significant localized competition. In
addition, within the commercial loan origination and securitization business,
access to and the cost of capital are critical to the Company's ability to
compete. The Company must compete with numerous competitors, many of whom have
superior access to capital sources and can arrange or obtain lower cost
capital for customers.
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INVESTMENT COMPANY ACT RISK
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"). Under the Investment Company Act, a non-exempt
entity that is an investment company is required to register with the
Securities and Exchange Commission ("SEC") and is subject to extensive,
restrictive and potentially adverse regulation relating to, among other
things, operating methods, management, capital structure, dividends and
transactions with affiliates. 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 SEC, to qualify
for this exemption, CRIIMI MAE, among other things, must maintain at least 55%
of its assets in Qualifying Interests. Pursuant to such SEC staff
interpretations, CRIIMI MAE's Government Insured Mortgage Assets are
Qualifying Interests, but such investments currently comprise only
approximately 40% of the Company's assets. Subordinated CMBS currently
comprise approximately 51% of CRIIMI MAE's assets. The Company will 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 either (i) it would not be
required to register as an investment company or (ii) it would comply with the
Investment Company Act and be able to register as an investment company. In
such event, (i) modification of the Company's business plan so that it would
not be required to register as an investment company would likely entail a
disposition of a significant portion of the Company's Subordinated CMBS or the
acquisition of significant additional assets, such as Government Insured
Mortgage Assets, which are Qualifying Interests or (ii) modification of the
Company's business plan to register as an investment company, which would
result in significantly increased operating expenses and would likely entail
significantly reducing the Company's indebtedness (including the possible
prepayment of the Company's repurchase agreement financing and/or the Notes),
which could also require it to sell a significant portion of its assets. No
assurances can be given that any such dispositions or acquisitions of assets,
or deleveraging, could be accomplished on favorable terms. Any such
modification of the Company's business plan could have a material adverse
effect on the Company. Further, if it were established that the Company were
an unregistered investment company, there would be a risk that the Company
would be subject to monetary penalties and injunctive relief in an action
brought by the SEC, that the Company would be unable to enforce contracts with
third parties and that third parties could seek to obtain recission of
transactions undertaken during the period it was established that the Company
was an unregistered investment company. Any such results would likely have a
material adverse effect on the Company and its ability to service its debt
obligations.
CERTAIN TAX CONSIDERATIONS
REIT Status. CRIIMI MAE has qualified and intends to continue to qualify as
a REIT under Sections 856-860 of the U.S. Internal Revenue Code of 1986, as
amended (the "Code"). Although CRIIMI MAE believes that it has operated and
will continue to operate in such a manner, no assurance can be given that the
Company was organized or has operated, or will be able to continue to operate,
in a manner which will allow it to qualify as a REIT. As a REIT, the Company
does not pay taxes at the corporate level. Qualification for treatment as a
REIT requires the Company to satisfy numerous requirements (some on an annual
and others on a quarterly basis) established under highly technical and
complex Code provisions for which there are only limited judicial and
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within CRIIMI MAE's control.
For example, to qualify as a REIT, at least 95% of CRIIMI MAE's gross income
in any year must be derived from qualifying sources, and the Company must pay
distributions to shareholders aggregating annually at least 95% of its taxable
income (determined without regard to the dividends
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paid deduction and by excluding net capital gains). No assurance can be given
that legislation, new regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification as a REIT or the U.S. federal income tax consequences of such
qualification.
If CRIIMI MAE were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its shareholders. Moreover, unless entitled to relief under
certain statutory provisions, CRIIMI MAE also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings of the
Company available to meet debt service obligations because of the additional
tax liability to CRIIMI MAE for the years involved.
Even if CRIIMI MAE maintains its REIT status, it may be subject to certain
federal, state and local taxes on its income. For example, if CRIIMI MAE has
net income from a prohibited transaction, such income will be subject to a
100% tax. In addition, any net income from its servicing affiliate, CRIIMI MAE
Services Limited Partnership (the "Services Partnership"), is subject to
federal income tax at regular corporate tax rates.
GENERAL ECONOMIC CONDITIONS
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate may adversely affect certain segments of the
Company's business. Such economic conditions could reduce the value of
mortgage loans and Subordinated CMBS and/or increase the cost of capital
invested by the Company, thereby adversely affecting the rate of return
realized from such assets. Economic downturns and rising interest rates also
may reduce the volume of loan originations and negatively affect the Company's
loan securitization activity.
In addition, periods of economic slowdown or recession, whether general,
regional or industry-related, may increase the risk of default on commercial
mortgage loans and, therefore, the risk of losses on the Company's
Subordinated CMBS backed by such loans, and may have an adverse effect on the
Company's business, financial condition and operating results. Such periods
may be accompanied by decreased demand for commercial mortgage loans,
resulting in declining values of commercial real estate securing outstanding
mortgage loans, which may weaken collateral coverage and increase the
possibility of losses in the event of default.
FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF THE BOARD OF
DIRECTORS
CRIIMI MAE's Board of Directors has established the Company's acquisition
and operating policies and strategies. Any such policies or strategies may be
modified or waived by the Board of Directors without stockholder consent.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Notes will be a new issue of securities for which there currently is no
market. There can be no assurance as to the liquidity of any market for the
Notes that may develop, the ability of holders of the Notes to sell the Notes,
or the prices at which holders of the Notes may be able to sell their Notes.
If such market were to exist, the Notes could trade at prices higher or lower
than their initial public offering price, depending on a variety of factors,
including prevailing interest rates, the Company's operating results and the
market for similar securities. The Underwriters have advised the Company that
they currently intend to make a market in the Notes. However, the Underwriters
are not obligated to do so, and any market making activity with respect to the
Notes may be suspended or discontinued at any time without notice. The Company
does not intend to apply for listing of the Notes on any securities exchange
or for quotation thereof through the National Association of Securities
Dealers Automated Quotation System.
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CRIIMI MAE
THE COMPANY
CRIIMI MAE is a leading fully integrated commercial mortgage company and is
one of the largest publicly traded REITS focused primarily on the CMBS market.
CRIIMI MAE's primary activities include (i) acquiring Subordinated CMBS and
(ii) servicing, originating and securitizing commercial mortgage loans and
CMBS. CRIIMI MAE believes that its focus on acquiring Subordinated CMBS,
together with its expertise in underwriting, servicing and originating
commercial mortgage loans, has enabled the Company to take advantage of the
rapid growth in the securitization of debt backed by commercial mortgage
loans. William B. Dockser, the Company's Chairman of the Board, and H. William
Willoughby, the Company's President, have led CRIIMI MAE since its formation
in 1989. The Company, which is structured as a self-administered REIT,
currently has over 130 employees, and the eight members of the Company's
senior management average over 20 years of experience in a wide range of real
estate activities. As of September 30, 1997, CRIIMI MAE's approximately $1.5
billion portfolio of assets included approximately $774.5 million of
Subordinated CMBS (representing approximately 51% of the Company's total
consolidated assets) and approximately $611.0 million of Government Insured
Mortgage Assets (representing approximately 40% of the Company's total
consolidated assets).
When acquiring CMBS, CRIIMI MAE focuses on classes of CMBS that are rated
below BB+ by Standard and Poor's (or below an equivalent rating given by
another rating agency), including the most subordinate class of the CMBS which
typically is not rated. CRIIMI MAE generally acquires Subordinated CMBS in
privately negotiated transactions, which allows CRIIMI MAE to perform due
diligence on the mortgage loans underlying the CMBS as well as the underlying
real estate prior to consummating the purchase, thus mitigating certain risks
associated with purchasing Subordinated CMBS. See "--Subordinated CMBS
Acquisitions."
CRIIMI MAE performs various servicing functions for approximately $11.2
billion of commercial mortgage loans as of October 10, 1997, including acting
as master servicer for approximately $2.2 billion of such loans, and is
authorized to act as special servicer for all of the loans underlying the
Company's CMBS. In its role as special servicer, CRIIMI MAE is responsible for
working out or foreclosing on defaulted mortgage loans backing its
Subordinated CMBS and other classes of CMBS. CRIIMI MAE's servicing operations
permit the Company to actively monitor and manage the performance of its
mortgage assets and provide CRIIMI MAE with additional income. CRIIMI MAE
believes that its loan servicing capabilities, particularly its ability to act
as master servicer in connection with its commercial loan securitizations,
enhance its ability to compete against other originators of commercial
mortgage loans. See "--Mortgage Loan Servicing Operations."
The Company also originates commercial mortgage loans that it intends to
securitize by issuing CMBS backed by pools of such loans. In connection with
any such securitization, CRIIMI MAE expects to retain the subordinated classes
of the CMBS plus an interest only class and sell the senior CMBS classes to
third party investors. CRIIMI MAE's origination activities generate additional
income for the Company in the form of origination fees, increase the size of
the Company's servicing portfolio and Subordinated CMBS. As of October 10,
1997, CRIIMI MAE originated loans in the aggregate principal amount of
approximately $44.3 million. See "--Loan Origination Activities."
THE CMBS MARKET
Historically, traditional lenders, including commercial banks, insurance
companies and savings and loans, have been the primary holders of commercial
mortgages. The real estate market of the late 1980s and early 1990s created
business and regulatory pressure to reduce the real estate assets held on the
books of these institutions. The result has been tremendous movement of
commercial real estate debt from private institutional holders to the public
markets. Consequently, the supply of private sector multifamily and other CMBS
has increased dramatically over recent years and is expected to continue to
increase in the forseeable future. According to Moody's Investors Service,
Inc. ("Moody's"), total 1996 CMBS issuances in the U.S. equaled $30 billion,
compared to only $18.6 billion in 1995. Subordinated CMBS comprised
approximately $4.5 billion or approximately 15% of the CMBS issued in the U.S.
in 1996.
S-16
<PAGE>
CMBS are generally created by pooling commercial mortgage loans and
directing the cash flow from such mortgage loans to various classes or
tranches of securities (ranging from investment grade to non-rated) which have
certain priority rights to the cash flow. The first step in the process of
creating CMBS, origination, occurs when a financial institution lends money to
a borrower for the purchase of a multifamily or other commercial real estate
property, and secures the loan with a first mortgage on the asset that the
borrower purchased. Next, a pool of these commercial real estate backed
mortgage loans is accumulated, often by a large commercial bank or other
financial institution, from various loan originators, including loans which
such financial institution originated. One or more rating agencies analyze the
loans and the underlying real estate to determine their credit quality. The
mortgage loans are then deposited into an entity that is not subject to
taxation, often a real estate mortgage investment conduit ("REMIC").
Securities backed by the commercial mortgage loans (i.e., the CMBS) are then
issued by the REMIC. The CMBS are divided into specific classes or tranches
which are afforded certain priority rights to the cash flow from the
underlying mortgage loans. Each class is assigned a rating by one or more
rating agencies based on their assessment of the likelihood of the class
receiving its stated right to payment of principal. Also at the time of the
securitization, one or more entities are appointed as "servicers" for the pool
of mortgage loans, responsible for performing servicing duties which include
collecting payments, monitoring performance and working out or foreclosing on
defaulted loans. Depending on the extent of servicing duties, the servicer
receives a fee and other financial incentives. The CMBS are then sold to
investors either through public offerings or private placements.
SUBORDINATED CMBS ACQUISITIONS
CRIIMI MAE believes that purchasing Subordinated CMBS is and will continue
to be an attractive real estate investment opportunity for the Company. The
Company believes that there are a limited number of companies which have the
in-house expertise and capabilities of CRIIMI MAE to purchase large volumes of
Subordinated CMBS while mitigating certain risks associated with these
investments. The Company believes that its ability to re-underwrite the
underlying mortgage loans, monitor their performance and control workout and
foreclosure procedures provides the Company with competitive advantages which
enable it to mitigate certain risks associated with owning Subordinated CMBS.
For the years ended December 31, 1995 and 1996 and for the nine months ended
September 30, 1997, issuances of Subordinated CMBS in the U.S. totaled
approximately $4.2 billion, $4.5 billion and $5.1 billion, respectively. Over
the same time periods, CRIIMI MAE has purchased Subordinated CMBS with an
aggregate face value of $308.4 million, $434.1 million and $341.7 million,
respectively. The Company believes that the supply of CMBS and Subordinated
CMBS will continue to grow as more commercial mortgage loans are securitized.
When CRIIMI MAE determines to invest in a CMBS pool, it generally purchases
the classes of CMBS that are rated below BB+ by Standard and Poor's (or below
an equivalent rating given by another rating agency) or are not rated.
Subordinated CMBS are typically acquired by the Company through private
placements in the primary market. The Company has purchased Subordinated CMBS
in the secondary market, and may consider additional secondary market
purchases as they become available.
In acquiring 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" a substantial portion of the mortgage loans in a prospective
CMBS pool, which entails a full review of the operating records, appraisals,
environmental studies, market studies and architectural and engineering
reports, as well as site visits at properties which represent a majority of
the portfolio. The Company then tests the projected financial performance of
the properties to determine their resiliency to a market downturn and applies
varying capitalization rates to assess collateral value. Further, CRIIMI MAE
will 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. CRIIMI MAE prices the portfolio based on estimates
of both the timing and magnitude of defaults and prepayments of loans within
the portfolio.
S-17
<PAGE>
CRIIMI MAE believes that its existing Subordinated CMBS holdings are secured
by a pool of first mortgage loans that are diversified by borrower, property
type and geographic location. As of September 30, 1997, approximately 55% of
the CMBS (based on aggregate amortized cost) are rated BB- or higher, 35% are
B or B- and 10% are unrated. See "The Portfolio--Subordinated CMBS."
MORTGAGE LOAN SERVICING OPERATIONS
CRIIMI MAE's servicing operations enable the Company to actively monitor and
manage the performance of its mortgage assets and provide CRIIMI MAE with an
additional source of income. CRIIMI MAE continues to increase its mortgage
servicing income by acquiring servicing rights in connection with purchases of
Subordinated CMBS and by originating commercial mortgage loans for its own
portfolio. As of October 10, 1997, CRIIMI MAE performed various servicing
functions for approximately $11.2 billion of commercial mortgage loans,
including acting as master servicer for approximately $2.2 billion of such
loans.
CRIIMI MAE's servicing activities include the following:
Special Servicing
A special servicer typically provides asset management and resolution
services with respect to nonperforming or underperforming loans within a pool
of mortgage loans. CRIIMI MAE conducts its servicing operations through its
affiliate, CRIIMI MAE Services Limited Partnership (the "Services
Partnership"). The Services Partnership has been approved to act as a special
servicer by Moody's, Standard and Poor's, Fitch Investors Service, L.P.
("Fitch") and Duff & Phelps Credit Rating Co., the four major rating agencies
that rate CMBS. The special servicer function provides CRIIMI MAE with the
authority to deal directly with any borrower that fails to perform under
certain terms of its mortgage loan, including the failure to make payments,
and to manage any loan workouts and foreclosures. CRIIMI MAE will not purchase
Subordinated CMBS unless it can secure the special servicing rights to the
mortgage loans underlying the portfolio. As of October 10, 1997, CRIIMI MAE is
authorized to act, if necessary, as the special servicer with respect to 2,681
commercial mortgage loans in the aggregate principal amount of approximately
$11.2 billion, including all of the mortgage loans underlying its Subordinated
CMBS portfolio.
Master Servicing
A master servicer typically provides administrative and reporting services
to the trustee with respect to a particular issuance of CMBS. Mortgage loans
underlying CMBS generally are serviced by a number of primary servicers. Under
most master servicing arrangements, the primary servicers retain principal
responsibility for administering the mortgage loans and the master servicer
acts as an intermediary in overseeing the work of the primary servicers,
monitoring their compliance with the standards of the issuer of the related
CMBS and consolidating the servicers' respective periodic accounting reports
for transmission to the trustee. CRIIMI MAE has been approved as a master
servicer by Standard and Poor's and Fitch. The master servicer function
provides the Company with greater control over the mortgage assets underlying
its Subordinated CMBS, including the authority to (i) collect monthly
principal and interest payments (either from a direct servicer or directly
from borrowers) on loans comprising a CMBS pool and remit such amounts to the
pool trustee, (ii) oversee the performance of sub-servicers and (iii) report
to trustees. For these duties, the master servicer is usually paid a fee and
can earn float income on the deposits it holds. In addition to this float and
fee income, the master servicer has more direct and regular contact with
borrowers than would be typical for a special servicer. The Company
anticipates expanding this line of business through the acquisition of
additional CMBS and through its own loan origination program. CRIIMI MAE has
been awarded master servicing assignments in 1997 on three CMBS portfolios
aggregating approximately $2.2 billion.
S-18
<PAGE>
Direct (or Primary) Servicing
Direct (or primary) servicers typically perform certain functions for the
master servicer. Direct serviced loans are those loans for which CRIIMI MAE
collects loan payments directly from the borrower (including tax and insurance
escrows and replacement reserves). The loan payments are remitted to the
master servicer for the loan (which may be the same entity as the direct
servicer), usually on a fixed date each month. The direct servicer is usually
paid a fee to perform these services, and is eligible to earn float income on
the deposits held. In addition to this fee and float income, the direct
servicer has more direct and regular contact with borrowers, which facilitates
the process of ongoing loan management and surveillance. As of October 10,
1997, CRIIMI MAE was a direct servicer for 384 loans totaling $1.6 billion.
Loan Management
In certain cases, CRIIMI MAE acts as loan manager, in which capacity CRIIMI
MAE monitors the ongoing performance of properties securing the mortgage loans
underlying its Subordinated CMBS portfolio through its continuous review of
property level operating statements and site inspections. This role allows the
Company to identify and resolve potential issues that could result in losses.
As of October 10, 1997, CRIIMI MAE performs these duties with respect to
approximately $9.4 billion of mortgage loans underlying CMBS pools in which
the Company owns Subordinated CMBS.
LOAN ORIGINATION ACTIVITIES
CRIIMI MAE believes that the expansion of its commercial loan origination
activities are an important part of its business strategy. As of October 31,
1997, the Company's origination activities are conducted by 24 employees
located in origination offices in Boston, Massachusetts, Memphis, Tennessee,
Rockville, Maryland and San Francisco, California. In addition to providing
additional income in the form of origination fees, the Company's origination
program is a source of commercial mortgage loans that the Company intends to
securitize by issuing CMBS backed by pools of such loans. In connection with
any such securitization, CRIIMI MAE anticipates retaining the subordinated
tranches of such CMBS and an interest only strip of the underlying mortgage
loan payments, placing the senior tranches with other investors, and retaining
the master and special servicing rights with respect to the mortgage loans
backing such CMBS. Accordingly, the Company expects that its loan originations
will enhance its ability to increase income from investments in commercial
mortgage assets, including Subordinated CMBS, and expand its servicing
portfolio.
During 1996, the Company entered into a $200.0 million loan origination
program agreement with Citicorp Real Estate, Inc. ("Citicorp"). Under the
program, CRIIMI MAE originates loans on behalf of Citicorp and retains the
right to acquire such loans upon accumulating a sufficient principal amount of
loans to execute a securitization. Citicorp will fund a substantial portion of
each mortgage loan originated under the program. In June 1997, the Company
expanded its commercial mortgage origination capabilities with the launch of
its fixed rate, "no-lock" loan program. Unlike most commercial mortgage loans
originated for the CMBS market which contain "lock-out" clauses (i.e.,
provisions which prohibit prepayment of a loan for a specified period after
the loan is originated or costly yield maintenance provisions), the Company's
program allows borrowers the flexibility to prepay loans at any time by paying
a prepayment penalty. The Company believes that its "no-lock" program will
further enhance its origination activities.
FINANCING STRATEGY
General
As of September 30, 1997, the Company's total consolidated debt was
approximately $1.1 billion, of which approximately $708.4 million (or
approximately 66%) is fixed rate debt having maturities that match those of
the Company's mortgage assets securing such debt ("match funding") and
approximately $369.5 million (or approximately 34%) is non-match-funded
floating rate debt. CRIIMI MAE's fixed rate debt has effective interest rates
averaging approximately 7.3% as of September 30, 1997. As of September 30,
1997, all of the Company's floating rate debt is hedged by interest rate cap
agreements with caps ranging from 6.0% to 6.7%. See "Risk Factors--Impact of
Changes in Interest Rates."
S-19
<PAGE>
Match-Funding
In general, CRIIMI MAE initially funds approximately 62% of the aggregate
purchase price of Subordinated CMBS with short term, floating rate, secured
debt, primarily repurchase agreement financing. CRIIMI MAE's long term
strategy is to refinance a significant portion of this debt with fixed rate,
match-funded debt, which significantly reduces its exposure to interest rate
risk. CRIIMI MAE effects such refinancing by pooling its Subordinated CMBS and
issuing CMBS backed by such assets. The CMBS issued in such resecuritizations
are fixed rate obligations with maturities that match the Subordinated CMBS
backing the new CMBS. In certain cases, these refinancings may also increase
the amount of borrowings available to the Company due to the increased
collateral value of the new CMBS relative to the underlying Subordinated CMBS
due to the diversification and seasoning of the pooled mortgage loans that
occurs when such underlying Subordinated CMBS are pooled. The Company
generally uses the net proceeds from such resecuritizations to temporarily
reduce the amount of its floating rate debt, including borrowings under the
Company's repurchase agreements.
During the first half of 1998, CRIIMI MAE intends to pool and resecuritize a
significant portion of its Subordinated CMBS portfolio and thus refinance a
portion of its floating rate debt. This resecuritization is expected to be
similar to CRIIMI MAE's resecuritization transaction in December 1996, which
match funded $142.0 million of floating rate debt with fixed rate, match-
funded debt. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." The Company
intends to enter into similar resecuritizations or refinancings approximately
every 18 to 24 months after accumulating a sufficient pool of Subordinated
CMBS.
BUSINESS STRATEGY
CRIIMI MAE believes that its position as a leading purchaser of Subordinated
CMBS, combined with its commercial loan servicing and origination capabilities
and its access to the capital markets, provides the Company with a competitive
advantage to capitalize on current opportunities existing in the securitized
debt market, particularly with respect to the acquisition of lower rated CMBS
tranches. Significant elements of CRIIMI MAE's current business strategy are
summarized below:
. INCREASE ITS PORTFOLIO OF SUBORDINATED CMBS. CRIIMI MAE intends to acquire
additional Subordinated CMBS, which the Company believes is and will
continue to be an attractive real estate investment opportunity for the
Company. The Company believes that its loan origination, servicing and
underwriting capabilities are competitive advantages as the Company
competes against other investors for the acquisition of Subordinated CMBS.
. EXPAND THE COMPANY'S SERVICING PORTFOLIO. The Company intends to increase
its servicing portfolio primarily by acquiring servicing rights in
connection with purchases of Subordinated CMBS and by originating mortgage
loans under its loan origination program. In addition, CRIIMI MAE intends
to continue to build on its status as an approved master servicer to
increase its servicing activities and servicing income.
. ORIGINATE COMMERCIAL MORTGAGE LOANS. The Company intends to originate
commercial loans for securitization. In connection with any such
securitization, CRIIMI MAE anticipates (i) retaining the non-investment
grade subordinated classes of the resulting CMBS issuance and an interest
only bond, (ii) placing the senior classes with other investors and (iii)
retaining the master and special servicing rights with respect to the
mortgage loans backing such CMBS. CRIIMI MAE expects to complete its first
securitization of originated commercial loans during the first half of
1998.
. RESECURITIZE SUBORDINATED CMBS. The Company plans to resecuritize
Subordinated CMBS acquired by the Company approximately every 18 to 24
months. By resecuritizing a substantial portion of the Subordinated CMBS in
its portfolio, CRIIMI MAE believes it will better match the maturities of
its liabilities and assets as such resecuritization transactions allow the
Company to refinance short-term, floating-rate debt with long term fixed
rate debt. During the first half of 1998, CRIIMI MAE intends to
resecuritize a significant portion of its Subordinated CMBS.
S-20
<PAGE>
THE PORTFOLIO
SUBORDINATED CMBS
As of September 30, 1997, CRIIMI MAE owned CMBS ranging from AAA to unrated
with a total carrying amount of approximately $774.5 million (representing
approximately 51% of the Company's total consolidated assets) which includes
CMBS with an aggregate amortized cost of approximately $739.6 million and
interest only strips with an aggregate fair value of approximately
$34.8 million, as set forth in the tables below.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
TRANCHE FACE OF TOTAL AMORTIZED OF TOTAL
RATING AMOUNT FACE AMOUNT FAIR VALUE(A) COST AMORTIZED COST
------- ------------- ----------- ------------- ------------- --------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
AA-(b).................. $ 10.6 0.9% $ 10.6 $ 10.5 1.4%
BBB..................... 4.0 0.4 4.3 4.0 0.5
BB+(b).................. 9.0 0.8 9.0 8.7 1.2
BB...................... 476.2 41.8 425.7 368.0 49.8
BB-..................... 32.0 2.8 27.1 25.7 3.5
B....................... 345.2 30.3 261.4 223.3 30.2
B-...................... 42.6 3.8 24.5 20.7 2.8
Unrated................. 218.6 19.2 87.7 78.7 10.6
-------- ----- ------ ------ -----
Total................. $1,138.2 100.0% $850.3 $739.6(c) 100.0%
======== ===== ====== ====== =====
</TABLE>
- --------
(a) The estimated fair values of Subordinated CMBS are based on dealer quoted
market prices or an average of dealer market quotes for the Company's
other Subordinated CMBS.
(b) Represents CMBS that were upgraded in July 1997 to investment grade.
(c) During the nine months ended September 30, 1997, CRIIMI MAE purchased a
portion of Subordinated CMBS tranches from five separate pools (excluding
interest only strips) having a total face value of approximately $342.3
million, for an aggregate purchase price of approximately $175.6 million.
The aggregate investment by the underlying rating of the interest only
strips of Subordinated CMBS held by CRIIMI MAE as of September 30, 1997 was as
follows:
<TABLE>
<CAPTION>
CURRENT ESTIMATED PERCENTAGE
SECURITY UNLEVERAGED NOTIONAL OF TOTAL
RATING YIELD TO MATURITY AMOUNTS(A) FAIR VALUE(B) AMORTIZED COST AMORTIZED COST
-------- ----------------- ------------- ------------- -------------- --------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
AAA..................... 7.6% $40.6 $ 7.2 $ 7.3 20.9%
B....................... 10.4 38.7 27.6 27.6 79.1
----- ----- ----- -----
$79.3 $34.8 $34.9 100.0%
===== ===== ===== =====
</TABLE>
- --------
(a) The notional amounts of interest only strips are calculated based on the
principal amount from which the pass-through rates are allocated.
(b) The estimated fair values of interest only strips are based on dealer
quoted market prices or an average of dealer market quotes for the
Company's other Subordinated CMBS.
S-21
<PAGE>
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:
<TABLE>
<CAPTION>
PROPERTY TYPE PERCENTAGE(1)
- ------------- -------------
<S> <C>
Multifamily............... 39.5%
Retail.................... 25.1
Hotel..................... 15.1
Office.................... 9.0
Other..................... 11.3
----
Total................... 100%
====
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC LOCATION PERCENTAGE(1)
- ------------------- -------------
<S> <C>
Texas..................... 16.7%
California................ 13.7
Florida................... 8.3
Georgia................... 4.8
Other(2).................. 56.5
----
Total................... 100%
====
</TABLE>
- --------
(1)Based on a percentage of the total unpaid face principal balance of the
underlying loans.
(2)No other individual state makes up more than 4% of the total.
S-22
<PAGE>
The following table summarizes information relating to CRIIMI MAE's
Subordinated CMBS on an aggregate basis by pool as of September 30, 1997:
<TABLE>
<CAPTION>
ORIGINAL CURRENT
ESTIMATED ESTIMATED
UNLEVERAGED UNLEVERAGED
YIELD TO YIELD TO
MATURITY(1) MATURITY(2)
----------- -----------
<S> <C> <C>
POOL(3)
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
Series 1994-C3 and
Series 1995-A......................................... 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 Commercial Securities, Inc.
Series 1997-C1........................................ 11.3 11.3
Morgan--Wells Fargo
Series 1997-WFI....................................... 10.2 10.2
Weighted average unleveraged yield to maturity...... 11.4%(5) 11.4%(5)
</TABLE>
- --------
(1) Represents the original estimated unleveraged yield over the expected life
(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.
(footnotes continued on next page)
S-23
<PAGE>
(3) As of October 10, 1997, CRIIMI MAE provided various servicing functions
for a total CMBS pool of approximately $11.2 billion, including acting as
master servicer for approximately $2.2 billion of such loans.
Approximately 0.5% of the total CMBS pool is in payment default and
approximately 0.5% of such pool is in nonpayment default.
(4) In July 1997, Fitch 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) 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.
GOVERNMENT INSURED MORTGAGE ASSETS
Prior to focusing primarily on the acquisition of Subordinated CMBS, CRIIMI
MAE acquired Government Insured Mortgage Assets directly and indirectly
through its subsidiaries. As of September 30, 1997, CRIIMI MAE directly and
indirectly owned approximately $611.0 million of Government Insured Mortgage
Assets (representing approximately 40% of the Company's total consolidated
assets) with weighted average effective interest rates ranging from 7.2% to
8.4% and weighted average remaining terms ranging from 30 to 35 years.
Approximately 96.9% of these mortgage assets have been securitized as part of
the Company's strategy to refinance floating rate debt with fixed rate match-
funded debt. CRIIMI MAE does not currently intend to purchase additional
Government Insured Mortgage Assets. CRIIMI MAE also owns general partnership
interests in four publicly traded partnerships that own primarily Government
Insured Mortgage Assets (the "AIM Funds"). As of September 30, 1997, the AIM
Funds had total invested assets of approximately $503.1 million. The Company's
interests in the AIM Funds represent a pro rata share of net income from the
AIM Funds' assets, which ranges from 2.9% to 4.9% of net income, plus annual
subadvisory fees equal to approximately 0.3% of total invested assets.
S-24
<PAGE>
USE OF PROCEEDS
The net proceeds to CRIIMI MAE from the Offering of the Notes are estimated
to be approximately $97.1 million. The Company expects that approximately
$15.0 million will be used to repay amounts borrowed subsequent to September
30, 1997 and currently outstanding under the Company's unsecured working line
of credit. Outstanding borrowings under this line of credit, which terminates
December 31, 1998, bear interest at one-month LIBOR plus a spread of 1.30%.
The Company intends to use the remainder of the net cash proceeds from the
Offering (i) together with additional borrowings, to acquire additional
mortgage assets, primarily Subordinated CMBS, (ii) to sponsor and/or
participate in loan origination programs and (iii) for other general corporate
purposes, including working capital. Pending application, net proceeds from
the Offering may be invested in short term marketable securities or used to
pay down borrowings outstanding under the Company's repurchase agreements. The
Company expects to use approximately $12.2 million and $36.3 million of the
net proceeds of the Offering to purchase Subordinated CMBS from Merrill Lynch
and Lehman Brothers, respectively. See "Underwriting."
CAPITALIZATION
The following table sets forth CRIIMI MAE's capitalization on an historical
basis and on an as adjusted basis as of September 30, 1997, assuming (i) the
sale of the Notes in the Offering and (ii) the application of the assumed net
proceeds therefrom as if the Offering had occurred on September 30, 1997. See
"Use of Proceeds." The information set forth in the table should be read in
conjunction with the Company's financial statements and notes thereto, which
are included in and incorporated by reference into this Prospectus Supplement
and the accompanying Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
HISTORICAL AS ADJUSTED(2)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Secured Debt:
Securitized mortgage obligations(1).............. $ 708,368 $ 708,368
Repurchase agreements-Subordinated CMBS.......... 365,569 365,569(2)
Other............................................ 3,900 3,900
---------- ----------
Total Secured Debt............................. 1,077,837 1,077,837
Notes offered hereby............................... -- 100,000
---------- ----------
Total Debt..................................... 1,077,837 1,177,837
Minority interests in consolidated subsidiary...... 2,944 2,944
Stockholders' Equity:
Convertible preferred stock...................... 19 19
Common shares.................................... 391 391
Net unrealized gains on mortgage assets and
interest only strips............................ 196 196
Additional paid in capital....................... 431,008 431,008
Less treasury stock, at cost--538,635 shares..... (5,051) (5,051)
---------- ----------
Total stockholders' equity..................... 426,563 426,563
---------- ----------
Total capitalization........................... $1,507,344 $1,607,344
========== ==========
</TABLE>
- --------
(/1/) Securitized mortgage obligations represent fixed rate debt with matched
principal amortization and maturity of a corresponding amount of assets.
The obligations consist of a $236.3 million FHLMC Funding Note, a $145.7
million FNMA Funding Note, $184.4 million of CMO's and $142.0 million of
securitized CMBS obligations.
(/2/) TheCompany expects to incur additional indebtedness in the form of
repurchase agreements to be used in conjunction with proceeds from this
Offering to acquire additional Subordinated CMBS.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRIIMI MAE's Management's Discussion and Analysis of Financial Condition and
Results of Operations contains statements that may be considered forward
looking. See "Forward-Looking Statements."
GENERAL
CRIIMI MAE is a leading fully integrated commercial mortgage company and is
one of the largest publicly traded REITs focused primarily on the CMBS market.
CRIIMI MAE's primary activities include (i) acquiring Subordinated CMBS and
(ii) servicing, originating and securitizing commercial mortgage loans and
CMBS. CRIIMI MAE believes that its focus on acquiring Subordinated CMBS,
together with its expertise in underwriting, servicing and originating
commercial mortgage loans, has enabled the Company to take advantage of the
rapid growth in the securitization of debt backed by commercial mortgage
loans. William B. Dockser, the Company's Chairman of the Board, and H. William
Willoughby, the Company's President, have led CRIIMI MAE since its formation
in 1989. The Company, which is structured as a self-administered REIT,
currently has over 130 employees, and the eight members of the Company's
senior management average over 20 years of experience in a wide range of real
estate activities. As of September 30, 1997, CRIIMI MAE's approximately $1.5
billion portfolio of assets included approximately $774.5 million of
Subordinated CMBS and approximately $611.0 million of Government Insured
Mortgage Assets.
As a result of a shareholder-approved merger transaction (the "Merger") with
certain mortgage businesses (the "CRI Mortgage Businesses") affiliated with
C.R.I., Inc. ("CRI") 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. For further
information with respect to the Merger, reference is made to Note 3 to the
accompanying consolidated financial statements.
Since the Merger, through CRIIMI MAE Services Limited Partnership ("Services
Partnership"), CRIIMI MAE has increased its mortgage advisory and servicing
activities primarily in conjunction with its purchases of Subordinated CMBS by
acquiring certain servicing rights relating to the mortgage loans
collateralizing these assets. The servicing fee strips are contributed to the
Services Partnership and increase CRIIMI MAE's interest in that partnership.
These servicing rights allow CRIIMI MAE to monitor the performance of its
Subordinated CMBS and the mortgage loans underlying such assets and provide
CRIIMI MAE with workout/foreclosure rights with respect to the underlying
mortgage loans. CRIIMI MAE Management, Inc., a wholly owned subsidiary of the
Company, is the sole general partner of the Services Partnership and owns a
62% interest in the Services Partnership. The sole limited partner of the
Services Partnership is CRIIMI MAE Services, Inc. As of October 10, 1997, the
Services Partnership was responsible for a variety of servicing functions on a
mortgage loan portfolio of approximately $11.2 billion, as compared to
approximately $4.0 billion as of September 30, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND NINE MONTHS ENDED SEPTEMBER 30,
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.
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<PAGE>
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" below,
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.
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's shareholders approved the adoption of a plan of
complete liquidation and dissolution of CRI Liquidating's, 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
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
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<PAGE>
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 approximately $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.
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
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<PAGE>
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 pay downs
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 approximately $5.5
million for the corresponding period in 1996. The increase in general and
administrative expenses during these periods is primarily the result of the
continual growth of CRIIMI MAE's commercial mortgage operation, 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 the three months ended 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 prepayments of mortgage assets held
by CRIIMI MAE and its subsidiaries during the nine months ended September 30,
1997, which resulted in financial statement 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.
1996 VERSUS 1995
Tax Basis Income. CRIIMI MAE earned approximately $39.0 million in tax basis
income available to common shareholders during 1996, a 54% increase from
approximately $25.3 million earned in 1995. On a primary share basis, tax
basis income increased to $1.27 in 1996 from $.89 in 1995. Ordinary income, on
a per primary share basis, increased from $0.70 in 1995 to $0.96 in 1996.
The primary factors for the increase in tax basis income were as follows:
Recurring income increased for 1996 as compared to 1995 primarily due to
higher earnings from CRIIMI MAE's growing portfolio of Subordinated CMBS.
Additionally, equity in earnings from investments increased as a result of the
increased revenues from the investment in Services Partnership due principally
to the one- time receipt in the fourth quarter of 1996 of approximately $1.4
million, net, which represented previously unpaid servicing fees on a group of
multifamily loans. Also contributing to the increase in equity in earnings in
1996 was the additional servicing fees earned in conjunction with purchases of
Subordinated CMBS. Partially offsetting these increases in tax basis income
was a decrease in mortgage interest earned due to the 1996 prepayment of ten
mortgages held by CRIIMI MAE and its wholly owned subsidiaries and the
disposition of 11 CRI Liquidating mortgage assets in accordance with its
business plan. Additionally, an increase in interest expense as a result of
additional amounts borrowed to
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<PAGE>
acquire Subordinated CMBS, as well as the higher interest rate on the long
term, fixed rate debt, also partially offset the above increases. Annual and
incentive fees paid to CRIIMI MAE's former adviser, CRI Insured Mortgage
Associates Adviser Limited Partnership (the "Adviser"), decreased as a result
of the termination of the CRIIMI MAE advisory agreement in connection with the
Merger. The decrease in CRIIMI MAE's annual and incentive fees was offset by
an increase in general and administrative expenses as a result of the June
1995 Merger and CRIIMI MAE's growth during 1995 and 1996. Net capital gains on
a per primary share basis, increased from $.19 per weighted average share in
1995 to $.31 per weighted average share in 1996, of which, $.19 and $.27,
respectively, were a result of mortgage dispositions made by CRI Liquidating
REIT, as discussed below.
Financial Statement Net Income. Net income available to common shareholders
for financial statement purposes was approximately $31.7 million for 1996, a
71% increase from approximately $18.5 million for 1995. On a per primary share
basis, financial statement net income increased to $1.03 per weighted average
share for 1996 from $.65 for 1995. The factors described in the preceding
paragraph also impacted net income for financial statement purposes. Partially
offsetting these increases to net income, but not affecting tax basis income,
was the non-cash amortization of assets acquired in the Merger, along with the
significant 1995 adjustment to hedges for valuation and sales. Descriptions of
the changes in financial statement net income are discussed below.
Mortgage Income. Mortgage income decreased by approximately $9.2 million or
14% to approximately $56.9 million for 1996 from approximately $66.1 million
in 1995. This decrease was principally due to the disposition of a significant
portion of CRI Liquidating's mortgage assets in 1996. Also contributing to the
decrease in mortgage income was the prepayment of ten mortgages held by CRIIMI
MAE and its wholly owned subsidiaries (aggregating approximately $52 million)
during 1996. These prepayments resulted in net losses of approximately $91,000
which are included in losses on mortgage dispositions on the accompanying
consolidated statement of income.
Income from Subordinated CMBS. Income from Subordinated CMBS increased by
approximately $30.6 million, or 276%, to approximately $41.7 million during
1996 as compared to approximately $11.1 million during 1995. This increase was
a result of the acquisition of Subordinated CMBS at purchase prices
aggregating approximately $525 million during 1996 and 1995, as discussed in
Note 7 to the consolidated financial statements.
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
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 weighted
average anticipated unleveraged yield over the expected average life for
CRIIMI MAE's Subordinated CMBS for financial statement purposes as of December
31, 1996 and 1995 is approximately 12%. Although there can be no assurance,
CRIIMI MAE anticipates the leveraged return on these mortgage assets for
financial statement purposes will approximate 21% over the life of the
Subordinated CMBS. This return was determined based on the anticipated yield
over the expected weighted average life of the Subordinated CMBS, which
considers, among other things, anticipated losses, net of interest expense
attributable to the financing of the rated tranches at current interest rates
and borrowing amounts. The leveraged tax basis return on Subordinated CMBS was
approximately 24% as of December 31, 1996. This return was determined based on
cash basis interest income, no defaults or unrecoverable losses, net of
interest expense attributable to the financing of the rated tranches at
current interest rates and borrowing amounts and adjusted for amortization of
original issue discount related to the Subordinated CMBS.
CRIIMI MAE's anticipated returns on Subordinated CMBS are based upon a
number of assumptions that are currently subject to certain business and
economic uncertainties and contingencies, including, without limitation: the
potential lack of a liquid secondary market for Subordinated CMBS, prevailing
interest rates on that portion of the Subordinated CMBS which has been
financed with floating rate debt, renewal of repurchase agreements at similar
terms or the availability of alternative financing, the timing and magnitude
of credit losses
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<PAGE>
on the underlying mortgages collateralizing the Subordinated CMBS that are a
result of the general condition of the real estate market (including
competition for tenants and 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 anticipated yields, discussed above and
elsewhere herein, will be achieved.
In making acquisitions of Subordinated CMBS, CRIIMI MAE and its affiliates
apply their knowledge of multifamily and other commercial mortgages to perform
due diligence on the mortgage loans collateralizing the Subordinated CMBS.
This analysis may include reviewing the operating records of the underlying
real estate assets, appraisals, environmental studies, market studies and
architectural and engineering studies, and where deemed necessary,
independently developing projected operating budgets. In addition, site visits
are conducted at a substantial portion of the properties. Further, CRIIMI MAE
will generally acquire Subordinated CMBS only when satisfactory arrangements
exist whereby CRIIMI MAE can closely monitor the collateral of the pool and
when CRIIMI MAE has workout/foreclosure rights with respect to the underlying
collateral. CRIIMI MAE believes that all transactions entered into to date
have had such satisfactory arrangements.
Equity in Earnings from Investments. Equity in earnings from investments
increased by approximately $2.0 million or 73% to $4.7 million during 1996 as
compared to $2.7 million during 1995. The increase was primarily due to
increases in earnings from the Services Partnership as a result of a one-time
receipt in the fourth quarter of 1996 of previously unpaid servicing fees
(which was approximately $1.4 million, net) on a group of multi-family loans,
as well as servicing fees earned in connection with additional acquisition of
Subordinated CMBS.
Other Investment Income. Other investment income increased by approximately
$501,000 or 23% to $2.6 million during 1996 as compared to $2.1 million during
1995. This increase was primarily attributable to income earned from the
short-term investment of CRIIMI MAE mortgage disposition proceeds pending pay
down of the related securitized debt. During 1996, ten CRIIMI MAE mortgages
prepaid resulting in net proceeds of approximately $52 million as compared to
the 1995 disposition of six CRIIMI MAE mortgages resulting in net proceeds of
approximately $14 million. Other investment income from CRI Liquidating did
not change significantly. Partially offsetting this increase to other
investment income was a decrease in fees recognized related to the setup of
servicing assets during 1996 as compared to 1995.
Interest Expense. Interest expense increased by approximately $13.2 million
or 27% to approximately $63.1 million for 1996 from approximately $49.9
million for 1995. This increase was principally a result of additional amounts
borrowed in connection with the acquisition of Subordinated CMBS during 1996
and 1995 and the higher rate on the longer term, fixed rate financings
completed in the fourth quarter of 1995. Although the December 1996
refinancing resulted in a higher cost of financing than the repurchase
agreement cost, the impact on 1996 earnings was insignificant. Partially
offsetting these increases was a reduction in interest expense as a result of
the expiration of interest rate collars in 1995 and the temporary use of
proceeds from equity offerings of $52.8 million to pay down repurchase
agreement debt pending purchase of Subordinated CMBS.
General and Administrative Expenses. General and administrative expenses
increased by approximately $2.1 million or 40% to $7.4 million for 1996 as
compared to $5.3 million for 1995. This increase was primarily due to a full
year of certain expenses in 1996 as compared to only six months of expenses in
1995, as well as due to growth in CRIIMI MAE's operations during 1996 and
1995.
Fees to Related Party. Total fees to related party were comprised of annual
fees and incentive fees paid to CRIIMI MAE's former Adviser and CRI
Liquidating's Adviser. From inception through June 30, 1995, the Adviser
received certain fees for managing CRIIMI MAE's portfolio. In connection with
the Merger, effective June 30, 1995, CRIIMI MAE was no longer required to pay
any fees to the Adviser. The Adviser continues to receive fees for managing
CRI Liquidating's portfolio.
Total fees to related party decreased by approximately $1.5 million or 80%
to approximately $382,000 for 1996 from approximately $1.9 million for 1995.
This decrease was primarily the result of the termination of
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CRIIMI MAE's advisory agreement on June 30, 1995 in connection with the
Merger. Contributing to the decrease in fees to related party was a reduction
in the annual fees payable by CRI Liquidating resulting from its reduced asset
base during 1996 and 1995. Incentive fees paid as a result of the disposition
of CRI Liquidating's mortgages during 1996 and 1995 were approximately
$569,000 and $0, respectively, which were netted with gains on mortgage
dispositions.
Amortization of Assets Acquired in the Merger. In connection with the
Merger, CRIIMI MAE acquired certain assets, $28.9 million of which are being
amortized using the straight line method over 10 years beginning June 30,
1995. Since the Merger was accounted for under the purchase method of
accounting, which resulted in recording the purchased assets at fair value,
there are significant non-cash amortization expenses related to these assets.
As a result, amortization of assets acquired in the Merger was approximately
$2.9 million for 1996 as compared to $1.4 million for 1995.
Adjustment to Hedges for Valuation and Sales. During 1996, CRIIMI MAE
recognized a charge to income for adjusting hedges to fair value of $179,000,
which compares to $2.4 million recognized during 1995 due to the sale and/or
termination of certain of its interest rate cap agreements and credit
facilities, along with charges to income to adjust the hedges to fair value
(As further discussed below in "Results of Operations--1995 versus 1994").
Gains/Losses on Mortgage Dispositions. Net gains on mortgage dispositions
increased by approximately $8.1 million, or 540%, to approximately $9.6
million for 1996 from approximately $1.5 million for 1995. Gains or losses on
mortgage dispositions are based on the number, carrying amounts, and proceeds
of mortgage assets disposed of during the period. The proceeds realized from
the disposition of a mortgage asset are based on the net coupon rates of the
specific mortgage assets disposed of in relation to prevailing long-term
interest rates at the date of disposition. The increase in net gains on
mortgage dispositions is due primarily to the disposition of CRI Liquidating
mortgages for 1996 as compared to 1995 (the net losses on the disposition of
CRIIMI MAE mortgages did not change materially for 1996 as compared to 1995).
During 1996, 11 CRI Liquidating mortgage assets were disposed of resulting in
net financial statement gains of approximately $9.7 million and tax basis
gains of approximately $14.5 million. This compares to the disposition of 22
CRI Liquidating mortgage assets during 1995 that generated net financial
statement gains of approximately $1.6 million and tax basis gains of
approximately $9.5 million.
1995 VERSUS 1994
Tax Basis Income. CRIIMI MAE earned approximately $25.3 million in tax basis
income during 1995 as compared to approximately $29.6 million during 1994. On
a per share basis, tax basis income decreased to $0.89 per weighted average
share in 1995 from $1.17 in 1994. Although ordinary income increased from
approximately $18.6 million in 1994 to approximately $19.8 million in 1995, on
a per share basis ordinary income decreased from $0.73 per weighted average
share in 1994 to $0.70 per weighted average share in 1995, as a result of a
13% increase in the weighted average shares outstanding during 1995 resulting
from equity issuances during 1994 and 1995. The primary factors resulting in
the increase in ordinary income were as follows: Mortgage income and income
from Subordinated CMBS increased as a result of additional purchases made
during 1994 and 1995, although these items were partially offset by a decrease
in mortgage income earned on CRI Liquidating's mortgage assets due to mortgage
dispositions during 1994 and 1995 in accordance with CRI Liquidating's
business plan. Additionally, equity in earnings from investments and other
investment income increased as a result of the mortgage servicing and advisory
revenue streams acquired in the Merger during 1995 and an increase in short-
term investment income. Partially offsetting the increases in income from
these revenue streams was an increase in interest expense as a result of
additional amounts borrowed under debt facilities to acquire mortgages and
Subordinated CMBS, as well as an increase in short-term interest rates during
1994 and 1995. Additionally, annual and incentive fees paid to CRIIMI MAE's
and CRI Liquidating's Adviser decreased as a result of the termination of the
advisory agreement in connection with the Merger and due to CRI Liquidating's
reduced asset base during 1994 and 1995. The decrease in CRIIMI MAE's annual
and incentive
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<PAGE>
fees was partially offset by an increase in general and administrative
expenses as a result of the Merger and CRIIMI MAE's growth during 1995. Net
capital gains decreased from approximately $11.0 million in 1994 to
approximately $5.4 million in 1995. On a per share basis, net capital gains
decreased from $0.44 per weighted average share in 1994 to $0.19 per weighted
average share in 1995. The decrease in net capital gains was primarily
attributable to a decrease in net gains from the disposition of CRI
Liquidating's assets, as discussed below. The non-cash purchase accounting
amortization expense and the adjustment to hedges described below do not
impact tax basis income.
Financial Statement Net Income. Net income for financial statement purposes
was approximately $18.5 million for 1995, a 29% decrease from approximately
$26.0 million for 1994. On a per share basis, financial statement net income
decreased to $0.65 per weighted average share for 1995 from $1.07 for 1994.
The factors described in the preceding paragraph also impacted net income for
financial statement purposes except for the following: (1) mortgage income
decreased slightly for financial statement purposes as compared to an increase
for tax purposes due to the difference in mortgage income earned on CRI
Liquidating's mortgage assets for financial statement purposes versus tax
basis income and (2) during 1995, noncash amortization of assets acquired in
the Merger and an adjustment to hedges for valuation and sales in connection
with the refinancings completed during the second half of 1995 was required
for financial statement purposes, but was not a component of tax basis income.
Descriptions of the changes in financial statement net income are discussed
below.
Mortgage Income. Mortgage income on an aggregate basis did not vary
materially during 1995 as compared to 1994. The increase in income from
mortgage assets, resulting from 1994 acquisitions of Government Insured
Multifamily Mortgages held directly by CRIIMI MAE, was offset by a decrease in
mortgage income as a result of CRI Liquidating's reduced asset base during
1994 and 1995.
Income from Subordinated CMBS. Income from Subordinated CMBS increased by
approximately $10.1 million during 1995 as compared to 1994. This increase was
a result of the acquisition of Subordinated CMBS at purchase prices
aggregating approximately $38.9 million during the second half of 1994, and
approximately $239.2 million during 1995.
Equity in Earnings from Investments. Equity in earnings from investments
increased by approximately $395,000 or 17% during 1995 as compared to 1994
primarily due to increases in earnings from the Services Partnership and the
Services Corporation as a result of additional revenue streams acquired in the
Merger.
Other Investment Income. Other investment income increased by approximately
$1.0 million in 1995 as compared to 1994. This increase was primarily
attributable to income earned from the short-term investment of CRI
Liquidating's mortgage disposition proceeds received in January 1995 pending
the distribution to shareholders on March 31, 1995. Also contributing to this
increase was the recognition of interest income on the note receivable from
CRI which was acquired by CRIIMI MAE in connection with the Merger and fees
recognized related to the setup of servicing assets during the third and
fourth quarters of 1995.
Interest Expense. Interest expense increased by approximately $10.6 million
or 27% to approximately $49.9 million for 1995 from approximately $39.2
million for 1994. This increase was principally a result of additional amounts
borrowed in connection with the acquisition of Subordinated CMBS and mortgage
assets during 1995 and 1994, the higher rate on the long term, fixed rate
financings and an increase in short term interest rates on floating rate
borrowings. Partially offsetting these increases was a decrease in interest
expense as a result of the expiration of CRIIMI MAE's interest rate collars
during the first and third quarters of 1995.
Adjustment to Hedges for Valuation and Sales. During the third quarter of
1995, in connection with the refinancings during late 1995, CRIIMI MAE sold
two interest rate cap agreements resulting in the recognition of a one-time
loss of approximately $833,000. Additionally, in the latter part of 1995,
certain interest rate protection agreements no longer qualified for hedge
accounting, and were accounted for at fair value, which resulted in a charge
to income of approximately $787,000. Additionally, during the third quarter of
1995, CRIIMI MAE terminated the Revolving Credit Facility and recognized a
one-time charge to income of approximately $325,000,
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representing the unamortized costs incurred in connection with the
establishment of this facility. Additionally, during the fourth quarter of
1995, a charge to income of $448,000 was recognized for hedge adjustments to
fair value. Thus, a total adjustment to hedges for valuation and sales of
approximately $2.4 million was recognized for 1995. No such adjustments were
recognized during 1994.
Fees to Related Party. Total fees to related party decreased by
approximately $1.9 million or 49% to approximately $1.9 million for 1995 from
approximately $3.8 million for 1994 primarily as a result of the termination
of the Advisory Agreement in connection with the Merger. Contributing to the
decrease in fees to related party was a reduction in the annual fees payable
by CRI Liquidating resulting from its reduced asset base during 1994 and 1995.
General and Administrative Expenses. General and administrative expenses
increased by approximately $1.0 million during 1995 as compared to 1994. This
increase was primarily due to increases in payroll and related costs, rent and
professional fees as a result of the Merger and the increasing size and
complexity of CRIIMI MAE's operations.
Amortization of Assets Acquired in the Merger. In connection with the
Merger, CRIIMI MAE acquired certain assets, $28.9 million of which are being
amortized using the straight line method over 10 years beginning June 30,
1995. Since the Merger was accounted for under the purchase method of
accounting, which resulted in recording the purchased assets at fair value,
there are significant non-cash amortization expenses related to these assets.
As a result, amortization of assets acquired in the Merger was approximately
$1.4 million during 1995.
Adjustment to Provision to Settlement of Litigation. In connection with the
settlement of certain class action litigation involving CRIIMI MAE and certain
of its affiliates, CRIIMI MAE accrued a total provision of $1.5 million during
1993. Because the actual number of warrants issued pursuant to the settlement
agreement was significantly lower than the initial estimate, CRIIMI MAE
reduced this provision in June 1994 to approximately $943,000, resulting in an
adjustment of approximately $557,000 during 1994.
Through December 29, 1995, the expiration date of the warrants, none of the
warrants had been exercised. Accordingly, an adjustment was recognized to
reverse into income the remaining obligation related to the warrants of
approximately $656,000 during 1995.
Gains/Losses on Mortgage Dispositions. Net gains on mortgage dispositions
decreased by approximately $11.5 million or 88% to approximately $1.5 million
for 1995 from approximately $13.0 million for 1994. Gains or losses on
mortgage dispositions are based on the number, carrying amounts, and proceeds
of mortgage assets disposed of during the period. During 1995, 22 CRI
Liquidating mortgage assets representing 33% of the tax basis carrying value
of the portfolio as of December 31, 1994 were disposed of resulting in net
financial statement gains of approximately $1.6 million and tax basis gains of
approximately $9.5 million. This compares to the disposition of 19 CRI
Liquidating mortgage assets during 1994 representing 25% of the tax basis
carrying value of the portfolio as of December 31, 1993 that generated net
financial statement gains of approximately $12.5 million and tax basis gains
of approximately $18.3 million. Additionally, during 1994, seven CRIIMI MAE
mortgage assets were disposed of resulting in net financial statement gains of
approximately $446,000 and net tax basis gains of approximately $646,000.
CASH FLOW
NINE MONTHS ENDED SEPTEMBER 30, 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.
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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 increases was an
increase in dividends paid the first three quarters of 1997 as compared to
1996.
1996 VERSUS 1995
Net cash provided by operating activities increased for 1996 as compared to
1995 primarily due to an increase in net income, as previously discussed and a
decrease in utilization of working capital as compared to 1995. The change in
working capital utilization is due to a change in the timing and amount of
mortgage asset income collection and interest expense payment as a result of
an increase in Subordinated CMBS assets and the various financing facilities
entered into during 1995 and 1996.
Net cash used in investing activities decreased for 1996 as compared to
1995. Although purchases of Subordinated CMBS increased for 1996 as compared
to 1995, as the company executed its business plan, the following items offset
that increase: greater amounts received from the 1996 disposition of CRIIMI
MAE mortgages due primarily to prepayments; decreases in purchases of
mortgages and advances on construction loans as CRIIMI MAE changes its
investment focus; and increases in distributions from equity investments
primarily as a result of increased net servicing income and prepayment of
mortgages in the AIM funds. Also contributing to the reduction in net cash
used in investing activities was a decrease in the payment of deferred costs.
Net cash provided by financing activities decreased for 1996 as compared to
1995 primarily due to decreased proceeds from debt issuances, net of principal
payments made. Partially offsetting this decrease was an increase in proceeds
from equity offerings primarily as a result of the Preferred Stock offerings
in 1996. Also contributing to the reduction in cash provided by financing
activities were higher dividends paid resulting from increased net income.
1995 VERSUS 1994
Net cash provided by operating activities decreased for 1995 as compared to
1994 primarily from an increase in receivables and other assets as a result of
the assignment of a mortgage to HUD during the fourth quarter of 1995,
resulting in accrued assignment proceeds receivable of approximately $2.4
million. The increase in accrued interest receivable was also attributable to
acquisitions of Subordinated CMBS during 1995. Also contributing to the
decrease in net cash provided by operating activities was an increase in the
amount and frequency of interest payments as a result of additional borrowings
during 1995. The decrease in net income, as previously discussed, also
contributed to the decrease in net cash provided in operating activities.
Net cash used in investing activities increased by an insignificant amount
for 1995 as compared to 1994. Although mortgage acquisitions and advances on
construction loans decreased during 1995 as compared to 1994 this decrease was
offset by increases in Subordinated CMBS acquisitions and a decrease in
proceeds from the disposition of CRI Liquidating's mortgage investments.
Net cash provided by financing activities increased for 1995 as compared to
1994 primarily due to an increase in proceeds from debt issuances to
approximately $1.2 billion in 1995 from approximately $311 million in 1994 as
a result of the fixed rate refinancings which occurred in late 1995. This
increase was partially offset by an increase in principal payments on debt
obligations to approximately $941.7 million in 1995 from
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approximately $162.4 million in 1994 as a result of the paydown of CRIIMI
MAE's floating rate debt. Also contributing to the decrease in net cash
provided by financing activities was a decrease in net proceeds from the
issuance of Common Shares to approximately $14.0 million in 1995 from
approximately $56.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
To meet its capital requirements, CRIIMI MAE uses proceeds from long term,
fixed rate debt refinancings, repurchase agreements, other borrowings,
issuances of capital stock and an unsecured working capital line of credit.
From March 1997 through early October 1997, the Company raised aggregate net
proceeds of approximately $110 million through the issuance of capital stock.
During March 1997, CRIIMI MAE completed a public offering of Common Shares
resulting in net proceeds of approximately $75 million. In September 1997, the
Company issued Cumulative Convertible Preferred Stock resulting in net
proceeds of approximately $15 million. Additionally, in October 1997, the
Company completed an offering of Common Shares which resulted in net proceeds
of approximately $20 million.
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 fluctuating interest rates on
that portion of its debt. The Company intends to enter into a similar
resecuritization or refinancing approximately every 18 to 24 months after
accumulating a sufficient pool of Subordinated CMBS, with the next such
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 debt.
The Company's ability to execute its business strategy, including the
acquisition of additional Subordinated CMBS, the expansion of its servicing
portfolio and its loan origination and securitization program, depends to a
significant degree on its ability to obtain additional indebtedness and equity
capital. Other than as described in this Prospectus, the Company has no
commitments for additional borrowings or sales of equity capital and there can
be no assurance that the Company will be successful in consummating any such
future financing transactions on terms satisfactory to the Company, if at all.
Factors which could affect the Company's access to the capital markets, or the
costs of such capital, include changes in interest rates, general economic
conditions and the perception in the capital markets of the Company's
business, results of operations, leverage, financial condition and business
prospects. Each of these factors is to a large extent subject to economic,
financial, competitive and other factors beyond the Company's control. In
addition, covenants under the Company's current and future debt securities and
credit facilities, including the Indenture, may significantly restrict the
Company's ability to incur additional indebtedness and to issue Stock. The
Company's ability to repay its outstanding indebtedness at maturity may depend
on its ability to refinance such indebtedness, which could be adversely
affected if the Company does not have access to the capital markets for the
sale of additional debt or equity securities through public offerings or
private placements on terms reasonably satisfactory to the Company.
The Company's financial flexibility is also affected 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.
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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. As previously discussed, CRIIMI MAE's investment policy requires
that at least 75% of floating rate debt be hedged; however, there can be no
assurance that the Company will be able to do so. 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. However, no assurance can be made that such amounts of
unencumbered assets will continue to be available. If the Company has
insufficient collateral to fund such requirements, the Company could default
on its obligations which may result in a material adverse effect on the
Company.
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 counter party 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, Nomura Bermuda, Ltd., Morgan Stanley International Co., Ltd.,
Merrill Lynch Mortgage Capital Inc., Citicorp Securities Inc. and DLJ Mortgage
Capital Inc.
DIVIDENDS
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, stock dividends on Common Shares were $0.35 per share
in each of the first three quarters of 1997 as compared to $.30 for the
corresponding periods in 1996. Dividends paid on shares of the Company's
Series B Cumulative Convertible 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 Cumulative Convertible 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.
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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 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
its 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. Under the Investment
Company Act, a non-exempt entity that is an investment company is required to
register with the Securities and Exchange Commission ("SEC") and is subject to
extensive, restrictive and potentially adverse regulation relating to, among
other things, operating methods, management, capital structure, dividends and
transactions with affiliates. 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 SEC, to qualify
for this exemption, CRIIMI MAE, among other things, must maintain at least 55%
of its assets in Qualifying Interests. Pursuant to such SEC staff
interpretations, CRIIMI MAE's Government Insured Mortgage Assets are
Qualifying Interests, but such investments currently comprise only
approximately 40% of the Company's assets. Subordinated CMBS currently
comprise approximately 51% of CRIIMI MAE's assets. The Company will 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 either (i) it would not be
required to register as an investment company or (ii) it would comply with the
Investment Company Act and be able to register as an investment company. In
such event, (i) modification of the Company's business plan so that it would
not be required to register as an investment company would likely entail a
disposition of a significant portion of the Company's Subordinated CMBS or the
acquisition of significant additional assets, such as Government Insured
Mortgage Assets, which are Qualifying Interests or (ii) modification of the
Company's business plan to register as an investment company, which would
result in significantly increased operating expenses and would likely entail
significantly reducing the Company's
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indebtedness (including the possible prepayment of the Company's repurchase
agreement financing and/or the Notes), which could also require it to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or deleveraging, could be accomplished
on favorable terms. Any such modification of the Company's business plan could
have a material adverse effect on the Company. Further, if it were established
that the Company were an unregistered investment company, there would be a
risk that the Company would be subject to monetary penalties and injunctive
relief in an action brought by the SEC, that the Company would be unable to
enforce contracts with third parties and that third parties could seek to
obtain recission of transactions undertaken during the period it was
established that the Company was an unregistered investment company. Any such
results would be likely to have a material adverse effect on the Company and
its ability to service its debt obligations.
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 Exchange
Act 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 been obtained. Under the
terms of the proposed settlement, the Company will neither make nor receive
any payments as damages as a result of the settlement, but will make, upon
court approval, certain disclosures and adopt a non-binding policy sought by
the Plaintiff.
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MANAGEMENT
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
William B. Dockser............... Chairman of the Board of Directors
H. William Willoughby............ Director, President and Secretary
Garrett G. Carlson, Sr........... Director
Larry H. Dale.................... Director
G. Richard Dunnells.............. Director
Robert J. Merrick................ Director
Frederick J. Burchill............ Executive Vice President
Cynthia O. Azzara................ Chief Financial Officer, Senior Vice President
and Treasurer
Brian L. Hanson.................. Group Vice President
Douglas L. Cooper................ Vice President and Chief Underwriter
Donald R. Drew................... Senior Vice President
David B. Iannarone............... Vice President and General Counsel
</TABLE>
William B. Dockser, age 60, has been Chairman of the Board of CRIIMI MAE
since 1989. Mr. Dockser also serves as Chairman of the Board for C.R.I., Inc.,
the former advisor to CRIIMI MAE, which currently oversees an approximately $5
billion real estate portfolio. Prior to forming C.R.I., Inc. in 1974, he
served as President of Kaufman Broad Asset Management, Inc., an affiliate of
Kaufman and Broad, Inc., which managed a number of publicly held limited
partnerships created to invest in low and moderate income multifamily
apartment complexes. For a period of 2 1/2 years prior to joining Kaufman and
Broad, he served in various positions in the U.S. Department of Housing and
Urban Development, culminating in the post of Deputy FHA Commissioner and
Deputy Assistant Secretary for Housing Production and Mortgage Credit, where
he was responsible for all federally insured housing production programs.
Before coming to Washington, D.C., Mr. Dockser was a practicing attorney in
Boston and also was a special Assistant Attorney General for the Commonwealth
of Massachusetts. He holds a Bachelor of Laws degree from Yale University Law
School and a Bachelor of Arts degree from Harvard University. Mr. Dockser is
also currently a director of both CRI Liquidating and CRIIMI MAE Financial
Corporation.
H. William Willoughby, age 51, President of CRIIMI MAE, is also President
and co-founder of CRI since its inception in 1974. Mr. Willoughby is
principally responsible for the structuring and oversight of investment
vehicles and acquisition programs. Prior to joining CRI in 1974, he was Vice
President of Shelter Corporation of America and a number of its subsidiaries,
dealing principally with real estate development and equity financing. Before
joining Shelter Corporation, he was a senior tax accountant with Arthur
Andersen & Company. He holds a Juris Doctor, a Master of Business
Administration and a Bachelor of Science in Business Administration from the
University of South Dakota. Mr. Willoughby is also currently a director of
both CRI Liquidating and CRIIMI MAE Financial Corporation.
Garrett G. Carlson, Sr., age 61, has been a Director of CRIIMI MAE since
1989. Mr. Carlson has been President of Can-American Realty Corp. and Canadian
Financial Corp. since 1979 and 1974, respectively. He also served as Chairman
of the Board of SCA Holdings, Inc. from 1983 to 1985. He was also Vice
Chairman of Shelter Development Corporation Ltd., from 1983 to 1995 and
President of Garrett Real Estate Development since 1982. Mr. Carlson is also
currently a director of CRI Liquidating.
Larry H. Dale, age 51, has been a Director of CRIIMI MAE since 1996. Mr Dale
is also a Managing Director and Member of the Board of Directors of Newman and
Associates. He also served as Senior Adviser to the Fannie Mae Housing
Investment Fund in 1996, Executive Director of Fannie Mae's National Housing
Impact Division from 1991 to 1996 and Senior Vice President-marketing and
mortgage-backed securities and Senior Vice President-multifamily finance and
housing initiatives for Fannie Mae from 1987 to 1991. Mr. Dale also served as
a Vice President of Newman and Associates from 1984 to 1987, and President of
Mid-City Financial
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Corporation from 1981 to 1983. Mr. Dale was employed by the U.S. Department of
Housing and Urban Development from 1971 to 1981, including service as deputy
to the Assistant Secretary for Housing/FHA Commissioner from 1979 to 1981. Mr.
Dale is also currently a director of CRI Liquidating.
G. Richard Dunnells, age 60, has been a Director of CRIIMI MAE since 1991.
Mr. Dunnells has been a partner of the Washington, D.C. office of the law firm
of Holland & Knight since January 1994. He was Senior Partner of the
Washington, D.C. law firm of Dunnells & Duvall from 1973 to 1993, and was
Chairman of such firm from 1989 to 1993. Mr. Dunnells served as Special
Assistant to the Under-Secretary and Deputy Assistant Secretary for Housing
Management with the U.S. Department of Housing and Urban Development from 1969
to 1973 and served on the President's Commission on Housing from 1981 to 1982.
Mr. Dunnells is also currently a director of CRI Liquidating.
Robert J. Merrick, age 52, has been a Director of CRIIMI MAE since May 1997.
Mr. Merrick has served as Executive Vice President since 1985 and Chief Credit
Officer since 1985 of Signet Banking Corporation, where he also serves as
Chairman of the Credit Policy committee and as a member of the Asset and
Liability committee and the Management committee. From 1980 to 1984, Mr.
Merrick served as Credit Officer of Virginia Banking Corporation, an affiliate
of Signet Bank/Virginia. From 1976 to 1980 Mr. Merrick was Senior Vice
President of Bank of Virginia.
Frederick J. Burchill, age 49, has served as Executive Vice President of
CRIIMI MAE since 1989. Mr. Burchill is responsible for mergers and
acquisitions as well as the development of new capital markets programs. Prior
to his employment at CRIIMI MAE, Mr. Burchill was the Senior Vice President of
Development for CRI, Inc. and also spent two years as a Project Manager at the
Virginia Housing Development Authority. Mr. Burchill earned a Masters of Urban
and Regional Planning degree from Virginia Commonwealth University and a B.A.
degree from the University of Richmond.
Cynthia O. Azzara, age 38, has served as Chief Financial Officer of CRIIMI
MAE since 1994, Senior Vice President since 1995 and Treasurer since 1997. Ms.
Azzara is responsible for financial and treasury matters of CRIIMI MAE as well
as equity and debt placements in the capital markets. From 1989 to 1994, she
served as Vice President/Controller of CRI public funds. From 1985 to 1989,
she held positions at CRI as manager of financial reporting and assistant
controller. Before joining CRI in 1985, Ms. Azzara was controller for a
consulting company and was a staff accountant for a regional CPA firm in
Virginia. Ms. Azzara is a certified public accountant and holds a B.B.A. in
accounting from James Madison University, magna cum laude.
Brian L. Hanson, age 36, has served as Group Vice President of CRIIMI MAE
since March 1996. Mr. Hanson has been active in the commercial mortgage
business for more than 13 years. He joined CRIIMI MAE early in 1996 and heads
the loan administration department, responsible for servicing and replacement
reserve management for a $10 billion commercial mortgage portfolio. Prior to
CRIIMI MAE, Mr. Hanson served as Chief Operating Officer, Director of Asset
Operations and Portfolio Director for JCF Partners, Lanham, MD. In this
capacity, he directed asset management and operation for a $1 billion real
estate portfolio, including assets of the Resolution Trust Corporation and
private clients. His responsibilities included bulk acquisition and sales,
loan and credit committees. Prior to joining JCF in 1991, Mr. Hanson was Vice
President of Secondary Marketing for a $500 million financial institution and
its wholly owned mortgage banking subsidiary. Mr. Hanson earned a B.A. in
Mathematics from Washington & Lee University.
Douglas L. Cooper, age 36, serves as Vice President and Chief Underwriter of
CRIIMI MAE. Mr. Cooper joined CRIIMI MAE in 1996 and is responsible for
analysis of commercial mortgage-backed security acquisitions and underwriting
new loan originations. During the eight years prior to joining CRIIMI MAE, Mr.
Cooper served with NationsBank in a series of commercial real estate lending
positions with increasing responsibility, culminating in the role of Senior
Credit Policy Officer for the Real Estate Banking Group. From 1986 to 1988,
Mr. Cooper was an Assistant Vice President with First American Bank, N.A.,
focusing on new business for the Commercial Real Estate Department. From 1984
to 1986, he was a commercial real estate loan officer with Suburban Bank. Mr.
Cooper earned a B.S. in Business Administration from West Virginia Wesleyan
College.
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Donald R. Drew, age 40, has served as Senior Vice President of CRIIMI MAE
since April 1997. Mr. Drew has been active in commercial real estate,
particularly finance, for more than 18 years. He joined CRIIMI MAE in April
1997 and heads the loan origination operation, including the "No-Lock"
Program, pricing, and application processing. Prior to CRIIMI MAE, Mr. Drew
served for four years as a Vice President in the lending division of First
Union National Bank of Virginia, focusing on revenue generation and business
development. Before that, he served for two years with First American Metro
Corporation, first as Vice President then as Senior Vice President. From 1987
through 1990, he served with commercial real estate investor and developer
Aldre, Inc., Rockville, Maryland, in a series of increasingly responsible
positions ranging from Vice President of Acquisition and Finance to Chief
Operating Officer. From 1980 to 1987, he served with Sovran Bank/Maryland (now
NationsBank), in a variety of commercial real estate finance positions. Mr.
Drew earned an M.B.A. from the American University and a B.S. in accounting
from Shepherd College.
David B. Iannarone, age 36, has served as General Counsel of CRIIMI MAE
since 1996. Mr. Iannarone is responsible for all corporate legal affairs,
including management of structured finance transactions. From 1991 to 1996, he
served with the Federal Deposit Insurance Corporation/Resolution Trust
Corporation as Counsel-Securities and Finance, handling various securitization
transactions and portfolio sales of non-performing loans and real estate. From
1989 to 1991, Mr. Iannarone served with Citibank, N.A. as assistant vice
president and counsel, where he handled legal affairs for a range of loan
originations, troubled loan restructurings, swaps and other transactions. He
served with Kaye, Scholer, Fierman, Hays & Handlers as an Associate in the
Corporate and Banking Department from 1986 to 1989. Mr. Iannarone received an
LL.M. from the Georgetown University Law Center, a J.D. from the University of
Villanova School of Law, and a B.A. from Trinity College.
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DESCRIPTION OF OTHER INDEBTEDNESS
MASTER ASSIGNMENT AGREEMENT
On September 25, 1997, the Company entered into a three year master
assignment agreement with a lender, Merrill Lynch Mortgage Capital Inc., an
affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, to finance up
to $200,000,000 of additional and/or existing investments in Subordinated
CMBS. Outstanding borrowings under this master assignment agreement are
evidenced by a note and are secured by the financed Subordinated CMBS. As of
September 30, 1997, approximately $31,900,000 in borrowings were outstanding
under this facility.
Interest. Borrowings under the master assignment agreement will bear
interest as follows: (i) one-month LIBOR plus a spread of 1.00% for all
borrowings secured by Subordinated CMBS purchased by CRIIMI MAE from the
lender or its affiliates; (ii) one-month LIBOR plus a spread of 1.375% for all
borrowings secured by Subordinated CMBS that were not purchased from the
lender or its affiliates and are rated "BB" or "BB-" (or the equivalent) by at
least one rating agency and not lower than "BB-" by any rating agency; and
(iii) one- month LIBOR plus a spread of 1.50% for all borrowings secured by
Subordinated CMBS that were not purchased from the lender or its affiliates
and are rated "B" or "B-" (or the equivalent) by at least one rating agency
and not lower than "B-" by any rating agency.
Covenants. The master assignment agreement places limitations on CRIIMI
MAE's ability to transfer or grant liens on any collateral that secures
borrowings outstanding under the agreement.
Events of Default. The following are certain "Events of Default" under the
master assignment agreement:
(i)failure to pay any amounts due (upon acceleration or otherwise); or
(ii)lapse or termination of CRIIMI MAE's interest in the Subordinated
CMBS pledged as collateral under the agreement; or
(iii)an event which causes the acceleration of the note evidencing the
Company's borrowings under the agreement; or
(iv)certain events of insolvency, bankruptcy or reorganization with
respect to the Company; or
(v)in the reasonable judgment of the lender, any material adverse change
in the business, operations, properties, prospects or condition of the
Company; or
(vi)material default with respect to any normal and customary covenant
under any contract to which the Company is a party which default permits
acceleration of the Company's obligations under such contract and which
default is likely to result in a material adverse change in the business,
operations, properties, prospects or condition of the Company; or
(vii)merger or consolidation of the Company into another entity; or
(viii)if the lender reasonably determines that the Company is or will be
unable to meet its commitments under the master assignment agreement and
the Company does not provide assurances to the lender to the contrary
within 36 hours;
(ix)a final judgment in an amount not less than $100,000 that remains
undischarged and unpaid for a period of 60 days during which execution of
the judgment is not effectively stayed; or
(x)failure to perform or observe any representation, warranty or covenant
in the master assignment agreement that is likely to result in a material
adverse change (A) in the business, operations, properties, prospects or
condition of the Company, (B) in the market value or marketability of the
Subordinated CMBS pledged as collateral or (C) in the ability of CRIIMI MAE
to perform its obligations, or the rights and remedies of the lender, under
the agreement; or
(xi)the ratio of the Company's outstanding indebtedness to equity is more
than 5 to 1 at any time; or
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(xii)losses or changes in the financial condition of the Company that
causes its shareholders' equity for any two consecutive calendar quarters
to be less than or equal to 80% of the shareholders' equity at the
commencement of such period; or
(xiii)the Company's shareholders' equity falls below $300,000,000.
If an Event of Default shall occur and be continuing, the lender may sell or
otherwise dispose of the pledged collateral at such prices and on such terms
as the lender may deem best, in a public or private sale. In addition, upon
acceleration of the note and until the balance of the note is repaid in full,
outstanding borrowings will accrue default interest at a rate equal to the
greater of (i) 2.0% over the pre-default interest rate and (ii) 2.0% over the
prime rate for short term bank commercial loans.
WORKING CAPITAL LINE OF CREDIT
In December 1996, CRIIMI MAE entered into a $30,000,000 unsecured working
capital line of credit provided by two lenders, Riggs Bank N.A. and Signet
Bank, with a termination date of December 31, 1998. In September 1997, the
line of credit was increased to $40,000,000 until December 16, 1997. No
amounts were outstanding under the line of credit as of September 30, 1997.
Interest. Borrowings under this line of credit will bear interest at a rate
equal to the prime rate or at one month LIBOR plus a spread of 1.30% (as
selected by the Company at the time of the borrowing).
Covenants. The working capital line of credit requires the Company to (i)
reduce to $0 all borrowings under the line of credit for a period of not less
than 15 days during each six month period, (ii) maintain interest rate
protection on not less than 70% of its outstanding long term floating rate
indebtedness and (iii) maintain at least $7.5 million of certain assets (e.g.,
cash and cash equivalents) free from any liens. In addition, the Company
agreed to adhere to the following ratios: (i) for a period of four consecutive
fiscal quarters, EBITDA may not be less than 1.35 times the interest expense
of the Company and its subsidiaries for such period; (ii) on the last day of
any fiscal quarter, the ratio of indebtedness to stockholders' equity of the
Company and its subsidiaries may not be greater than 3.75 to 1.00; (iii) at
any time, stockholders' equity may not be less than $300 million plus 75% of
all increases in stockholders' equity resulting from the proceeds from certain
events; and (iv) on the last day of any fiscal quarter, the ratio of (X)
consolidated liabilities less match funded debt to (Y) consolidated
stockholders' equity may not be greater than 1.25 to 1.00. The covenants also
restrict the Company's ability to effect certain mergers or consolidations, to
enter into other unsecured lines of credit on comparable terms and to engage
in certain transactions with its affiliates.
Events of Default. The following are certain "Events of Default" under the
working capital line of credit:
(i)failure to pay amounts when due; or
(ii)a representation or warranty that was incorrect in any material
respect when made or any default in the performance or observance of a
covenant, which default is not cured within a grace period (if any); or
(iii)a payment default or any covenant default with respect to any
indebtedness of the Company that exceeds $1,000,000, which default is not
timely cured; or
(iv)certain events of insolvency, bankruptcy or reorganization with
respect to the Company; or
(v)certain prohibited transactions; or
(vi)a final judgment in an amount not less than $1,000,000 that remains
undischarged and unpaid for a period of 60 days during which execution of
the judgment is not effectively stayed.
If an Event of Default shall occur, the lenders may terminate the
commitments under the line of credit and declare any outstanding borrowings
immediately due and payable (except for a bankruptcy related Event of Default,
upon which the commitments automatically terminate).
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MASTER REPURCHASE AGREEMENT
On March 28, 1996, CRIIMI MAE entered into a master repurchase agreement
with German American Capital Corporation to finance up to $200,000,000
($100,000,000 of which has been committed) of additional and/or existing
investments in lower-rated Subordinated CMBS. This agreement was amended in
October 1997 to increase the amount of the facility to up to $300,000,000 and
to extend the term to December 2000. The agreement terminates in December
2000. Outstanding borrowings under this master repurchase agreement are
secured by the financed Subordinated CMBS. As of September 30, 1997,
approximately $116.2 million in borrowings were outstanding under this
facility
Interest. Borrowings under this facility will bear interest at a rate equal
to, at the option of CRIIMI MAE, one- or three-month LIBOR plus a spread of
1.50%.
Covenants. The financing facility restricts the Company's ability to impair
the lender's title to, or the value of, the pledged collateral or to pledge or
transfer any interest in the collateral. In addition, CRIIMI MAE is required
to take all action necessary to ensure that the lender has a first priority
security interest in the collateral.
Events of Default. The following are certain "Events of Default" under the
financing facility:
(i)breach of a representation or certain covenants that are not cured
within a grace period (if any); or
(ii)certain events of insolvency, bankruptcy or reorganization with
respect to the Company or the lender; or
(iii)governmental or regulatory action which has a material adverse
effect on the ordinary business operations of the Company or its
affiliates; or
(iv)merger or consolidation of the Company into another entity; or
(v)the lender, in its good faith judgment, has reasonable cause to
believe that (A) there has been a material adverse change in the business,
operations, financial condition or creditworthiness of the Company, (B) the
Company will not meet its obligations under the facility, (C) a material
adverse change in the financial or legal condition of the Company may occur
due to any threatened or pending legal action against the Company or its
affiliates or (D) an act or event has occurred which would have a material
adverse effect on the liquidity or value of the pledged collateral or the
economic or political stability of the United States; or
(vi)payment default in excess of $100,000 in respect of any of the
Company's indebtedness; or
(vii)failure to pay any amount due under the facility within five days of
a payment date; or
(viii)cross default under certain agreements, which default involves the
failure to pay an obligation in excess of $100,000 or permits the
acceleration of the Company's obligations under the agreement, and which
default is not cured within any applicable grace period; or
(ix)the Company's ratio of consolidated total liabilities to consolidated
stockholders' equity exceeds 5 to 1; or
(x)pledge or excumberance of (A) assets already pledged under existing
credit facilities, (B) assets required to be pledged for collateral
maintenance under existing credit facilities, (C) Subordinated CMBS subject
to repurchase agreements or comparable financing facilities in excess of
$300,000,000, or (D) assets pledged by the Company or its affiliates under
existing financial arrangements; or
(xi)the Company's shareholders' equity falls below $125,000,000; or
(xii)three consecutive quarters of consolidated net losses on either a
GAAP or tax basis; or
(xiii)a final judgement in an amount not less than $100,000 that remains
undischarged or unpaid for a period of 30 days, during which execution of
such judgement is not effectively stayed; or
(xiv)any adverse claim on, or the cessation of a valid first priority
security interest in favor of the lender with respect to, the pledged
collateral; or
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(xv)certain changes in U.S. law directly affecting the pledged collateral
or the consequences of the lender holding a security interest in the
pledged collateral.
Upon the occurrence of an Event of Default, the lender may terminate the
facility and sell or otherwise dispose of the collateral at such prices and on
such terms as the lender may deem best, in a public or private sale.
REPURCHASE AGREEMENTS AND REVOLVING CREDIT FACILITY--GOVERNMENT INSURED
MORTGAGE ASSETS
In May 1996, CRIIMI MAE renewed a financing facility with Deutsche Morgan
Grenfell in an amount up to $100,000,000 ($20,000,000 committed and
$80,000,000 uncommitted) with a termination date of June 1, 1999. Any
borrowings under this facility will be secured by FHA-Insured Loans or GNMA
Mortgage-Backed Securities 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.
Interest. Borrowings collateralized with FHA-Insured Loans will bear
interest at a rate equal to one-, three- or six-month LIBOR (as selected at
the outset of the facility) plus a spread of 0.75%. Borrowings collateralized
with the GNMA Mortgage Backed Securities will bear interest at a rate equal to
one-, three- or six-month LIBOR (as selected at the outset of the facility)
plus a spread of 0.50%.
Covenants. The repurchase agreements restrict the Company's ability (i) to
impair the lender's title to or the value of the FHA-Insured Loans or GNMA
Mortgage Backed Securities, as applicable, pledged as collateral and (ii) to
transfer or grant liens on any FHA-Insured Loans or GNMA Mortgage Backed
Securities, as applicable, pledged as collateral. In addition, the Company is
required to take all action necessary to ensure that the lender has a first
priority security interest in any pledged collateral and to use its best
efforts to register in lender's name any FHA-Insured Mortgage Loan pledged as
collateral repurchase agreement in connection with FHA-Insured Mortgage Loans.
Events of Default. The following are certain "Events of Default" under each
repurchase agreement under the credit facility:
(i)breach of a material covenant under the agreement that is not timely
cured (if the agreement provides for a grace period with respect to such
covenant) or any representation that was incorrect in any material respect
when made; or
(ii)certain events of insolvency, bankruptcy or reorganization with
respect to the Company or the lender; or
(iii)governmental or regulatory action which has a material adverse
effect on the ordinary business operations of the Company or its
affiliates; or
(iv)merger or consolidation of the Company into another entity; or
(v)the lender, in its good faith judgment, has reasonable cause to
believe that (A) there has been a material adverse change in the business,
operations, financial condition or prospects of the Company, (B) the
Company will not meet its obligations under the facility or (C) a material
adverse change in the financial or legal condition of the Company may occur
due to any threatened or pending legal action against the Company or its
affiliates; or
(vi)a payment default in respect of any of the Company's indebtedness; or
(vii)failure to pay any amount due under the facility within five days of
a payment date; or
(viii)cross default under certain agreements between the Company or any
of its affiliates and the lender or any of its affiliates, which default is
not cured within any applicable grace period; or
(ix)the Company's ratio of consolidated total liabilities to consolidated
shareholders' equity exceeds 3 to 1; or
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(x)pledge or excumberance of (A) assets already pledged under existing
credit facilities, (B) assets required to be pledged for collateral
maintenance under existing credit facilities or (C) Subordinated CMBS
subject to repurchase agreements or comparable financing facilities in
excess of $50,000,000; or
(xi)the Company's shareholders' equity falls below $125,000,000; or
(xii)three consecutive quarters of consolidated net losses on either a
GAAP or tax basis; or
(xiii)a final judgment in an amount not less than $100,000 that remains
undischarged or unpaid for a period of 60 days, during which execution of
such judgment is not effectively stayed; or
(xiv)any adverse claim on, or the cessation of a valid first priority
security interest in favor of the lender with respect to, the pledged
collateral; or
Upon the occurrence of an Event of Default, the lender may terminate the
repurchase agreements and sell or otherwise dispose of the collateral at such
prices and on such terms as the lender may deem best, in a public or private
sale.
(xv)failure to maintain interest rate hedges on at least 75% of its
floating rate liabilities; or
(xvi)failure to maintain specified collateral amounts with respect to
both the FHA-Insured Loans and GNMA Mortgage Backed Securities repurchase
agreements.
BANK TERM LOANS
In connection with the Merger, the Company's wholly owned subsidiary, CRIIMI
MAE Management, Inc., assumed certain debt of the CRI Mortgage Businesses in
the aggregate 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. As of September 30, 1997 borrowings under Bank Term Loan II totaled
approximately $3,900.000.
Interest. Interest on the loan is based on CRIIMI MAE's choice of one-, two-
or three-month LIBOR, plus a spread of 1.25%.
Covenants. Bank Term Loan II places limitations on CRIIMI MAE's ability to
(i) transfer or grant liens on any of its assets pledged as collateral, (ii)
incur additional debt and (iii) effect certain mergers, consolidations and
sales of assets.
The following are certain "Events of Default" under Bank Term Loan II:
(i) failure to pay amounts when due; or
(ii) representation or warranty that was incorrect in any material respect
when made or any default in the performance of observance of a covenant,
which is not timely cured; or
(iii) certain events of bankruptcy, insolvency or reorganization with
respect to the Company; or
(iv) the Company's shareholders' equity falls below $150,000,000; or
(v) failure to pay an amount aggregating in excess of $1,000,000 which is
due and payable under Title IV of ERISA; or
(vi) a final judgement in an amount not less than $5,000,000 that remains
undischarged and unpaid for a period of 30 days during which execution of
the judgment is not effectively stayed; or
(vii) an event which causes acceleration of the loan; or
(viii) certain prohibited transactions.
If an Event of Default shall occur, all borrowings under Bank Term Loan II
shall become immediately due and payable.
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DESCRIPTION OF THE NOTES
The following description of certain terms of the Notes offered hereby
supplements and, to the extent inconsistent therewith, replaces the
description of the general terms and provisions of the Debt Securities set
forth in the accompanying Prospectus. The following statements relating to the
Notes and the Indenture are summaries of certain provisions contained therein
and do not purport to be complete. Such statements are qualified by reference
to the provisions of the Notes and the Indenture, including the definitions
therein of certain terms. Unless otherwise expressly stated or the context
otherwise requires, all references to the "Company" appearing under this
caption "Description of the Notes" and under the caption "Description of Debt
Securities" in the accompanying Prospectus shall mean CRIIMI MAE Inc.,
excluding its Subsidiaries. For definitions of certain capitalized terms used
in the following summary, see "--Certain Definitions." Other capitalized terms
used herein but not otherwise defined shall have the meanings given to them in
the accompanying Prospectus or, if not defined in the Prospectus, in the
Indenture.
GENERAL
The Notes constitute a separate series of Senior Securities (which are more
fully described in the accompanying Prospectus) to be issued pursuant to an
Indenture (the "Indenture," which term, as used herein, includes the First
Supplemental Indenture establishing the terms of the Notes) between the
Company and State Street Bank and Trust Company, as trustee (the "Trustee"),
and are limited in aggregate principal amount to $100 million. The terms of
the Notes include those provisions contained in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "TIA"). The Notes are subject to all such terms, and investors
are referred to the Indenture and the TIA for a statement thereof.
The Notes will rank pari passu in right of payment with all existing and
future unsecured and unsubordinated indebtedness of the Company and senior in
right of payment to all existing and future subordinated indebtedness of the
Company. The Notes will be effectively subordinated to the claims of any
secured lender to the extent of the value of the collateral securing such
indebtedness. The Notes will also be effectively subordinated to all existing
and future indebtedness and other liabilities of the Company's Subsidiaries.
As of September 30, 1997, after giving pro forma effect to this Offering and
the application of the net proceeds therefrom as described in "Use of
Proceeds," the Company and its subsidiaries had total indebtedness of
approximately $1.2 billion, of which approximately $1.1 billion was secured
indebtedness of the Company and its subsidiaries. Of the total secured
indebtedness of the Company and its subsidiaries, approximately $708.4 million
was non-recourse indebtedness of the Company's subsidiaries. See
"Capitalization." Subject to certain limitations set forth in the Indenture,
and as described under "Certain Covenants--Limitations on Incurrence of Debt"
below, the Indenture will permit the Company and its Restricted Subsidiaries
to incur additional secured and unsecured indebtedness. Such additional
indebtedness may consist of, but is not limited to, indebtedness issued under
the Indenture.
The Notes will mature on December 1, 2002. The Notes will be subject to
redemption at the option of the Company as described below under "--Optional
Redemption." The Company will not be required to make any sinking fund
payments with respect to the Notes. The Notes will be issued only in fully
registered, book-entry form without coupons, in denominations of $1,000 and
integral multiples thereof, except under the limited circumstances described
below under "--Global Notes."
PRINCIPAL AND INTEREST
The Notes will bear interest at 9 1/8% per annum, from November 21, 1997 or
from the immediately preceding Interest Payment Date (as defined below) to
which interest has been paid, payable semi-annually in arrears on each June 1
and December 1, commencing June 1, 1998 (each, an "Interest Payment Date"),
and on the applicable Maturity Date, to the persons (the "Holders") in whose
names the applicable Notes are registered in the security register applicable
to the Notes at the close of business on the date 15 calendar days prior to
such payment day regardless of whether such day is a Business Day, as defined
below (each, a "Regular Record Date"). Interest on the Notes will be computed
on the basis of a 360-day year of twelve 30-day months.
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The principal of each Note payable on the applicable Maturity Date will be
paid against presentation and surrender of such Note at the corporate trust
office of the Trustee, located initially c/o Two International Place,
Financial Services, Corporate Trust Department, Boston, Massachusetts 02110,
in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
If any Interest Payment Date or a Maturity Date falls on a day that is not a
Business Day, the required payment shall be made on the next Business Day as
if it were made on the date such payment was due and no interest shall accrue
on the amount so payable for the period from and after such Interest Payment
Date or such Maturity Date, as the case may be. "Business Day" means any day,
other than a Saturday or Sunday, on which banking institutions in The City of
New York are open for business.
OPTIONAL REDEMPTION
The Notes may be redeemed at any time at the option of the Company, in whole
or from time to time in part, at a redemption price equal to the sum of (i)
the principal amount of the Notes being redeemed plus accrued interest thereon
to the redemption date and (ii) the Make-Whole Amount (as defined below), if
any, with respect to such Notes (collectively, the "Redemption Price").
If notice has been given as provided in the Indenture and funds for the
redemption of any Notes called for redemption shall have been made available
on the redemption date referred to in such notice, such Notes will cease to
bear interest on the date fixed for such redemption specified in such notice
and the only right of the Holders of the Notes will be to receive payment of
the Redemption Price.
Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the security register for the Notes, not more
than 60 nor less than 30 days prior to the date fixed for redemption. The
notice of redemption will specify, among other items, the Redemption Price and
the principal amount of the Notes held by such Holder to be redeemed.
If less than all the Notes are to be redeemed at the option of the Company,
the Company will notify the Trustee at least 45 days prior to giving notice of
redemption (or such shorter period as is satisfactory to the Trustee) of the
aggregate principal amount of Notes to be redeemed and their redemption date.
The Trustee shall select, in such manner as it shall deem fair and
appropriate, the particular Notes to be redeemed in whole or in part.
CERTAIN COVENANTS
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, take any
of the following actions:
(i) declare, pay or set apart any funds for the payment of any dividend
on, or make any distribution to holders of, any Capital Stock of the
Company (other than dividends or distributions to the extent payable in
Qualified Capital Stock or in options, warrants or other rights to acquire
such shares of Qualified Capital Stock of the Company);
(ii) repurchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any Capital Stock of the Company or any Restricted
Subsidiary of the Company (other than shares of Capital Stock of any Wholly
Owned Restricted Subsidiary) or any options, warrants or other rights to
acquire such shares of Capital Stock;
(iii) declare, pay or set apart any funds for the payment of any dividend
on, or make any distribution on any shares of Capital Stock of any
Restricted Subsidiary to any Person (other than with respect to any shares
of Capital Stock held by the Company or any Wholly Owned Restricted
Subsidiary and other than pro rata dividends or distributions on a class of
Capital Stock of any Restricted Subsidiary the majority of which is owned
by the Company or a Wholly Owned Restricted Subsidiary; provided that no
Restricted Subsidiary shall declare or pay such pro rata dividend or
distribution on its Capital Stock (other than to the
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Company or a Wholly Owned Restricted Subsidiary) at a time when it has
outstanding Debt owed to the Company or a Wholly Owned Restricted
Subsidiary);
(iv) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
or
(v) make any Investment in any Person, including an Unrestricted
Subsidiary, other than a Permitted Investment;
(each of the foregoing actions described in clauses (i) through (v) above,
other than any such action that is a Permitted Payment (as defined below), is
referred to herein as a "Restricted Payment"), unless immediately after giving
effect to the proposed Restricted Payment (the amount of any such Restricted
Payment, if other than cash, as determined in good faith by the Board of
Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution), (1) no Default or Event of Default shall
have occurred and be continuing, (2) the Company could incur at least $1.00 of
additional Debt (other than Permitted Indebtedness) pursuant to the
"Limitation on Incurrence of Debt" covenant; and (3) the aggregate amount of
all such Restricted Payments by the Company and its Restricted Subsidiaries
declared or made after the Issue Date does not exceed the sum of:
(A) (i) so long as the Company maintains its status as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"), 100% of the "real
estate investment trust taxable income" of the Company as determined under
Section 857(b)(2) of the Code or any successor provision computed prior to
taking into account any deductions allowed pursuant to Section 857(b)(2) of
the Code and computed after giving effect to any net deficit in "real
estate investment trust taxable income" for prior years, whether or not
such deficit is deductible as a net operating loss carryforward for the
year of determination, accrued on a cumulative basis during the period
commencing on October 1, 1997 and ending on the last day of the Company's
most recent fiscal quarter ending prior to the date of such Restricted
Payment or (ii) in the event the Company no longer qualifies as a REIT
under the Code, the sum of (a) 50% of the aggregate cumulative Adjusted
Consolidated Net Income (or if such aggregate cumulative Adjusted
Consolidated Net Income shall be a loss, minus 100% of such loss) accrued
on a cumulative basis during the period commencing on the first day of the
fiscal quarter following the failure of the Company to qualify as a REIT
under the Code and ending on the last day of the Company's most recent
fiscal quarter ending prior to the date of such Restricted Payment, and (b)
100% of any cumulative amount available under clause (i) above for the
period commencing October 1, 1997 and ending on the last day of the
Company's most recent fiscal quarter ending prior to the failure of the
Company to qualify as a REIT under the Code (or minus 100% of any such
amount if a deficit); plus
(B) the aggregate of the Net Cash Proceeds received by the Company after
October 1, 1997 from the issuance or sale (other than to any of its
Restricted Subsidiaries) of Qualified Capital Stock of the Company
(including upon the exercise of options, warrants or rights) or warrants,
options or rights to purchase shares of Qualified Capital Stock of the
Company; plus
(C) the aggregate of the Net Cash Proceeds received by the Company after
October 1, 1997 from the issuance or sale (other than to any of its
Restricted Subsidiaries) of any debt securities or Redeemable Capital Stock
that is subsequently converted into or exchanged for Qualified Capital
Stock of the Company plus (without duplication) any additional Net Cash
Proceeds received by the Company at the time of such conversion or
exchange; plus
(D) 100% of the net reduction in Investments, subsequent to the Issue
Date, in any Person, resulting from payments of interest on Debt,
dividends, repayments of loans or advances, or other transfers of property
(but only to the extent such interest, dividends, repayments or other
transfers of property are not included in the calculation of "real estate
investment trust taxable income" or Adjusted Consolidated Net Income, as
the case may be), in each case to the Company or any Restricted Subsidiary
from any Person (including, without limitation, from Unrestricted
Subsidiaries) or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition
of "Investments"),
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not to exceed in the case of any Person the amount of Investments in such
Person which were made subsequent to the Issue Date by the Company or any
Restricted Subsidiary and which were treated as a Restricted Payment; plus
(E) $15 million.
(b) Notwithstanding paragraph (a) above, the Company and any Restricted
Subsidiary may take the following actions so long as (with respect to clauses
(ii), (iii), (iv) and (v)) no Default or Event of Default shall have occurred
and be continuing (each being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date such declaration complied with the
provisions of paragraph (a) above and such payment shall be deemed to have
been paid on such date of declaration for purposes of the calculation
required by the foregoing paragraph (a);
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company in exchange for, or out
of the Net Cash Proceeds of, a substantially concurrent issuance and sale
(other than to a Restricted Subsidiary) of shares of Qualified Capital
Stock of the Company;
(iii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Indebtedness in
exchange for, or out of the Net Cash Proceeds of, a substantially
concurrent issuance and sale (other than to a Restricted Subsidiary) of
shares of Qualified Capital Stock of the Company; and
(iv) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Indebtedness
(referred to herein as the "Subordinated Indebtedness being refinanced") in
exchange for, or out of the Net Cash Proceeds of a substantially concurrent
incurrence (other than to a Restricted Subsidiary) of, Subordinated
Indebtedness of the Company so long as (A) the principal amount of such new
Subordinated Indebtedness does not exceed the principal amount (or, if such
Subordinated Indebtedness being refinanced provides for an amount less than
the principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
of the Subordinated Indebtedness being refinanced, plus the amount of any
stated premium (including any Make-Whole Amount) required to be paid in
connection with such refinancing pursuant to the terms of the Subordinated
Indebtedness being refinanced or the amount of any premium actually paid at
such time to refinance the Subordinated Indebtedness as determined in good
faith as being necessary by the Company, plus, in either case, the amount
of reasonable expenses of the Company incurred in connection with such
refinancing, (B) such new Subordinated Indebtedness is subordinated to the
Notes to the same extent as such Subordinated Indebtedness being refinanced
and (C) (1) if the Subordinated Indebtedness being refinanced has an
Average Life to Stated Maturity shorter than that of the Notes or a final
Stated Maturity earlier than the final Stated Maturity of the Notes, such
new Subordinated Indebtedness shall have an Average Life to Stated Maturity
no shorter than the Average Life to Stated Maturity of such refinanced
Subordinated Indebtedness and a final Stated Maturity no earlier than the
final Stated Maturity of such refinanced Subordinated Indebtedness or (2)
in all other cases, each Stated Maturity of principal (or any required
repurchase, redemption or sinking fund payments) of such new Subordinated
Indebtedness shall be on or after the final Stated Maturity or principal of
the Notes;
(v) make any distribution which is necessary to maintain the Company's
status as a REIT under the Code; and
(vi) the repurchase, redemption or other acquisition or retirement for
value of shares of Voting Stock of any Restricted Subsidiary owned by
Persons in an amount not to exceed 5% of the economic interest of such
Restricted Subsidiary.
The actions described in clauses (i), (ii), (iii) and (v) of this paragraph
(b) shall be Restricted Payments that shall be permitted to be taken in
accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph
(a) and that the actions described in clauses (iv) and (vi) of this paragraph
(b) shall be Restricted Payments that shall be permitted to be taken in
accordance
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with this paragraph and shall not reduce the amount that would otherwise be
available for Restricted Payments under clause (3) of paragraph (a).
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the required
calculations were computed.
Limitations on Incurrence of Debt. The Company will not, and will not permit
any Restricted Subsidiary to, incur any Debt (including Acquired Debt), other
than Permitted Indebtedness; provided, however, that the Company may incur
Debt if, at the time of such incurrence, either (a) the ratio of Adjusted
Earnings Available for Fixed Charges to Adjusted Fixed Charges for the period
consisting of the four full consecutive fiscal quarters most recently ended
prior to the date on which such additional Debt is to be incurred (after
giving pro forma effect to (i) the incurrence of such Debt and (if applicable)
the application of the net proceeds therefrom, including to refinance other
Debt, as if such Debt was incurred, and the application of such proceeds
occurred, on the first day of such four-quarter period, (ii) the incurrence,
repayment or retirement of any other Debt by the Company and its Restricted
Subsidiaries since the first day of such four-quarter period as if such Debt
was incurred, repaid or retired on the first day of such four-quarter period
(except that, in making such computation, the amount of Debt under any
revolving credit facility shall be computed based upon the average daily
balance of such Debt during such four-quarter period), and (iii) the
acquisition (whether by purchase, merger or otherwise) or disposition (whether
by sale, merger or otherwise) of any company, entity or business acquired or
disposed of by the Company or its Restricted Subsidiaries (including the
operations thereof), as the case may be, since the first day of such four-
quarter period, as if such acquisition or disposition occurred on the first
day of such four-quarter period) shall have been (x) greater than 1.75 to 1
for the period from the Issue Date to the date that is 18 months following the
Issue Date and (y) greater than 2.0 to 1 thereafter or (b) the Adjusted Debt
to Capital Ratio on a pro forma basis after giving effect to the incurrence of
such Debt and to the application of the proceeds therefrom as of the end of
the quarter most recently ended prior to the date on which such additional
Debt is to be incurred shall have been less than 2.0 to 1.
Limitation on Affiliate Transactions. The Company will not, and will not
permit any of its Restricted Subsidiaries to, enter into or permit to exist
any transaction (including, without limitation, the purchase, sale, lease or
exchange of any property, any employee compensation arrangements or the
rendering of any service) with any Affiliate of the Company or any Affiliate
of any of the Company's Restricted Subsidiaries unless the terms thereof (i)
are no less favorable to the Company or such Restricted Subsidiary, as the
case may be, than those that could be obtained at the time of such transaction
in arm's length dealings with a Person who is not such an Affiliate, (ii) if
such transaction involves an amount in excess of $5 million, (a) are set forth
in writing and (b) have been approved by resolution adopted by a majority of
the members of the Company's or such Restricted Subsidiary's board of
directors having no personal stake in such transaction and (iii) if such
transaction involves an amount in excess of $15 million, have been determined
(as set forth in a written opinion) by a nationally recognized investment
banking firm (or, if nationally recognized investment banking firms do not
customarily render opinions with respect to transactions of such type, by a
nationally recognized expert with experience in evaluating the terms and
conditions of transactions of such type) to be fair, from a financial point of
view, to the Company or such Restricted Subsidiary, as the case may be; and
the Company shall have delivered to the Trustee the writings, resolutions
and/or opinions, as the case may be, required by clauses (ii) and (iii) of
this sentence.
The provisions of the foregoing paragraph shall not apply to (i)
transactions between or among the Company and any of its Wholly Owned
Restricted Subsidiaries or between or among Wholly Owned Restricted
Subsidiaries of the Company, (ii) any Restricted Payment or Permitted Payment
permitted to be made under the covenant described under "--Limitation on
Restricted Payments," (iii) customary directors fees and indemnities, (iv) the
purchase of any CMBS, Mortgage Loans or servicing rights for Mortgage Loans by
the Company or any of its Restricted Subsidiaries in the ordinary course of
the Company's or such Restricted Subsidiary's business, (v) any issuance of
securities or other payments, compensation, benefits, awards or grants
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in cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board of
Directors of the Company, (vi) the grant of stock options or similar rights to
employees and directors of the Company or any of its Restricted Subsidiaries
pursuant to plans approved by the Board of Directors of the Company and (vii)
the payment of advisory and subadvisory fees to the Company or any Restricted
Subsidiary from American Insured Mortgage Investors, American Insured Mortgage
Investors L.P.--Series 85, American Insured Mortgage Investors L.P.--Series 86
and American Insured Mortgage Investors L.P.--Series 88.
Limitation on the Issuance or Sale of Capital Stock. The Company will not
permit any Restricted Subsidiary to issue any Capital Stock (other than to the
Company or a Restricted Subsidiary) and shall not permit any Person (other
than the Company or a Restricted Subsidiary) to own any Capital Stock of any
Restricted Subsidiary; provided, however, that the foregoing shall not
prohibit (a) the issuance and sale of all, but not less than all, of the
issued and outstanding Capital Stock of any Restricted Subsidiary owned by the
Company or any Restricted Subsidiary in accordance with the provisions of the
Indenture or (b) Capital Stock of a Restricted Subsidiary issued and
outstanding on the Issue Date and held by Persons other than the Company or
any Restricted Subsidiary or (c) the issuance or sale of Capital Stock of a
Restricted Subsidiary to Persons other than the Company or a Restricted
Subsidiary in the event that, upon the advice of counsel, the Board of
Directors of the Company determines that such issuance or sale is necessary or
advisable to maintain the Company's status as a REIT; provided, however, that
the Company or a Restricted Subsidiary continues to own at least 95% of the
economic interest of such Restricted Subsidiary.
Limitation on the Pledge of Capital Stock. The Company will not, directly or
indirectly, create, incur, assume or suffer to exist any Lien of any kind on
or with respect to any of the Capital Stock of any Restricted Subsidiary,
whether owned on the Issue Date or thereafter acquired, or any income, profits
or proceeds therefrom, or assign or otherwise convey any right to receive
income thereon without making effective provision for securing the Notes (x)
equally and ratably with such Debt as to such property for so long as such
Debt will be so secured or (y) in the event such Debt is Subordinated
Indebtedness, prior to such Debt as to such property for so long as such Debt
will be so secured.
Business Activities. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any business, except as set forth in
clause (k) of the definition of "Permitted Investments," other than in the
usual and ordinary course of the commercial mortgage business and other than
which is consistent with the industry standards in the commercial mortgage
industry.
Purchase of Notes Upon a Change of Control. If a Change of Control shall
occur at any time, then each Holder of Notes shall have the right to require
that the Company purchase such Holder's Notes, in whole or in part in integral
multiples of $1,000, at a purchase price (the "Change of Control Purchase
Price") in cash in an amount equal to 101% of the principal amount thereof,
plus accrued interest, if any, to the date of purchase (the "Change of Control
Purchase Date"), pursuant to the offer described below (the "Change of Control
Offer") and the other procedures set forth in the Indenture.
Within 30 days following any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes by first-class mail, postage prepaid, at the address appearing
in the security register, stating, among other things, (i) the purchase price
and the purchase date, which shall be a Business Day no earlier than 30 days
nor later than 60 days from the date such notice is mailed, or such later date
as is necessary to comply with requirements under the Exchange Act; (ii) that
any Note not tendered will continue to accrue interest; (iii) that, unless the
Company defaults in the payment of the purchase price, any Notes accepted for
payment pursuant to the Change of Control Offer shall cease to accrue interest
after the Change of Control Purchase Date; and (iv) certain other procedures
that the holder of Notes must follow to accept a Change of Control Offer or to
withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of
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the Notes seeking to accept the Change of Control Offer. There can be no
assurance that in the event of a Change of Control the Company will be able to
obtain the consents necessary to consummate a Change of Control Offer from the
lenders under agreements governing outstanding Debt which may prohibit such an
offer. The failure of the Company to make or consummate the Change of Control
Offer or pay the Change of Control Purchase Price when due would result in an
Event of Default and would give the Trustee and the holders of' the Notes the
rights described under "--Events of Default, Notice and Waiver."
One of the events which constitutes a Change of Control under the Notes is
the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law
of the Indenture and the Notes) to represent a specific quantitative test. As
a consequence, in the event holders of the Notes elect to require the Company
to purchase the Notes and the Company elects to contest such election, there
can be no assurance as to how a court interpreting New York law would
interpret the phrase.
The existence of a Holder's right to require the Company to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford holders of Notes the right to
require the Company to purchase such Notes in the event of a highly leveraged
transaction or certain transactions with the Company's management or its
Affiliates, including a reorganization, restructuring, merger or similar
transaction involving the Company (including, in certain circumstances, an
acquisition of the Company by management or its Affiliates) that may adversely
affect Holders of the Notes, if such transaction is not a transaction defined
as a Change of Control. See "--Certain Definitions" for the definition of
"Change of Control." A transaction involving the Company's management or its
Affiliates, or a transaction involving a recapitalization of the Company,
would result in a Change of Control if it is the type of transaction specified
by such definition.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws
and regulations in connection with a Change of Control Offer.
Reports. The Company will file on a timely basis with the Commission, to the
extent such filings are accepted by the Commission and whether or not the
Company has a class of securities registered under the Exchange Act, the
annual reports, quarterly reports and other documents that the Company would
be required to file if it were subject to Section 13 or 15 of the Exchange
Act. The Company will also be required (a) to file with the Trustee, and
provide to each Holder of Notes, without cost to such Holder, copies of such
reports and documents within 30 days after the date on which the Company files
such reports and documents with the Commission or the date on which the
Company would be required to file such reports and documents if the Company
were so required and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply at the Company's cost copies of such reports and
documents to any prospective holder of Notes promptly upon written request.
Compliance with the covenants described herein and such additional covenants
with respect to the Notes generally may not be waived by the Board of
Directors of the Company or by the Trustee unless the Holders of at least a
majority in principal amount of all outstanding Notes consent to such waiver;
provided, however that the defeasance and covenant defeasance provisions of
the Indenture described under "--Defeasance or Covenant Defeasance" will apply
to the Notes.
RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Company may designate a Subsidiary (including a newly formed or newly
acquired Subsidiary) of the Company or any of its Restricted Subsidiaries as
an Unrestricted Subsidiary (a "Designation") if (i) no Default shall have
occurred and be continuing at the time of or after giving effect to such
Designation, (ii) (A) such
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Subsidiary has total assets of $1,000 or less or (B) such Subsidiary has total
assets of more than $1,000 and an Investment in such Subsidiary (the
"Designation Amount") would then be permitted under the "Limitation on
Restricted Payments" covenant and (iii) the Company would be permitted to
incur $1.00 of additional Debt (other than Permitted Debt) pursuant to the
"Limitation on Incurrence of Debt" covenant at the time of and after giving
effect to such Designation. Unless so designated as an Unrestricted
Subsidiary, any Person that becomes a Subsidiary of the Company or any of its
Restricted Subsidiaries shall be classified as a Restricted Subsidiary
thereof.
In the event of any such Designation, the Company shall be deemed to have
made an Investment in the Designation Amount, constituting a Restricted
Payment pursuant to the covenant described under "--Limitation on Restricted
Payments" for all purposes of the Indenture. The Indenture will further
provide that the Company shall not, and shall not permit any Restricted
Subsidiary to, at any time (x) provide direct or indirect credit support for
or a guarantee of any Debt of any Unrestricted Subsidiary (including of any
undertaking, agreement or instrument evidencing such Debt), (y) be directly or
indirectly liable for any Debt of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Debt which provides that the holder
thereof may (upon notice, lapse of time or both) declare a default thereon or
cause the payment thereof to be accelerated or payable prior to its final
scheduled maturity upon the occurrence of a default with respect to any Debt
of any Unrestricted Subsidiary (including any right to take enforcement action
against such Unrestricted Subsidiary), except, in the case of clause (x) or
(y), to the extent permitted under the covenants described under "--Limitation
on Restricted Payments," "Limitation on Incurrence of Debt" and "--Limitation
on Affiliate Transactions."
The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Debt of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time, have
been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by a Board Resolution of
the Company, which, together with an Officers' Certificate certifying
compliance with the foregoing provisions, shall be delivered to the Trustee.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets to any other Person or Persons, or permit any
Restricted Subsidiary to enter into any such transaction or series of
transactions, if such transaction or series of transactions, in the aggregate,
would result in the sale, assignment, conveyance, transfer, lease or other
disposition of all or substantially all of the properties and assets of the
Company and its Restricted Subsidiaries on a consolidated basis to any other
Person or Persons, unless at the time and after giving effect thereto (a)
either (i) if the transaction is a consolidation or merger, the Company will
be the continuing corporation or (ii) the Person (if other than the Company)
formed by such consolidation or into which the Company or such Restricted
Subsidiary is merged or the Person that acquires by sale, assignment,
conveyance, transfer, lease or disposition all or substantially all the
properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis (the "Surviving Entity") (A) will be a corporation duly
organized and validly existing under the laws of the United States of America,
any state thereof or the District of Columbia and (B) will expressly assume,
by a supplemental indenture, in form and substance satisfactory to the
Trustee, the Company's obligation for the due and punctual payment of the
principal of, premium, if any, and interest on all the Notes and the
performance and observance of every covenant of the Indenture or the Notes on
the part of the Company to be performed or observed; (b) immediately before
and immediately after giving effect to such transaction or series of
transactions
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on a pro forma basis (and treating any obligation of the Company or any
Restricted Subsidiary incurred in connection with or as a result of such
transaction or series of transactions as having been incurred at the time of
such transaction), no Default or Event of Default will have occurred and be
continuing; and (c) immediately after giving effect to such transaction or
series of transactions on a pro forma basis (on the assumption that the
transaction or series of transactions occurred on the first day of the four-
quarter period immediately prior to the consummation of such transaction or
series of transactions with the appropriate adjustments with respect to the
transaction or series of transactions being included in such pro forma
calculation), the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) could incur at least $1.00 of
additional Debt (other than Permitted Indebtedness) under the provisions of
the "Limitation on Incurrence of Debt" covenant. Neither the Company nor any
of its Restricted Subsidiaries may merge with or into, or be consolidated
with, an Unrestricted Subsidiary of the Company, except to the extent such
Unrestricted Subsidiary has been designated a Restricted Subsidiary, as
provided in the Indenture, in advance of or in connection with such
transaction.
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, the Company or the Surviving
Entity shall have delivered to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, and if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture, comply with the requirements of the Indenture and that all
conditions precedent therein provided for relating to such transaction have
been complied with.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties
and assets of the Company in accordance with the immediately preceding
paragraphs in which the Company is not the continuing obligor under the
Indenture, the Surviving Entity shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with
the same effect as if such successor had been named as the Company therein.
When a successor assumes all the obligations of its predecessor under the
Indenture and the Notes, the predecessor shall be released from those
obligations: provided that in the case of a transfer by lease, the predecessor
shall not be released from the payment of principal, premium, if any, and
interest on the Notes.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The following events are "Events of Default" with respect to the Notes: (a)
default for 30 days in the payment of any installment of interest on any Note;
(b) default in the payment of the principal of (or premium or Make-Whole
Amount, if any, on) any Note at its maturity (upon acceleration, optional
redemption, required repurchase or otherwise); (c) default in the performance,
or breach, of the provisions described in "--Merger, Consolidation or Sale of
Assets" or the failure to make or consummate a Change of Control Offer in
accordance with the provisions of the "Purchase of the Notes Upon a Change of
Control" covenant; (d) default in the performance, or breach, of any other
covenant or warranty of the Company contained in the Indenture or the Notes,
such default having continued for 30 days after written notice as provided in
the Indenture; (e) (i) any default in the payment of the principal, premium,
if any, or interest on any Debt shall have occurred under any of the
agreements, indentures or instruments under which the Company or any
Restricted Subsidiary then has outstanding Debt in excess of $10 million when
the same shall become due and payable in full and such default shall have
continued after any applicable grace period and shall not have been cured or
waived and, if not already matured at its final maturity in accordance with
its terms, the holder of such Debt shall have the right to accelerate such
Debt or (ii) an event of default as defined in any of the agreements,
indentures or instruments described in clause (i) of this clause (e) shall
have occurred and the Debt thereunder, if not already matured at its final
maturity in accordance with its terms, shall have been accelerated; (f) one or
more judgments or orders shall be rendered against the Company or any
Significant Subsidiary or any of their respective properties for the payment
of money, either individually or in an aggregate amount in excess of $10
million and shall not be discharged and either (i) an enforcement proceeding
shall have been commenced by a creditor upon such
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judgment or order or (ii) there shall have been a period of 30 consecutive
days during which a stay of enforcement of such judgment or order, by reason
of a pending appeal or otherwise, was not in effect; (g) certain events of
bankruptcy, insolvency or reorganization, or court appointment of a receiver,
liquidator or trustee of the Company or any Significant Subsidiary or any of
their respective property; (h) any holder of at least $10 million in aggregate
principal amount of Debt of the Company or any Significant Subsidiary shall
commence judicial proceedings for foreclosure upon assets of the Company or
any Significant Subsidiary having an aggregate fair market value, individually
or in the aggregate, in excess of $10 million or shall have exercised any
right under applicable law or applicable security documents to take ownership
of any such amounts in lieu of foreclosure, and there shall have been a period
of 30 consecutive days during which a stay of enforcement of such proceeding
or action was not in effect; and (i) any other Event of Default provided in
the Indenture or the Notes.
If an Event of Default under the Indenture occurs and is continuing, then in
every such case the Trustee or the Holders of not less than 25% in principal
amount of the Outstanding Notes (as defined below) may declare the principal
amount of all of the Notes to be due and payable immediately by written notice
thereof to the Company (and to the Trustee if given by the Holders). However,
at any time after such a declaration of acceleration with respect to Notes has
been made, but before a judgment or decree for payment of the money due has
been obtained by the Trustee, the Holders of not less than a majority in
principal amount of Outstanding Notes may rescind and annul such declaration
and its consequences if (a) the Company shall have paid or deposited with the
Trustee all required payments of the principal of (and premium or Make-Whole
Amount, if any) and interest on the Notes, plus certain fees, expenses,
disbursements and advances of the Trustee and (b) all Events of Default, other
than the nonpayment of accelerated principal of (or specified portion
thereof), or premium (if any) or interest on the Notes have been cured or
waived as provided in the Indenture. The Indenture also provides that the
Holders of not less than a majority in principal amount of the Outstanding
Notes may waive any past default with respect to such series and its
consequences, except a default (x) in the payment of the principal of (or
premium or Make-Whole Amount, if any) or interest payable on any Note or (y)
in respect of a covenant or provision contained in the Indenture that cannot
be modified or amended without the consent of the Holder of each Outstanding
Note affected thereby.
The Trustee will be required to give notice to the Holders of Notes within
30 days of a default under the Indenture unless such default has been cured or
waived; provided, however that the Trustee may withhold notice to the Holders
of any default (except a default in the payment of the principal of (or
premium or Make-Whole Amount, if any) or interest on any Note) if specified
Responsible Officers of the Trustee consider such withholding to be in the
interest of such Holders; and provided further that in the case of any default
of the character specified in Section 501(d) of the Indenture no such notice
shall be given until at least 30 days after the occurrence thereof.
The Indenture provides that no Holders of Notes may institute any
proceedings, judicial or otherwise, with respect to the Indenture or for any
remedy thereunder, except in the case of failure of the Trustee, for 60 days,
to act after it has received a written request to institute proceedings in
respect of an Event of Default from the Holders of not less than 25% in
principal amount of the Outstanding Notes, as well as an offer of indemnity
reasonably satisfactory to it. This provision will not prevent, however, any
holder of Notes from instituting suit for the enforcement of payment of the
principal of (and premium, if any) and interest on such Notes at the
respective due dates thereof.
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of any
Notes then Outstanding under the Indenture, unless such Holders shall have
offered to the Trustee thereunder reasonable security or indemnity. The
Holders of not less than a majority in principal amount of the Outstanding
Notes shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or of exercising any
trust or power conferred upon the Trustee. However, the Trustee may refuse to
follow any direction which is in conflict with any law or the Indenture, which
may
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involve the Trustee in personal liability or which may be unduly prejudicial
to the holders of Notes of such series not joining therein.
Within 120 days after the close of each fiscal year, the Company must
deliver to the Trustee a certificate, signed by one of several specified
officers of the Company, stating whether or not such officer has knowledge of
any default under the Indenture or the Notes and, if so, specifying each such
default and the nature and status thereof.
DEFEASANCE OR COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have the
obligations of the Company upon the Notes discharged with respect to the
outstanding Notes ("defeasance"). Such defeasance means that the Company will
be deemed to have paid and discharged the entire Debt represented by the
outstanding Notes and to have satisfied all its other obligations under such
Notes and the Indenture insofar as such Notes are concerned except for (i) the
rights of Holders of outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due, (ii) the Company's obligations to issue temporary Notes, register the
transfer or exchange of any Notes, replace mutilated, destroyed, lost or
stolen Notes, maintain an office or agency for payments in respect of the
Notes and segregate and hold such payments in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee and (iv) the defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company released with
respect to certain covenants set forth in the Indenture and the Notes, and any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Notes ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged, as security for, and dedicated
solely, to the benefit of the holders of the Notes, cash in United States
dollars, or Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay and
discharge the principal of, premium, if any, and interest on the outstanding
Notes on the Stated Maturity (or upon redemption, if applicable) of such
principal, premium, if any, or installment of interest; (ii) no Default or
Event of Default with respect to the Notes will have occurred and be
continuing on the date of such deposit or, insofar as an event of bankruptcy
under clause (g) of "--Events of Default" above is concerned, at any time
during the period ending on the 91st day after the date of such deposit; (iii)
such defeasance or covenant defeasance will not result in a breach or
violation of, or constitute a default under, the Indenture or any material
agreement or instrument to which the Company is a party or by which it is
bound; (iv) in the case of defeasance, the Company shall have delivered to the
Trustee an opinion of counsel stating that the Company has received from, or
there has been published by, the Internal Revenue Service a ruling, or since
the Issue Date, there has been a change in applicable federal income tax law,
in either case to the effect that, and based thereon such opinion shall
confirm that, the holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance
had not occurred; (v) in the case of covenant defeasance, the Company shall
have delivered to the Trustee an opinion of counsel to the effect that the
holders of the Notes outstanding will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will
be subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such covenant defeasance had
not occurred; (vi) the Company shall have delivered to the Trustee an opinion
of counsel to the effect that the trust funds will not be subject to any
rights of holders of Debt, including, without limitation, any rights arising
under the Indenture (other than the rights of the holders of the Notes to be
paid out of the proceeds of such trust funds) and that after the 91st day
following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar law affecting
creditors' rights generally; and (vii) the Company shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with.
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MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture will be permitted to be made
only with the consent of the Holders of not less than a majority in principal
amount of all Outstanding Notes which are affected by such modification or
amendment; provided, however that no such modification or amendment may,
without the consent of the Holders of each such Note affected thereby, (a)
change the Stated Maturity of the principal of or premium (if any) or any
installment of interest on, any such Note; (b) reduce the principal amount of,
or the rate or amount of interest on, or any premium or Make-Whole Amount,
payable on redemption of, any such Note, (c) change the place of payment, or
the coin or currency, for payment of principal of, premium, if any, or
interest on any such Note; (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any such Note; (e) reduce the
above stated percentage of outstanding Notes of any series necessary to modify
or amend the Indenture, to waive compliance with certain provisions thereof or
certain defaults and consequences thereunder or to reduce the quorum or voting
requirements set forth in the Indenture; or (f) modify any of the foregoing
provisions or any of the provisions relating to the waiver of certain past
defaults or certain covenants, except to increase the required percentage to
effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the Holders of each such Note
affected thereby. A Note shall be deemed outstanding ("Outstanding") if it has
been authenticated and delivered under the Indenture unless, among other
things, such Note has been cancelled or redeemed.
Notwithstanding the foregoing limitations, modifications and amendments of
the Indenture will be permitted to be made by the Company and the Trustee
without the consent of any Holder of Notes for any of the following purposes:
(i) to evidence the succession or addition of another Person to the Company as
obligor under the Indenture; (ii) to add to the covenants of the Company for
the benefit of the Holders of the Notes or to surrender any right or power
conferred upon the Company in the Indenture; (iii) to add additional Events of
Default for the benefit of the Holders of the Notes; (iv) to permit or
facilitate the issuance of the Notes in uncertificated form, provided, that
such action shall not adversely affect the interests of the Holders of Notes
in any material respect; (v) to secure the Notes; (vi) to establish the form
or terms of additional notes of any series; (vii) to provide for the
acceptance of appointment by a successor Trustee or facilitate the
administration of the trusts under the Indenture by more than one Trustee;
(viii) to cure any ambiguity, defect or inconsistency in the Indenture,
provided that such action shall not adversely affect the interests of Holders
of Notes in any material respect; or (ix) to supplement any of the provisions
of the Indenture to the extent necessary to permit or facilitate defeasance
and discharge of any series of Notes or additional notes under the Indenture,
provided that such action shall not adversely affect the interests of the
Holders of the Notes in any material respect.
The Indenture provides that the Holders of not less than a majority in
principal amount of Outstanding Notes have the right to waive compliance by
the Company with certain covenants in the Indenture.
The Indenture contains provisions for convening meetings of the Holders of
Notes. A meeting will be permitted to be called at any time by the Trustee,
and also, upon request, by the Company or the Holders of at least 10% in
principal amount of the Outstanding Notes, in any such case upon notice given
as provided in the Indenture. Except for any consent that must be given by the
Holder of each Note affected by certain modifications and amendments of the
Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present will be permitted to be adopted by the
affirmative vote of the Holders of a majority in principal amount of the
Outstanding Notes of that series; provided, however that, except as referred
to above, any resolution with respect to any request, demand, authorization,
direction, notice, consent, waiver or other action that may be made, given or
taken by the Holders of a specified percentage, which is less than a majority,
in principal amount of the Outstanding Notes may be adopted at a meeting or
adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the Holders of such specified percentage in principal
amount of the Outstanding Notes. Any resolution passed or decision taken at
any meeting of Holders of Notes duly held in accordance with the Indenture
will be binding on all Holders of Notes. The quorum at any meeting called to
adopt a resolution, and at any reconvened meeting, will be Persons holding or
representing a majority in principal amount of the Outstanding Notes;
provided, however that if any action is to be taken at such meeting with
respect to a consent or waiver which may be given by the Holders of not less
than a specified
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percentage in principal amount of the Outstanding Notes, the Persons holding
or representing such specified percentage in principal amount of the
Outstanding Notes will constitute a quorum.
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Notes of any series with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that the
Indenture expressly provides may be made, given or taken by the Holders of a
specified percentage in principal amount of all Outstanding Notes affected
thereby, or of the Holders of such series and one or more additional series:
(i) there shall be no minimum quorum requirement for such meeting and (ii) the
principal amount of the Outstanding Notes that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action
shall be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been
made, given or taken under the Indenture.
SATISFACTION AND DISCHARGE
The Company may discharge certain obligations to Holders of Notes that have
not already been delivered to the Trustee for cancellation and that either
have become due and payable or will become due and payable within one year (or
scheduled for redemption within one year) by irrevocably depositing with the
Trustee, in trust, funds in such currency or currencies, currency unit or
units or composite currency or currencies in which such Notes are payable in
an amount sufficient to pay the entire indebtedness on such Notes in respect
of principal (and premium or Make-Whole Amount, if any) and interest to the
date of such deposit (if such Notes have become due and payable) or to the
Stated Maturity or Redemption Date, as the case may be.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest in respect of the
Notes in the form of Global Notes will be made by the Company in immediately
available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing house or next-day funds. In contrast, Notes
represented by a Global Note will trade in DTC's Same-Day Funds Settlement
System until maturity or until the Notes are issued in certificate form, and
secondary market trading activity in such Notes will therefore be required by
DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Notes.
GOVERNING LAW
The Indenture and the Notes will be governed by and shall be construed in
accordance with the laws of the State of New York.
CERTAIN DEFINITIONS
"Acquired Debt" means Debt of a Person (a) existing at the time such Person
becomes a Restricted Subsidiary or (b) assumed in connection with the
acquisition of assets from such Person, in each case other than Debt incurred
in connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or such acquisition. Acquired Debt shall be deemed to be incurred
on the date of the related acquisition of assets from any Person or the date
the acquired Person becomes a Restricted Subsidiary.
"Adjusted Consolidated Net Income" means Consolidated Net Income, adjusted
by excluding, without duplication, (a) any net after-tax extraordinary gains
or losses (less all fees and expenses relating thereto); (b) any net after-tax
gains or losses (less all fees and expenses relating thereto) attributable to
asset dispositions other than in the ordinary course of business; (c) the
portion of net income (or loss) of any Person (other than the Company or a
Restricted Subsidiary) in which the Company or any Restricted Subsidiary has
an ownership
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interest, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any Restricted Subsidiary in
cash dividends or distributions during such period, (d) the net income (or
loss) of any Person combined with the Company or any Restricted Subsidiary on
a "pooling of interests" basis attributable to any period prior to the date of
combination and (e) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary is not at the date of determination permitted, directly
or indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary or its stockholders.
"Adjusted Debt to Capital Ratio" means the ratio of (a) total Debt of the
Company and its Restricted Subsidiaries on a consolidated basis less (i) Match
Funded Debt and (ii) non-recourse Debt of any Restricted Subsidiary that is
not consolidated with the Company on its financial statements in accordance
with GAAP to (b) Consolidated Net Worth.
"Adjusted Earnings Available for Fixed Charges" is defined as the sum of (1)
Adjusted Consolidated Net Income; plus (2) Consolidated Interest Expense,
adjusted by excluding Match Funded Fixed Charges, plus (3) Consolidated Income
Tax Expense, plus (4) Consolidated Noncash Items.
"Adjusted Fixed Charges" means the amount which is expensed in any period
for Consolidated Interest Expense of the Company and its Restricted
Subsidiaries, Preferred Stock dividends of the Company (other than dividends
paid in shares of Qualified Capital Stock) declared and paid or payable during
such period and accrued Redeemable Capital Stock dividends of the Company and
its Restricted Subsidiaries for such period, whether or not declared or paid,
adjusted by subtracting Match Funded Fixed Charges.
"Affiliate" means, with respect to any specified Person (a) any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any other Person
that owns, directly or indirectly, 10% or more of such specified Person's
Capital Stock or any executive officer or director of any such specified
Person or other Person. For the purposes of this definition, "control," when
used with respect to any specified Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Average Life" means, as of the date of determination with respect to any
Debt, the quotient obtained by dividing (a) the sum of the products of (i) the
number of years from the date of determination to the date or dates of each
successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Debt multiplied by (ii) the amount of each
such principal payment, by (b) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participations, rights in or other
equivalents (however designated) of such Person's equity, including any
Preferred Stock, and any rights (other than debt securities convertible into
or exchangeable or exercisable for such equity), warrants or options
exchangeable or exercisable for or convertible into such equity, whether now
outstanding or issued after the Issue Date.
"Cash Equivalents" means (a) securities with maturities of one year or less
from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof; (b) certificates of deposit,
bankers acceptances and Eurodollar time deposits with maturities of one year
or less from the date of acquisition and overnight bank deposits of any
commercial bank having capital and surplus in excess of $500,000,000; (c)
commercial paper of a domestic issuer rated at least A-1 by S&P or P-l by
Moody's; (d) securities with maturities of one year or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States, by any political subdivision or taxing authority of any
such state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political subdivision,
taxing authority or foreign government (as the case may be) are rated at least
A by S&P or
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A2 by Moody's; or (e) shares of money market mutual or similar funds which
invest exclusively in assets satisfying the requirements of clauses (a)
through (d) of this definition.
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a Person shall be deemed to have "beneficial ownership" of all securities
that such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 40% of the total outstanding Voting Stock of the Company; (b) the
Company consolidates with, or merges with or into, another Person or conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any Person, or any Person consolidates with, or merges with or into,
the Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction (i) where
the outstanding Voting Stock of the Company is not converted or exchanged at
all (except to the extent necessary to reflect a change in the jurisdiction of
incorporation of the Company) or is converted into or exchanged for (A) Voting
Stock (other than Redeemable Capital Stock) of the surviving or transferee
corporation and/or (B) cash, securities and other property (other than Capital
Stock of the entity surviving such transaction) in an amount that could be
paid by the Company as a Restricted Payment as described under the "Limitation
on Restricted Payments" covenant (and such amount shall be treated as a
Restricted Payment subject to the provisions of the Notes as described under
the "Limitation on Restricted Payments" covenant) and (ii) where immediately
after such transaction, no "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders,
is the beneficial owner" (as defined in Rules 13d 3 and 13d 5 under the
Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of 40% or more of the total outstanding Voting
Stock of the surviving or transferee corporation; (c) Continuing Directors
shall at any time cease to constitute a majority of the Board of Directors of
the Company; or (d) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution other than in a transaction which complies with the
provisions described under "Consolidation, Merger and Sale of Assets."
"Consolidated Income Tax Expense" for any period means the provision for
federal, state, local and foreign income taxes of the Company and all
Restricted Subsidiaries for such period as determined on a consolidated basis
in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, and without
duplication, all interest (including the interest component of rentals on
leases reflected in accordance with GAAP as capitalized leases on the
consolidated balance sheet of the Company and its Restricted Subsidiaries,
letter of credit fees, Interest Rate Agreement fees, commitment fees and other
like financial charges) and all amortization of debt discount on all Debt
(including, without limitation, payment in kind, zero coupon and other
securities) of the Company and its Restricted Subsidiaries, determined in
accordance with GAAP less interest expense attributable to non-recourse Debt
of any Restricted Subsidiary that is not consolidated with the Company on its
financial statements in accordance with GAAP; provided that (x) the
Consolidated Interest Expense attributable to interest on any Debt computed on
a pro forma basis and (A) bearing a floating interest rate shall be computed
as if the rate in effect on the date of computation had been the applicable
rate for the entire period and (B) which was not outstanding during the period
for which the computation is being made but which bears, at the option of the
Company, a fixed or floating rate of interest, shall be computed by applying
at the option of the Company, either the fixed or floating rate, and (y) in
making such computation, the Consolidated Interest Expense attributable to
interest on any Debt under a revolving credit facility computed on a pro forma
basis shall be computed based upon the average daily balance of such Debt
during the applicable period.
"Consolidated Net Income" for any period means the amount of net income (or
loss) of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP.
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"Consolidated Net Worth" means, at any date of determination, the
consolidated stockholders' equity (excluding Redeemable Capital Stock or
treasury stock) of the Company and any Restricted Subsidiaries, as determined
on a consolidated basis in accordance with GAAP.
"Consolidated Noncash Items" means, for any period, the aggregate
depreciation, amortization and other noncash items (including noncash interest
expense) of the Company and any Restricted Subsidiary reducing or increasing
Consolidated Net Income for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such noncash charge if and to the extent
that the Company has made or shall, under GAAP, be required to be made an
accrual of or reserve for cash charges for any future period).
"Continuing Directors" shall mean, collectively, (i) all members of the
Board of Directors of the Company on the Issue Date and (ii) all members of
the Board of Directors of the Company who assume office after the Issue Date
and whose nomination for election by the Company's shareholders was approved
by a majority of the directors then in office whose nomination for election
was previously so approved.
"Debt" of any Person means, without duplication, any indebtedness of such
Person, whether or not contingent, in respect of (i) borrowed money evidenced
by bonds, notes, debentures or similar instruments, (ii) indebtedness secured
by any mortgage, pledge, lien, charge, encumbrance or any security interest
existing on property owned by such Person, (iii) the reimbursement
obligations, contingent or otherwise, in connection with any letters of credit
actually issued or amounts representing the balance deferred and unpaid of the
purchase price of any property or services except any such balance that
constitutes an accrued expense or trade payable, (iv) all obligations under or
in respect of Interest Rate Agreements, (v) all Debt referred to in the
preceding clauses, of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holders of such Debt have an
existing right, contingent or otherwise, to be secured by) any Lien upon or
with respect to property owned by such Person, even though such Person has not
assumed or become liable for the payment of such Debt (the amount of such
obligation being deemed to be the lesser of the fair market value of such
property or asset (as determined in good faith by the Company's Board of
Directors whose determination shall be conclusive) or the amount of the
obligation so secured), (vi) any lease of property by such Person as lessee
which is reflected in such Person's consolidated balance sheet as a
capitalized lease in accordance with GAAP, (vii) all Redeemable Capital Stock
of such Person valued at the greater of its voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends (for purposes hereof,
the "maximum fixed repurchase price" of any Redeemable Capital Stock which
does not have a fixed repurchase price shall be calculated in accordance with
the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock
were purchased on any date on which Debt shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by,
the fair market value of such Redeemable Capital Stock, such fair market value
shall be determined in good faith by the board of directors of the issuer of
such Redeemable Capital Stock), (viii) all guarantees by such Person of Debt
referred to in this definition of any other Person or (ix) any amendment,
supplement, modification, deferral, renewal, extension, refunding or
refinancing of any Debt of the types referred to in clauses (i) through (viii)
above, (it being understood that "Debt" shall be deemed to be incurred by the
Company and its Restricted Subsidiaries on a consolidated basis whenever the
Company and its Restricted Subsidiaries on a consolidated basis shall create,
assume, guarantee or otherwise become liable in respect thereof; Debt of a
Restricted Subsidiary of the Company existing prior to the time it became a
Restricted Subsidiary of the Company shall be deemed to be incurred upon such
Restricted Subsidiary's becoming a Restricted Subsidiary of the Company; and
Debt of a person existing prior to a merger or consolidation of such person
with the Company or any Restricted Subsidiary of the Company in which such
person is the successor to the Company or such Restricted Subsidiary shall be
deemed to be incurred upon the consummation of such merger or consolidation);
provided, however that the term Debt shall not include any such indebtedness
that has been the subject of an "in substance" defeasance in accordance with
GAAP.
"DTC" means The Depository Trust Company.
"Global Note" means a Note in book-entry form registered in the name of DTC
or its nominee or in the name of any successor depositary for the Notes or any
nominee of such successor.
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"Government Insured Mortgage Assets" means interests in mortgages that are
insured or guaranteed by the U.S. Government or its agencies and are secured
by multifamily housing complexes located throughout the United States.
"Interest Rate Agreements" means interest rate protection agreements in the
form of a swap, cap, collar, floor, rate lock, or similar agreement designed
to protect against or manage exposure to fluctuations in interest rates
relating to any floating rate Debt of the Company or its Subsidiaries.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by
means of a transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase,
acquisition or ownership by such Person of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Debt issued or owned by, any
other Person and all other items that would be classified as investments on a
balance sheet prepared in accordance with GAAP. For purposes of the definition
of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments"
covenant described above, (i) "Investment" shall include the fair market value
of the assets (net of liabilities) of any Restricted Subsidiary of the Company
at the time that such Restricted Subsidiary of the Company is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the assets
(net of liabilities) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary of the Company
and (ii) any property transferred to or from any Person shall be valued at its
fair market value at the time of such transfer, in each case as determined by
the Board of Directors of the Company in good faith.
"Issue Date" means the date the Notes are first authenticated and delivered
under the Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim,
or preference or priority or other encumbrance upon or with respect to any
property owned on the Issue Date or thereafter assigned.
"Make-Whole Amount" means, in connection with any optional redemption of any
Notes, the excess, if any, of (i) the aggregate present value as of the date
of such redemption of each dollar of principal being redeemed and the amount
of interest (exclusive of interest accrued to the date of redemption) that
would have been payable in respect of each such dollar if such redemption had
not been made, determined by discounting, on a semiannual basis, such
principal and interest at the Reinvestment Rate (determined on the third
Business Day preceding the date notice of such redemption is given) from the
respective dates on which such principal and interest would have been payable
if such redemption had not been made, to the date of redemption, over (ii) the
aggregate principal amount of the Notes being redeemed.
"Match Funded Debt" means Debt of a special purpose, bankruptcy remote
Restricted Subsidiary as to which no recourse exists either to the Company or
any other Restricted Subsidiary, on which (i) the aggregate principal
amortization and maturity of such Debt are based upon the principal
amortization and maturity of a like or greater amount of the funded assets,
and (ii) the interest rate of such Debt is at a fixed rate; provided however,
that the interest rate of such Debt may be at a floating rate if (x) the
funded assets include adjustable rate assets or (y) the funded assets have
been effectively swapped under an Interest Rate Agreement.
"Match Funded Fixed Charges" means interest expenses relating to any Match
Funded Debt.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Mortgage" means a mortgage or deed of trust on real property which has been
improved by a completed single or multifamily dwelling unit or commercial real
estate property.
"Mortgage Loan" means a Mortgage Note and the related Mortgage.
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"Mortgage Note" means a promissory note which has a term not exceeding 30
years evidencing a loan or advance which is secured by a Mortgage.
"Mortgage Warehouse Debt" means Debt of any Person under any warehouse line
of credit, mortgage loan repurchase agreement or similar facility or under any
commercial paper program (a) that is incurred for the purpose of funding the
origination or purchase of Mortgage Loans or Mortgage Notes that are intended
to be sold to investors or securitized, (b) that in the case of any warehouse
line of credit or similar facility is, or, in the case of any commercial paper
program, the letters of credit or revolving credit facility providing credit
enhancement or liquidity backup for such commercial paper program are, secured
by Mortgage Loans, Mortgage Notes, CMBS or any combination thereof owned by
such Person, and (c) the outstanding amount of which shall not exceed 100% of
the principal amount of the Mortgage Notes, Mortgage Loans or CMBS, or any
combination thereof securing such Debt.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, or debt securities that have been converted into or exchanged for
Capital Stock, the proceeds of such issuance or sale in the form of cash or
Cash Equivalents, including payments in respect of deferred payment
obligations when received in the form of cash or Cash Equivalents, net of
attorney's fees, accountant's fees and brokerage, consulting, underwriting and
other fees and expenses, actually incurred in connection with such issuance or
sale and net of taxes paid or payable as a result thereof.
"Permitted Holders" means William B. Dockser and H. William Willoughby and
trusts controlled by either of them, CRI, Inc. and its successors, and
Affiliates of each of the foregoing.
"Permitted Indebtedness" means:
(a) Debt of the Company pursuant to the Notes;
(b) Debt of the Company or any Restricted Subsidiary outstanding on the
date of the Indenture and listed on a schedule thereto, other than any Debt
described in any other paragraph of this definition;
(c) Debt of the Company owing to any Wholly Owned Restricted Subsidiary;
provided that any Debt of the Company owing to any such Restricted
Subsidiary is made pursuant to an intercompany note and is subordinated in
right of payment from and after such time as the Notes shall become due and
payable (whether at Stated Maturity, upon acceleration or otherwise) to the
payment and performance of the Company's obligations under the Notes;
provided further, that any disposition, pledge or transfer of any such Debt
to a Person (other than a disposition, pledge or transfer to another Wholly
Owned Restricted Subsidiary) shall be deemed to be an incurrence of such
Debt by the Company not permitted by this clause (c);
(d) Debt of a Wholly Owned Restricted Subsidiary owing to the Company or
to another Wholly Owned Restricted Subsidiary of the Company; provided that
any such Debt is made pursuant to an unsubordinated intercompany note;
provided, further, that (i) any disposition, pledge or transfer of any such
Debt to a Person (other than a disposition, pledge or transfer to the
Company or another Wholly Owned Restricted Subsidiary) shall be deemed to
be an incurrence of such Debt by such Wholly Owned Restricted Subsidiary
not permitted by this clause (d) and (ii) any transaction pursuant to which
any Wholly Owned Restricted Subsidiary, which is owed Debt by any other
Restricted Subsidiary, ceases to be a Wholly Owned Restricted Subsidiary
shall be deemed to be an incurrence of such Debt not permitted by this
clause (d);
(e) repurchase agreements (including "gestation" repurchase transactions)
entered into in the ordinary course of the mortgage banking business;
provided that the aggregate payment obligations under all such repurchase
agreements at any time outstanding shall not exceed 70% of the amount equal
to (i) the aggregate amortized cost of all Mortgage Loans, Government
Insured Mortgage Assets and CMBS owned by the Company and its Restricted
Subsidiaries less (ii) the principal amount of Match Funded Debt;
(f) the endorsement of negotiable instruments by the Company or any
Restricted Subsidiary for deposit or collection or similar transactions in
the ordinary course of business;
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(g) unsecured Debt of the Company under one or more bank credit
agreements in an amount outstanding at any one time of up to $75 million;
(h) Debt under Interest Rate Agreements, provided that such agreements
relate to Debt permitted pursuant to the "Limitation on Incurrence of Debt"
covenant and provided that such agreements have a notional amount no
greater than the payments due with respect to the Debt being hedged thereby
and such agreements are not for purposes of speculation;
(i) Match Funded Debt;
(j) Debt incurred by the Company in an amount not to exceed $25 million
pursuant to a secured facility for the purpose of financing the purchase of
real property or Mortgage Loans;
(k) Servicing Secured Indebtedness in an amount not to exceed $50 million
at any time outstanding;
(l) Mortgage Warehouse Debt;
(m) Debt of the Company or any Restricted Subsidiary not otherwise
permitted to be incurred pursuant to clauses (a) through (l) above which,
together with any other outstanding Debt incurred pursuant to this clause
(m) has an aggregate principal amount not in excess of $10 million at any
time outstanding; and
(n) any renewals, extensions, substitutions, refinancings or replacements
(each, for purpose of this clause, a "refinancing") of any Debt described
in clauses (a) and (b) of this definition, including any successive
refinancings, so long as (i) any such new Debt shall be in a principal
amount that does not exceed the principal amount (or, if such Debt being
refinanced provides for an amount less than the principal amount thereof to
be due and payable upon a declaration of acceleration thereof, such lesser
amount as of the date of determination) so refinanced, plus the amount of
any premium required to be paid in connection with such refinancing
pursuant to the terms of the Debt refinanced or the amount of any premium
actually paid at such time to refinance the Debt as determined by the
Company in good faith, plus, in either case, the amount of reasonable
expenses incurred in connection with such refinancing, (ii) (A) if such new
Debt has an Average Life to Stated Maturity shorter than that of the Notes
or a final Stated Maturity earlier than the final Stated Maturity of the
Notes, such new Debt shall have an Average Life no shorter than the
remaining Average Life of the Debt so refinanced and a final Stated
Maturity no earlier than the final Stated Maturity of the Debt so renewed,
extended, substituted, refinanced or replaced or (B) in all other cases,
the Stated Maturity of principal (or any required repurchase, redemption or
sinking fund payments) of such new Debt shall be on or after the final
Stated Maturity or principal of the Notes; and (iii) in the case of any
refinancing of Subordinated Debt, such new Debt is made subordinate to the
Notes at least to the same extent as the Debt being refinanced, provided
that Debt of the Company may not be refinanced by Debt of any Subsidiary of
the Company pursuant to this clause (n).
"Permitted Investments" means any of the following:
(a) Investments in Cash Equivalents;
(b) Investments in the Company or any Wholly Owned Restricted Subsidiary
engaged in the commercial mortgage business;
(c) intercompany Indebtedness to the extent permitted under clauses (c)
and (d) of the definition of Permitted Indebtedness;
(d) negotiable instruments held for deposit or collection in the ordinary
course of business, except to the extent that they would constitute
Investments in Affiliates;
(e) Investments in stock, obligations or securities received in
settlement of debts owing to the Company or a Restricted Subsidiary as a
result of foreclosure, perfection or enforcement of any Lien, in each case
in the ordinary course of business;
(f) travel, moving and other advances made to officers, employees and
consultants in the ordinary course of business;
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(g) Investments by the Company or any Restricted Subsidiary in another
Person, if as a result of such Investment (i) such other Person becomes a
Wholly Owned Restricted Subsidiary or (ii) such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all
of its assets to, the Company or a Restricted Subsidiary;
(h) Investments in any special purpose, bankruptcy remote Restricted
Subsidiary formed to incur Match Funded Debt pursuant to clause (i) of the
definition of "Permitted Indebtedness";
(i) Investments in Mortgage Loans, CMBS, interest only strips, Government
Insured Mortgage Assets, mortgage servicing rights and Interest Rate
Agreements, including short-term Investments in escrow accounts established
in connection with the origination of Mortgage Loans intended for
securitization, in each case made in the ordinary course of business;
(j) so long as the Company could incur at least $1.00 of Debt (other than
Permitted Indebtedness) pursuant to the "Limitation on Incurrence of Debt"
covenant, Investments in an amount not to exceed $40 million at any time
outstanding in any Person engaged in the commercial mortgage business as
long as the Company would own a majority of the Voting Stock and a majority
of the value of economic interests in such Person; and
(k) so long as the Company could incur at least $1.00 of Debt (other than
Permitted Indebtedness) pursuant to the "Limitation on Incurrence of Debt"
covenant, Investments in an amount not to exceed $10 million at any time
outstanding in any Person engaged in the real estate business as long as
the Company would own a majority of the Voting Stock and a majority of the
value of the economic interests in such Person.
"Person" means any individual, corporation, partnership, business trust,
joint venture, association, joint stock company, trust, unincorporated
organization, real estate investment trust, limited liability company or other
entity, or government or any agency or political subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, whether now outstanding, or issued
after the Issue Date, and including, without limitation, all classes and
series of preferred or preference stock of such Person.
"Qualified Capital Stock" means any and all Capital Stock of such Person
other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes or is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity, or is convertible
into or exchangeable for debt securities at any time prior to such final
Stated Maturity.
"Reinvestment Rate" means 0.375% plus the arithmetic mean of the yields
under the heading "Week Ending" published in the most recent Statistical
Release under the caption "Treasury Constant Maturities" for the maturity
(rounded to the nearest month) corresponding to the remaining life to
maturity, as of the payment date of the principal being redeemed or paid. If
no maturity exactly corresponds to such maturity, yields for the two published
maturities most closely corresponding to such maturity shall be calculated
pursuant to the immediately preceding sentence and the Reinvestment Rate shall
be interpolated or extrapolated from such yields on a straight-line basis,
rounding in each of such relevant periods to the nearest month. For the
purposes of calculating the Reinvestment Rate, the most recent Statistical
Release published prior to the date of determination of the Make-Whole Amount
shall be used. If the format or content of the Statistical Release changes in
a manner that precludes determination of the Treasury yield in the above
manner, then the Treasury yield shall be determined in the manner that most
closely approximates the above manner, as reasonably determined by the
Company.
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"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated as an "Unrestricted Subsidiary." On the Issue Date, all
Subsidiaries of the Company will be Restricted Subsidiaries.
"S&P" means Standard and Poor's Rating Services, a division of the McGraw-
Hill Companies and its successors.
"Servicing Rights" means, at any date of determination, the mortgage loan
servicing rights and related receivables owned by the Company and its
Restricted Subsidiaries.
"Servicing Secured Indebtedness" means, Debt of the Company or its
Restricted Subsidiaries under any agreement or facility, other than Mortgage
Warehouse Debt, that is secured by, among other things, a first priority
security interest in Servicing Rights, and is advanced in an amount not to
exceed the value of such Servicing Rights.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary' as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date of the Indenture.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable, and, when used with respect to any other Indebtedness, means
the date specified in the instrument governing such Indebtedness as the fixed
date on which the principal of such Indebtedness, or any installment of
interest thereon, is due and payable.
"Statistical Release" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which reports yields on actively traded United States government
securities adjusted to constant maturities, or, if such statistical release is
not published at the time of any determination under the Indenture, then such
other reasonably comparable index which shall be designated by the Company.
"Subordinated Indebtedness" means Indebtedness of the Company that is
expressly subordinated in right of payment to the Notes.
"Subsidiary" means a Person a majority of the voting power of the voting
equity securities or a majority of the value of the equity interests of which
are owned, directly or indirectly by the Company and/or by one or more
Subsidiaries of the Company.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the
Indenture.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers, trustees or
other voting members of the governing body of any Person (irrespective of
whether or not, at the time, stock of any other class or classes shall have,
or might have, voting power by reason of the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of the
Company of which 100% of Capital Stock is owned, directly or indirectly, by
the Company or another Wholly Owned Restricted Subsidiary of the Company,
including the Services Partnership.
GLOBAL NOTES
The Notes will be issued in the form of one or more Global Notes that will
be deposited with, or on behalf of, DTC. The Company anticipates that the
Global Notes will be registered in the name of Cede & Co., DTC's
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nominee, and that the following provisions will apply to the depository
arrangements with respect to the Global Notes.
So long as DTC or its nominee is the registered owner of the Global Notes,
DTC or its nominee, as the case may be, will be considered the sole holder of
the Notes represented by such Global Notes for all purposes under the
Indenture. Except as described below, owners of beneficial interests in a
Global Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Notes in certificated form and will not be considered the owners
or holders thereof under the Indenture. The laws of some states may require
that certain purchasers of securities take physical delivery of such
securities in certificated form; accordingly, such laws may limit the
transferability of beneficial interests in a Global Note.
Each Global Note will be exchangeable for certificated Notes only if (i) DTC
notifies the Company that it is unwilling or unable to continue as depository
or DTC ceases to be a clearing agency registered under the Exchange Act (if so
required by applicable law or regulation) and, in either case, a successor
depository is not appointed by the Company within 90 days after the Company
receives such notice or becomes aware of such ineligibility, (ii) the Company
in its sole discretion determines that the Global Notes shall be exchangeable
for certificated Notes or (iii) there shall have occurred and be continuing an
Event of Default under the Indenture with respect to the Notes. Upon any such
exchange, owners of beneficial interests in the Global Notes will be entitled
to physical delivery of individual Notes in certificated form, equal in
principal amount to such beneficial interests, and to have such Notes in
certificated form registered in the names of the beneficial owners, which
names are expected to be provided by DTC's relevant Participants (as
identified by DTC) to the Trustee. Notes so issued in certificated form will
be issued in denominations of $1,000 or any integral multiple thereof, and
will be issued in registered form only, without coupons.
The following is based on information furnished to the Company:
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. Access to the DTC system is also available to
others, such as securities brokers and dealers, and banks and trust companies
that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and its Participants are on file with the Securities
and Exchange Commission.
Purchases of Notes under the DTC system must be made by or through Direct
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual purchaser of each Note ("beneficial owner")
is in turn recorded on the Direct and Indirect Participants' records. A
beneficial owner does not receive written confirmation from DTC of its
purchase, but is expected to receive a written confirmation providing details
of the transaction, as well as periodic statements of its holdings, from the
Direct or Indirect Participant through which such beneficial owner entered
into the transaction. Transfers of ownership interests in Notes are
accomplished by entries made on the books of Direct and Indirect Participants
acting on behalf of beneficial owners. Beneficial owners will not receive
certificates representing their ownership interests in Notes except under the
limited circumstances described above.
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To facilitate subsequent transfers, the Notes are expected to be registered
in the name of DTC's nominee, Cede & Co. The deposit of the Notes with or on
behalf of DTC and their registration in the name of Cede & Co. will effect no
change in beneficial ownership. DTC has no knowledge of the actual beneficial
owners of the Notes; DTC's records reflect only the identity of the Direct
Participants to whose accounts Notes are credited, which may or may not be the
beneficial owners. The Participants remain responsible for keeping account of
their holdings on behalf of their customers.
Principal payments, premium payments, if any, and interest payments on the
Global Notes will be made to DTC. DTC's practice is to credit Direct
Participants' accounts on the payment date in accordance with their respective
holdings as shown on DTC's records unless DTC has reason to believe that it
will not receive payment on the payment date. Payments by Direct and Indirect
Participants to beneficial owners are governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name" and are the
responsibility of such Direct and Indirect Participants and not of DTC, the
Trustee or the Company, subject to any statutory or regulatory requirements as
may be in effect from time to time. Payment of principal, premium, if any, and
interest to DTC is the responsibility of the Company or the Trustee,
disbursement of such payments to Direct Participants is the responsibility of
DTC, and disbursement of such payments to the beneficial owners is the
responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Global Notes at any time by giving notice to the Company or the
Trustee. The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository).
The information in this section concerning DTC and DTC's bookentry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
None of the Company, the Trustee or any applicable paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial interests in a Global Note, or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the principal United States federal
income tax consequences of the purchase, ownership and disposition of the
Notes. This summary is based on the Code, final, temporary, and proposed
Treasury regulations promulgated thereunder, administrative pronouncements and
rulings, and judicial decisions, changes to any of which subsequent to the
even date may affect the tax consequences described herein, possibly with
retroactive effect.
This summary discusses only Notes held as capital assets within the meaning
of Code section 1221. It does not discuss all of the tax consequences that may
be relevant to a Holder in light of the Holder's particular circumstances or
to Holders subject to special rules, such as certain financial institutions,
banks, insurance companies, regulated investment companies, dealers in
securities or foreign currencies, persons holding Notes as part of a straddle
or hedging transaction, or United States Holders whose functional currency (as
defined in Code section 985) is not the U.S. dollar. Persons considering
purchasing Notes should consult their own tax advisors concerning the
application of United States federal tax laws to their particular situations
as well as any tax consequences arising under the laws of any state, local or
foreign taxing jurisdiction.
As used in this summary, the term "U.S. Holder" means the beneficial owner
of a Note that is (i) for United States federal income tax purposes a citizen
or resident of the United States (including certain former citizens and former
long-term residents); (ii) a corporation, partnership or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof (other than a partnership that is not treated as a United
States person under any applicable Treasury Regulations); (iii) an estate the
income of which is subject to United States federal income taxation regardless
of its source; or (iv) a trust with respect to the administration of which a
court within the United States is able to exercise primary supervision and one
or more United States persons have the authority to control all substantial
decisions of the trust. As used in this summary, the term "Non-U.S. Holder"
means a beneficial owner of a Note that is not a U.S. Holder.
TAX CONSEQUENCES TO U.S. HOLDERS
Payments of Interest. Interest paid or accrued on Notes will be taxable to
U.S. Holders as ordinary interest income. Interest will be included in U.S.
Holders' income at the time such payments are accrued or are received in
accordance with the U.S. Holder's method of accounting for United States
federal income taxes. It is not anticipated that the Notes will be issued with
"original issue discount" within the meaning of Code section 1273.
Market Discount. If a Holder purchases a Note at a market discount (as
described below) a Holder will be required to treat any principal payments on,
or any gain realized on the sale, exchange, retirement or maturity of, such
Note as ordinary income to the extent of the accrued market discount (not
previously included in income) at the time of such payment or disposition. In
addition, a U.S. Holder who purchases a Note with market discount may be
required to defer the deduction of all or a portion of the interest paid or
accrued on any indebtedness incurred or continued to purchase or carry such
Note until the maturity of the Note or its earlier disposition in a taxable
transaction.
In general, market discount is the amount by which the Note's principal
amount exceeds the U.S. Holder's basis in the Note immediately after the Note
is acquired, unless such difference is less than a specified de minimis
amount. Market discount is considered to accrue ratably, unless the U.S.
Holder elects to accrue market discount under the "constant interest method"
described under the original issue discount rules. This election, once made,
is irrevocable and applies only to the Notes for which it is made. A Holder
also may elect to include market discount in income currently as it accrues,
in which case the rules described above regarding the deferral of interest
deductions will not apply. This election, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies and may not be revoked without the consent
of the IRS. Generally, if a Note with market discount is transferred in
certain non-taxable transactions, the market discount will be transferred to
the property received in exchange for the Note; however, under certain limited
circumstances, the market discount will be includible as ordinary income as if
such Note had been sold at its fair market value.
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Amortizable Bond Premium. In general, if a U.S. Holder of a Note purchases
the Note at a premium (i.e., an amount in excess of the amount payable upon
the maturity thereof), such excess will be treated as 'amortizable bond
premium.' In such case, a Holder may elect, under Code section 171, to offset
interest income with the amortizable bond premium as it is amortized under a
constant-yield method (as defined in the Code). The Holder's tax basis in the
Note then decreases by the amount of the amortizable bond premium used to
offset interest income. An election under Code section 171 is available only
if a Note is held as a capital asset. U.S. Holders should consult their own
tax advisors regarding special rules that apply for determining the amount and
method of amortizing bond premium with respect to the Notes that may be
redeemed prior to maturity.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange or
retirement of a Note, a U.S. Holder will recognize taxable gain or loss equal
to the difference between the amount realized on the sale, exchange or
retirement and such U.S. Holder's adjusted tax basis in the Note. For these
purposes, the amount realized does not include any amount attributable to
accrued interest on the Note which has not previously been included in income.
Such amounts are treated as payments of interest. See Payments of Interest
above. A U.S. Holder's adjusted tax basis in a Note will equal the U.S.
Holder's cost of acquiring the Note increased by the amount of any market
discount previously included in the U.S. Holder's income with respect to the
Note, and reduced by any amortized bond premium, principal payments, and the
amount of any other payments except payments of stated interest.
Gain or loss realized on the sale, retirement or other disposition
(including redemption) of a Note will be capital gain or loss if the Note is a
capital asset in the hands of the U.S. Holder (except that any portion of such
gain attributable to market discount will be ordinary income). For certain
non-corporate U.S. Holders (including individuals), the maximum rate of tax on
net capital gains is 20 percent for capital assets held more than 18 months,
and 28 percent for capital assets held for more than 12 months but not more
than 18 months. Gain on the sale of capital assets held for one year or less
are subject to U.S. federal income tax at ordinary income tax rates. Certain
limitations exist on the deductibility of capital losses by both corporations
and individual taxpayers. U.S. Holders should consult their own tax advisors
with respect to applicable rates and holding periods, and netting rules for
capital losses.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Income and Withholding Tax. Under present United States federal law, and
subject to the discussion below concerning backup withholding:
(a) under the so-called portfolio interest exemption, payments of
interest on the Notes by the Company or any paying agent to any Non-U.S.
Holder will not be subject to the 30 percent United States federal
withholding tax otherwise applicable, provided that (i) such Non-U.S.
Holder does not own, actually or constructively, 10 percent or more of the
total combined voting power of all classes of stock of the Company entitled
to vote, is not a controlled foreign corporation related, directly or
indirectly, to the Company through stock ownership, and is not a bank
receiving interest described in Code section 881(c)(3)(A); and (ii) the
requirements set forth in Code section 871(h) or Code section 881(c) of the
Code have been fulfilled with respect to the beneficial owner, as discussed
below;
(b) a Non-U.S. Holder of a Note will not be subject to United States
federal income tax on gain realized on the sale, exchange or other
disposition of such Note, unless (i) such Non-U.S. Holder is an individual
who is present in the United States for 183 days or more in the taxable
year of disposition, and either (a) such individual has a tax home' (as
defined in Code section 911(d)(3)) in the United States (unless such gain
is attributable to a fixed place of business in a foreign country
maintained by such individual and has been subject to foreign tax of at
least 10 percent), or (b) the gain is attributable to an office or other
fixed place of business maintained by such individual in the United States;
or (ii) (a) such gain is effectively connected with the conduct by such
Non-U.S. Holder of a trade or business in the United States, or (b) if a
tax treaty applies, the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Holder.
S-72
<PAGE>
Code section 871(h) and Code section 881(c) require that, in order to obtain
the portfolio interest exemption from withholding tax described in paragraph
(a) above, either (i) the beneficial owner of a Note must certify to the
Company or its agent, under penalties of perjury, that it is a Non-U.S. Holder
and provide a completed IRS Form W-8 ("Certificate of Foreign Status"); or
(ii) a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business (a "Financial Institution") and that is holding the Note on behalf of
such beneficial owner, certifies to the Company or its agent, under penalties
of perjury, that it has received an IRS Form W-8 from the beneficial owner (or
from another Financial Institution) and furnishes the Company/agent with a
copy thereof.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States, and if interest on the Note or gain realized on its sale,
exchange or other disposition is effectively connected with the conduct of
such trade or business, such Non-U.S. Holder will be able to claim an
exemption from U.S. withholding taxes by providing the Company with a properly
executed IRS Form 4224. Such Non-U.S. Holder, although exempt from the
withholding tax discussed in the preceding paragraph, will generally be
subject to regular United States income tax on such effectively connected
income in the same manner as if it were a U.S. Holder. See Tax Consequences to
U.S. Holders above. In addition, if such Non-U.S. Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30 percent (or
such lower rate provided by an applicable treaty) of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments.
Even if the portfolio interest exemption described above is inapplicable to
a particular Non-U.S. Holder, such holder may be eligible for an exemption
from or reduced rate of withholding tax under an applicable income tax treaty.
In order to obtain such an exemption or rate reduction, such Non-U.S. Holder
must provide the Company or its agent with a properly completed IRS Form 1001
in the year in which payment occurs or in either of the two proceeding years,
describing such exemption or reduced rate.
A Non-U.S. Holder that is required to submit a certification on Form 1001,
4224, or W-8 to avoid the imposition of U.S. withholding taxes or to obtain a
reduced rate with respect to a payment on a Note is required to submit such
certification to the Company or its agent as soon as practicable after the
Non-U.S. Holder acquires such Note (or a beneficial therein) and to update
such forms as required by the IRS. If the Company or its agent does not
physically receive such certification by the date that is 10 days prior to a
payment date on the Note, then the Company and/or its agent may treat such
certification as ineffective with respect to any payment to such Non-U.S.
Holder on such payment date and may withhold tax from such payment.
Under Code section 2105(b), a Note held by an individual who is not a
citizen or resident of the United States at the time of his death will not be
subject to United States federal estate tax as a result of such individual's
death, provided that the individual does not own, actually or constructively,
10 percent or more of the total combined voting power of all classes of stock
of the Company entitled to vote and, at the time of such individual's death,
payments with respect to such Note would not have been effectively connected
to the conduct by such individual of a trade or business in the United States.
Final Regulations issued by the IRS on October 6, 1997, which will be
effective for payments made after December 31, 1998, make certain
modifications to the certification procedures applicable to Non-U.S. Holders.
Prospective investors should consult their tax advisers regarding the
certification requirements for Non-U.S. Holders.
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. Holders. In general, under current U.S. federal tax law, payments to a
U.S. Holder of (a) principal, premium (if any) and interest on a Note, and (b)
the proceeds of sales or other dispositions of Notes before maturity will be
subject to U.S. information reporting requirements. Such payments to
noncorporate U.S. Holders may be subject to backup withholding at a rate of 31
percent if such U.S. Holder fails to furnish its Taxpayer Identification
Number "TIN" which, for an individual, would be his Social Security Number,
and/or certain other information in the required manner. The amount of any
backup withholding from a payment to a U.S.
S-73
<PAGE>
Holder will be allowed as a credit against such U.S. Holder's United States
federal income tax liability and may entitle such U.S. Holder to a refund,
provided that the required information is furnished to the IRS. U.S. Holders
should consult their own tax advisors regarding the qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption, if applicable.
Non-U.S. Holders. In general, there is no U.S. information reporting
requirement or backup withholding tax on payments to Non-U.S. Holders who
provide the appropriate certification described above regarding qualification
for the portfolio interest exemption from U.S. federal income tax for payments
of interest on the Notes.
Payment by the Company of principal on the Notes or payment by a United
States office of a broker of the proceeds of a sale of Notes is subject to
both backup withholding and information reporting unless the beneficial owner
provides a completed IRS Form W-8 which certifies under penalties of perjury
that such owner is a Non-U.S. Holder who meets all the requirements for
exemption from U.S. federal income tax on any gain from the sale, exchange or
retirement of the Notes.
In general, backup withholding and information reporting will not apply to a
payment of the gross proceeds of a sale of the Notes effected at a foreign
office of a broker. If, however, such a broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation, or a foreign person
50 percent or more of whose gross income for certain periods is derived from
activities that are effectively connected with the conduct of a trade or
business in the United States, such payments will not be subject to backup
withholding, but will be subject to information reporting unless (i) such
broker has documentary evidence in its records that the beneficial owner is a
Non-U.S. Holder and certain other considerations are met; or (ii) the
beneficial owner otherwise establishes an exemption, provided such broker does
not have actual knowledge that the payee is a United States person. Non-U.S.
Holders should consult their own tax advisors regarding the application of
these rules to their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if applicable.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a credit against Non-U.S. Holder's
U.S. federal income tax liability and may entitle such Holder to a refund,
provided the required information is furnished to the IRS.
THE FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE PRECISE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE NOTES.
S-74
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), among the Company and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and Lehman Brothers Inc. (the
"Underwriters"), CRIIMI MAE has agreed to sell to the Underwriters, and the
Underwriters have severally agreed to purchase, the respective principal
amount of Notes set forth opposite their names below. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters will be obligated to
purchase all of the Notes if any are purchased.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................... $ 66,700,000
Lehman Brothers Inc. ...................................... 33,300,000
------------
Total................................................. $100,000,000
============
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Notes to the public at the public offering price set forth on the
cover page of this Prospectus Supplement and to certain dealers at such price
less a concession not in excess of .25% of the principal amount of the Notes.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of .125% of the principal amount of the Notes to certain other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
The Notes will be a new issue of securities for which there currently is no
market. Although the Underwriters have informed the Company that they each
currently intend to make a market in the Notes, they are not obligated to do
so and any such market making may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the liquidity of or development
of any market for the Notes. The Company does not intend to apply for listing
of the Notes on any securities exchange or for quotation thereof through the
National Association of Securities Dealers Automated Quotation System.
The Company has agreed that, during a period of 90 days from the date of
this Prospectus Supplement, it will not, and will not cause or permit any of
its Subsidiaries to, without the prior written consent of Merrill Lynch, sell,
offer to sell, grant any option for the sale of, or otherwise dispose of, any
Notes or any other debt securities of the Company or any of its Subsidiaries,
or any securities convertible into or exchangeable or exercisable for any
Notes or any such other debt securities, except for Notes sold to the
Underwriters pursuant to the Underwriting Agreement and except for
certificates of deposit and repurchase agreements and reverse repurchase
agreements entered into in the ordinary course of business.
Until the distribution of the Notes is completed, rules of the SEC may limit
the ability of the Underwriters to bid for and purchase the Notes. Pursuant to
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Notes. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Notes.
If the Underwriters create a short position in the Notes in connection with
the Offering, i.e., if they sell more Notes than set forth on the cover page
of this Prospectus Supplement, the Underwriters may reduce that short position
by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Notes. In addition,
S-75
<PAGE>
neither the Company nor any of the Underwriters make any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in
respect thereof.
Since 1995, CRIIMI MAE acquired Subordinated CMBS from certain of the
Underwriters or their affiliates, including acquisitions for an aggregate
purchase price of $149 million from Merrill Lynch and of $129 million from
Lehman Brothers Inc. Furthermore, the Company expects to acquire approximately
$26 million and approximately $75 million of additional Subordinated CMBS from
Merrill Lynch and Lehman Brothers Inc., respectively, following the closing of
this Offering, of which $12.2 million and $36.3 million, respectively, will be
funded with a portion of the net proceeds of this Offering, with the balance
being funded with repurchase financing from each of Merrill Lynch and Lehman
Brothers Inc., as applicable.
Additionally, in September 1997, the Company entered into a three year
master assignment agreement with Merrill Lynch Mortgage Capital Inc., an
affiliate of Merrill Lynch, to finance up to $200 million of additional and/or
existing investments in CMBS. See "Description of Other Indebtedness--Master
Assignment Agreement."
LEGAL MATTERS
The validity of the issuance of the Notes pursuant to this Prospectus
Supplement and certain legal matters set forth in "Certain United States
Federal Income Tax Considerations" will be passed upon for CRIIMI MAE by
Swidler & Berlin, Chartered, Washington, D.C. Certain legal matters will be
passed upon for the Underwriters by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements of CRIIMI MAE as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994 which are
included in this Prospectus Supplement and incorporated in the accompanying
Prospectus and in the Registration Statement by reference from the Company's
Annual Report on Form 10-K have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein and have been incorporated by reference
herein in reliance upon the authority of said firm as experts in accounting
and auditing in giving said reports.
S-76
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS FOR YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Report of Independent Public Accountants............................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995........... F-3
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995 and 1994................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the
years Ended December 31, 1996, 1995 and 1994.......................... F-5
Consolidated Statements of Cash Flows for the years Ended December 31,
1996, 1995 and 1994................................................... F-6
Notes to Consolidated Financial Statements............................. F-7
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND 1996 (UNAUDITED)
Consolidated Balance Sheets as of September 30, 1997 and December 31,
1996.................................................................. F-39
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 1997 and 1996........................................... F-40
Consolidated Statements of Changes in Shareholders' Equity for the Nine
Months Ended September 30, 1997....................................... F-41
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996........................................... F-42
Notes to Consolidated Financial Statements............................. F-43
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
CRIIMI MAE Inc.
We have audited the accompanying consolidated balance sheets of CRIIMI MAE
Inc. (CRIIMI MAE) and its subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the years ended December 31, 1996, 1995 and 1994. These
financial statements are the responsibility of CRIIMI MAE's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CRIIMI MAE
and its subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
February 17, 1997
F-2
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS:
Mortgage Assets:
Mortgage security collateral, at amortized
cost..................................... $ 618,133,219 $ 674,289,774
Subordinated CMBS, at amortized cost...... 564,335,400 278,400,699
Mortgages, at fair value.................. 72,976,503 132,823,515
Equity Investments.......................... 35,059,648 37,137,786
Receivables and Other Assets................ 65,774,174 64,073,725
Cash and cash equivalents................... 10,966,354 16,577,407
-------------- --------------
Total assets............................ $1,367,245,298 $1,203,302,906
============== ==============
LIABILITIES:
Securitized Mortgage Obligations:
Mortgage security collateral.............. $ 590,222,369 $ 645,260,921
Subordinated CMBS......................... 142,000,000 --
Repurchase Agreements-Subordinated CMBS..... 241,137,588 187,947,276
Bank Term Loans............................. 8,897,880 21,227,880
Payables and accrued expenses............... 11,798,073 10,929,366
-------------- --------------
Total liabilities....................... 994,055,910 865,365,443
-------------- --------------
Minority interests in consolidated
subsidiary................................... 26,518,125 52,233,520
-------------- --------------
Commitments and contingencies
Shareholders' equity:
Convertible Preferred stock................. 24,900 --
Common stock................................ 319,128 309,356
Net unrealized gains on mortgage assets..... 8,916,228 16,138,649
Additional paid-in capital.................. 342,462,380 274,226,356
-------------- --------------
351,722,636 290,674,361
Less treasury stock, at cost--538,635 and
528,594 shares, respectively................. (5,051,373) (4,970,418)
-------------- --------------
Total shareholders' equity.................... 346,671,263 285,703,943
-------------- --------------
Total liabilities and shareholders' equity.... $1,367,245,298 $1,203,302,906
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Income:
Mortgage income..................... $ 56,911,670 $66,114,642 $67,043,342
Income from Subordinated CMBS....... 41,713,126 11,104,576 975,835
Equity in earnings from invest-
ments.............................. 4,685,269 2,704,846 2,309,685
Other investment income............. 2,645,354 2,144,287 1,112,938
------------ ----------- -----------
105,955,419 82,068,351 71,441,800
------------ ----------- -----------
Expenses:
Interest expense.................... 63,078,767 49,852,672 39,244,621
General and administrative.......... 7,409,143 5,280,281 4,279,489
Fees to related party............... 382,050 1,909,304 3,761,118
Amortization of assets acquired in
the Merger......................... 2,881,824 1,435,356 --
Adjustment to hedges for valuation
and sales.......................... 178,750 2,393,106 --
Provision for settlement of litiga-
tion............................... -- (656,127) (557,340)
------------ ----------- -----------
73,930,534 60,214,592 46,727,888
------------ ----------- -----------
Income before mortgage dispositions
and minority interests............... 32,024,885 21,853,759 24,713,912
Mortgage dispositions:
Gains............................... 10,071,696 1,819,176 13,482,665
Losses.............................. (470,336) (317,578) (483,357)
------------ ----------- -----------
Income before minority interests...... 41,626,245 23,355,357 37,713,220
Minority interests in net income of
consolidated subsidiary.............. (6,386,388) (4,821,268) (11,703,101)
------------ ----------- -----------
Net income............................ $ 35,239,857 $18,534,089 $26,010,119
Preferred dividends................... (3,526,451) -- --
------------ ----------- -----------
Net income available to common share-
holders.............................. $ 31,713,406 $18,534,089 $26,010,119
============ =========== ===========
Earnings per share:
Primary............................. $ 1.03 $ 0.65 $ 1.07
============ =========== ===========
Shares used in computing primary earn-
ings per share, exclusive of shares
held in treasury..................... 30,853,511 28,414,266 24,249,403
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<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,
1993................... $ -- $211,848 $29,028,019 $195,561,015 $ -- $(9,512,103) $215,288,779
Net income............. -- -- -- -- 26,010,119 -- 26,010,119
Dividends of $1.07 per
weighted average
share................. -- -- -- -- (26,010,119) -- (26,010,119)
Return of capital of
$0.14 per weighted
average share......... -- -- -- (3,347,781) -- -- (3,347,781)
Net unrealized gains on
mortgage assets....... -- -- (18,711,251) -- -- -- (18,711,251)
Shares issued........... -- 50,424 -- 52,011,750 -- 4,750,000 56,812,174
------- -------- ----------- ------------ ----------- ----------- ------------
Balance, December 31,
1994................... -- 262,272 10,316,768 244,224,984 -- (4,762,103) 250,041,921
Net income............. -- -- -- -- 18,534,089 -- 18,534,089
Dividends of $0.65 per
weighted average
share................. -- -- -- -- (18,534,089) -- (18,534,089)
Return of capital of
$0.27 per weighted
average share......... -- -- -- (7,742,508) -- -- (7,742,508)
Adjustment to net
unrealized gains on
mortgage assets....... -- -- 5,821,881 -- -- -- 5,821,881
Shares issued.......... -- 47,084 -- 37,743,880 -- -- 37,790,964
Shares forfeited....... -- -- -- -- -- (208,315) (208,315)
------- -------- ----------- ------------ ----------- ----------- ------------
Balance, December 31,
1995................... -- 309,356 16,138,649 274,226,356 -- (4,970,418) 285,703,943
Net income............. -- -- -- -- 35,239,857 -- 35,239,857
Dividends paid on
preferred shares...... -- -- -- -- (3,526,451) -- (3,526,451)
Dividends of $1.03 per
weighted average
common share.......... -- -- -- -- (31,713,406) -- (31,713,406)
Return of capital of
$0.19 per weighted
average share......... -- -- -- (5,842,422) -- -- (5,842,422)
Conversion of preferred
stock into common
stock................. (750) 7,446 -- (6,696) -- -- --
Stock options
exercised............. -- 2,306 -- 2,251,559 -- -- 2,253,865
Adjustment to net
unrealized gains on
mortgage assets....... -- -- (7,222,421) -- -- -- (7,222,421)
Shares issued.......... 25,650 20 -- 71,833,583 -- -- 71,859,253
Shares forfeited....... -- -- -- -- -- (80,955) (80,955)
------- -------- ----------- ------------ ----------- ----------- ------------
Balance, December 31,
1996................... $24,900 $319,128 $ 8,916,228 $342,462,380 $ -- $(5,051,373) $346,671,263
======= ======== =========== ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net Income...................... $ 35,239,857 $ 18,534,089 $ 26,010,119
Adjustments to reconcile net
income to net cash provided by
operating activities
Amortization of discount and
deferred financing costs on
debt......................... 2,811,444 3,796,743 5,483,786
Amortization of assets
acquired in the Merger....... 2,881,824 1,435,356 --
Depreciation and other
amortization................. 914,671 690,056 579,194
Discount/Premium amortization
on mortgage assets........... (880,349) (1,482,052) (985,369)
Net gains on mortgage
dispositions................. (9,601,360) (1,501,598) (12,999,308)
Equity in (earnings)/loss from
investments.................. (2,635,287) 33,943 49,032
Valuation adjustment to
hedges....................... 178,750 2,393,106 --
Minority interests in earnings
of consolidated subsidiary... 6,386,388 4,821,268 11,703,101
Changes in assets and
liabilities:
Increase in receivables and
other assets............... (2,036,158) (6,802,887) (1,362,585)
Increase (decrease) in
payables and accrued
expenses................... 723,315 (2,416,667) (1,894,121)
Increase (decrease) in
interest payable........... 645,612 (1,880,727) 4,069,697
------------- ------------- -------------
Net cash provided by
operating activities..... 34,628,707 17,620,630 30,653,546
------------- ------------- -------------
Cash flows from investing
activities:
Purchase of mortgages and
advances on construction
loans.......................... (968,689) (7,858,922) (235,758,541)
Purchase of Subordinated CMBS... (285,419,093) (239,211,572) (38,848,431)
Payment of deferred costs....... (102,696) (1,139,725) (1,319,201)
Servicing rights contributed to
Services Partnership........... (1,549,017) (875,349) --
Distributions received from
equity investments............. 5,466,793 501,909 737,560
Proceeds from mortgage
dispositions................... 109,055,010 64,451,314 94,436,841
Receipt of principal payments... 5,955,067 6,699,927 6,201,127
Other investing activities...... 253,292 560,792 253,292
------------- ------------- -------------
Net cash used in investing
activities............... (167,309,333) (176,871,626) (174,297,353)
------------- ------------- -------------
Cash flows from financing
activities:
Proceeds from debt issuances.... 534,166,951 1,159,487,990 310,618,324
Principal payments on debt
obligations.................... (407,793,958) (941,677,058) (162,415,442)
Increase in deferred financing
costs.......................... (5,226,281) (8,222,044) (4,370,145)
Dividends (including return of
capital) paid to shareholders,
including minority interests... (68,190,257) (52,723,404) (65,457,793)
Repurchase of common stock...... -- (208,315) --
Proceeds from issuance of
Convertible Preferred stock.... 71,859,253 -- --
Proceeds from the issuance of
common stock................... 2,253,865 14,028,063 56,812,174
------------- ------------- -------------
Net cash provided by
financing activities..... 127,069,573 170,685,232 135,187,118
------------- ------------- -------------
Net (decrease) increase in cash
and cash equivalents............. (5,611,053) 11,434,236 (8,456,689)
Cash and cash equivalents,
beginning of year................ 16,577,407 5,143,171 13,599,860
------------- ------------- -------------
Cash and cash equivalents, end of
year............................. $ 10,966,354 $ 16,577,407 $ 5,143,171
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
CRIIMI MAE Inc. (CRIIMI MAE) is a full service commercial mortgage company
structured as a self-administered real estate investment trust (REIT). CRIIMI
MAE's portfolio of mortgage assets includes government insured and guaranteed
mortgages secured by multifamily housing complexes located throughout the
United States (Government Insured Mortgage Assets) and uninsured commercial
mortgage loans and ownership interests in subordinated commercial mortgage
backed securities (Subordinated CMBS). The Subordinated CMBS are purchased
using a combination of debt and equity, are generally backed by first
mortgages on multifamily and other commercial property and offer potential
higher yields with increased risk. 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 mortgage, 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 owns 100% of multiple financing and operating subsidiaries
(discussed in Notes 6 and 9), approximately 57% of CRI Liquidating REIT, Inc.
(CRI Liquidating), a finite-life, self-liquidating REIT which, through early
1997, held Government Insured Multifamily Mortgages, 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. 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"). Under the Investment Company Act, a non-exempt
entity that is an investment company is required to register with the
Securities and Exchange Commission ("SEC") and is subject to extensive,
restrictive and potentially adverse regulation relating to, among other
things, operating methods, management, capital structure, dividends and
transactions with affiliates. 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 SEC, to qualify
for this exemption, CRIIMI MAE, among other things, must maintain at least 55%
of its assets in Qualifying Interests. Pursuant to such SEC staff
interpretations, CRIIMI MAE's Government Insured Mortgage Assets are
Qualifying Interests. The Company will 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
F-7
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CRIIMI MAE's Subordinated CMBS constitute Qualifying Interests, the Company
could be required to modify its business plan so that either (i) it would not
be required to register as an investment company or (ii) it would comply with
the Investment Company Act and be able to register as an investment company.
In such event, (i) modification of the Company's business plan so that it
would not be required to register as an investment company would likely entail
a disposition of a significant portion of the Company's Subordinated CMBS or
the acquisition of significant additional assets, such as Government Insured
Mortgage Assets, which are Qualifying Interests or (ii) modification of the
Company's business plan to register as an investment company, which would
result in significantly increased operating expenses and would likely entail
significantly reducing the Company's indebtedness (including the possible
prepayment of the Company's repurchase agreement financing and/or the Notes) ,
which could also require it to sell a significant portion of its assets. No
assurances can be given that any such dispositions or acquisitions of assets,
or deleveraging, could be accomplished on favorable terms. Consequentially,
any such modification of the Company's business plan could have a material
adverse effect on the Company. Further, if it were established that the
Company were an unregistered investment company, there would be a risk that
the Company would be subject to monetary penalties and injunctive relief in an
action brought by the SEC, that the Company would be unable to enforce
contracts with third parties and that third parties could seek to obtain
recission of transactions undertaken during the period it was established that
the Company was an unregistered investment company. Any such results would be
likely to have a material adverse effect on the Company.
2. 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 (see Note 7).
Reclassifications
Certain amounts in the consolidated financial statements for the years ended
December 31, 1995 and December 31, 1994 have been reclassified to conform to
the 1996 presentation.
Consolidation and Minority Interests
The consolidated financial statements reflect the financial position,
results of operations, and cash flows of CRIIMI MAE, CRI Liquidating, CRIIMI,
Inc., CRIIMI Management, CRIIMI MAE Financial Corporation, CRIIMI MAE
Financial Corporation II, CRIIMI MAE Financial Corporation III, CRIIMI MAE QRS
1, Inc., CRIIMI MAE Holding, Inc. and CRIIMI MAE Holding L.P. for all periods
presented. All intercompany accounts and transactions have been eliminated in
consolidation.
Since CRIIMI MAE owned approximately 57% of CRI Liquidating as of December
31, 1996, 1995 and 1994, respectively, the ownership interests of the other
shareholders in the equity and net income of CRI Liquidating are reflected as
minority interests in the accompanying consolidated financial statements.
Additionally, the portion of equity and net income of CRIIMI MAE Holding
L.P. not owned by CRIIMI MAE is reflected as minority interests in the
accompanying consolidated financial statements.
F-8
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Assets Acquired in the Merger
Assets acquired and costs incurred in connection with the Merger were
recorded using the purchase method of accounting. The amounts allocated to the
assets acquired were based on management's estimate of their fair values with
the excess of purchase price over fair value allocated to goodwill.
The AIM sub-advisory contracts and the mortgage servicing contracts
transferred to the Services Partnership are amortized using the effective
interest method over 10 years. This amortization is reflected through CRIIMI
MAE's equity in earnings from investments. The remaining assets acquired by
CRIIMI MAE, including goodwill, are amortized using the straight-line method
over 10 years.
Cash and Cash Equivalents
Cash and cash equivalents consist of money market funds, time and demand
deposits and repurchase agreements with original maturities of three months or
less.
Mortgages and Mortgage Security Collateral
CRIIMI MAE's consolidated investment in mortgages and mortgage security
collateral is comprised of participation certificates evidencing a 100%
undivided beneficial interest in Government Insured Multifamily Mortgages
issued or sold pursuant to programs of the Federal Housing Administration
(FHA) (FHA-Insured Loans) and mortgage-backed securities guaranteed by the
Government National Mortgage Association (GNMA) (GNMA Mortgage-Backed
Securities). Payment of principal and interest on FHA-Insured Loans is insured
by the United States Department of Housing and Urban Development (HUD)
pursuant to Title 2 of the National Housing Act. Payment of principal and
interest on GNMA Mortgage-Backed Securities is guaranteed by GNMA pursuant to
Title 3 of the National Housing Act.
CRIIMI MAE Financial Corporation, CRIIMI MAE Financial Corporation II,
CRIIMI MAE Financial Corporation III and CRIIMI MAE QRS 1, Inc. have the
intent and ability to hold their mortgage assets until maturity. Consequently,
all of their mortgage assets have been classified as Held to Maturity and
continue to be recorded at amortized cost as of December 31, 1996. Upon
implementation of SFAS 115, CRIIMI MAE's mortgage assets (except for CRI
Liquidating's mortgage assets) were classified as Held to Maturity based on
CRIIMI MAE's intent and ability to hold such mortgage assets to maturity.
Accordingly, such assets were recorded at amortized cost. However, during the
fourth quarter of 1995, approximately $17.8 million, at amortized cost, of
CRIIMI MAE's mortgage assets (not included in the financing subsidiaries) were
reclassified to the Available for Sale category in accordance with the FASB
publication, "A Guide to Implementation of Statement 115," resulting in
unrealized gains of approximately $305,000. Such assets are recorded at fair
market value with the difference between fair market value and amortized cost
reflected as a component of shareholders' equity.
CRI Liquidating Company's board of directors has approved a plan of complete
liquidation and dissolution (the Plan) and has recommended that the
shareholders of CRI Liquidating vote to approve the Plan at a Special Meeting
of shareholders. CRI Liquidating has filed proxy materials with the SEC to
solicit shareholder approval of the Plan. If the Plan is approved by the CRI
Liquidating shareholders, CRI Liquidating will, pursuant to the Plan, dissolve
and proceed to dispose of its assets after providing for its liabilities. In
January 1997, in accordance with its Business Plan, CRI Liquidating sold the
11 remaining mortgage assets generating proceeds of approximately $54 million
which resulted in financial statement gains and tax basis gains of
approximately $14 million. Accordingly, as of December 31, 1996, $18.5 million
of CRIIMI MAE's mortgage investments and all of CRI Liquidating's mortgage
investments are recorded at fair value with the unrealized gains on those
CRIIMI MAE mortgage investments and CRIIMI MAE's share of the net unrealized
gains on CRI Liquidating's mortgage investments reported as a separate
component of shareholders' equity. Subsequent increases or
F-9
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
decreases in the fair value of mortgage investments classified as Available
for Sale will be included as a separate component of shareholders' equity.
Realized gains and losses for mortgage investments classified as Available for
Sale will continue to be reported in earnings, as discussed below.
The difference between the cost and the unpaid principal balance at the time
of purchase is carried as a discount or premium and amortized over the
remaining contractual life of the mortgage using the effective interest
method. The effective interest method provides a constant yield of income over
the term of the mortgage.
Mortgage income is comprised of amortization of the discount plus the stated
mortgage interest payments received or accrued less amortization of the
premium.
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 as of December 31, 1996 and 1995.
Income from Subordinated CMBS is recognized based on the effective interest
method using the anticipated yield over the expected life of these
investments. Changes in yield resulting from prepayments are recognized over
the 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 impact of
expected future credit losses, as currently projected, exceeds the impact of
expected future credit losses as originally projected. Impairment losses are
determined by comparing the current fair value of a Subordinated CMBS to its
existing carrying amount, the difference being recognized as a loss in the
current period on the consolidated statement of income. Reduced estimates of
credit losses are recognized as an adjustment to the yield over the remaining
life of the Subordinated CMBS.
Equity Investments
CRIIMI, Inc., a wholly owned subsidiary of CRIIMI MAE, owns all of the
general partnership interests in the AIM Funds. The AIM Funds own mortgage
assets which are substantially similar to those owned by CRIIMI MAE and CRI
Liquidating. CRIIMI, Inc. receives the general partner's share of income, loss
and distributions (which ranges among the AIM Funds from 2.9% to 4.9%) from
each of the AIM Funds. In addition, CRIIMI MAE indirectly owns a limited
partnership interest in the adviser to the AIM Funds. CRIIMI MAE is utilizing
the equity method of accounting for its investment in the AIM Funds and
advisory partnership, which provides for recording CRIIMI MAE's share of net
earnings or losses in the AIM Funds and advisory partnership reduced by
distributions from the limited partnerships and adjusted for purchase
accounting amortization. In connection with the Merger, discussed below in
Note 3, CRIIMI MAE acquired an additional 10% interest in the adviser to the
AIM Funds.
CRIIMI MAE accounts for its investment in the Services Corporation under the
equity method because the voting common stock of the Services Corporation is
owned by directors and officers of CRIIMI MAE and because CRIIMI MAE is
entitled to substantially all of the economic benefits of ownership of the
Services Corporation.
CRIIMI MAE's investment in the Services Partnership is accounted for under
the equity method since the limited partner has the right to approve any
significant actions that are required to manage the Services Partnership.
Deferred Costs
Costs incurred in connection with the establishment of CRIIMI MAE's
financing facilities are amortized using the effective interest method over
the terms of the borrowings. Also included in deferred costs are mortgage
F-10
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
selection fees, which were paid to the Adviser or were paid to the former
general partners or adviser to the predecessor entities to CRI Liquidating
(collectively, the CRIIMI Funds). These deferred costs are being amortized
using the effective interest method on a specific mortgage basis from the date
of the acquisition of the related mortgage to the expected dissolution date of
CRI Liquidating or over the term of the mortgage for CRIIMI MAE. Upon
disposition of a mortgage, the related unamortized fee is treated as part of
the mortgage asset carrying value in order to measure the gain or loss on the
disposition.
Discount on Securitized Mortgage Obligation Issuances
Discounts incurred in connection with the issuance of debt are amortized
using the effective interest method over the projected term of the related
debt which is based on management's estimate of prepayments on the underlying
collateral and are included as a component of interest expense.
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. 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.
Shareholders' Equity
CRIIMI MAE has authorized 60,000,000 shares of $.01 par value common stock
and has issued 31,374,163 and 30,935,618 shares as of December 31, 1996 and
1995, respectively. All shares issued, exclusive of the shares held in
treasury, are outstanding. As of December 31, 1996 and 1995, respectively,
7,346 and 7,421 shares were held for issuance pending presentation of
predecessor units and were considered outstanding.
CRIIMI MAE has authorized 25,000,000 shares of $.01 par value convertible
preferred stock, of which 150,000 shares have been classified as Series A
Preferred shares and 3,000,000 shares have been classified as Series B
Preferred shares. At December 31, 1996, CRIIMI MAE has issued 150,000 Series A
Preferred shares and 2,415,000 Series B Preferred shares. At December 31,
1996, 75,000 shares of Series A Preferred shares and 2,415,000 shares of
Series B Preferred shares are outstanding. At December 31, 1995, no shares of
Series A Preferred shares and Series B Preferred shares were issued or
outstanding.
Income Taxes
CRIIMI MAE and CRI Liquidating have qualified and intend to continue to
qualify as REITs under Sections 856-860 of the Internal Revenue Code. As
REITs, CRIIMI MAE and CRI Liquidating do not pay taxes at the corporate level.
Qualification for treatment as REITs requires CRIIMI MAE and CRI Liquidating
to meet certain criteria, including certain requirements regarding the nature
of their ownership, assets, income and distributions of taxable income. The
income from certain CRIIMI MAE activities, origination and servicing, will not
be considered as Qualifying income under Section 856. CRIIMI MAE will monitor
and minimize the levels of Non-Qualifying income in order to meet REIT
Qualification criteria.
CRIIMI MAE and CRI Liquidating intend to distribute substantially all of
their taxable income and, accordingly, no provision for income taxes has been
made in the accompanying consolidated financial
F-11
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
statements. In 1996, CRIIMI MAE generated $0.003 per common share of excess
inclusion income from its December 1996 refinancing. The excess inclusion
income is taxable at the shareholder level as CRIIMI MAE intends to distribute
substantially all of its taxable income. Excess inclusion cannot be offset by
a net operating loss and is considered unrelated taxable business income under
Section 511. CRIIMI MAE and CRI Liquidating, however, may be subject to tax at
normal corporate rates on net income or capital gains not distributed.
Per Share Amounts
Per share amounts for 1996, 1995 and 1994 represent net income after payment
of preferred dividends, dividends and return of capital, respectively, divided
by the weighted average common shares outstanding during each year. The
weighted average common shares outstanding include shares held for issuance
pending presentation of predecessor units in the CRIIMI Funds.
Consolidated Statements of Cash Flows
Since the consolidated statements of cash flows are intended to reflect only
cash receipt and cash payment activity, the consolidated statements of cash
flows do not reflect investing and financing activities that affect recognized
assets and liabilities while not resulting in cash receipts or cash payments.
In connection with the Merger, the following significant non-cash investing
and financing activities were recorded upon consummation of the Merger on June
30, 1995:
<TABLE>
<S> <C>
ASSETS ACQUIRED
Investment in Services Corporation....................... $ 6,871,000 (1)
Investment in Services Partnership....................... 538,000 (1)
Note receivable.......................................... 5,002,183 (2)
Terminated contract and workforce........................ 23,900,000 (2)
Mortgage servicing assets................................ 881,000 (2)
Goodwill................................................. 4,079,839 (2)
Fixed assets............................................. 212,484 (2)
Decrease in deferred costs............................... (1,162,756)
Decrease in receivables and other assets................. (250,000)
-----------
Total assets acquired.................................... $40,071,750
===========
LIABILITIES ASSUMED AND STOCK ISSUED
Bank term loan........................................... $ 9,100,000
Deferred compensation payable............................ 5,002,183
Merger costs payable..................................... 2,206,666
Common stock issued...................................... 22,262,901
Value of stock options issued............................ 1,500,000
-----------
Liabilities assumed and stock issued..................... $40,071,750
===========
</TABLE>
- --------
(1) Included in Equity Investments on the accompanying consolidated balance
sheets as of December 31, 1996 and 1995.
(2) Included in Receivables and other assets on the accompanying consolidated
balance sheet as of December 31, 1996 and 1995.
Cash payments made for interest for the years ended December 31, 1996, 1995
and 1994 were $59,621,711, $47,936,656, and $29,691,138, respectively.
F-12
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NEW ACCOUNTING STATEMENTS
During 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities using a financial components approach that
focuses on control. This statement provides consistent standards for
distinguishing transfers of financial assets that are sold from transfers that
are secured borrowings. Adoption of this statement is required on a
prospective basis in fiscal years beginning after December 31, 1996.
Management intends to adopt the statement in the fiscal year ending December
31, 1997 and does not believe that the impact of such adoption will be
material to the financial statements.
Additionally, the FASB issued SFAS No. 127 "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 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.
3. MERGER OF CRI MORTGAGE BUSINESSES
On September 29, 1994, a special committee (the Special Committee)
consisting of the independent directors of the board of directors (the Board
of Directors) was appointed by the Board of Directors to consider whether, and
on what basis, CRIIMI MAE should become self-administered and self-managed.
The members of the Special Committee are not and have not been affiliates of
CRI or the CRI Mortgage Businesses nor officers or employees of CRIIMI MAE.
The consideration paid by CRIIMI MAE in connection with the Merger was
determined in negotiations between William B. Dockser and H. William
Willoughby (collectively, the Principals) and the Special Committee. In the
negotiations, the Special Committee was assisted by Duff & Phelps Capital
Markets Co. (Duff & Phelps) and considered the views of Merrill Lynch, Pierce,
Fenner & Smith, Incorporated, the financial adviser to CRIIMI MAE with respect
to the merger proposal. Duff & Phelps rendered an opinion to the effect that
the merger proposal was fair to CRIIMI MAE and its shareholders, other than
the Principals, from a financial point of view.
The Special Committee unanimously recommended the merger proposal to the
Board of Directors. The Board of Directors (with the Principals abstaining)
unanimously approved the merger proposal and recommended that the shareholders
of CRIIMI MAE vote for the merger proposal. The merger proposal was approved
by the shareholders of CRIIMI MAE at a meeting held on June 21, 1995. Holders
of approximately 56% of the 26,888,456 shares outstanding as of the April 24,
1995 record date voted in favor of the Merger. Of the shares voted, the margin
was 8.5 to 1 in favor of the Merger.
The Merger became effective on June 30, 1995 (the Closing Date) at which
time certain assets and liabilities of the CRI Mortgage Businesses were merged
with and into CRIIMI Management. The CRI Mortgage Businesses were affiliates
of CRI. CRI and its affiliates had been involved in mortgage origination,
underwriting, investment and related activities for over 20 years.
As discussed in Note 4, through June 30, 1995, the Adviser provided advisory
services to CRIIMI MAE pursuant to an advisory agreement. Immediately prior to
the Merger, the advisory agreement between CRIIMI MAE and the Adviser was sold
to CRI Acquisition, Inc., a newly formed entity which was then merged into
CRIIMI MAE.
The consideration paid by CRIIMI MAE (measured on the Closing Date) for the
CRI Mortgage Businesses was approximately $32.9 million. Additionally, CRIIMI
MAE incurred costs of approximately $3.3 million to
F-13
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
execute the Merger. As part of the consideration paid in the Merger, CRIIMI
MAE issued, on the Closing Date, 1,325,419 shares of common stock (Common
Shares), which vested immediately, to each of the Principals. On the Closing
Date, CRIIMI MAE issued, for services rendered in connection with the Merger,
to certain executive officers (collectively, the Executive Officers) a total
of 110,452 Common Shares. The Common Shares issued to the Executive Officers
will vest in three equal installments on the first three anniversaries of the
Closing Date. As a result of these transactions, the Principals and Executive
Officers held approximately 10% of the 30,407,024 Common Shares issued and
outstanding as of December 31, 1995.
Registration Rights and Lock-up Agreement--The Common Shares received by the
Principals and the Executive Officers in connection with the Merger (the
Restricted Shares) are "restricted securities" within the meaning of Rule 144
under the Securities Act of 1933, as amended (the Securities Act), and may be
sold only pursuant to an effective registration statement under the Securities
Act or an applicable exemption, including an exemption under Rule 144. On June
30, 1995, the Principals and the Executive Officers entered into an agreement
with CRIIMI MAE pursuant to which those persons are not permitted to offer,
sell, contract to sell or otherwise dispose of any Restricted Shares for 36
months after the Closing Date, except for gifts to relatives and charitable
contributions. Each Principal is prohibited from making such gifts in excess
of 662,709 Common Shares during such period. After expiration of the lock-up
period, the holders of the Restricted Shares, after notifying CRIIMI MAE of
their intention, will be permitted, subject to certain procedural
requirements, to sell Restricted Shares. If an exemption from the registration
requirements is not available, the Principals and Executive Officers may
exercise piggyback registration rights, may utilize any available shelf
registration and, if the aggregate number of Common Shares to be registered
exceeds 50,000 Common Shares, exercise demand registration rights; provided
that a maximum of two demand registration statements may be required and a
second notice demanding registration must be at least a year after the first.
Under the agreements providing for such registration rights, CRIIMI MAE will
pay all expenses, other than underwriting discounts, in connection with any
registration.
Pursuant to the Merger Agreement, CRIIMI Management became liable for
certain debt of the CRI Mortgage Businesses in the principal amount of $9.1
million, as discussed in Note 9, below.
CRIIMI MAE allocated the purchase price to the fair value of the assets
acquired and the excess of the purchase price over the fair value of the net
assets acquired is allocated to goodwill. CRIIMI MAE determined the fair
values based on the present value of the cash flow streams discounted at a
rate commensurate with the associated risk of investing in and owning those
assets. The allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
NOTE AMOUNT (YEARS)
---- ---------- ------------
<S> <C> <C> <C>
AIM subadvisory contracts and certain mortgage
servicing contracts............................. 1 7,409,000 10
Mortgage servicing assets........................ 2 881,000 10
Terminated contract and workforce................ 3 23,900,000 10
Goodwill......................................... 4 4,079,839 10
</TABLE>
- --------
(1) The fair value of the AIM subadvisory contracts and certain mortgage
servicing contracts were determined based on the projected discounted cash
flows over the estimated life of the assets. These assets have been
contributed to the Services Corporation and the Services Partnership as
follows:
Services Corporation--CRIIMI MAE made an investment in the Services
Corporation which is represented by 100% of the non-voting common stock.
The Services Corporation issued installment notes to purchase certain
intangible assets. The Services Corporation contributed those intangible
assets to the Services Partnership for an initial 92% limited partnership
interest. These intangible assets consisted of the AIM subadvisory
contracts and certain other mortgage servicing contracts valued at
$6,871,000.
F-14
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Services Partnership--CRIIMI MAE also made an investment in the Services
Partnership by contributing certain mortgage servicing contracts valued at
$538,000 for an initial 8% general partnership interest.
(2) Represents the fair value of the remaining intangible assets that CRIIMI
MAE acquired from the CRI Mortgage Businesses.
(3) Represents CRIIMI MAE's acquisition of the workforce and intellectual
property of the CRI Mortgage Businesses. The benefits of these services
were previously provided to CRIIMI MAE through the Adviser. The expected
future benefit of such services was the basis for the determination of the
fair value.
(4) Reflects the allocation of the purchase price to goodwill. Goodwill is
represented by the excess of purchase price over the fair value of the net
assets acquired.
The Principals and the Executive Officers entered into employment and non-
competition agreements with CRIIMI Management for terms of five years and
three years, respectively. The agreements require each Principal to devote a
substantial portion of his time to the affairs of CRIIMI MAE and its
affiliated entities, except that each of them may devote time to his other
existing business activities; provided that the time devoted to such other
existing business activities does not interfere with the performance of his
duties to CRIIMI MAE and its affiliated entities. The Principal's agreements
define the phrase "substantial portion" to mean all of the time required to
perform the services necessary and appropriate for the conduct of the
businesses of CRIIMI MAE and its affiliated entities.
The employment agreements include provisions prohibiting the Principals from
competing with CRIIMI Management, CRIIMI MAE or CRIIMI MAE's affiliated
entities for at least six years after the Closing Date, unless the Principals'
employment is terminated other than for "cause" or pursuant to an "involuntary
resignation" (as such terms are defined in the employment agreements).
However, subsequent to the Merger, the Principals continue to have a
substantial economic interest in, and control over, CRI and its affiliates,
which may continue to (1) be a general partner in, and have minority economic
interests in, certain existing partnerships which, directly or indirectly, own
equity or debt investments in multifamily or commercial properties, (2) engage
in and manage trading operations in multifamily and related mortgages, and (3)
through the Adviser, which is an affiliate of CRI, serve as the adviser to CRI
Liquidating.
In addition to the Common Shares received, each of the Principals received
from CRIIMI MAE options to purchase one million Common Shares at an exercise
price equal to $1.50 per share more than the aggregate average of the high and
low sale prices of Common Shares on the New York Stock Exchange during the ten
trading days preceding the Closing Date, which average sale price was
calculated at $8.27 per share (the Trading Price) and 500,000 Common Shares at
an exercise price equal to $4.00 per share more than the Trading Price. The
options vest in equal installments on the first five anniversaries of the
Closing Date. The Executive Officers received options to purchase a total of
180,000 Common Shares at an exercise price equal to $1.50 per share more than
the Trading Price. In addition, certain other officers (the Other Officers) of
CRIIMI MAE received options to purchase a total of 50,000 Common Shares at an
exercise price of $1.50 per share more than the Trading Price. These options
vest in equal installments on the first three anniversaries of the Closing
Date. The Principals', Executive Officers' and Other Officers' options expire
on the eighth anniversary of the Closing Date. As of December 31, 1996, 30,832
option shares have been forfeited and 230,668 have been exercised.
As discussed in Note 14, in June 1995, a complaint was filed in the United
States District Court for the District of Maryland against CRIIMI MAE's
directors in connection with the Merger.
F-15
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. TRANSACTIONS WITH RELATED PARTIES
Below is a summary of the related party transactions which occurred during
the years ended December 31, 1996, 1995 and 1994. These items are described
further in the text which follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
PAYMENTS TO THE ADVISER:
Annual fee--CRI Liquidating (b)(g)........... $ 382,050 $ 416,007 $ 696,342
Incentive fee--CRI Liquidating (g)(f)........ 568,638 -- 394,812
Annual fee--CRIIMI MAE (a)(b)(h)............. -- 1,493,297 2,567,101
Incentive fee--CRIIMI MAE (b)................ -- -- 497,675
Mortgage selection fees--CRIIMI MAE (c)...... -- 212,909 1,570,415
---------- ---------- ----------
Total...................................... $ 950,688 $2,122,213 $5,726,345
========== ========== ==========
PAYMENTS TO CRI:
Expense reimbursement--CRIIMI MAE (d)(i)..... $ 674,674 $1,302,074 $1,524,440
Expense reimbursement--CRI Liquidating
(d)(j)...................................... -- 125,482 285,423
---------- ---------- ----------
Total...................................... $ 674,674 $1,427,556 $1,809,863
========== ========== ==========
AMOUNTS RECEIVED OR ACCRUED FROM RELATED
PARTIES:
CRI/AIM Investment Limited Partnership
(e)(h)...................................... $ 765,050 $ 738,362 $ 700,000
========== ========== ==========
EXPENSE REIMBURSEMENTS TO CRIIMI MANAGEMENT
CRI Liquidating and the AIM Funds (d)(j)..... $ 363,669 $ 183,650 $ --
Services Partnership (d)(j).................. 1,944,974 576,483 --
---------- ---------- ----------
$2,308,643 $ 760,133 $ --
========== ========== ==========
</TABLE>
- --------
(a) In connection with the Merger, effective June 30, 1995, CRIIMI MAE became
a self-administered REIT, and as of that date is no longer required to
make payments to the Adviser.
(b) Included in the accompanying consolidated statements of income as fees to
related party.
(c) Included as receivables and other assets on the accompanying consolidated
balance sheets and amortized over the expected mortgage life.
(d) Included as general and administrative expenses on the accompanying
consolidated statements of income.
(e) Included as equity in earnings from investments on the accompanying
consolidated statements of income.
(f) Netted with gains on mortgage dispositions on the accompanying
consolidated statements of income.
(g) As a result of reaching certain specified performance goals during 1996,
1995, and 1994, CRI Liquidating paid deferred annual fees of $168,307
(which included $86,739 for 1995), $28,467 and $118,659, respectively.
(h) As of June 1, 1993, pursuant to the First Amendment to the CRI Insured
Mortgage Association, Inc. advisory agreement (the Advisory Agreement),
CRI guaranteed that CRIIMI MAE would receive an annual distribution from
CRI/AIM Investment Limited Partnership of $700,000. CRIIMI MAE was granted
the right to reduce the amounts paid to the Adviser by the difference
between the guaranteed $700,000 distribution and the amount actually paid
to CRIIMI MAE by CRI/AIM Investment Limited Partnership. As such, the
amounts paid to the Adviser for the years ended December 31, 1995 and 1994
were reduced by $158,811 and $312,222, respectively, which represents the
difference between the guaranteed distribution and the amount actually
paid to CRIIMI MAE. This guarantee was terminated effective June 30, 1995
in connection with the transaction in which CRIIMI MAE a self-administered
REIT.
(i) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid
to CRI as reimbursement for expenses incurred by the Adviser on behalf of
CRIIMI MAE. In connection with the Merger, on June
F-16
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
30, 1995, CRIIMI MAE was no longer required to reimburse the Adviser, as
these expenses are now directly incurred by CRIIMI MAE. However, pursuant
to an agreement between CRIIMI MAE and CRI (the CRI Administrative Services
Agreement), CRI provides CRIIMI MAE with certain administrative and office
facility services and other services, at cost, with respect to certain
aspects of CRIIMI MAE's business. CRIIMI MAE uses the services provided
under the CRI Administrative Services Agreement to the extent such services
are not performed by CRIIMI Management or provided by another service
provider. The CRI Administrative Services Agreement is terminable on 30
days notice at any time by CRIIMI MAE.
(j) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid
to CRI as reimbursement for expenses incurred by the Adviser on behalf of
CRI Liquidating and the AIM Funds. The transaction in which CRIIMI MAE
became a self-administered REIT had no impact on CRI Liquidating's or the
AIM Funds' financial statements except that the expense reimbursements
previously paid to CRI, are, effective June 30, 1995, paid to CRIIMI
Management. Additionally, effective June 30, 1995, CRIIMI Management is
reimbursed for its employees' time and expenses incurred on behalf of
CRIIMI MAE Services Limited Partnership.
CRIIMI MAE'S ADVISORY AGREEMENT
CRIIMI MAE is governed by the Board of Directors, a majority of whom are
independent directors. From inception through June 30, 1995, the Board of
Directors engaged the Adviser, an affiliate of CRI, to act in the capacity of
adviser to CRIIMI MAE. Prior to June 30, 1995, the Adviser conducted CRIIMI
MAE's day-to-day operations and managed CRIIMI MAE's assets with the goal of
maximizing CRIIMI MAE's value. Under the Advisory Agreement between CRIIMI MAE
and the Adviser, the Adviser and its affiliates received certain fees and
expense reimbursements from CRIIMI MAE through June 30, 1995. However, as
discussed in Note 3, effective June 30, 1995, CRIIMI MAE became a self-
administered REIT and, pursuant to the Merger, the Advisory Agreement was
terminated. Accordingly, the Adviser no longer manages CRIIMI MAE's operations
and is, thus, not entitled to receive fees and expense reimbursements from
CRIIMI MAE.
Under the Advisory Agreement (through June 30, 1995), the Adviser received
compensation from CRIIMI MAE as follows:
. An annual fee (the Annual Fee) for managing and master servicing CRIIMI
MAE's portfolio of mortgages. The Annual Fee was equal to 0.40% of
average invested assets invested in certain mortgage investments,
payable quarterly. Such fee was subject to reduction if the spread
between the yield on investments declined below the portfolio's cost of
funds by greater than 0.40%.
. An incentive fee, equal to 25% of the amount by which tax basis net
income from Additional Mortgage Investments (as defined in the Advisory
Agreement) exceeded the annual target return on equity, was payable
quarterly, subject to year-end adjustment. The target return on equity
was determined on a quarterly basis and equalled 1% over the average
yield on Treasury Bonds maturing nearest to ten years from such quarter.
. A mortgage selection fee (the Mortgage Selection Fee) for analyzing,
evaluating and structuring mortgage investments. The Mortgage Selection
Fee was equal to 0.75% of amounts invested in Additional Mortgage
Investments.
CRI LIQUIDATING ADVISORY AGREEMENT
CRI Liquidating has also entered into an agreement with the Adviser (CRI
Liquidating Advisory Agreement) under which the Adviser is obligated to
evaluate and negotiate voluntary mortgage dispositions, provide administrative
services to CRI Liquidating and conduct CRI Liquidating's day-to-day affairs.
F-17
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the CRI Liquidating Advisory Agreement, the Adviser receives
compensation from CRI Liquidating as follows:
. An annual fee (the CRI Liquidating Annual Fee) for managing CRI
Liquidating's portfolio of mortgages. The CRI Liquidating Annual Fee is
calculated separately based on specific criteria for each of the
remaining mortgage pools from the former CRIIMI funds.
. The Adviser is also entitled to certain incentive fees (the CRI
Liquidating Incentive Fees) in connection with the disposition of
certain mortgage investments. Like the CRI Liquidating Annual Fee, the
CRI Liquidating Incentive Fees are calculated separately with respect to
mortgage investments in each of the mortgage pools from the former
CRIIMI funds.
The Merger had no impact on the payments required to be made by CRI
Liquidating, except that the expense reimbursements previously paid by CRI
Liquidating to CRI in connection with the provision of services by its Adviser
are paid to CRIIMI Management subsequent to June 30, 1995.
CRIIMI MAE has entered into a deferred compensation arrangement with William
B. Dockser and H. William Willoughby (collectively, the Principals) in the
aggregate amount of $5,002,183 pursuant to which CRIIMI MAE agreed to pay each
of the Principals for services performed in connection with structuring the
Merger. CRIIMI MAE's obligation to pay the deferred compensation is limited,
with certain exceptions, to the creation of an irrevocable grantor trust for
the benefit of the Principals and to the transfer to such trust of the right
to receive such deferred compensation in the amount of $5,002,183 (the Note
Receivable). The deferred compensation is fully vested and payable only to the
extent that CRI continues to make principal payments on the Note Receivable.
However, in the event of bankruptcy or a similar event affecting CRIIMI MAE,
the remaining trust corpus would revert back to CRIIMI MAE, and the Principals
would become unsecured creditors of CRIIMI MAE. Payments of principal and
interest on the Note Receivable and the deferred compensation are payable
quarterly and terminate on June 30, 2005. Both the Note Receivable and the
deferred compensation obligation bear interest at the prime rate (8.25% as of
December 31, 1996) plus 2% per annum. During the year ended December 31, 1996
and 1995, CRIIMI MAE, through CRIIMI Management, recognized interest income of
approximately $470,000 and $267,000, respectively, on the Note Receivable,
which is included in other investment income on the accompanying consolidated
statements of income, and recognized interest expense of approximately
$470,000 and $267,000, respectively on the deferred compensation obligation,
which is included in interest expense on the accompanying consolidated
statements of income. The deferred compensation obligation and the Note
Receivable are included in Payables and accrued expenses and Receivables and
other assets, respectively, on the accompanying consolidated balance sheets as
of December 31, 1996 and December 31, 1995.
Since the Merger, through one of its affiliates, the Services Partnership,
CRIIMI MAE has increased its mortgage advisory and servicing activities in
conjunction with its purchases of Subordinated CMBS by acquiring certain
servicing rights for the mortgage loans collateralizing these purchases. These
servicing rights allow CRIIMI MAE to monitor the performance of its
investments in Subordinated CMBS and provide CRIIMI MAE with appropriate
workout/foreclosure rights with respect to the underlying collateral. As of
February 1, 1997, the Services Partnership was responsible for a variety of
servicing functions on a mortgage loan portfolio of approximately $6.4
billion. The servicing contracts are contributed to the Services Partnership
and increase CRIIMI MAE's interest in that partnership. As of December 31,
1996, CRIIMI MAE held a 33% general partnership interest in the Services
Partnership. The Services Partnership provides mortgage servicing and advisory
services to third parties, CRIIMI MAE, and the AIM Funds on a fee basis.
CRIIMI MAE, through CRIIMI Management, manages the Services Partnership as
general partner.
F-18
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of CRIIMI MAE's consolidated financial
instruments 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.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
--------------------------- ---------------------------
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Mortgage security col-
lateral................ $618,133,219 $618,823,121 $674,289,774 $685,141,970
Mortgages............... 57,409,073 72,976,503 104,507,083 132,823,515
Subordinated CMBS....... 564,335,400 573,592,462 278,400,699 284,717,422
Cash and cash equiva-
lents.................. 10,966,354 10,966,354 16,577,407 16,577,407
Accrued interest receiv-
able................... 11,830,216 11,830,216 9,446,229 9,446,229
LIABILITIES
OBLIGATIONS UNDER
FINANCING FACILITIES
Securitized Mortgage
Obligations:
Mortgage security
collateral.......... 590,222,369 585,293,708 645,260,921 662,602,136
Subordinated CMBS.... 142,000,000 142,000,000 -- --
Repurchase
Agreements--
Subordinated CMBS.... 241,137,588 241,137,588 187,947,276 187,947,276
Bank Term Loans....... 8,897,880 8,897,880 21,227,880 21,227,880
OFF BALANCE SHEET
Interest rate protection
agreements--asset...... $ 1,365,829 $ 572,991 $ 2,492,986 $ 1,112,804
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
MORTGAGE ASSETS--MORTGAGE SECURITY COLLATERAL AND MORTGAGES
The fair value of the Mortgage Security Collateral and Mortgages is based on
the quoted market price from an investment banking institution which trades
these instruments as part of its day-to-day activities.
MORTGAGE ASSETS--SUBORDINATED CMBS
The fair value of the Subordinated CMBS is based on the price obtained from
various investment banking institutions which trade Subordinated CMBS. The use
of different market assumptions, valuation methodologies or both may have a
material effect on the estimates of fair value. The fair value estimates
presented herein are based on pertinent information available as of December
31, 1996. However, there is not an active secondary trading market for
Subordinated CMBS and the estimates of fair value presented herein are not
necessarily indicative of the amounts CRIIMI MAE could realize in a current
market exchange.
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST RECEIVABLE
The carrying amount approximates fair value because of the short maturity of
these instruments.
F-19
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OBLIGATIONS UNDER FINANCING FACILITIES
The fair value of the Securitized Mortgage Obligations is based on the
quoted market price from an investment banking institution which trades these
instruments as part of its day-to-day activities. The carrying amount of the
other obligations under financing facilities approximates fair value because
the current rate on the debt is generally reset monthly based on market rates.
INTEREST RATE PROTECTION AGREEMENTS
The fair value of interest rate protection agreements (used to hedge CRIIMI
MAE's floating-rate debt) is the estimated amount that CRIIMI MAE would
receive to terminate the agreements as of December 31, 1996 and 1995, taking
into account current interest rates and the current creditworthiness of the
counterparties. The amount was determined based on a quote received from a
financial institution which enters into these types of transactions as part of
its day-to-day activities.
6. MORTGAGE ASSETS--MORTGAGE SECURITY COLLATERAL AND MORTGAGES
CRIIMI MAE's consolidated investment in mortgage security collateral and
mortgages is comprised of FHA-Insured Loans, GNMA Mortgage-backed Securities
and, to a lesser extent, GNMA-guaranteed or HUD-insured non-amortizing
construction loans. Such construction loans are intended to be converted to
permanent, amortizing insured loans upon completion of construction.
Additionally, mortgage security collateral includes Federal Home Loan Mortgage
Corporation (Freddie Mac) participation certificates which are collateralized
by FHA-Insured Loans and GNMA Mortgage Backed Securities, as discussed below.
As of December 31, 1996, 27% of CRIIMI MAE's investment in mortgage security
collateral and mortgages were FHA-Insured Loans, 72% were GNMA Mortgage-backed
securities and 1% was construction loans (including loans which collateralize
Freddie Mac participation certificates). FHA-Insured loans and GNMA Mortgage-
backed securities are collectively referred to as mortgages herein.
During 1995, CRIIMI MAE consummated three financing transactions which
transferred 97% of its directly owned mortgages into wholly-owned financing
corporations for financing purposes as follows:
. During September 1995, CRIIMI MAE transferred 59 GNMA Mortgage-Backed
Securities with an aggregate face value of $251 million to Freddie Mac
in exchange for Freddie Mac participation certificates evidencing 100%
beneficial interests in the mortgages transferred (Freddie Mac Giant
Participation Certificates). CRIIMI MAE immediately transferred the
Freddie Mac Giant Participation Certificates to its wholly-owned
financing subsidiary, CRIIMI MAE Financial Corporation II, in
conjunction with the issuance of a fixed-rate $249 million Funding Note
payable to Freddie Mac (FHLMC Funding Note).
. During October 1995, CRIIMI MAE transferred 40 FHA-Insured Loans and 17
GNMA Mortgage-Backed Securities with an aggregate face value of $223
million to its wholly-owned financing subsidiary, CRIIMI MAE Financial
Corporation, in conjunction with the issuance of $216 million of fixed
rate collateralized mortgage obligations (CMOs).
. During December 1995, CRIIMI MAE transferred 46 GNMA Mortgage-Backed
Securities with an aggregate face value of $198 million to its wholly-
owned financing subsidiary, CRIIMI MAE Financial Corporation III, in
conjunction with the issuance of a $193 million Funding Note payable to
the Federal National Mortgage Association (FNMA Funding Note).
CRI Liquidating's mortgage assets consist solely of the Government Insured
Multifamily Mortgages it acquired from the CRIIMI Funds. The CRIIMI Funds
invested primarily in Government Insured Multifamily Mortgages issued or sold
pursuant to programs of GNMA and FHA.
F-20
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a result of these transfers, through its wholly-owned subsidiaries and
CRI Liquidating, CRIIMI MAE owns the following mortgages directly and
indirectly:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------------------------
NUMBER OF
MORTGAGE CARRYING EFFECTIVE WEIGHTED AVERAGE
ASSETS VALUE INTEREST RATE REMAINING TERM
--------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
CRIIMI MAE.............. 5 $ 18,527,970 8.09% 35 years
CRIIMI MAE Financial
Corporation............ 55 206,803,142 8.41% 31 years
CRIIMI MAE Financial
Corporation II......... 59 249,969,567 7.19% 30 years
CRIIMI MAE Financial
Corporation III........ 39 161,360,510 8.08% 32 years
CRI Liquidating......... 11(1) 54,448,533 11.3% 25 years
--- ------------
169 $691,109,722
=== ============
</TABLE>
- --------
(1) In January 1997, the Liquidating Company sold the remaining 11 mortgage
assets, generating proceeds of approximately $54 million which resulted in
financial statement gains and tax basis gains of approximately $14
million.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-----------------------------------------------------
NUMBER OF
MORTGAGE CARRYING EFFECTIVE WEIGHTED AVERAGE
ASSETS VALUE INTEREST RATE REMAINING TERM
--------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
CRIIMI MAE............. 6 $ 18,138,311 8.16% 36 years
CRIIMI MAE Financial
Corporation........... 57 222,533,271 8.45% 33 years
CRIIMI MAE Financial
Corporation II........ 59 252,152,518 7.19% 31 years
CRIIMI MAE Financial
Corporation III....... 46 199,603,985 8.36% 32 years
CRI Liquidating........ 22 114,685,204 10.67% 27 years
--- ------------
190 $807,113,289
=== ============
</TABLE>
In accordance with SFAS 115 (see Note 2), CRIIMI MAE Financial
Corporation's, CRIIMI MAE Financial Corporation II's, and CRIIMI MAE Financial
Corporation III's assets in mortgage security collateral are classified as
held to maturity and are recorded at amortized cost; however, CRIIMI MAE's
remaining mortgage assets (approximately $18.5 million) and CRI Liquidating's
mortgage assets are classified as available for sale and are recorded at fair
value as of December 31, 1996. The difference between the amortized cost and
the fair value of mortgage assets recorded at fair value represents the net
unrealized gains on those mortgage assets, which is reported as a separate
component of shareholders' equity as of December 31, 1996 and 1995.
F-21
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Descriptions of the mortgage assets owned, directly or indirectly by CRIIMI
MAE which exceed 3% of the total carrying value of the consolidated mortgage
assets as of December 31, 1996, summarized information regarding other
mortgage assets and mortgage income earned in 1996, 1995 and 1994, including
interest earned on the disposed mortgage assets, are as follows:
<TABLE>
<CAPTION>
CARRYING MORTGAGE MORTGAGE MORTGAGE
FACE VALUE OF EFFECTIVE INCOME INCOME INCOME FINAL
VALUE OF MORTGAGES INTEREST EARNED EARNED EARNED MATURITY
MORTGAGES(B) (A),(C),(D) RATE RANGE IN 1996 IN 1995 IN 1994 DATE RANGE
------------ ----------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CRIIMI MAE
FHA-INSURED LOANS
Other (3 mortgages).... $13,100,243 $13,353,069 7.05%- $ 409,310 $ 509,404 $ 317,472 March 2020--
10.49% April 2035
CONSTRUCTION LOANS
Other (1 loan)......... 4,420,270 4,493,014 8.4% 944,941** 1,994,627** 4,145,462** March 2035
GNMA MORTGAGE-BACKED
SECURITIES
Other (1 mortgage)..... 683,685 681,887 6.80% 46,433 46,787 39,641 February 2029
----------- ----------- ---------- ---------- ----------
Sub-Total............... 18,204,198 18,527,970 1,400,684 2,550,818 4,502,575
----------- ----------- ---------- ---------- ----------
CRIIMI MAE FINANCIAL
CORPORATION
FHA-INSURED LOANS
Other (38 Mortgages) 129,524,760 129,262,906 7.35%- 11,451,567 11,517,199 9,719,900 May 1999--
11.00% April 2034
GNMA MORTGAGE-BACKED
SECURITIES
Other (17 mortgages) 77,132,000 77,540,236 7.92%- 6,328,473 6,372,047 4,473,431 June 2018--
9.75% April 2035
----------- ----------- ---------- ---------- ----------
Sub-total............... 206,656,760 206,803,142 17,780,040 17,889,246 14,193,331
----------- ----------- ---------- ---------- ----------
CRIIMI MAE FINANCIAL
CORPORATION II
GNMA MORTGAGE-BACKED
SECURITIES
San Jose South.......... 29,105,552 29,353,612 7.66% 2,114,560 2,136,701 2,157,217 October 2023
Somerset Park........... 29,571,380 30,119,793 7.41% 2,166,226 2,182,221 2,197,079 July 2028
Other (57 mortgages)... 189,101,117 190,496,162 7.14%- 13,776,344 13,894,693 13,177,809 June 2018--
8.02% July 2031
----------- ----------- ---------- ---------- ----------
Sub-total............... 247,778,049 249,969,567 18,057,130 18,213,615 17,532,105
----------- ----------- ---------- ---------- ----------
CRIIMI MAE FINANCIAL
CORPORATION III
GNMA MORTGAGE-BACKED
SECURITIES
Other (39 mortgages)... 160,654,717 161,360,510 7.11%- 13,082,476 12,191,061 8,800,785 August 2015--
10.01% February 2035
----------- ----------- ---------- ---------- ----------
Sub-total............... 160,654,717 161,360,510 13,082,476 12,191,061 8,800,785
----------- ----------- ---------- ---------- ----------
CRI LIQUIDATING
FHA-INSURED LOANS
Other (11 mortgages)... 53,512,072 54,448,533 10.11%- 4,482,880 4,511,182 4,536,459 August 2019--
12.29% July 2024
Sub-total............... 53,512,072 54,448,533 4,482,880 4,511,182 4,536,459
----------- ----------- ---------- ---------- ----------
Total mortgages and
mortgage security
collateral.............. 686,805,796 691,109,722 54,803,210 55,355,922 49,565,255
----------- ----------- ---------- ---------- ----------
</TABLE>
F-22
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CARRYING MORTGAGE MORTGAGE MORTGAGE
FACE VALUE OF EFFECTIVE INCOME INCOME INCOME FINAL
VALUE OF MORTGAGES INTEREST EARNED EARNED EARNED MATURITY
MORTGAGES(B) (A),(C),(D) RATE RANGE IN 1996 IN 1995 IN 1994 DATE RANGE
------------ ------------ ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage Dispositions:
1996................... -- -- 8.70%- 2,108,460 9,547,098 9,139,609
11.31%
1995................... -- -- 8.35%- -- 1,211,622 5,702,303
11.00%
1994................... -- -- 8.44%- -- -- 2,636,175
12.12%
------------ ------------ ----------- ----------- -----------
Mortgages and mortgage
security collateral..... $686,805,796 $691,109,722 $56,911,670 $66,114,642 $67,043,342
============ ============ =========== =========== ===========
Investment in Limited
Partnerships............ $ -- $ 253,292 $ 119,526 $ (49,032)
============ =========== =========== ===========
</TABLE>
- ----
** Includes mortgage income earned on construction loans that converted to
permanent loans during 1996 (1 loan), 1995 (6 loans) and 1994 (10 loans).
(A) All mortgages are collateralized by first or second liens on residential
apartment, retirement home, nursing home or townhouse complexes which
have diverse geographic locations and are FHA-Insured Loans or GNMA
Mortgage-Backed Securities. Payment of the principal and interest on FHA-
Insured Loans is insured by HUD pursuant to Title 2 of the National
Housing Act. Payment of the principal and interest on GNMA Mortgage-
Backed Securities is guaranteed by GNMA pursuant to Title 3 of the
National Housing Act. The investment in limited partnerships is not
federally insured or guaranteed.
(B) Principal and interest on permanent mortgages is payable at level amounts
over the life of the mortgage asset. Total annual debt service payable to
CRIIMI MAE and its financing subsidiaries for the mortgage assets held as
of December 31, 1996 is approximately $54 million.
(C) Reconciliations of the carrying amount of CRIIMI MAE's consolidated
mortgage assets for the years ended December 31, 1996 and 1995 follow:
F-23
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ------------------------
<S> <C> <C> <C> <C>
Balance at beginning of
year........................ $807,113,289 $857,589,329
Additions during the year:
Purchases and advances on
construction loans........ 968,689 7,858,922
Amortization of discount... 469,708 675,834
Adjustment to net
unrealized gains on
mortgage assets........... -- 10,063,756
Deductions during the year:
Principal payments......... $ 5,454,847 $ 6,015,172
Mortgage dispositions...... 99,133,148 62,949,716
Adjustment to net
unrealized gains on
mortgage assets........... 12,749,002 --
Accretion of premium....... 104,967 117,441,964 109,664 69,074,552
----------- ------------ ----------- ------------
Balance at end of year....... $691,109,722 $807,113,289
============ ============
</TABLE>
- --------
(D) Principal Amount of Loans Subject to Delinquent Principal or Interest is
not presented since all required payments with respect to CRIIMI MAE's
consolidated mortgage assets are current and none of these mortgage
assets is delinquent as of December 31, 1996.
F-24
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. MORTGAGE ASSETS--SUBORDINATED CMBS
In addition to holding investments in Government Insured Mortgage Assets,
CRIIMI MAE has also purchased other mortgage assets which are not federally
insured or guaranteed.
The following table summarizes information related to these other mortgage
assets on an aggregate basis by pool:
<TABLE>
<CAPTION>
ORIGINAL CURRENT
ANTICIPATED ANTICIPATED
UNLEVERAGED UNLEVERAGED
YIELD TO YIELD TO
POOL MATURITY(1) MATURITY(2)
---- ----------- -----------
<S> <C> <C>
Mortgage Capital Funding, Inc.
Series 1993-C1................................. 13.0% 14.4%
Series 1994-MC1................................ 13.9% 13.8%
Series 1995-MC1................................ 12.2% 12.1%
Nomura Asset Securities
Series 1994-C3................................. 12.1% 12.1%
Lehman Pass-Through Securities Inc.
Series 1994-A.................................. 13.4% 13.4%
Structured Mortgage Securities Corp.
Series 1995-M1................................. 12.4% 12.4%
Fannie Mae Multifamily REMIC
Series 1996-M1................................. 11.7% 11.6%
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 1996-D2................................. 12.4% 12.4%
Series 1996-D3................................. 11.9% 11.9%
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C3................................. 11.1% 11.1%
Series 1996-C2................................. 11.9% 11.9%
WEIGHTED AVERAGE UNLEVERAGED YIELD TO MATURITY... 11.9% 11.9%
</TABLE>
- --------
(1) Represents the original anticipated yield to maturity of the Subordinated
CMBS, based on management's estimate of the timing and amount of future
credit losses and prepayments.
(2) Unless otherwise noted, changes in the current anticipated yield to
maturity from that originally anticipated are primarily the result of
changes in prepayment assumptions relating to mortgage collateral. As of
December 31, 1996, 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.
F-25
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information related to these mortgage assets
on an aggregate basis by security rating:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
FACE PASS-THROUGH AMORTIZED AMORTIZED
AMOUNT RATE WEIGHTED FAIR VALUE COST COST
SECURITY RATING(4) AS OF 12/31/96 AS OF 12/31/96 AVERAGE LIFE(2) AS OF 12/31/96(1) AS OF 12/31/96 AS OF 12/31/95
- ------------------ -------------- ---------------- --------------- ----------------- -------------- --------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BBB Rated................ $ 14.6 8.6% 3 years $ 14.7 $ 14.2 $ 3.9
BB Rated(3)................. 362.6 8.4% 13 years 318.4 307.8 155.3
B Rated(3).................. 244.5 8.3% 16 years 173.9 175.0 91.7
B- Rated................. 13.8 8.6% 17 years 8.3 8.3 --
Unrated.................. 161.0 8.2% 19 years 58.3 59.0 27.5
------ ------ ------ ------
Total...................... $796.5 $573.6 $564.3 $278.4
====== ====== ====== ======
</TABLE>
- --------
(1) The estimated fair values of Subordinated CMBS are upon quoted market
prices.
(2) Weighted average life represents the weighted average expected life of the
Subordinated CMBS prior to consideration of losses, extensions or
prepayments other than those factored in the assumed constant prepayment
rate used at closing which ranged from 0%--4% depending upon the
portfolio.
(3) In May 1996, Fitch Investor Services, one of the rating agencies for
Subordinated CMBS, announced that it had upgraded several of the Mortgage
Capital Funding, Inc. Series 1993-C1 tranches. As a result of the upgrade,
CRIIMI MAE's investment in the B rated tranche, with a face amount of $9.1
million and an amortized cost (at June 30, 1996) of $7.8 million, was
upgraded to BB rated and CRIIMI MAE's investment in the BB rated tranche,
with a face amount of $10.6 million and an amortized cost (at June 30,
1996) of $9.9 million, was upgraded to BBB rated.
(4) These ratings are based upon the Subordinated CMBS on an individual basis.
Upon consummation of the securitized mortgage obligation discussed in Note
9, $449 million of these securities were pooled and used as collateral for
bonds which overall, have a significantly higher weighted average credit
rating.
CRIIMI MAE's investment in the lower rated and unrated tranches provides
credit support to the more senior bond classes of the related commercial
securitization. Cash flow from the underlying mortgages is allocated to the
securitized tranches, with the investment grade or higher rated tranches
having a priority right to the cash flow until their investment returns are
met. Then, any remaining cash flow is allocated, 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 unrated tranche will bear this loss first. To the
extent there are losses in excess of the unrated tranche's stated right to
principal and interest, then the most subordinated rated tranches will begin
absorbing losses.
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 weighted average anticipated unleveraged yield over the expected average
life for Subordinated CMBS as of December 31, 1996 and 1995 is approximately
12%. Although there can be no assurance, CRIIMI MAE anticipates the leveraged
return on these mortgage assets for financial statement purposes will
approximate 21% over the life of the Subordinated CMBS. This return was
determined based on the anticipated yield over the expected weighted average
life of the Subordinated CMBS, which considers, among other things,
anticipated losses, net of interest expense attributable to the financing of
the rated tranches at current interest rates and borrowing amounts.
F-26
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CRIIMI MAE's anticipated returns on its Subordinated CMBS are based upon a
number of assumptions that are currently subject to certain business and
economic uncertainties and contingencies, including, without limitation, the
potential lack of a liquid secondary market for Subordinated CMBS, prevailing
interest rates on that portion of the Subordinated CMBS which has been
financed with floating-rate debt, renewal of repurchase agreements at similar
terms or the availability of alternative financing, and the timing and
magnitude of credit losses on the underlying mortgages collateralizing the
Subordinated CMBS that are a result of the general condition of the real
estate market, (including competition for tenants and 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 anticipated
yields to maturity, discussed above and elsewhere, will be achieved.
In making acquisitions of Subordinated CMBS, CRIIMI MAE and its affiliates
apply their multifamily and other commercial mortgage expertise to perform due
diligence on the mortgage loans collateralizing the Subordinated CMBS. This
analysis may include reviewing, to the extent available, the operating records
of the underlying real estate assets, appraisals, environmental studies,
market studies and architectural and engineering studies, and where deemed
necessary, independently developing projected operating budgets. In addition,
site visits are conducted at a majority of the properties. Further, CRIIMI MAE
will generally purchase Subordinated CMBS only when satisfactory arrangements
exist whereby CRIIMI MAE can monitor the performance of the collateral and
when CRIIMI MAE has appropriate workout/foreclosure rights with respect to the
underlying collateral. CRIIMI MAE believes that all transactions entered into
to date have had such satisfactory arrangements.
The underlying mortgages collateralizing CRIIMI MAE's investment in
Subordinated CMBS (aggregate) as of December 31, 1996 are concentrated as
follows:
<TABLE>
<CAPTION>
PROPERTY TYPE
- -------------
<S> <C>
Multifamily............. 48%
Retail.................. 20%
Hotel................... 14%
Mobile Homes............ 8%
Office.................. 5%
Other................... 5%
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC(1)
- -------------
<S> <C>
Texas................... 17%
California.............. 12%
Florida................. 8%
Michigan................ 5%
Other................... 58%(2)
</TABLE>
- --------
(1) No significant concentration by region.
(2) No other individual state makes up more than 5% of the total.
Investments in 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 a series
of repurchase agreements which provides financing to purchase the rated
tranches of the Subordinated CMBS (the unrated tranches are purchased with
equity or available 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
9 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 December 31,
1996, repurchase agreements in the amount of approximately $241 million were
outstanding related to the Subordinated CMBS. Additionally, as of December 31,
1996, 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 9).
F-27
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. RECONCILIATION OF FINANCIAL STATEMENT NET INCOME TO TAX BASIS INCOME
Reconciliations of the financial statement net income to the tax basis
income for the years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Consolidated financial statement net
income................................. $35,239,857 $18,534,089 $26,010,119
Adjustment due to accounting for
subsidiary as a pooling for financial
statement purposes and a purchase for
tax purposes........................... 2,520,569 4,466,852 3,610,806
Mortgage dispositions................... 307,704 53,740 200,195
Reamortization of Subordinated CMBS..... 1,918,841 741,391 187,305
Interest income--U.S. Treasuries........ 589,367 714,599 860,202
Interest expense--defeased notes........ (812,736) (1,005,382) (1,198,027)
Interest expense--amortization of
deferred financing and debt issue
costs.................................. (1,200,503) (2,087,222) (290,158)
Interest expense--write-off of deferred
financing costs and adjustment to
valuation of hedges.................... 178,750 2,393,106 795,614
Provision for settlement of litigation.. -- (656,127) (557,340)
Equity in earnings from investments..... (138,772) 514,773 (7,462)
Amortization of assets acquired in the
Merger................................. 2,881,824 1,435,356 --
Capital gain on installment sale........ 1,214,091 68,269 --
Other................................... (165,835) 114,370 (4,831)
----------- ----------- -----------
Tax basis income........................ $42,533,157 $25,287,814 $29,606,423
----------- ----------- -----------
Dividends paid on preferred shares...... (3,526,451) -- --
----------- ----------- -----------
Tax basis income available to common
shareholders........................... $39,006,706 $25,287,814 $29,606,423
=========== =========== ===========
Tax basis income per share:
Ordinary income per share--Primary...... $ 0.96 $ 0.70 $ 0.73
Capital gain income per share--Primary.. 0.31 0.19 0.44
----------- ----------- -----------
Total tax basis income per share--
Primary................................ $ 1.27 $ 0.89 $ 1.17
=========== =========== ===========
Weighted Average Shares--Primary........ 30,773,621 28,536,557 25,309,560
=========== =========== ===========
</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, mortgages and mortgage security collateral and
Subordinated CMBS, long-term debt, deferred financing costs, partnership
investments and the merger of the CRIIMI Funds.
F-28
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a result of the foregoing, the nature of the dividends for income tax
purposes on a per share basis is as follows:
<TABLE>
<CAPTION>
1996(1) 1995 1994
------- ----- -----
<S> <C> <C> <C>
Ordinary income...................................... $0.91 $0.73 $0.72
Long-term capital gains.............................. 0.31 0.19 0.44
----- ----- -----
$1.22 $0.92 $1.16
===== ===== =====
</TABLE>
- --------
(1) In 1996, CRIIMI MAE generated $0.003 per common share of excess inclusion
income from its December 1996 refinancing. The excess inclusion income is
taxable at the shareholder level as CRIIMI MAE intends to distribute
substantially all of its taxable income. Excess inclusion cannot be offset
by a net operating loss and is considered unrelated taxable business
income under Section 511. CRIIMI MAE and CRI Liquidating, however, may be
subject to tax at normal corporate rates on net income or capital gains
not distributed.
9. OBLIGATIONS UNDER FINANCING FACILITIES
The following table summarizes CRIIMI MAE's debt outstanding as of December
31, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------- -----------------------------------
BALANCE EFF. RATE AVERAGE AVERAGE MATURITY BALANCE AVERAGE AVERAGE
TYPE OF DEBT AT YEAR END AT YEAR END BALANCE EFF. RATE DATE AT YEAR END BALANCE EFF. RATE
- ------------ ------------ ----------- ------------ --------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securitized Mortgage
Obligations(6):
FHLMC Funding Note
(1).................. $237,708,781 7.4% $238,700,000 7.4% Sept 2031 $239,485,471 $ 66,000,000 7.4%
FNMA Funding Note
(2).................. 157,607,340 7.3% 169,500,000 7.4% March 2035 195,501,376 8,700,000 7.4%
CMO (3)............... 194,906,248 7.3% 207,800,000 7.3% Jan 2033 210,274,074 47,300,000 7.3%
Subordinated CMBS May 1998--
(4).................. 142,000,000 7.6% 4,300,000 7.6% March 2016 -- -- --
Repurchase Agreements-- June 1997--
Subordinated CMBS..... 241,137,588 6.8% 193,500,000 6.8% March 1999 187,947,276 56,500,000 7.3%
April 1997--
Bank Term Loans........ 8,897,880 3.1% 12,300,000 3.9%(5) Dec 1998 21,227,880 21,600,000 6.6%(5)
Revolving Credit
Facility.............. -- -- -- -- -- -- 49,400,000 6.6%
Master Repurchase
Agreement............. -- -- -- -- April 1998 -- 408,700,000 6.7%
------------ ------------
Total................. $982,257,837 $854,436,077
============ ============
</TABLE>
- --------
(1) As of December 31, 1996 and 1995, the face amount of the note was
$246,708,610 and $248,821,009 with unamortized discount of $8,999,829 and
$9,335,538, respectively. During 1996, discount amortization of $335,709
and $88,599, respectively, was recorded as interest expense.
(2) As of December 31, 1996 and 1995, the face amount of the note was
$160,250,349 and $198,394,480 with unamortized discount of $2,643,009 and
$2,893,104, respectively. During 1996 and 1995, discount amortization of
$250,095 and $20,815, respectively, was recorded as interest expense.
F-29
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) As of December 31, 1996 and 1995, the face amount of the note was
$200,035,759 and $215,766,328 with unamortized discount of $5,129,511 and
$5,492,254, respectively. During 1996 and 1995, discount amortization of
$362,743 and $42,746, respectively, was recorded as interest expense.
(4) Balance at year-end represents face amount of notes, as the issuance did
not include any bond discount.
(5) The average effective interest rate for 1996 and 1995 includes the impact
of a rate reduction agreement which was in place from July 1995 through
December 1996, providing for a reduction in the rate on a portion of the
loan based on balances maintained at the bank.
The stated maturities of CRIIMI MAE's debt follows:
<TABLE>
<S> <C>
1997............................... $ 96,611,248
1998............................... 68,859,391
1999............................... 104,243,702
2000............................... --
2001............................... --
Beyond............................. 712,543,496(1)
-------------
Total.............................. $ 982,257,837
=============
</TABLE>
- --------
(1) Payments of principal on the Securitized Mortgage Obligations are required
to the extent mortgage principal is received on the related collateral.
SECURITIZED MORTGAGE OBLIGATIONS--SUBORDINATED CMBS
In December 1996, CRIIMI MAE, through a wholly owned financing subsidiary,
issued an aggregate of $142 million of longer-term, fixed-rate bonds to
refinance short-term, floating-rate debt which was previously used to finance
Subordinated CMBS purchases. Additionally, the refinancing transaction created
liabilities with maturities that more closely match those of the underlying
collateral and provided CRIIMI MAE with approximately $22 million for other
corporate purposes. The three classes of bonds issued are collateralized by 35
separate pledged Subordinated CMBS certificates 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.
Through this transaction, CRIIMI MAE was able to obtain, overall, a
significantly higher weighted average credit rating for its securitized
mortgage obligation 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: $215 million was used to pay down short-term, floating-rate debt
facilities, approximately $4 million was used to pay transaction costs and, as
previously discussed, 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: $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 invested in Subordinated CMBS.
F-30
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As discussed further in Note 6, the refinancings were completed through
three separate transactions. GNMA Mortgage-Backed Securities with a fair value
of approximately $247 million as of December 31, 1996 are pledged as security
for a funding note payable to Freddie Mac (the FHLMC Funding Note).
Collateralized Mortgage Obligations (CMOs) are collateralized by FHA-Insured
Loans and GNMA Mortgage-Backed Securities with a fair value of approximately
$210 million as of December 31, 1996. GNMA Mortgage-Backed Securities with a
fair value of approximately $162 million as of December 31, 1996 are pledged
as security for a funding note payable to the Federal National Mortgage
Association (the FNMA Funding Note).
Each of the above-mentioned transactions has been accounted for as a
financing in accordance with FASB Technical Bulletin 85-2. The discount on the
CMOs and the Funding Notes is being amortized on a level yield basis.
Transaction costs were capitalized and are included in deferred costs on the
accompanying balance sheet as of December 31, 1996 and 1995.
REPURCHASE AGREEMENTS-SUBORDINATED CMBS
As previously discussed, when purchasing Subordinated CMBS, CRIIMI MAE
finances, through repurchase agreements, generally, 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 of the
CMBS pool or through a master repurchase agreement, as discussed below. As of
December 31, 1996, the Repurchase Agreements on Subordinated CMBS have
maturity dates ranging from June 1997 to March 1999 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 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 Subordinated CMBS.
As of December 31, 1996, $168 million in borrowings were outstanding under
this facility.
The aforementioned repurchase agreements are secured by the rated tranches
with an aggregate fair value of approximately $348 million and $260 million as
of December 31, 1996 and December 31, 1995, respectively. The 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 December 31, 1996, CRIIMI MAE had repurchase
agreements with German American Capital Corporation and Nomura Grand Cayman,
Ltd. which has such counterparty credit risk.
REPURCHASE AGREEMENTS AND REVOLVING CREDIT FACILITY--GOVERNMENT INSURED
MORTGAGES
Prior to the financings described above, CRIIMI MAE financed the purchase of
FHA-Insured Loans and GNMA Mortgage-Backed Securities through the use of two
separate master repurchase facilities with two separate lenders and a
revolving credit facility. The master repurchase facility with one lender and
the revolving credit facility were both terminated upon the completion of the
1995 refinancings described above. On April 1, 1996, a commitment of $300
million, available under another master repurchase facility, expired in
accordance with its terms. In May 1996, CRIIMI MAE renewed this facility in an
amount up to $100 million ($20 million committed and $80 million uncommitted)
for a period of three years. Any borrowings under this facility will be
secured by FHA-Insured Loans or GNMA Mortgage-Backed Securities, and will bear
interest at CRIIMI MAE's choice of one, three- or six-month LIBOR, plus a
spread of 0.75% or 0.50%, depending on whether FHA-Insured Loans or GNMA
Mortgage-Backed Securities, respectively, are pledged as collateral.
F-31
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
BANK TERM LOANS
CRIIMI MAE has two reducing term loans (Bank Term Loans) with a lender. As
of December 31, 1996 and December 31, 1995, Bank Term Loan I was secured by
the value of 2,447,500 and 6,950,000 CRI Liquidating shares owned by CRIIMI
MAE, respectively, based on a requirement that collateral valued at 125% and
175% of the outstanding balance, respectively, secure the loan. Interest is
based on CRIIMI MAE's choice of one, two or three-month LIBOR. Bank Term Loan
I requires a quarterly principal payment based on the greater of (i) the
return of capital portion of the dividend received by CRIIMI MAE on its CRI
Liquidating shares securing Bank Term Loan I or (ii) the amount necessary to
bring Bank Term Loan I to its scheduled outstanding balance at the end of such
quarter. Any remaining amounts outstanding are due by April 1, 1997.
In connection with the Merger, CRIIMI Management assumed certain debt of the
CRI Mortgage Businesses in the principal amount of $9,100,000 (Bank Term Loan
II). Bank Term Loan II is secured by certain cash flows generated by CRIIMI
MAE's direct and indirect interests in the AIM Funds and is guaranteed by
CRIIMI MAE. The loan requires quarterly principal payments of $650,000 and
matures on December 31, 1998. Interest on the loan is based on CRIIMI MAE's
choice of one, two or three-month LIBOR, plus a spread of 1.25%.
WORKING CAPITAL LINES OF CREDIT
In June 1996, CRIIMI MAE entered into a $15 million working capital line of
credit which was terminated in December 1996 and replaced with a $30 million
unsecured working capital line of credit provided by two lenders. This
unsecured working capital line of credit expires December 31, 1998.
Outstanding borrowings under the 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 December 31, 1996.
LOAN ORIGINATION PROGRAM AGREEMENT
In July of 1996, CRIIMI MAE entered into a $200 million mortgage loan
origination program agreement with a major financial institution (the
Program). The Program is designed to create a pool of multifamily and
commercial mortgage loans, either through origination or acquisition, for the
purpose of issuing commercial mortgage-backed securities. The financial
institution will fund all mortgage loans under the Program, and, as collateral
therefor, CRIIMI MAE will deposit in a reserve account with this institution
in connection with the funding of each mortgagee loan, an amount determined
pursuant to the Program. Additionally, a subsidiary of CRIIMI MAE will service
the mortgage loans, and CRIIMI MAE will facilitate any securitization of the
loans. In any such securitization, CRIIMI MAE anticipates retaining the
subordinated bond tranches backed by these pools; the senior bonds would be
placed with other investors.
OTHER DEBT RELATED INFORMATION
In January 1996, CRIIMI MAE's management adopted and the Board of Directors
approved a change in CRIIMI MAE's investment policy requiring, among other
things: (1) A maximum overall debt-to-equity ratio of 5.0 to 1.0, (2) maximum
debt-to-equity ratios for specific asset types based on management's perceived
risk of those investments and the related funding, and (3) interest rate
protection agreements in a notional amount of at least 75% of the outstanding
floating-rate debt. This policy enables CRIIMI MAE to continue to utilize
leverage in taking advantage of investment opportunities while directing and
monitoring how CRIIMI MAE funds its purchases of Subordinated CMBS and other
investments.
As previously stated, changes in interest rates will have no impact on the
cost of funds or the collateral requirements on CRIIMI MAE's fixed-rate debt,
which approximates 75% of CRIIMI MAE's consolidated debt as of December 31,
1996. Fluctuations in interest rates will continue to impact the value on that
portion of
F-32
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 the underlying asset, CRIIMI MAE would be
required to provide additional collateral in connection with its short-term,
floating-rate borrowing facilities. From time to time, CRIIMI MAE has been
required to fund such additional collateral needs. In each instance and
currently, CRIIMI MAE has had adequate unencumbered assets to meet its
operating, investing and financing requirements and management continually
monitors the levels of unencumbered collateral.
CRIIMI MAE's ability to extend or refinance debt facilities upon maturity
will depend on a number of variables including, among other things, CRIIMI
MAE's financial condition and its current and projected results from
operations which are impacted by a number of variables. As previously
discussed, in early 1996, CRIIMI MAE entered into a three-year master
repurchase agreement to finance investments in lower-rated Subordinated CMBS.
Management intends to utilize this facility to replace a portion of existing
floating-rate debt on Subordinated CMBS which is scheduled to mature over the
next 12 months and/or to finance additional investments in lower rated
Subordinated CMBS. 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 year ended December 31, 1996, CRIIMI MAE's weighted average cost of
borrowing, (including amortization of discounts and deferred financing fees of
approximately $2.8 million) was approximately 7.6%. As of December 31, 1996,
CRIIMI MAE's debt-to-equity ratio was approximately 2.8 to 1.0. Under certain
of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity ratio,
as defined, may not exceed 5.0 to 1.0.
10. INTEREST RATE PROTECTION AGREEMENTS
CRIIMI MAE has entered into interest rate protection (cap) agreements to
partially limit the adverse effects of rising interest rates on its floating-
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. At December 31, 1996,
CRIIMI MAE held caps with a notional amount of approximately $85 million in
anticipation of 1997 CMBS acquisitions funded, in part, by variable rate debt.
The following protection agreements were in place at December 31, 1996:
F-33
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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................ August 27, 1993 August 27, 1997 6.1250% 3M LIBOR
50,000,000................ November 10, 1993 November 10, 1997 6.0000% 3M LIBOR
50,000,000................ August 10, 1993 August 11, 1997 6.0000% 3M LIBOR
$335,000,000(a)
</TABLE>
- --------
(a) CRIIMI MAE's designated interest rate protection agreements hedge CRIIMI
MAE's floating-rate borrowing costs. As of December 31, 1996, total
borrowings of approximately $250 million are hedged by the interest rate
cap agreements.
(b) The weighted average remaining term for these interest rate cap agreements
is approximately 1.17 years.
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 cap agreements are highly liquid. The cap
agreements 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 cap agreements are exchange-traded,
there are a number of financial institutions which enter into these types of
transactions as part of their day-to-day activities.
11. COMMON STOCK
In March 1994, CRIIMI MAE completed a public offering of 5,000,000 shares of
common stock at a price to the public of $11.25 per share (the Equity
Offering). The net proceeds of the Equity Offering totaled approximately $52.2
million, which CRIIMI MAE used primarily to acquire Government Insured
Multifamily Mortgages. The cost of the Equity Offering, including professional
fees, filing fees, printing costs and other items, approximated $.7 million.
Additionally, underwriting fees in an amount which approximated 6.0% of the
gross offering proceeds were incurred. These costs were netted against the
offering proceeds.
On June 23, 1994, CRIIMI MAE filed with the SEC a Shelf Registration
Statement on Form S-3 (Commission File No. 33-54267) in order to register for
sale Debt Securities, Preferred Shares and Common Shares of CRIIMI MAE to the
public in the aggregate principal amount of up to $200 million. CRIIMI MAE may
from time to time offer in one or more series the securities in amounts, at
prices and on terms to be set forth in supplements to the registration
statement. During the fourth quarter of 1994, CRIIMI MAE sold 500,000 shares
of common stock, which were formerly held in treasury, under the shelf
registration statement for net proceeds of approximately $4.3 million. During
1995, CRIIMI MAE sold an aggregate 1,875,000 shares of common stock under the
shelf registration statement for net proceeds of approximately $13.5 million.
Additionally, in October 1995 CRIIMI MAE repurchased 27,320 common shares for
approximately $208,000. As discussed below, CRIIMI MAE also issued Convertible
Preferred stock off the Shelf Registration Statement. As of December 31, 1996,
$106.6 million remains available under the Shelf Registration Statement.
On June 30, 1995, in conjunction with the Merger, CRIIMI MAE issued
2,761,290 common shares, as discussed in Note 3.
F-34
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Beginning in the third quarter of 1994, CRIIMI MAE implemented a dividend
reinvestment and stock purchase plan (the Plan) which allows shareholders who
elect to participate in the Plan (Participants) to purchase additional CRIIMI
MAE common shares at a 2% discount through the reinvestment of CRIIMI MAE's
dividends and through optional cash payments. Common shares purchased under
the Plan may be, at CRIIMI MAE's option, newly issued common shares or common
shares purchased for Participants in the open market. The price of common
shares purchased from CRIIMI MAE with reinvested dividends will be 98% of the
average of the closing sales prices of the common shares as reported on the
New York Stock Exchange Composite Tape on the five trading days prior to the
date on which dividends are paid subject to any threshold price restrictions,
as more fully described in the Registration Statement on Form S-3 filed with
the SEC covering the shares to be issued under the Plan. The price to
Participants of common shares purchased in the open market with reinvested
dividends will be 98% of the average price of common shares purchased for the
Plan by the Agent over the period during which such common shares are
purchased, exclusive of taxes and commissions. CRIIMI MAE reserves the right
to modify the pricing or any other provision of the Plan at any time.
Participants in the Plan may have cash dividends on all or a portion of their
common shares automatically reinvested. Participants may terminate their
accounts at any time in the manner provided for in the Plan. During the year
ended December 31, 1995, 72,075 common shares were newly issued under the
Plan. No common shares were newly issued under the plan in 1996 as CRIIMI MAE
elected to purchase shares for the Participants in the open market.
12. 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 and 3,000,000 shares have been classified as Series B
Preferred Shares as of December 31, 1996.
Series A Cumulative Convertible Preferred Stock
In July 1996, CRIIMI MAE completed a public offering of 75,000 shares of
Series A Cumulative Convertible Preferred Stock, with a par value of $0.01 per
share (the Series A Preferred Shares), at an aggregate offering price of
$7,500,000. The Series A Preferred Shares pay a dividend based on a fixed
premium over three-month LIBOR and, subject to the terms of CRIIMI MAE's
Articles of Incorporation, as amended and supplemented, are (i) convertible at
the option of the holders, (ii) subject to mandatory conversion by CRIIMI MAE
and (iii) subject to redemption by CRIIMI MAE. The number of common shares
deliverable upon conversion of a Series A Preferred Share is equal to a
fraction (1) the numerator of which is 100 and (2) the denominator of which is
94% of the average closing trade price reported on the New York Stock Exchange
of CRIIMI MAE's common shares for the 21 days prior to the date notice of
conversion is received. The liquidation preference and the redemption price on
the Series A Preferred Shares equals $100 per share, together with accrued but
unpaid dividends. The Series A Preferred Shares were purchased by a single
European institutional investor. CRIIMI MAE also acquired a put option to sell
up to an additional 75,000 Series A Preferred Shares, at a price of $100 per
share, to such investor at any time prior to July 1, 1997.
In late 1996, the holder of the Series A Preferred Shares elected to
exercise its right to convert the initial 75,000 Series A Preferred Shares
into 744,512 shares of common stock. In December 1996, CRIIMI MAE exercised
its put option to sell an additional 75,000 Series A Preferred Shares to such
investor at an aggregate offering price of $7,500,000. Accordingly, as of
December 31, 1996, there were 75,000 Series A Preferred Shares outstanding.
Dividends paid and accrued on Series A Preferred Shares totaled $128,546 for
the year ended December 31, 1996.
On January 15, 1997, the holder of the Series A Preferred Shares elected to
exercise its right to convert 25,000 Series A Preferred Shares into 208,011
shares of common stock. On February 12, 1997, the holder converted an
additional 25,000 Series A Preferred Shares into 190,212 shares of common
stock.
F-35
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Series B Cumulative Convertible Preferred Stock
In August 1996, CRIIMI MAE completed a public offering of 2,415,000 shares
of Series B Cumulative Convertible Preferred Stock, with a par value of $0.01
per share (the Series B Preferred Shares), at an aggregate offering price of
$60,375,000. The Series B Preferred Shares pay a dividend in an amount equal
to the sum of (1) $.68 per share per quarter plus (ii) the product of the
excess over $.30, if any, of the quarterly cash dividend declared and paid
with respect to each share of common stock times a conversion ratio (2.2844)
times one plus a conversion premium of 3%, subject to adjustment upon the
occurrence of certain events. The Series B Preferred Shares are (i)
convertible at the option of the holders, and (ii) subject to redemption at
CRIIMI MAE's sole discretion after the 10th anniversary of issuance. Each
Series B Preferred Share is convertible into 2.2844 shares of common stock,
subject to adjustment upon the occurrence of certain events. The liquidation
preference and the redemption price on the Series B Preferred Shares equals
$25 per share, together with accrued but unpaid dividends. At December 31,
1996, there were 2,415,000 Series B Preferred Shares outstanding. Dividends
paid and accrued on Series B Preferred Shares totaled $3,397,905 for the year
ended December 31, 1996.
On January 9, 1997, a holder of the Series B Preferred Shares elected to
exercise its right to convert 46,000 Series B Preferred Shares into 105,082
shares of common stock.
13. STOCK BASED COMPENSATION PLANS
CRIIMI MAE has two stock option plans, the Stock Option Plan for Key
Employees ("Key Employee Plan"), and the 1996 Non-Employee Director Stock Plan
("Director Plan"). In addition, as discussed in Note 3, CRIIMI MAE has granted
to each of the Principals options to purchase common stock under separate
Stock Option agreements ("The Agreements") resulting from the Merger. CRIIMI
MAE accounts for these Agreements and Plans under APB Opinion No. 25, under
which no compensation cost has been recognized. The value of option shares
granted as part of the Merger was capitalized as a component to goodwill.
Accordingly, the pro forma information below excludes option shares granted at
the time of Merger. During 1996, FASB Statement No. 123 became effective. This
Statement requires pro forma disclosure of the impact on net income and
earnings per share if the cost of options issued was recorded at their
estimated fair value at the issuance date. Had compensation cost for these
Plans been determined consistent with FASB Statement No. 123, CRIIMI MAE's net
income and earnings per share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net Income:
As Reported....................................... $31,713,406 $18,534,089
Pro Forma......................................... 31,695,973 18,534,089
Primary EPS:
As Reported....................................... $1.03 $0.65
Pro Forma......................................... 1.03 0.65
</TABLE>
CRIIMI MAE may grant options for up to 500,000 shares under the Key Employee
Plan. CRIIMI MAE has granted options on 361,000 shares through December 31,
1996, including shares granted at the time of Merger. Under the Key Employee
Plan, options granted prior to July 28, 1995 have an option price of $9.77,
and options granted after July 28, 1995 must have an option price of not less
than fair market value at date of grant. Options vest in equal installments on
either the first three or four anniversaries of the date of grant and expire
after eight years.
CRIIMI MAE may grant options for up to 500,000 shares under the Director
Plan. CRIIMI MAE has granted options on 2,000 shares through December 31,
1996. Under the Director Plan, the option exercise price is equal to the
stock's market price on date of grant, the options vest immediately, and the
options expire after ten years.
F-36
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the Agreements, each of the Principals received from CRIIMI MAE
options to purchase 1,000,000 Common Shares at an exercise price equal to
$1.50 per share more than the aggregate average of the high and low sale
prices of Common Shares on the New York Stock Exchange during the ten trading
days preceding the Closing Date, which average sale price was calculated at
$8.27 per share (the Trading Price) and 500,000 Common Shares at an exercise
price equal to $4.00 per share more than the Trading Price. The options vest
in equal installments on the first five anniversaries of the Closing Date. The
options expire on the eighth anniversary of the Closing Date.
A summary of the status of CRIIMI MAE's two stock option plans, and shares
granted at the time of the Merger, at December 31, 1996 and 1995 and changes
during the years then ended is presented in the table below:
<TABLE>
<CAPTION>
1996 1995(1)
------------------- ------------------
WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at Beginning of Year....... 3,230,000 $10.54 0 $ --
Granted................................ 133,000 10.88 3,230,000 10.54
Exercised.............................. (230,668) 9.77 0 --
Forfeited.............................. (40,832) 10.04 0 --
Expired................................ 0 -- 0 --
--------- ------ --------- ------
Outstanding at end of Year............. 3,091,500 $10.62 3,230,000 $10.54
========= ====== ========= ======
Exercisable at end of Year............. 447,999 $10.89 0 --
========= ====== ========= ======
Weighted average fair value of options
granted............................... $ .81 $ .46
====== ======
</TABLE>
- --------
(1) The fair value of these options was capitalized as a component of goodwill
in conjunction with the Merger.
The 3,091,500 options outstanding at December 31, 1996 have exercise prices
between $9.77 and $12.27 with a weighted average exercise price of $10.62 and
a weighted average remaining contractual life of 6.5 years.
The fair value of the 1996 option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants in 1996: risk-free interest rate of 6.16%,
expected life of 2.05 years; expected volatility of 22.5%; dividend yield of
11%.
The fair value of the 1995 option grant was estimated at the time of the
Merger using the Cox-Rous-Rubinstein option pricing model with the following
weighted average assumptions: risk free interest rate of 8.12%; expected life
of 4.86 years; expected volatility of 23.5%; dividend yield of 11%.
14. LITIGATION
In connection with the settlement of certain class-action litigation
involving CRIIMI MAE and certain of its affiliates, CRIIMI MAE entered into a
settlement agreement, which was approved by the court in November 1993,
providing for, among other things, the issuance of up to 2.5 million warrants,
exercisable for 18 months after issuance. Based on the Adviser's initial
estimate of the number of warrants to be issued, CRIIMI MAE accrued a total
provision of $1.5 million in its consolidated statement of income for the year
ended December 31, 1993. Because the actual number of warrants issued pursuant
to the Settlement Agreement was significantly lower than the initial estimate,
CRIIMI MAE reduced this provision in June 1994 to approximately $943,000,
resulting in an adjustment of approximately $557,000 during 1994. Through
December 29, 1995, the expiration date of the warrants, none of the warrants
had been exercised. Accordingly, an adjustment of approximately $656,000 was
recognized during 1995 to reverse into income the remaining obligation related
to the warrants.
F-37
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Exchange
Act 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.
In November 1996, each defendant filed an Answer to the Complaint. Discovery
proceedings began in December 1996 and are continuing. Management believes the
suit is without merit and does not expect the case to have a material adverse
financial impact on CRIIMI MAE.
15. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Income (principally
mortgage income and
income from Subordinated
CMBS).................... $22,963,855 $24,077,854 $23,970,116 $34,943,594
Net gain (loss) on
mortgage dispositions.... 9,420,191 (31,742) (120,439) 333,350
Net income................ 11,543,125 6,391,525 6,513,152 10,792,055
Net income per share-
Primary.................. .38 .21 .16 .28
<CAPTION>
1995
--------------------------------------------------
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Income (principally
mortgage income and
income from Subordinated
CMBS).................... $19,501,446 $19,381,933 $20,421,498 $22,763,474
Net gain (loss) on
mortgage dispositions.... 1,567,346 66,933 (9,409) (123,272)
Net income................ 4,915,397 4,609,412 3,237,359 5,771,921
Net income per share...... .19 .17 .11 .19
<CAPTION>
1994
--------------------------------------------------
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Income (principally
mortgage income)......... $15,918,972 $17,184,041 $19,164,345 $19,174,442
Net gain on mortgage
dispositions............. 11,627,196 445,747 724,439 201,926
Net income................ 9,982,050 6,076,374 5,449,251 4,502,444
Net income per share...... .47 .24 .22 .18
</TABLE>
F-38
<PAGE>
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, at amortized cost and
fair value (See Note 6).................. 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.
F-39
<PAGE>
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 Subordi-
nated 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 in-
come................. 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
minority interest...... 11,552,832 7,108,836 31,671,015 21,102,099
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
============= ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NET
COMMON UNREALIZED
PREFERRED 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
======= ======== =========== ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE>
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
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE>
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"). Under the Investment Company Act, a non-exempt
entity that is an investment company is required to register with the
Securities and Exchange Commission ("SEC") and is subject to extensive,
restrictive and potentially adverse regulation relating to, among other
things, operating methods, management, capital structure, dividends and
transactions with affiliates. 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 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 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 either (i) it would not be
required to register as an investment company or (ii) it would comply with the
Investment Company Act and be able to register as an investment company. In
such event, (i) modification of the Company's business plan so that it would
not be required to register as an investment company would likely entail a
disposition of a significant portion of the Company's Subordinated CMBS or the
acquisition of significant additional assets, such as Government Insured
Mortgage Assets, which are Qualifying Interests or
F-43
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ii) modification of the Company's business plan to register as an investment
company, which would result in significantly increased operating expenses and
would likely entail significantly reducing the Company's indebtedness
(including the possible prepayment of the Company's repurchase agreement
financing and/or the Notes) , which could also require it to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or deleveraging, could be accomplished
on favorable terms. Consequentially, any such modification of the Company's
business plan could have a material adverse effect on the Company. Further, if
it were established that the Company were an unregistered investment company,
there would be a risk that the Company would be subject to monetary penalties
and injunctive relief in an action brought by the SEC, that the Company would
be unable to enforce contracts with third parties and that third parties could
seek to obtain recission of transactions undertaken during the period it was
established that the Company was an unregistered investment company. Any such
results would be likely to have a material adverse effect on the Company.
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.
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
F-44
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-45
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-46
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<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
============== ============ ============ ============
</TABLE>
- --------
(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 on the accompanying
consolidated statements of income.
F-47
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-48
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Through its wholly owned subsidiaries and CRI Liquidating, CRIIMI MAE owns
the following mortgages directly and indirectly:
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
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
=== ============ ============
</TABLE>
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
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
=== ============ ============
</TABLE>
- --------
(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 Mortgage Assets 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, CRI Liquidating 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.
F-49
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The following table summarizes information related to these other mortgage
assets on an aggregate basis by pool:
<TABLE>
<CAPTION>
ORIGINAL ESTIMATED CURRENT ESTIMATED
UNLEVERAGED YIELD TO UNLEVERAGED 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 Commercial Securities,
Inc.
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)
</TABLE>
- --------
(1) Represents the original estimated unleveraged yield over the expected life
(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.
F-50
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate investment by the underlying rating of the Subordinated CMBS
(except for IO strips shown below) is as follows:
<TABLE>
<CAPTION>
FACE AMOUNT AMORTIZED COST AS OF
AS OF FAIR VALUE AS OF ------------------------------------
SECURITY RATING(C) SEPTEMBER 30, 1997 % SEPTEMBER 30, 1997(A) SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------ ----- --------------------- ------------------ -----------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<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 the 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:
<TABLE>
<CAPTION>
CURRENT
AMORTIZED COST AS OF ESTIMATED
NOTIONAL AMOUNT FAIR VALUE -------------------------- UNLEVERAGED
AS OF AS OF SEPTEMBER 30, DECEMBER 31, YIELD TO
SECURITY RATING SEPTEMBER 30, 1997(A) SEPTEMBER 30, 1997(B) 1997 1996 MATURITY
--------------- --------------------- --------------------- ------------- ------------ -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<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 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.
F-51
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
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:
<TABLE>
<CAPTION>
PROPERTY TYPE PERCENTAGE(3) GEOGRAPHIC(1) PERCENTAGE(3)
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Multifamily..................... 40% Texas 17%
Retail.......................... 25% California 14%
Hotel........................... 15% Florida 8%
Office.......................... 9% Georgia 5%
Other........................... 11% Other(2) 56%
--- ---
100% 100%
</TABLE>
- --------
(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.
F-52
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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).
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:
<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.
F-53
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
DIVIDEND RECORD DATE
-------- ------------------
<S> <C> <C>
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
=====
</TABLE>
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).
F-54
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. OBLIGATIONS UNDER FINANCING FACILITIES
The following table summarizes CRIIMI MAE's debt outstanding as of September
30, 1997 and December 31, 1996:
<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
==============
<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
==============
</TABLE>
- --------
(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,
F-55
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
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).
F-56
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. 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
F-57
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
F-58
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 agreements ("Caps") to
partially limit the adverse effects of rising interest rates on its floating-
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.
<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)
</TABLE>
- -----------
- -----------
- --------
(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.
F-59
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-60
<PAGE>
PROSPECTUS
CRIIMI MAE INC.
$264,915,000
DEBT SECURITIES, PREFERRED SHARES, COMMON SHARES AND WARRANTS
CRIIMI MAE Inc. ("CRIIMI MAE") may from time to time offer in one or more
series its debt securities (the "Debt Securities"), shares of its preferred
stock, par value $.01 per share (the "Preferred Shares"), shares of its common
stock, par value $.01 per share (the "Common Shares"), and warrants to
purchase Preferred Shares or Common Shares (the "Warrants"), with an aggregate
public offering price of up to $264,915,000 (or its foreign currency
equivalent based on the exchange rate at the time of sale) in amounts, at
prices and on terms to be determined at the time of offering. The Debt
Securities, Preferred Shares, Common Shares and Warrants (collectively, the
"Securities") may be offered, separately or together, in separate series in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Debt Securities, the
specific title, ranking, aggregate principal amount, currency, form (which may
be registered or bearer, or certificated or global), authorized denominations,
maturity, rate (or manner of calculation thereof) and time of payment of
interest, terms for redemption at the option of CRIIMI MAE or repayment at the
option of the holder, terms for sinking fund payments, terms for conversion
into Preferred Shares or Common Shares, covenants and any initial public
offering price; (ii) in the case of Preferred Shares, the specific title and
stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price; (iii) in the case of
Common Shares, any public offering price; and (iv) in the case of Warrants,
the number and terms thereof, the designation and number or amount of
Preferred Shares or Common Shares issuable upon their exercise, the exercise
price, the terms of the offering and sale thereof and, where applicable, the
duration and detachability thereof. In addition, such specific terms may
include limitations on direct or beneficial ownership and restrictions on
transfer of the Securities, in each case as may be appropriate to preserve the
status of CRIIMI MAE as a real estate investment trust ("REIT") for federal
income tax purposes. See "Certain United States Federal Income Tax
Considerations."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities
covered by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by CRIIMI MAE, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable
from the information set forth, in the applicable Prospectus Supplement. See
"Plan of Distribution." No Securities may be sold without delivery of the
applicable Prospectus Supplement describing the method and terms of the
offering of such Securities.
CRIIMI MAE's Common Shares, and shares of its Series B Cumulative
Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred
Shares"), are traded on the New York Stock Exchange (the "NYSE") under the
symbol "CMM" and "CMM-PrB," respectively.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
----------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 28, 1997.
<PAGE>
AVAILABLE INFORMATION
CRIIMI MAE and certain of its subsidiaries are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC" or
"Commission"). Reports, proxy statements and other information filed by CRIIMI
MAE can be inspected and copied at the SEC's Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549 and the SEC's Regional Offices at 7 World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and copies of such material can
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
material and other information concerning CRIIMI MAE may be inspected at the
NYSE, 20 Broad Street, New York, New York 10005 or reviewed through the
Commission's Electronic Data Gathering Analysis and Retrieval System, which is
publicly available through the Commission's Web site (http://www.sec.gov).
This Prospectus constitutes part of a Registration Statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement")
filed by CRIIMI MAE with the SEC under the Securities Act of 1933, as amended
(the "Securities Act"). This Prospectus does not contain all of the
information included in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Reference is
made to the Registration Statement for further information with respect to
CRIIMI MAE and the Securities. Statements contained in this Prospectus and any
accompanying Prospectus Supplement concerning the provisions or contents of
any contract, agreement or any other document referred to herein are not
necessarily complete. With respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made
to such exhibit for a more complete description of the matters involved, and
each such statement shall be deemed qualified in its entirety by such
reference to the copy of the applicable document filed with the Commission.
The Registration Statement including the exhibits and schedules thereto, may
be inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. and copies of it or any part thereof may be
obtained from such office, upon payment of the fees prescribed by the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by CRIIMI MAE with the SEC (File
No. 1-10360) are incorporated herein by reference (collectively, the
"Incorporated Information"):
1. Annual Report on Form 10-K for the year ended December 31, 1996.
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
3. Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
4. Definitive Proxy Statements dated March 26, 1997, April 28, 1995 and
April 6, 1993.
5. Form 8-K, as filed with the SEC on October 3, 1997.
6. Form 8-K, as filed with the SEC on September 23, 1997.
7. Form 8-K, as filed with the SEC on June 30, 1995.
8. Form 8-A, as filed with the SEC on October 16, 1989.
9. Form 8-B, as filed with the SEC on October 27, 1993.
The Prospectus should be read in conjunction with the Incorporated
Information and any applicable Prospectus Supplement, which are incorporated
by reference into the Prospectus. All documents filed by CRIIMI
2
<PAGE>
MAE pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after
the date of this Prospectus and prior to the termination of the offering of
the Securities offered hereby shall be deemed to be incorporated by reference
in this Prospectus from the date of filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
CRIIMI MAE will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus has been delivered, on the
written or oral request of any such person, a copy of any or all of the
documents referred to above which have been or may be incorporated in this
Prospectus by reference, other than exhibits to such documents, unless such
exhibits are specifically incorporated by reference. Requests for such copies
should be directed to CRIIMI MAE's principal executive offices: CRIIMI MAE
Inc., Investor Services, 11200 Rockville Pike, Rockville, Maryland 20852, or
telephone (301) 816-2300 or toll-free (800) 266-0535.
3
<PAGE>
CRIIMI MAE
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. 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, enable CRIIMI MAE to take advantage of the rapid growth in the
securitization of debt backed by income-producing commercial real estate.
CRIIMI MAE is one of the largest publicly traded REITs focused primarily on
the acquisition of Subordinated CMBS. In addition, CRIIMI MAE provides certain
servicing functions, including acting as the special servicer for the
commercial mortgage loans underlying its Subordinated CMBS portfolio, with
respect to commercial mortgage assets.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for any
offering of Securities, CRIIMI MAE intends to use the majority of the net
proceeds from the sale of Securities (i) to acquire additional mortgage
assets, primarily Subordinated CMBSs, (ii) to sponsor and/or participate in
collateralized mortgage obligation programs, and (iii) for other general
corporate purposes, including working capital. Pending their use for the
foregoing purposes, the net proceeds may be invested in short term, interest-
bearing accounts and/or used to pay down debt on a temporary basis.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The following table sets forth CRIIMI MAE's consolidated ratios of (i)
earnings to fixed charges and (ii) earnings to combined fixed charges and
preferred stock dividends for the periods shown:
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ ---------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges...... 1.69 1.48 1.66 1.35 1.50 1.57 1.74
Ratio of earnings to combined fixed
charges and preferred stock
dividends*............................. 1.69 1.48 1.66 1.35 1.47 1.57 1.67
</TABLE>
- --------
* Prior to the offering of Series A Cumulative Convertible Preferred Stock on
July 1, 1996, CRIIMI MAE did not have any issued or outstanding Preferred
Shares.
For purposes of computing these ratios, earnings consist of CRIIMI MAE's
consolidated net income, plus fixed charges, extraordinary items, loss from
investment in limited partnerships and dividends on Preferred Shares. Fixed
charges and Preferred Share dividends consist of gross interest cost,
including amortization of debt cost, discount or premium and adjustment to
hedges for valuation and sales, and dividends on Preferred Shares.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities are to be issued under one or more trust indentures
(each, an "Indenture") between CRIIMI MAE and one or more trustees (each, a
"Trustee"). The form of the Subordinated Indenture (as defined
4
<PAGE>
below) and the form of the Senior Indenture (as defined below) have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The Indentures are subject to and governed by the Trust Indenture Act of 1939,
as amended (the "TIA"). The statements made under this heading relating to the
Debt Securities and the Indentures, as modified or superseded by any
applicable Prospectus Supplement, are summaries of the provisions thereof and
do not purport to be complete and are qualified in their entirety by reference
to the Indentures and such Debt Securities. If Debt Securities are to be
issued, a description of their terms (as well as the form of Debt Securities)
will be filed by CRIIMI MAE as an exhibit to a current report on Form 8-K and
incorporated herein by reference.
When issued, the Debt Securities will be direct obligations of CRIIMI MAE
and may be either senior Debt Securities ("Senior Debt Securities") or
subordinated Debt Securities ("Subordinated Debt Securities"). The
indebtedness represented by Subordinated Debt Securities, as set forth below
under "--Subordination," will be subordinate in right of payment to Senior
Debt Securities and other senior indebtedness of CRIIMI MAE. In addition to
the terms of the Indenture and any specific, express terms of the Debt
Securities described below, the issuance of the Debt Securities will be
limited by, and subject to certain terms of, CRIIMI MAE's existing financing
facilities. Senior Debt Securities and Subordinated Debt Securities will be
issued pursuant to separate indentures (respectively, a "Senior Indenture" and
a "Subordinated Indenture"), in each case between the Company and a Trustee.
TERMS
The applicable Indenture may provide that the Debt Securities may be issued
without limit as to aggregate principal amount, in one or more series, in each
case as established from time to time in or pursuant to authority granted by a
resolution of the Board of Directors of CRIIMI MAE (the "Board") or as
established in one or more indentures supplemental to such Indenture. All Debt
Securities of one series need not be issued at the same time and, unless
otherwise provided, a series may be reopened, without the consent of the
holders of the Debt Securities of such series, for issuances of additional
Debt Securities of such series.
The applicable Indenture may also provide that there may be more than one
Trustee thereunder, each with respect to one or more series of Debt
Securities. Any Trustee under the applicable Indenture may resign or be
removed with respect to one or more series of Debt Securities, and a successor
Trustee may be appointed to act with respect to such series. In the event that
two or more persons are acting as Trustee with respect to different series of
Debt Securities, each such Trustee shall be a Trustee of a trust under the
applicable Indenture separate and apart from the trust administered by any
other Trustee, and, except as otherwise indicated therein, any action
described therein to be taken by the Trustee may be taken by each such Trustee
with respect to, and only with respect to, the one or more series of Debt
Securities for which it is Trustee under the applicable Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
(1) the title of such Debt Securities and whether such Debt Securities
are Senior Debt Securities or Subordinated Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) the percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the portion
of the principal amount thereof payable upon declaration of acceleration of
the maturity thereof, or (if applicable) the portion of the principal
amount of such Debt Securities that is convertible into Common Shares
and/or Preferred Shares, or the method by which any such portion shall be
determined;
(4) if convertible, in connection with the preservation of CRIIMI MAE's
status as a REIT, any applicable limitations on the ownership or
transferability of the Common Shares and/or Preferred Shares into which
such Debt Securities are convertible;
5
<PAGE>
(5) the date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(6) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities
will bear interest, if any;
(7) the date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the interest payment dates on
which any such interest will be payable, the regular record dates for such
interest payment dates, or the method by which such dates shall be
determined, the persons to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a 360-
day year of twelve 30-day months;
(8) the place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and where notices or demands to or upon CRIIMI MAE in respect of
such Debt Securities and the applicable Indenture may be served;
(9) the period or periods within which, the price or prices at which and
the other terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the option of CRIIMI MAE, if CRIIMI MAE
is to have such an option;
(10) the obligation, if any, of CRIIMI MAE to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous provision or
at the option of a holder thereof, and the period or periods within which,
the price or prices at which and the other terms and conditions upon which
such Debt Securities will be redeemed, repaid or purchased, as a whole or
in part, pursuant to such obligation;
(11) if other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(12) whether the amount of payments of principal of (and premium, if any)
or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
(13) whether such Debt Securities will be issued in the form of one or
more global securities and whether such global securities are to be
issuable in a temporary global form or permanent global form;
(14) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the events of default or covenants set
forth in the applicable Indenture;
(15) any provision for collateral security for repayment of such Debt
Securities;
(16) whether such Debt Securities will be issued in certificated or book-
entry form;
(17) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(18) the applicability, if any, of the defeasance and covenant defeasance
provisions of the applicable Indenture;
(19) the terms, if any, upon which such Debt Securities may be
convertible into Common Shares and/or Preferred Shares and the terms and
conditions upon which such conversion will be effected, including, without
limitation, the initial conversion price or rate and the conversion period;
(20) whether and under what circumstances CRIIMI MAE will pay additional
amounts on such Debt Securities in respect of any tax, assessment or
governmental charge and, if so, whether CRIIMI MAE will have the option to
redeem such Debt Securities in lieu of making such payment; and
(21) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
6
<PAGE>
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities") or that the principal amount thereof
payable at their stated maturity may be more or less than the principal amount
thereof at original issuance ("Indexed Securities"). Special U.S. federal
income tax, accounting and other considerations applicable to Original Issue
Discount Securities or Indexed Securities will be described in the applicable
Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Debt Securities
will not contain any provisions that would limit the ability of CRIIMI MAE to
incur indebtedness or that would afford holders of Debt Securities protection
in the event of a highly leveraged or similar transaction involving CRIIMI MAE
or in the event of a change of control. Restrictions on ownership and
transfers of CRIIMI MAE's Common Shares and Preferred Shares are designed to
preserve its status as a REIT and, therefore, may act to prevent or hinder a
change of control. See "Description of Capital Stock." Reference is made to
the applicable Prospectus Supplement for information with respect to any
deletions from, modifications of, or additions to, the events of default or
covenants of CRIIMI MAE that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of
Debt Securities will be payable at the corporate trust office of the Trustee;
provided that, at the option of CRIIMI MAE, payment of interest may be made by
check mailed to the address of the person entitled thereto as it appears in
the register to be maintained by the Trustee or by wire transfer of funds to
such person at an account maintained within the United States.
Any interest not punctually paid or duly provided for on any interest
payment date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder thereof on the applicable record
date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
applicable Trustee, notice whereof shall be given to each holder of such Debt
Security not less than 10 days prior to such Special Record Date, or may be
paid at any time in any other lawful manner, all as more completely described
in the applicable Indenture.
Subject to certain limitations imposed upon Debt Securities issued in book-
entry form, the Debt Securities of any series will be exchangeable for other
Debt Securities of the same series and of a like aggregate principal amount
and tenor of different authorized denominations upon surrender of such Debt
Securities at the corporate trust office of the applicable Trustee. In
addition, subject to certain limitations imposed upon Debt Securities issued
in book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the corporate trust office
of the applicable Trustee. Every Debt Security tendered for conversion,
registration of transfer or exchange shall be duly endorsed or accompanied by
a written instrument of transfer. No service charge will be made for any
registration of transfer or exchange of any Debt Securities, but CRIIMI MAE
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. If the applicable Prospectus
Supplement refers to any transfer agent (in addition to the applicable
Trustee) initially designated by CRIIMI MAE with respect to any series of Debt
Securities, CRIIMI MAE may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts, except that CRIIMI MAE will be required to maintain a
transfer agent in each place of payment for such series of Debt Securities.
CRIIMI MAE may at any time designate additional transfer agents with respect
to any series of Debt Securities.
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To protect CRIIMI MAE's status as a REIT, CRIIMI MAE may refuse to effect a
transfer of Debt Securities if, as a result of such transfer, any person would
beneficially own, either directly or indirectly, more than 9.8% of CRIIMI
MAE's outstanding capital stock. Neither CRIIMI MAE nor any Trustee shall be
required to (i) issue, register the transfer of or exchange Debt Securities of
any series during a period beginning at the opening of business 15 days before
any selection of Debt Securities of that series to be redeemed and ending at
the close of business on the day of mailing of the relevant notice of
redemption; (ii) register the transfer of or exchange any Debt Security, or
portion thereof, called for redemption, except the unredeemed portion of any
Debt Security being redeemed in part; or (iii) for Debt Securities repayable
at the option of the holder, issue, register the transfer of or exchange any
Debt Security that has been surrendered for repayment at the option of the
holder, except the portion, if any, of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE
Each Indenture will provide that CRIIMI MAE may consolidate with, or sell,
lease or convey all or substantially all of its assets to, or merge with or
into, any other corporation or trust or other entity provided that (a) either
CRIIMI MAE shall be the continuing corporation, or the successor corporation
(if other than CRIIMI MAE) formed by or resulting from any such consolidation
or merger or which shall have received the transfer of such assets and shall
be an entity organized and existing under the laws of the United States or a
state thereof and the successor entity shall expressly assume payment of the
principal of (and premium, if any) and interest on all of the Debt Securities
and the due and punctual performance and observance of all of the covenants
and conditions contained in the applicable Indenture; (b) immediately after
giving effect to such transaction and treating any indebtedness that becomes
an obligation of CRIIMI MAE or any subsidiary as a result thereof as having
been incurred by CRIIMI MAE or such subsidiary at the time of such
transaction, no event of default under the applicable Indenture, and no event
which, after notice or the lapse of time, or both, would become such an event
of default, shall have occurred and be continuing; and (c) an officers'
certificate and legal opinion covering such conditions shall be delivered to
each Trustee.
CERTAIN COVENANTS
Existence. Except as permitted under "--Merger, Consolidation or Sale,"
CRIIMI MAE will do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights (charter and
statutory) and franchises; provided, however, that CRIIMI MAE shall not be
required to preserve any right or franchise if it determines that the
preservation thereof is no longer desirable in the conduct of its business and
that the loss thereof is not disadvantageous in any material respect to the
holders of the Debt Securities.
Maintenance of Properties. CRIIMI MAE will cause all of its material
properties used or useful in the conduct of its business or the business of
any subsidiary to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of CRIIMI MAE may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided, however, that CRIIMI MAE and its
subsidiaries shall not be prevented from discontinuing the operation and
maintenance of any such properties if such discontinuance is in the judgment
of CRIIMI MAE desirable in the conduct of its business and not disadvantageous
in any material respect to the holders of the Debt Securities.
Payment of Taxes and Other Claims. CRIIMI MAE will pay or discharge or cause
to be paid or discharged, before the same shall become delinquent, (i) all
taxes, assessments and governmental charges levied or imposed upon it or any
subsidiary or upon the income, profits or property of CRIIMI MAE or any
subsidiary, and (ii) all lawful claims for labor, materials and supplies
which, if unpaid, might by law become a lien upon the property of CRIIMI MAE
or any subsidiary; provided, however, that CRIIMI MAE shall not be required to
pay or discharge or cause to be paid or discharged any such tax, assessment,
charge or claim whose amount, applicability or validity is being contested in
good faith by appropriate proceedings.
Additional Covenants. Any additional covenants of CRIIMI MAE with respect to
any series of Debt Securities will be set forth in the Prospectus Supplement
relating thereto.
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EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture will describe specific "Events of Default" with respect to
any series of Debt Securities issued thereunder. Such "Events of Default" are
likely to include (with grace and cure periods): (a) default for 30 days in
the payment of any installment of interest on any Debt Security of such
series; (b) default in the payment of the principal of (or premium, if any,
on) any Debt Security of such series when due and payable, at maturity, upon
redemption or otherwise which continues for five business days; (c) default in
making any sinking fund payment as required for any Debt Security of such
series which continues for five business days; (d) default in the performance
or breach of any other covenant or warranty of CRIIMI MAE contained in the
applicable Indenture (other than a covenant added to such Indenture solely for
the benefit of a series of Debt Securities issued thereunder other than such
series), continued for 60 days after written notice as provided in the
applicable Indenture; (e) a default not being contested in good faith by
CRIIMI MAE under any bond, debenture, note or other evidence of indebtedness
for money borrowed by CRIIMI MAE (including obligations under leases required
to be capitalized on the balance sheet of the lessee under generally accepted
accounting principles but not including any indebtedness or obligations for
which recourse is limited to property purchased) in an aggregate principal
amount in excess of $10,000,000 or under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by CRIIMI MAE (including such leases but
not including such indebtedness or obligations for which recourse is limited
to property purchased) in an aggregate principal amount in excess of
$10,000,000 by CRIIMI MAE, whether such indebtedness now exists or shall
hereafter be created which default shall have resulted in such indebtedness
becoming or being declared due and payable prior to the date on which it would
otherwise have become due and payable or such obligations being accelerated,
without such acceleration having been rescinded or annulled; (f) certain
events of bankruptcy, insolvency or reorganization, or court appointment of a
receiver, liquidator or trustee of CRIIMI MAE or any Significant Subsidiary or
either of its properties; and (g) any other Event of Default provided with
respect to a particular series of Debt Securities. The term "Significant
Subsidiary" means each significant subsidiary (as defined in Regulation S-X
promulgated under the Securities Act) of CRIIMI MAE.
If an Event of Default under an Indenture with respect to Debt Securities of
any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or Indexed Securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to
CRIIMI MAE (and to the applicable Trustee if given by the holders). However,
at any time after such a declaration of acceleration with respect to Debt
Securities of such series (or of all Debt Securities then outstanding under
the applicable Indenture, as the case may be) has been made, but before a
judgment or decree for payment of the money due has been obtained by the
applicable Trustee, the holders of not less than a majority in principal
amount of outstanding Debt Securities of such series (or of all Debt
Securities then outstanding under the applicable Indenture, as the case may
be) may rescind and annul such declaration and its consequences if (a) CRIIMI
MAE shall have paid or deposited with the applicable Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series (or of all Debt Securities then outstanding under
the applicable Indenture, as the case may be), plus certain fees, expenses,
disbursements and advances of the applicable Trustee and (b) all Events of
Default, other than the non-payment of accelerated principal (or specified
portion thereof), with respect to Debt Securities of such series (or of all
Debt Securities then outstanding under the applicable Indenture, as the case
may be) have been cured or waived as provided in the applicable Indenture.
Each Indenture will also provide that the holders of not less than a majority
in principal amount of the outstanding Debt Securities of any series (or of
all Debt Securities then outstanding under the applicable Indenture, as the
case may be) may waive any past default with respect to such series and its
consequences, except a default (x) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (y) in
respect of a covenant or provision contained in the applicable Indenture that
cannot be modified or amended without the consent of the holder of each
outstanding Debt Security affected thereby.
The applicable Trustee will be required to give notice to the holders of
Debt Securities within 90 days of a default under the applicable Indenture
unless such default shall have been cured or waived; provided, however,
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that such Trustee may withhold notice to the holders of any series of Debt
Securities of any default with respect to such series (except a default in the
payment of the principal of (or premium, if any) or interest on any Debt
Security of such series or in the payment of any sinking fund installment in
respect of any Debt Security of such series) if designated officers of such
Trustee consider such withholding to be in the interest of such holders.
The right of any holder to institute a proceeding with respect to an
Indenture will be subject to certain conditions precedent including notice and
indemnity to the applicable Trustee, but the holder has an absolute right to
receipt of principal of (and premium, if any) and interest on such holder's
Debt Security on or after the respective due dates expressed in the Debt
Security, and to institute suit for the enforcement of any such payments.
Subject to provisions in the Indenture relating to its duties in case of
default, no Trustee will be under an obligation to exercise any of its rights
or powers under such Indenture at the request or direction of any holders of
any series of Debt Securities then outstanding under such Indenture, unless
such holders shall have offered to the applicable Trustee thereunder
reasonable security or indemnity. The holders of not less than a majority in
aggregate principal amount of the outstanding Debt Securities of any series
(or of all Debt Securities then outstanding under the applicable Indenture, as
the case may be) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee,
or of exercising any trust or power conferred upon such Trustee. However, each
Trustee may refuse to follow any direction which is in conflict with any law
or the applicable Indenture, which may involve such Trustee in personal
liability or which may be unduly prejudicial to the holders of Debt Securities
of such series not joining therein.
Within 120 days after the close of each fiscal year, CRIIMI MAE will be
required to deliver to each Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the applicable Indenture and, if so, specifying each such
default and the nature and status thereof.
MODIFICATION OF THE INDENTURE
Modifications and amendments of an Indenture may be made only with the
consent of the holders of not less than a majority in aggregate principal
amount of all outstanding Debt Securities issued under the Indenture which are
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the holder of each such
Debt Security affected thereby, (a) change the stated maturity of the
principal of, or any installment of interest (or premium, if any) on, any such
Debt Security; (b) reduce the principal amount of, or the rate or amount of
interest on, or any premium payable on redemption of, any such Debt Security,
or reduce the amount of principal of an Original Issue Discount Security that
would be due and payable upon declaration of acceleration of the maturity
thereof or would be provable in bankruptcy, or adversely affect any right of
repayment of the holder of any such Debt Security; (c) change the place of
payment, or the coin or currency, for payment of principal of, premium, if
any, or interest on any such Debt Security; (d) impair the right to institute
suit for the enforcement of any payment on or with respect to any such Debt
Security; (e) reduce the above-stated percentage of outstanding Debt
Securities of any series necessary to modify or amend the Indenture, to waive
compliance with certain provisions thereof or certain defaults and
consequences thereunder or to reduce the quorum or voting requirements set
forth in the Indenture; or (f) modify any of the foregoing provisions or any
of the provisions relating to the waiver of certain past defaults or certain
covenants, except to increase the required percentage to effect such action or
to provide that certain other provisions may not be modified or waived without
the consent of the holder of such Debt Security.
The holders of not less than a majority in principal amount of outstanding
Debt Securities issued under an Indenture have the right to waive compliance
by CRIIMI MAE with certain covenants in such Indenture.
Modifications and amendments of an Indenture may be made by CRIIMI MAE and
the respective Trustee thereunder without the consent of any holder of Debt
Securities for any of the following purposes: (i) to evidence the succession
of another person to CRIIMI MAE as obligor under such Indenture; (ii) to add
to the covenants of CRIIMI MAE for the benefit of the holders of all or any
series of Debt Securities or to surrender any right or power conferred upon
CRIIMI MAE in such Indenture; (iii) to add Events of Default for the benefit
of the
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holders of all or any series of Debt Securities; (iv) to add or change any
provisions of the Indenture to facilitate the issuance of, or to liberalize
certain terms of, Debt Securities in bearer form, or to permit or facilitate
the issuance of Debt Securities in uncertificated form, provided that such
action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect; (v) to change or eliminate
any provisions of the Indenture, provided that any such change or elimination
shall become effective only when there are no Debt Securities outstanding of
any series created prior thereto which are entitled to the benefit of such
provision; (vi) to secure the Debt Securities; (vii) to establish the form or
terms of Debt Securities of any series, including the provisions and
procedures, if applicable, for the conversion of such Debt Securities into
Common Shares and/or Preferred Shares; (viii) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the
trusts under the Indenture by more than one Trustee; (ix) to cure any
ambiguity, defect or inconsistency in the Indenture, provided that such action
shall not adversely affect the interests of holders of Debt Securities of any
series issued under such Indenture in any material respect; or (x) to
supplement any of the provisions of the Indenture to the extent necessary to
permit or facilitate defeasance and discharge of any series of such Debt
Securities, provided that such action shall not adversely affect the interests
of the holders of the Debt Securities of any series in any material respect.
Each Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have
given any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security
that shall be deemed to be outstanding shall be the amount of the principal
thereof that would be due and payable as of the date of such determination
upon declaration of acceleration of the maturity thereof, (ii) the principal
amount of a Debt Security denominated in a foreign currency that shall be
deemed outstanding shall be the U.S. dollar equivalent, determined on the
issue date for such Debt Security, of the principal amount (or, in the case of
an Original Issue Discount Security, the U.S. dollar equivalent on the issue
date of such Debt Security of the amount determined as provided in (i) above),
(iii) the principal amount of an Indexed Security that shall be deemed
outstanding shall be the principal face amount of such Indexed Security at
original issuance, unless otherwise provided with respect to such Indexed
Security pursuant to the Indenture, and (iv) Debt Securities owned by CRIIMI
MAE or any other obligor upon the Debt Securities or any affiliate of CRIIMI
MAE or of such other obligor shall be disregarded.
Each Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting may be called at any time by the
applicable Trustee, and also, upon request, by CRIIMI MAE or the holders of at
least 25% in principal amount of the outstanding Debt Securities of such
series, in any such case upon notice given as provided in the applicable
Indenture. Except for any consent that must be given by the holder of each
Debt Security affected by certain modifications and amendments of the
Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present may be adopted by the affirmative vote
of the holders of a majority in principal amount of the outstanding Debt
Securities of that series; provided, however, that, except as referred to
above, any resolution with respect to any request, demand, authorization,
direction, notice, consent, waiver or other action that may be made, given or
taken by the holders of a specified percentage, which is less than a majority,
in principal amount of the outstanding Debt Securities of a series may be
adopted at a meeting or adjourned meeting duly reconvened at which a quorum is
present by the affirmative vote of the holders of such specified percentage in
principal amount of the outstanding Debt Securities of that series. Any
resolution passed or decision taken at any meeting of holders of Debt
Securities of any series duly held in accordance with the applicable Indenture
will be binding on all holders of Debt Securities of that series. The quorum
at any meeting called to adopt a resolution, and at any reconvened meeting,
will be persons holding or representing a majority in principal amount of the
outstanding Debt Securities of a series; provided, however, that if any action
is to be taken at such meeting with respect to a consent or waiver which may
be given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of holders of Debt Securities of any series with respect to any
request, demand, authorization, direction, notice, consent, waiver or
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other action that the applicable Indenture expressly provides may be made,
given or taken by the holders of a specified percentage in principal amount of
all outstanding Debt Securities affected thereby, or of the holders of such
series and one or more additional series: (i) there shall be no minimum quorum
requirement for such meeting and (ii) the principal amount of the outstanding
Debt Securities of such series that vote in favor of such request, demand,
authorization, direction, notice, consent, waiver or other action shall be
taken into account in determining whether such request, demand, authorization,
direction, notice, consent, waiver or other action has been made, given or
taken under the Indenture.
SUBORDINATION
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
any Subordinated Debt Securities will be subordinated to the extent provided
in the applicable Indenture in right of payment to the prior payment in full
of all Senior Debt Securities and other senior indebtedness. No payment of
principal or interest will be permitted to be made on Subordinated Debt
Securities at any time if a default in Senior Debt Securities exists that
permits the holders of such Senior Debt Securities to accelerate their
maturity and the default is the subject of judicial proceedings or the Company
receives notice of the default. After all Senior Debt Securities are paid in
full and until the Subordinated Debt Securities are paid in full, holders of
Subordinated Debt Securities will be subrogated to the right of holders of
Senior Debt Securities to the extent that distributions otherwise payable to
holders of Subordinated Debt Securities have been applied to the payment of
Senior Debt Securities. By reason of such subordination, in the event of a
distribution of assets upon insolvency, certain general creditors of the
Company may recover more, ratably, than holders of Subordinated Debt
Securities. If this Prospectus is being delivered in connection with a series
of Subordinated Debt Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will contain the approximate
amount of Senior Debt Securities outstanding as of the end of the Company's
most recent fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Under the Indentures, CRIIMI MAE may be permitted to discharge certain
obligations to holders of any series of Debt Securities issued thereunder that
have not already been delivered to the applicable Trustee for cancellation and
that either have become due and payable or will become due and payable within
one year (or scheduled for redemption within one year) by irrevocably
depositing with the applicable Trustee, in trust, funds in such currency or
currencies, currency unit or units or composite currency or currencies in
which such Debt Securities are payable in an amount sufficient to pay the
entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or
redemption date, as the case may be.
Each Indenture will provide that, under certain circumstances, CRIIMI MAE
may elect either (a) to defease and be discharged from any and all obligations
with respect to such Debt Securities (except for the obligation to pay
additional amounts, if any, upon the occurrence of certain events of tax,
assessment or governmental charge with respect to payments on such Debt
Securities and the obligations to register the transfer or exchange of such
Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold moneys for payment in trust) ("defeasance") or (b) to
be released from its obligations with respect to such Debt Securities under
the applicable Indenture or, under certain circumstances, its obligations with
respect to any other covenant, and any omission to comply with such
obligations shall not constitute a default or an Event of Default with respect
to such Debt Securities ("covenant defeasance"), in either case upon the
irrevocable deposit by CRIIMI MAE with the applicable Trustee, in trust, of an
amount, in such currency or currencies, currency unit or units or composite
currency or currencies in which such Debt Securities are payable at stated
maturity, or Government Obligations (as defined below), or both, applicable to
such Debt Securities which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium, if any) and interest on such
Debt Securities, and any mandatory sinking fund or analogous payments thereon,
on the scheduled due dates therefor.
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Such a trust may be established only if, among other things, CRIIMI MAE has
delivered to the applicable Trustee an opinion of counsel (as specified in
each Indenture) to the effect that the holders of such Debt Securities will
not recognize income, gain or loss for U.S. federal income tax purposes as a
result of such defeasance or covenant defeasance and will be subject to U.S.
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance or covenant defeasance
had not occurred, and such opinion of counsel, in the case of defeasance, must
refer to and be based upon a ruling of the Internal Revenue Service or a
change in applicable U.S. federal income tax law occurring after the date of
the Indenture.
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations
of a person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which
issued the foreign currency in which the Debt Securities of such series are
payable, the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America or such other
government, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such
Government Obligation or a specific payment of interest on or principal of any
such Government Obligation held by such custodian for the account of the
holder of a depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
CRIIMI MAE has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any
series, (a) the holder of a Debt Security of such series is entitled to, and
does, elect pursuant to the Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security shall be deemed to have been,
and will be, fully discharged and satisfied through the payment of the
principal of (and premium, if any) and interest on such Debt Security as they
become due out of the proceeds yielded by converting the amount so deposited
in respect of such Debt Security into the currency, currency unit or composite
currency in which such Debt Security becomes payable as a result of such
election or such cessation of usage based on the applicable market exchange
rate. "Conversion Event" means the cessation of use of (i) a currency,
currency unit or composite currency both by the government of the country
which issued such currency and for the settlement of transactions by a central
bank or other public institutions of or within the international banking
community, (ii) the European Currency Unit ("ECU") both within the European
Monetary System established by the Resolution of December 5, 1978 of the
council of the European Economic Community, European Coal and Steel Community
and the European Atomic Energy Community (collectively, the "European
Communities") and for the settlement of transactions by public institutions of
or within the European Communities or (iii) any currency unit or composite
currency other than the ECU for the purposes for which it was established.
Unless otherwise provided in the applicable Prospectus Supplement, all
payments of principal of (and premium, if any) and interest on any Debt
Security that is payable in a foreign currency that ceases to be used by its
government of issuance shall be made in U.S. dollars.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications of the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Shares or Preferred Shares will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will
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include whether such Debt Securities are convertible into Common Shares and/or
Preferred Shares, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option
of the holders or CRIIMI MAE, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Debt Securities.
To protect CRIIMI MAE's status as a REIT, CRIIMI MAE may refuse to effect a
conversion of the Debt Securities if, as a result of such conversion, any
person would beneficially own, either directly or indirectly, more than 9.8%
of CRIIMI MAE's outstanding capital stock. See "Description of Capital Stock--
Common Shares--Restrictions on Ownership and Transfer."
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of CRIIMI MAE comprises 60 million Common
Shares and 25 million Preferred Shares.
PREFERRED SHARES
General. The following description of the Preferred Shares sets forth
certain general terms and provisions of the Preferred Shares to which any
Prospectus Supplement may relate. The statements below describing the
Preferred Shares are in all respects subject to and qualified in their
entirety by reference to the applicable provisions of CRIIMI MAE's Articles of
Incorporation, as amended (the "Articles of Incorporation") and Bylaws and
applicable articles supplementary relating to any offering of Preferred Shares
("Articles Supplementary"). If Preferred Shares are to be issued, a
description of the terms of such Preferred Shares (as well as the form of
Preferred Share certificate) will be filed by CRIIMI MAE as an exhibit to a
current report on Form 8-K and incorporated by reference.
Terms. Subject to the limitations prescribed by the Articles of
Incorporation, the Board is authorized to fix the number of shares
constituting each series of Preferred Shares and the designations and powers,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including such provisions
as may be desired concerning voting, redemption, dividends, dissolution or the
distribution of assets, conversion or exchange, and such other subjects or
matters as may be fixed by resolution of the Board. The Preferred Shares will,
when issued, be fully paid and nonassessable by CRIIMI MAE and will have no
preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Shares offered thereby for specific terms, including:
(1) The title and stated value of such Preferred Shares;
(2) The number of such Preferred Shares offered, the liquidation
preference per share and the offering price of such Preferred Shares;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Shares;
(4) The date from which dividends on such Preferred Shares shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Shares;
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(6) The provision for a sinking fund, if any, for such Preferred Shares;
(7) The provision for redemption, if applicable, of such Preferred
Shares;
(8) Any listing of such Preferred Shares on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Shares will be convertible into Common Shares, including the conversion
price (or manner of calculation thereof);
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Shares;
(11) A discussion of federal income tax considerations applicable to such
Preferred Shares;
(12) The relative ranking and preferences of such Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of CRIIMI MAE;
(13) Any limitations on issuance of any series of Preferred Shares
ranking senior to or on a parity with such series of Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of CRIIMI MAE; and
(14) Any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the status of
CRIIMI MAE as a REIT.
Rank. Unless otherwise specified in the Prospectus Supplement, the Preferred
Shares will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of CRIIMI MAE, rank (i) senior to all classes or
series of Common Shares and to all equity securities ranking junior to such
Preferred Shares with respect to dividend rights or rights upon liquidation,
dissolution or winding up of CRIIMI MAE; (ii) on a parity with all equity
securities issued by CRIIMI MAE the terms of which specifically provide that
such equity securities rank on a parity with the Preferred Shares with respect
to dividend rights or rights upon liquidation, dissolution or winding up of
CRIIMI MAE; and (iii) junior to all equity securities issued by CRIIMI MAE the
terms of which specifically provide that such equity securities rank senior to
the Preferred Shares with respect to dividend rights or rights upon
liquidation, dissolution or winding up of CRIIMI MAE. The term "equity
securities" does not include convertible debt securities.
Dividends. Holders of the Preferred Shares of each series will be entitled
to receive, when, as and if declared by the Board, out of assets of CRIIMI MAE
legally available for payment, cash dividends at such rates and on such dates
as will be set forth in the applicable Prospectus Supplement. Each such
dividend shall be payable to holders of record as they appear on the share
transfer books of CRIIMI MAE on such record dates as shall be fixed by the
Board.
Dividends on any series of the Preferred Shares may be cumulative or non-
cumulative, as provided in the applicable Prospectus Supplement. Dividends, if
cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board fails to declare a dividend
payable on a dividend payment date on any series of the Preferred Shares for
which dividends are noncumulative, then the holders of such series of the
Preferred Shares will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and CRIIMI MAE will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
If Preferred Shares of any series are outstanding, full dividends will not
be declared or paid or set apart for payment on the Preferred Shares of any
other series ranking, as to dividends, on a parity with the Preferred Shares
of such series, and no dividends will be declared or paid or set apart for
payment on the Preferred Shares of any other series ranking, as to dividends,
junior to the Preferred Shares of such series for any period unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends have been or contemporaneously are declared and paid or declared and
a sum sufficient for the payment thereof set apart for such payment on the
Preferred Shares of such series for all past dividend periods and the then
current dividend period or (ii) if such series of Preferred Shares does not
have a cumulative dividend, full dividends for the then current dividend
period have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for such payment on the
Preferred Shares of such series. When dividends are
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not paid in full (or a sum sufficient for such full payment is not so set
apart) upon Preferred Shares of any series and the shares of any other series
of Preferred Shares ranking on a parity as to dividends with the Preferred
Shares of such series, all dividends declared upon Preferred Shares of such
series and any other series of Preferred Shares ranking on a parity as to
dividends with such Preferred Shares shall be declared pro rata so that the
amount of dividends declared per Preferred Share of such series and such other
series of Preferred Shares shall in all cases bear to each other the same
ratio that accrued dividends per share on the Preferred Shares of such series
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods if such Preferred Shares do not have a cumulative
dividend) and such other series of Preferred Shares bear to each other.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends on the Preferred Shares of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past dividend periods and
the then current dividend period and (ii) if such series of Preferred Shares
does not have a cumulative dividend, full dividends on the Preferred Shares of
such series have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for the
then current dividend period, no dividends (other than in Common Shares or
other capital shares ranking junior to the Preferred Shares of such series as
to dividends and upon liquidation) shall be declared or paid or set aside for
payment or other distribution shall be declared or made upon the Common
Shares, or any other capital shares of CRIIMI MAE ranking junior to or on a
parity with the Preferred Shares of such series as to dividends or upon
liquidation, nor shall any Common Shares, or any other capital shares of
CRIIMI MAE ranking junior to or on a parity with the Preferred Shares of such
series as to dividends or upon liquidation be redeemed, purchased or otherwise
acquired for any consideration (or any moneys be paid to or made available for
a sinking fund for the redemption of any such shares) by CRIIMI MAE (except by
conversion into or exchange for other capital shares of CRIIMI MAE ranking
junior to the Preferred Shares of such series as to dividends and upon
liquidation).
Any dividend payment made on shares of a series of Preferred Shares shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
Redemption. If so provided in the applicable Prospectus Supplement, the
Preferred Shares will be subject to mandatory redemption or redemption at the
option of CRIIMI MAE, as a whole or in part, in each case upon the terms, at
the times and at the redemption prices set forth in such Prospectus
Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of such Preferred
Shares that shall be redeemed by CRIIMI MAE in each year commencing after a
date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon
(which shall not, if such Preferred Shares do not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in
cash or other property, as specified in the applicable Prospectus Supplement.
If the redemption price for Preferred Shares of any series is payable only
from the net proceeds of the issuance of capital shares of CRIIMI MAE, the
terms of such Preferred Shares may provide that, if no such capital shares
shall have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Shares shall automatically and mandatorily be converted into the
applicable capital shares of CRIIMI MAE pursuant to conversion provisions
specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Shares
has a cumulative dividend, full cumulative dividends on all shares of any
series of Preferred Shares shall have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart
for payment for all past dividend periods and the then current dividend period
and (ii) if such series of Preferred Shares does not have a cumulative
dividend, full dividends on the Preferred Shares of any series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the then
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current dividend period, no shares of any series of Preferred Shares shall be
redeemed (unless all outstanding Preferred Shares of such series are
simultaneously redeemed) or directly or indirectly purchased or acquired
(except by conversion into or exchange for capital shares of CRIIMI MAE
ranking junior to the Preferred Shares of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of Preferred Shares of such series to preserve the
REIT status of CRIIMI MAE or pursuant to a purchase or exchange offer made on
comparable terms to holders of all outstanding Preferred Shares of such
series.
If fewer than all of the outstanding Preferred Shares of any series are to
be redeemed, the number of shares to be redeemed will be determined by the
Board and such shares may be redeemed pro rata from the holders of record of
such shares in proportion to the number of such shares held by such holders
(with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Board.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Shares
of any series to be redeemed at the address shown on the share transfer books
of CRIIMI MAE. Each notice shall state: (i) the redemption date; (ii) the
number of shares and series of the Preferred Shares to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such
Preferred Shares are to be surrendered for payment of the redemption price;
(v) that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the date upon which the holder's conversion rights,
if any, as to such shares shall terminate. If fewer than all the Preferred
Shares of any series are to be redeemed, the notice mailed to each such holder
thereof shall also specify the number of Preferred Shares to be redeemed from
each such holder. If notice of redemption of any Preferred Shares has been
given and if the funds necessary for such redemption have been set aside by
CRIIMI MAE in trust for the benefit of the holders of any Preferred Shares so
called for redemption, then from and after the redemption date dividends will
cease to accrue on such Preferred Shares, such Preferred Shares shall no
longer be deemed outstanding and all rights of the holders of such shares will
terminate, except the right to receive the redemption price. Any moneys so
deposited which remain unclaimed by the holders of the Preferred Shares at the
end of two years after the redemption date will be returned by such bank or
trust company to CRIIMI MAE.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of CRIIMI MAE, then, before any
distribution or payment shall be made to the holders of any Common Shares or
any other class or series of capital shares of CRIIMI MAE ranking junior to
the Preferred Shares in the distribution of assets upon any liquidation,
dissolution or winding up of CRIIMI MAE, the holders of each series of
Preferred Shares shall be entitled to receive out of assets of CRIIMI MAE
legally available for distribution to stockholders, liquidating distributions
in the amount of the liquidation preference per share (set forth in the
applicable Prospectus Supplement), plus an amount equal to all dividends
accrued and unpaid thereon (which shall not include any accumulation in
respect of unpaid dividends for prior dividend periods if such Preferred
Shares do not have a cumulative dividend). After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of
Preferred Shares will have no right or claim to any of the remaining assets of
CRIIMI MAE. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of CRIIMI MAE are
insufficient to pay the amount of the liquidating distributions on all
outstanding Preferred Shares and the corresponding amounts payable on all
shares of other classes or series of capital shares of CRIIMI MAE ranking on a
parity with the Preferred Shares in the distribution of assets upon
liquidation, dissolution or winding up, then the holders of the Preferred
Shares and all other such classes or series of capital shares shall share
ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Shares, the remaining assets of CRIIMI MAE shall be distributed
among the holders of any other classes or series of capital shares ranking
junior to the Preferred Shares upon liquidation, dissolution or winding up,
according to their respective rights and preferences and in each case
according to their respective number of shares. For such purposes, the
consolidation or merger of CRIIMI MAE with or into any other corporation,
trust or entity, or the sale, lease or
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conveyance of all or substantially all of the property or business of CRIIMI
MAE, shall not be deemed to constitute a liquidation, dissolution or winding
up of CRIIMI MAE.
Voting Rights. Holders of the Preferred Shares will not have any voting
rights, except as set forth below or as otherwise from time to time required
by law or as indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Shares, so long as any
Preferred Shares remain outstanding, CRIIMI MAE will not, without the
affirmative vote or consent of the holders of at least a majority of the
shares of each series of Preferred Shares outstanding at the time, given in
person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (i) authorize or create, or increase the authorized or
issued amount of, any class or series of capital shares ranking prior to such
series of Preferred Shares with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital shares of CRIIMI MAE into any such shares,
or create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares; or (ii) amend, alter or
repeal the provisions of CRIIMI MAE's Articles of Incorporation or the
Articles Supplementary for such series of Preferred Shares, whether by merger,
consolidation or otherwise (each, an "Event"), so as to materially and
adversely affect any right, preference, privilege or voting power of such
series of Preferred Shares or the holders thereof; provided, however, with
respect to the occurrence of any of the Events set forth in (ii) above, so
long as the Preferred Shares remain outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an
Event, CRIIMI MAE may not be the surviving entity, the occurrence of any such
Event shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of holders of Preferred Shares, and
provided further that (x) any increase in the amount of the authorized Common
Shares or Preferred Shares or the authorization, creation or issuance of any
other series of Preferred Shares or any other class or series of capital
shares, or (y) any increase in the amount of authorized shares of such series
or any other series of Preferred Shares or any other class or series of
capital shares, in each case ranking on a parity with or junior to the
Preferred Shares of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not
be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Shares shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
Conversion Rights. The terms and conditions, if any, upon which any series
of Preferred Shares are convertible into Common Shares will be set forth in
the applicable Prospectus Supplement relating thereto. Such terms will include
the number of Common Shares into which the Preferred Shares are convertible,
the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the
holders of the Preferred Shares or CRIIMI MAE, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Preferred Shares.
Restrictions on Ownership and Transfer. As discussed below under "--Common
Shares--Restrictions on Ownership and Transfer," for CRIIMI MAE to qualify as
a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), not
more than 50% in value of its outstanding capital shares may be owned,
directly or constructively, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of a taxable year. To
assist CRIIMI MAE in meeting this requirement, CRIIMI MAE may take certain
actions to limit the beneficial ownership, directly or indirectly, by a single
person of more than 9.8% of CRIIMI MAE's outstanding capital stock, including
any Preferred Shares of CRIIMI MAE. Therefore, the Articles Supplementary for
each series of Preferred Shares may contain certain provisions restricting the
ownership and transfer of the Preferred Shares. The applicable Prospectus
Supplement will specify any additional ownership limitation relating to a
series of Preferred Shares.
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COMMON SHARES
The following description of the Common Shares is summarized from relevant
portions of CRIIMI MAE's Articles of Incorporation and Bylaws, as amended. A
more complete description of the Common Shares may be obtained by reference to
such documents and to the documents incorporated by reference in this
Prospectus. The following statements are qualified in their entirety by such
reference.
General. Stockholders are entitled to one vote for each Common Share held on
all matters presented for a vote to stockholders. The Board serves in
staggered three-year terms. Directors may be removed only for cause, upon the
affirmative vote of holders of a majority of the Common Shares voting together
as a single class. Except as otherwise provided in the Articles of
Incorporation, in meetings where a quorum is present, a majority of the votes
cast by stockholders is required to adopt a provision. Stockholders are
entitled to receive all assets available for distribution to the stockholders,
subject to any preferential rights of the holders of any Preferred Shares. The
Common Shares, when issued, will be fully paid and nonassessable and will not
be subject to redemption, except as provided in the Articles of Incorporation,
nor will they have any preference, conversion, exchange, preemptive or
cumulative voting rights.
The transfer agent and register for the Common Shares is Registrar and
Transfer Company.
Restrictions on Ownership and Transfer. The Code provides that a corporation
may not qualify as a REIT if more than 50% in value of the shares of the
corporation are owned, directly or indirectly, by five or fewer individuals,
which for this purpose includes pension funds and certain other tax-exempt
entities. Provisions of the Articles of Incorporation, intended to prevent
concentrated ownership of the capital stock of CRIIMI MAE that might
jeopardize its qualification as a REIT, authorize the Board to refuse to
effect a transfer of shares of capital stock of CRIIMI MAE to any person who
as a result would own in excess of 9.8% of the outstanding shares of capital
stock of CRIIMI MAE ("Excess Shares") and to redeem such Excess Shares.
DESCRIPTION OF WARRANTS
CRIIMI MAE may issue Warrants for the purchase of Preferred Shares or Common
Shares. Warrants may be issued independently or together with any Debt
Securities, Preferred Shares or Common Shares, offered by any Prospectus
Supplement and may be attached to or separate from such Debt Securities,
Preferred Shares or Common Shares. Each series of Warrants will be issued
under a separate warrant agreement (a "Warrant Agreement") to be entered into
between CRIIMI MAE and a bank or trust company, as warrant agent (the "Warrant
Agent"), all as set forth in the Prospectus Supplement relating to the
particular issue of Warrants. The Warrant Agent will act solely as an agent of
CRIIMI MAE in connection with the Warrants and will not assume any obligation
or relationship of agency or trust for or with any holders of Warrants or
beneficial owners of Warrants. If Warrants are to be issued, a copy of the
form of Warrant Agreement will be filed by CRIIMI MAE as an exhibit to a
current report on Form 8-K and incorporated herein by reference. The following
summary of certain provisions of the form of Warrant Agreement does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the applicable Warrant Agreement.
General. If Warrants are offered, the related Prospectus Supplement will
describe the Warrant Agreement and the terms of the Warrants, including the
following: (i) the title of such Warrants; (ii) the aggregate number of such
Warrants; (iii) the price or prices at which such Warrants will be issued;
(iv) the currencies in which the price or prices of such Warrants may be
payable; (v) the designation, amount and terms of the Preferred Shares and/or
Common Shares purchasable upon exercise of such Warrants; (vi) the designation
and terms of the Debt Securities, Preferred Shares and/or Common Shares, if
any, with which such Warrants are issued and the number of such Warrants
issued with each such Security; (vii) if applicable, the date on and after
which such Warrants and the Preferred Shares and/or Common Shares purchasable
upon exercise of such Warrants will be separately transferable; (viii) the
price or prices at which and the currency or currencies in which the Preferred
Shares and/or Common Shares purchasable upon exercise of such Warrants may be
purchased; (ix) the date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire; (x) the minimum and
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maximum amount of such Warrants which may be exercised at any one time; (xi)
information with respect to book-entry procedures, if any; (xii) a discussion
of certain United States federal income tax considerations; and (xiii) any
other material terms of such Warrants, including terms, procedures and
limitations relating to exchange or exercise of such Warrants.
Exercise. Prior to the exercise of any Warrants to purchase Preferred Shares
and/or Common Shares, holders of such Warrants will not have any of the rights
of holders of Preferred Shares or Common Shares, as the case may be,
purchasable upon such exercise, including the right to receive payments of
dividends, if any, on the Preferred Shares or Common Shares purchasable upon
such exercise, or to exercise any applicable right to vote.
Each Warrant will entitle the holder to purchase Preferred Shares and/or
Common Shares at such exercise price as shall in each case be set forth in, or
calculable from, the Prospectus Supplement relating to the Warrants. Warrants
may be exercised at any time up to 5:00 P.M. New York time on the expiration
date set forth in the Prospectus Supplement relating to such Warrants. After
the close of business on the expiration date (or such later date to which such
expiration date may be extended by CRIIMI MAE), unexercised Warrants will
become void.
Restrictions on Ownership and Transfer. As discussed above under "--Common
Shares--Restrictions on Ownership and Transfer," for CRIIMI MAE to qualify as
a REIT under the Code, not more than 50% in value of its outstanding capital
shares may be owned, directly or constructively, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year. To assist CRIIMI MAE in meeting this requirement, CRIIMI MAE may
take certain actions to limit the beneficial ownership, directly or
indirectly, by a single person of more than 9.8% of CRIIMI MAE's outstanding
capital stock. An individual or entity that owns Warrants to acquire Common
Shares and/or Preferred Shares will be deemed to own such Common Shares or
Preferred Shares for purposes of meeting the ownership requirement. Therefore,
the terms of any Warrant Agreement entered into in connection with the
issuance of Warrants may contain certain provisions restricting the ownership
and transfer of the Warrants. The applicable Prospectus Supplement will
specify any additional ownership limitation relating to the Warrants.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States federal income tax
considerations to CRIIMI MAE is based on current law, is for general
information only, and is not tax advice. The tax treatment of a holder of any
of the Securities will vary depending upon the terms of the specific
Securities acquired by such holder, as well as such holder's particular
situation, and this discussion does not attempt to address any aspects of
United States federal income taxation relating to holders of Securities.
Certain United States federal income tax considerations relevant to holders of
the Securities will be provided in the applicable Prospectus Supplement
relating thereto.
This discussion does not consider specific facts and circumstances that may
be relevant to a particular holder's tax position, and does not consider U.S.
state and local or non-U.S. tax consequences. Furthermore, the following
discussion is based on provisions of the Code and administrative and judicial
interpretations, all of which are subject to change, possibly on a retroactive
basis.
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS
WELL AS HIS OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OF THE
ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
CRIIMI MAE has qualified, and intends to continue to qualify, as a REIT
under the Code. Qualification for treatment as a REIT requires CRIIMI MAE to
meet certain criteria including certain requirements regarding the
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nature of its ownership, assets, income and distributions of taxable income. A
REIT generally is not subject to federal income tax on that portion of its
ordinary income or capital gains that is distributed currently to
stockholders. CRIIMI MAE has distributed and intends to continue to distribute
substantially all of its taxable income to stockholders and to meet
distribution requirements to continue to qualify as a REIT. CRIIMI MAE will
generally be subject to federal income tax at normal corporate rates on its
undistributed income and to a 4% excise tax under the Code on the amount, if
any, by which 85% of its REIT taxable income (including accrued but unpaid
interest income) and 95% of any net capital gain exceed the amount actually
distributed to its stockholders during the year (or declared as a dividend
during October, November or December of a calendar year, if distributed during
the following January as ordinary income dividends). Accrued income for the
last month of each quarter is generally received within 30 days after the end
of the quarter. CRIIMI MAE is not aware of any present circumstances that
would cause it to fail to qualify as a REIT, nor does it anticipate any such
circumstances in the reasonably foreseeable future. If the U.S. Internal
Revenue Service ("IRS") successfully challenged the tax status of CRIIMI MAE
as a REIT, CRIIMI MAE's earnings would become subject to federal income tax
(including any applicable minimum tax) at corporate rates.
To assist in maintaining CRIIMI MAE's qualification as a REIT under the
Code, CRIIMI MAE's Articles of Incorporation provide that no person or persons
acting as a group (defined to include partnerships, corporations, trusts and
other entities), with the exception of C.R.I., Inc. or its affiliates, shall
at any time directly or indirectly acquire ownership of more than 9.8% of the
outstanding shares of CRIIMI MAE's capital stock.
PLAN OF DISTRIBUTION
CRIIMI MAE may sell Securities to or through one or more underwriters, and
also may sell Securities directly to other purchasers or through agents. The
distribution of the Securities may be effected from time to time in one or
more transactions, at a fixed price or prices which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. If underwriters are used in the sale of
Securities, the Securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions. If the Securities are sold through one or
more agents, as designated by CRIIMI MAE from time to time, any such agent
will be acting on a best efforts basis for the period of its appointment.
In connection with the sale of Securities, underwriters may receive
compensation from CRIIMI MAE or from purchasers of Securities, for whom they
may act as agents, in the form of discounts, concessions, or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions, or commissions
from the underwriters (which may be all or a portion of the discount to be
received by such underwriter from CRIIMI MAE) and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers, and agents
that participate in the distribution of Securities may be deemed to be
underwriters, and any discounts or commissions they receive from CRIIMI MAE,
and any profit on the resale of Securities they realize may be deemed to be
underwriting discounts and commissions, under the Securities Act. Any such
underwriter or agent will be identified, and any such compensation received
from CRIIMI MAE will be described, in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other
than the Common Shares which are listed on the NYSE. Any Common Shares sold
pursuant to a Prospectus Supplement are expected to be listed on such
exchange, subject to official notice of issuance. CRIIMI MAE may elect to list
any series of Debt Securities, Preferred Shares or Warrants on a securities
exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a series of Securities, but will not be
obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of the
trading market for any Securities (other than Common Shares).
21
<PAGE>
Under agreements CRIIMI MAE may enter into, underwriters, dealers, and
agents who participate in the distribution of Securities may be entitled to
indemnification by CRIIMI MAE against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, or be customers of, CRIIMI MAE in the ordinary course of
business. In connection with any particular issue of Debt Securities, CRIIMI
MAE may enter into hedging transactions with an underwriter, dealer or agent
participating in such transaction or an affiliate thereof.
If so indicated in the Prospectus Supplement, CRIIMI MAE will authorize
underwriters or other persons acting as CRIIMI MAE's agents to solicit offers
by certain institutions to purchase Securities from CRIIMI MAE pursuant to
contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such institutions must be
approved by CRIIMI MAE. The obligations of any purchaser under any such
contract will be subject to the condition that the purchase of the Securities
shall not at the time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject. The underwriters and such
other agents will not have any responsibility in respect of the validity or
performance of such contracts.
LEGAL MATTERS
Certain matters relating to the validity of the Securities will be passed
upon for CRIIMI MAE by Swidler & Berlin, Chartered, Washington, D.C.
EXPERTS
The financial statements included in CRIIMI MAE's Annual Report on Form 10-K
incorporated herein by reference, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and have been incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
22
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE NOTES
OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary.................................................................. S-3
Risk Factors............................................................. S-9
CRIIMI MAE............................................................... S-16
The Portfolio............................................................ S-21
Use of Proceeds.......................................................... S-25
Capitalization........................................................... S-25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-26
Management............................................................... S-40
Description of Other Indebtedness........................................ S-43
Description of the Notes................................................. S-48
Certain United States Federal Income Tax Considerations.................. S-71
Underwriting............................................................. S-75
Legal Matters............................................................ S-76
Experts.................................................................. S-76
Index to Consolidated Financial Statements............................... F-1
PROSPECTUS
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
CRIIMI MAE............................................................... 4
Use of Proceeds.......................................................... 4
Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed
Charges and Preferred Stock Dividends................................... 4
Description of Debt Securities........................................... 4
Description of Capital Stock............................................. 14
Description of Warrants.................................................. 19
Certain United States Federal Income Tax Considerations.................. 20
Plan of Distribution..................................................... 21
Legal Matters............................................................ 22
Experts.................................................................. 22
</TABLE>
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$100,000,000
CRIIMI MAE INC.
9 1/8% SENIOR NOTES DUE 2002
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
LEHMAN BROTHERS
NOVEMBER 18, 1997
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