<PAGE>1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------------
For the quarter ended June 30, 1999 Commission file number 1-10360
CRIIMI MAE INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1622022
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
11200 Rockville Pike
Rockville, Maryland 20852
(301) 816-2300
(Address, including zip code, and telephone number,
Including area code, of registrant's principal executive offices)
-------------------
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ----------------------------
Common Stock New York Stock Exchange, Inc.
Series B Cumulative Convertible New York Stock Exchange, Inc.
Preferred Stock
Securities Registered Pursuant to Section 12(g) of the Act:
None
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of August 10, 1999
----- ---------------------------------
Common Stock, $.01 par value 53,553,161
<PAGE>2
CRIIMI MAE INC.
Quaterly Report on Form 10-Q
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - as of June 30, 1999
(unaudited) and December 31, 1998............................3
Consolidated Statements of Income and Comprehensive Income -
for the three and six months ended June 30, 1999
and 1998 (unaudited).........................................4
Consolidated Statements of Changes in Shareholders' Equity -
for the six months ended June 30, 1999 (unaudited)...........5
Consolidated Statements of Cash Flows - for the six months
ended June 30, 1999 and 1998 (unaudited).....................6
Notes to Consolidated Financial Statements (unaudited).........7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................60
Item 2A. Quantitative and Qualitative Disclosures about Market Risk....77
PART II. Other Information
Item 1. Legal Proceedings.............................................78
Item 2. Changes in Securities.........................................78
Item 3. Defaults Upon Senior Securities...............................78
Item 4. Submission of Matters to a Vote of
Security Holders............................................78
Item 5. Other Information.............................................78
Item 6. Exhibits and Reports on Form 8-K..............................78
Signature ...........................................79
<PAGE>3
PART I
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Assets:
Mortgage Assets:
Subordinated CMBS, at fair value $1,244,388,630 $1,274,185,678
Insured Mortgage Securities, at fair value 420,940,390 488,095,221
Investment in originated loans, at
amortized cost 486,686,694 499,076,030
Equity Investments 37,499,119 42,868,469
Receivables 70,877,253 46,992,337
Other assets 57,915,739 62,520,146
Cash and cash equivalents
67,437,377 24,180,072
-------------- --------------
Total assets $2,385,745,202 $2,437,917,953
============== ==============
Liabilities:
Liabilities Not Subject to Chapter 11
proceedings:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS $ 277,055,925 $ 117,831,435
Collateralized mortgage obligations -
Insured mortgage securities 407,338,895 456,101,720
Collateralized mortgage obligations -
Originated loans 393,887,835 386,752,951
Payables and accrued expenses 24,485,873 17,124,124
Liabilities Subject to Chapter 11 proceedings:
Secured:
Variable rate secured borrowings-CMBS 764,538,213 932,236,674
Other financing facilities 3,050,000 3,050,000
Payables and accrued expenses 18,959,621 13,690,004
Unsecured:
Senior unsecured notes 100,000,000 100,000,000
Other financing facilities 89,749,522 89,749,522
Payables and accrued expenses
25,697,523 13,504,618
-------------- --------------
Total liabilities 2,104,763,407 2,130,041,048
-------------- --------------
Shareholders' equity:
Convertible preferred stock, $ .01 par; 25,000,000
shares authorized; 1,796,982 and 1,816,982 shares
issued and outstanding, respectively 17,970 18,170
Common stock, $ .01 par; 120,000,000 shares
authorized; 53,553,161 and 52,898,100 shares
issued and outstanding, respectively 535,532 528,981
Accumulated Other Comprehensive Income (289,541,294) (251,255,309)
Additional paid-in capital 558,585,837 558,585,063
Shareholders' undistributed net income 11,383,750 --
---------------- ----------------
Total shareholders' equity 280,981,795 307,876,905
---------------- ----------------
Total liabilities and shareholders' equity $ 2,385,745,202 $ 2,437,917,953
=============== ===============
The accompanying notes are an integral
part of these consolidated financial
statements.
</TABLE>
<PAGE>4
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
1999 1998 1999 1998
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest Income:
Subordinated CMBS $ 38,418,611 $ 35,547,939 $ 76,903,756 $ 66,438,960
Insured Mortgage Securities 8,489,030 11,277,667 17,389,338 22,865,904
Originated Loans 8,647,815 2,749,695 17,488,642 2,749,695
-------------- -------------- -------------- --------------
Total interest income 55,555,456 49,575,301 111,781,736 92,054,559
-------------- -------------- -------------- --------------
Interest and related expenses:
Fixed-rate collateralized bond obligations-CMBS 5,948,766 2,355,015 9,449,286 5,169,181
Fixed-rate collateralized mortgage obligations
-insured securities 8,304,889 10,198,204 16,709,161 20,654,525
Fixed-rate collateralized mortgage obligations
-originated loans 6,687,220 1,998,166 13,250,128 1,998,166
Fixed-rate senior unsecured notes 2,281,251 2,431,723 4,562,502 4,831,347
Variable-rate secured borrowings-CMBS 12,397,081 14,629,517 26,367,454 25,858,460
Other financing facilities 1,689,082 450,659 3,398,688 943,458
-------------- -------------- -------------- --------------
Total interest expense 37,308,289 32,063,284 73,737,219 59,455,137
-------------- -------------- -------------- --------------
Net interest margin 18,247,167 17,512,017 38,044,517 32,599,422
-------------- -------------- -------------- --------------
Gain on sale of CMBS -- 29,140,689 -- 29,140,689
Equity in earnings (losses) from investments 121,016 941,719 (1,485,616) 2,244,696
Other income 787,508 1,623,924 1,423,540 2,811,981
Net gains (losses) on mortgage security 778,608 (92,283) 1,585,812 (45,834)
dispositions
Gain on originated loan dispositions 58,810 -- 160,210 --
General and administrative expenses (3,617,040) (3,047,234) (6,251,154) (6,030,991)
Amortization of assets acquired in the Merger (719,394) (719,394) (1,438,788) (1,438,788)
Unrealized loss on warehouse obligation (10,871,970) -- (6,925,495) --
Reorganization Items (5,438,943) -- (10,946,781) --
-------------- -------------- -------------- --------------
(18,901,405) 27,847,421 (23,878,272) 26,681,753
-------------- -------------- -------------- --------------
Minority interest in net income of consolidated
Subsidiary -- (15,055) -- (41,364)
Net (Loss) Income before dividends accrued or
paid on preferred shares (654,238) 45,344,383 14,166,245 59,239,811
Dividends accrued or paid on preferred shares (1,378,961) (1,918,007) (2,782,495) (3,557,504)
-------------- -------------- -------------- --------------
Net (loss) income available to common shareholders $ (2,033,199) $ 43,426,376 $ 11,383,750 $ 55,682,307
============== ============== ============== ==============
Net (loss) income available to common
Shareholders per common share:
Basic $ (0.04) $ 0.92 $ 0.21 $ 1.23
============== ============== ============== ==============
Diluted $ (0.04) $ 0.85 $ 0.20 $ 1.16
============== ============== ============== ==============
Shares used in computing basic earnings
Per share, exclusive of shares held in treasury 53,553,161 47,274,908 53,282,424 45,101,762
============== ============== ============== ==============
Comprehensive Income
Net (loss) Income before Dividends paid or
accrued on preferred shares $ (654,238) $ 45,344,383 $ 14,166,245 $ 59,239,811
Other Comprehensive (Loss) Income (29,613,575) 116,595,389 (38,285,985) 116,868,629
-------------- -------------- -------------- --------------
Comprehensive (Loss) Income $ (30,267,813) $ 161,939,772 $ (24,119,740) $ 176,108,440
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>5
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Preferred Common Stock Other Additional Shareholders' Total
Stock Par Par Comprehensive Paid-in Undistributed Shareholders'
Value Value Income Capital Net Income Equity
---------- ----------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 18,170 $ 528,981 $(251,255,309) $558,585,063 $ -- $307,876,905
Net income -- -- -- -- 14,166,245 14,166,245
Dividends accrued on
preferred shares -- -- -- -- (2,782,495) (2,782,495)
Dividends paid on
common shares -- -- -- -- -- --
Conversion of preferred
shares into common shares (200) 6,531 -- (6,331) -- --
Shares granted -- 20 -- 7,105 -- 7,125
Adjustment to unrealized
losses on investments -- -- (38,285,985) -- (38,285,985)
----------- ----------- -------------- ------------- ------------ -------------
Balance, June 30, 1999 $ 17,970 $ 535,532 $(289,541,294) $558,585,837 $11,383,750 $280,981,795
=========== =========== ============== ============= ============ =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>6
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30,
1999 1998
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $14,166,245 $ 59,239,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Cash gain on sale of CMBS -- (29,140,689)
Amortization of discount and deferred financing
costs on debt 3,960,987 2,448,867
Amortization of assets acquired in the Merger 1,438,788 1,438,788
Other amortization and depreciation 739,313 850,940
Discount amortization on mortgage assets (307,185) (1,248,750)
Net (gains)/loss on mortgage security dispositions (1,585,812) 45,834
Gain on originated loan disposition (160,210) --
Equity in losses/earnings from investments 1,485,616 (2,244,696)
Unrealized loss on warehouse obligation 6,925,154 --
Change in reorganization items accrual 10,305,282 --
Minority interests in earnings of
consolidated subsidiary -- 41,364
Changes in assets and liabilities:
Increase in receivables and other assets (25,336,567) (24,124,451)
Increase in payables and accrued expenses 8,310,998 6,081,135
------------- ---------------
Net cash provided by operating activities 19,942,609 13,388,153
============= ===============
Cash flows from investing activities:
Proceeds from sale of collateralized bond obligation -- 334,919,531
Purchase of originated loans -- (495,825,576)
Proceeds from mortgage securities dispositions 58,428,715 32,734,704
Proceeds from originated loan dispositions 7,747,205 --
Purchase of Subordinated CMBS -- (786,870,157)
Funding of loan origination reserve -- (61,219,019)
Return of loan origination reserve from securitization -- 71,877,560
Payment of deferred costs -- (9,049,031)
Receipt of principal payments 6,497,298 7,992,195
Distributions received from AIM investments 3,682,444 3,093,950
Distributions received from CMSLP -- 4,350,000
Servicing rights acquired and contributed to
Services Partnership -- (3,928,957)
------------- ---------------
Net cash provided by (used in) investing activities 76,355,662 (901,924,800)
------------- ---------------
Cash flows from financing activities:
Proceeds from sale of CMO bonds -- 390,068,687
Proceeds from debt issuances 158,509,207 1,862,928,331
Principal payments on match-funded debt obligations (61,162,244) (504,686,464)
Principal payments on secured borrowings and other
debt facilities (150,387,929) (913,624,850)
Increase in deferred financing costs -- (8,275,482)
Dividends (including return of capital) accrued or
paid to shareholders, including minority interests -- (39,154,864)
Proceeds from issuance of convertible preferred stock -- 15,000,000
Proceeds from the issuance of common stock -- 104,595,663
------------- ---------------
Net cash (used in) provided by financing activities (53,040,966) 906,851,021
------------- ---------------
Net increase in cash and cash equivalents 43,257,305 18,314,374
Cash and cash equivalents, beginning of the period 24,180,072 2,108,794
------------- ---------------
Cash and cash equivalents, end of the period $ 67,437,377 $ 20,423,168
============= ===============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>7
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
General
CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless the
context otherwise indicates, "CRIIMI MAE" or the "Company") is a fully
integrated commercial mortgage company structured as a self-administered real
estate investment trust ("REIT"). On October 5, 1998 (the "Petition Date"),
CRIIMI MAE (unconsolidated) and two of its consolidated operating subsidiaries,
CRIIMI MAE Management, Inc. ("CM Management"), and CRIIMI MAE Holdings II, L.P.
("Holdings II" and, together with CRIIMI MAE and CM Management, the "Debtors")
filed for relief under Chapter 11 of the U.S. Bankruptcy Code in the United
States Bankruptcy Court for the District of Maryland, Southern Division in
Greenbelt, Maryland (the "Bankruptcy Court"). These related cases are being
jointly administered under the caption "In re CRIIMI MAE Inc., et al.," Ch. 11
Case No. 98-2-3115-DK.
Prior to the Petition Date, CRIIMI MAE's primary activities included (i)
acquiring non-investment grade securities (rated below BBB-) or unrated
securities backed by pools of mortgage loans on multifamily, retail and other
commercial real estate ("Subordinated CMBS"), (ii) originating and underwriting
commercial mortgage loans, (iii) securitizing pools of commercial mortgage loans
and resecuritizing pools of Subordinated CMBS, and (iv) through the Company's
servicing affiliate, CRIIMI MAE Services Limited Partnership ("CMSLP"),
performing servicing functions with respect to the mortgage loans underlying the
Company's Subordinated CMBS. Since filing for Chapter 11 protection, CRIIMI MAE
has suspended its Subordinated CMBS acquisition, origination and securitization
programs. The Company continues to hold a substantial portfolio of Subordinated
CMBS and other mortgage and mortgage related assets and, through CMSLP, to act
as a servicer for its own as well as third party securitized commercial mortgage
loan pools.
The Company's business is subject to a number of risks and uncertainties
including, but not limited to: (1) the effect of the Chapter 11 filing and
substantial doubt as to the Company's ability to continue as a going concern;
(2) risk of loss of REIT status; (3) Taxable Mortgage Pool risk; (4) substantial
leverage; (5) inherent risks in owning Subordinated CMBS; (6) the limited
protection provided by certain hedging transactions; (7) risk of foreclosure on
CMBS assets; (8) limited liquidity of the CMBS market; (9) pending litigation;
(10) risk of being deemed an Investment Company; (11) possible adverse effects
of an economic recession on losses and defaults; and (12) information technology
risks associated with the Year 2000.
In addition to the two operating subsidiaries which filed for Chapter 11
protection with the Company, the Company owns 100% of multiple financing and
operating subsidiaries as well as various interests in other entities (including
CMSLP) which either own or service mortgage and mortgage-related assets (the
"Non-Debtor Affiliates"). See Note 3. None of the Non-Debtor Affiliates has
filed for bankruptcy protection.
The Company is working diligently toward the preparation of a plan of
reorganization. The Bankruptcy Court has granted the motion to extend the
Company's exclusive right to file a plan of reorganization through September 10,
1999 and to solicit acceptances thereof through November 10, 1999. Management
expects to file a plan of reorganization during September 1999, which would
contemplate the Company's emergence from bankruptcy in 1999. There can be
no assurance at this time, however, that a plan of reorganization will be
proposed by the Company during such time or that such plan will be confirmed
and consummated.
While in bankruptcy, the Company has streamlined its operations. The
Company significantly reduced the number of employees in its originations and
underwriting operations in October 1998, but has retained key employees in
each of these operational areas. In connection with these reductions, the
Company closed its five regional loan origination and underwriting offices,
retaining only a core presence in Rockville, Boston, Houston, Chicago and
San Francisco.
<PAGE>8
Although the Company has significantly reduced its work force, the Company
recognizes that retention of its executive management and other remaining
employees is essential to the efficient operation of its business and to its
reorganization efforts. Accordingly, the Company has, with Bankruptcy Court
approval, adopted an employee retention plan. See Note 14.
The Company's independent public accountants have issued a report on the
Company's 1998 financial statements expressing substantial doubt about the
Company's ability to continue as a going concern. In addition, the Company has
been advised by its independent public accountants that, if the reorganization
plan is not approved by the Bankruptcy Court prior to the completion of their
audit of the Company's financial statements for the year ended December 31,
1999, the auditors' report on those financial statements will be modified to
express substantial doubt about the Company's ability to continue as a going
concern.
The Company was incorporated in Delaware in 1989 under the name CRI Insured
Mortgage Association, Inc. ("CRI Insured"). In July 1993, CRI Insured changed
its name to CRIIMI MAE Inc. and reincorporated in Maryland. In June 1995,
certain mortgage businesses affiliated with C.R.I., Inc. were merged into CRIIMI
MAE (the "Merger"). The Company is not a government sponsored entity or in any
way affiliated with the United States government or any United States government
agency.
Effect of Chapter 11 Filing on REIT Status and Other Tax Matters
REIT Status. CRIIMI MAE is required to meet income, asset, ownership and
distribution tests to maintain its REIT status. The Company has satisfied the
REIT requirements for all years through, and including, 1998. However, due to
the uncertainty resulting from its Chapter 11 filing, there can be no assurance
that CRIIMI MAE will retain its REIT status for 1999 or subsequent years. If the
Company fails to retain its REIT status for any taxable year, it will be taxed
as a regular domestic corporation subject to federal and state income tax in the
year of disqualification and for at least the four subsequent years.
The Company's 1999 Taxable Income. As a REIT, CRIIMI MAE is generally
required to distribute at least 95% of its "REIT taxable income" to its
shareholders each tax year. For purposes of this requirement, REIT taxable
income excludes certain excess noncash income such as original issue discount
("OID"). In determining its federal income tax liability, CRIIMI MAE, as a
result of its REIT status, is entitled to deduct from its taxable income
dividends paid to its shareholders. Accordingly, to the extent the Company
distributes its net income to shareholders, it effectively reduces taxable
income, on a dollar-for-dollar basis, and eliminates the "double taxation" that
normally occurs when a corporation earns income and distributes that income to
shareholders in the form of dividends. The Company, however, still must pay
corporate level tax on any 1999 taxable income not distributed to shareholders.
Unlike the 95% distribution requirement, the calculation of the Company's
federal income tax liability does not exclude excess noncash income such as OID.
Should CRIIMI MAE terminate or fail to maintain its REIT status during the year
ended December 31, 1999, the tax liability on the taxable income for the six
months ended June 30, 1999 of approximately $31.5 million would be approximately
$12.6 million.
In determining the Company's taxable income for 1999, distributions
declared by the Company on or before September 15, 2000 and actually paid by the
Company on or before December 31, 2000 will be considered as dividends paid for
the 1999 year. The Company is exploring a method for distributing some or all of
its 1999 and subsequent years' taxable income in a noncash form, including the
potential distribution of securities such as convertible preferred stock. There
can be no assurance that the Company will be able to make distributions with
respect to its 1999 taxable income.
<PAGE>9
1999 Excise Tax Liability. Apart from the requirement that the Company
distribute at least 95% of its REIT taxable income to maintain REIT status,
CRIIMI MAE is also required each calendar year to distribute an amount at least
equal to the sum of 85% of its "REIT ordinary income" and 95% of its "REIT
capital gain income" to avoid incurring a nondeductible excise tax. Unlike the
95% distribution requirement, the 85% distribution requirement is not reduced by
excess noncash income items such as OID. In addition, in determining the
Company's excise tax liability, only dividends actually paid in 1999 will reduce
the amount of income subject to this excise tax.
The Company's 1998 Taxable Income. For 1998, the Company has approximately
$15.7 million in undistributed taxable income, which will result in a tax
liability of up to $6.3 million for state and federal taxes, unless the Company
declares a dividend of approximately $15.7 million by September 15, 1999 and
pays such dividend by December 31, 1999. The Company is exploring a method for
distributing some or all of its 1998 undistributed taxable income in a noncash
form, including the distribution of securities such as convertible preferred
stock. Any such noncash distribution would be taxable to the recipient. There
can be no assurance that the Company will be able to make distributions with
respect to its 1998 taxable income.
Taxable Mortgage Pool Risks. An entity that constitutes a "taxable mortgage
pool" as defined in the Tax Code ("TMP") is treated as a separate corporate
level taxpayer for federal income tax purposes. In general, for an entity to be
treated as a TMP (i) substantially all of the assets must consist of debt
obligations and a majority of those debt obligations must consist of mortgages;
(ii) the entity must have more than one class of debt securities outstanding
with separate maturities and (iii) the payments on the debt securities must bear
a relationship to the payments received from the mortgages. The Company
currently owns all of the equity interests in three trusts that constitute TMPs
(CBO-1, CBO-2 and CMO-IV, collectively the "Trusts"). See Notes 5 and 6 for
descriptions of CBO-1, CBO-2 and CMO-IV. The statutory provisions and
regulations governing the tax treatment of TMPs (the "TMP Rules") provide an
exemption for TMPs that constitute "qualified REIT subsidiaries" (that is,
entities whose equity interests are wholly owned by a REIT). As a result of this
exemption and the fact that the Company owns all of the equity interests in each
Trust, the Trusts currently are not required to pay a separate corporate level
tax on income they derive from their underlying mortgage assets.
The Company also owns certain securities structured as bonds (the "Bonds")
issued by each of the Trusts. Certain of the Bonds owned by the Company serve as
collateral (the "Pledged Bonds") for short-term, variable-rate borrowings used
by the Company to finance their initial purchase. If the creditors holding the
Pledged Bonds were to seize or sell this collateral and the Pledged Bonds were
deemed to constitute equity interests (rather than debt) in the Trusts, then the
Trusts would no longer qualify for the exemption under the TMP Rules provided
for qualified REIT subsidiaries. The Trusts would then be required to pay a
corporate level federal income tax. As a result, available funds from the
underlying mortgage assets that would ordinarily be used by the Trusts to make
payments on certain securities issued by the Trust (including the equity
interests and the Pledged Bonds) would instead be applied to tax payments. Since
the equity interests and Bonds owned by the Company are the most subordinated
securities and, therefore, would absorb payment shortfalls first, the loss of
the exemption under the TMP rules could have a material adverse effect on their
value and the payments received thereon.
In addition to causing the loss of the exemption under the TMP Rules, a
seizure or sale of the Pledged Bonds and a characterization of them as equity
for tax purposes could also jeopardize the Company's REIT status if the value of
the remaining ownership interests in any Trust held by the Company (i) exceeded
5% of the total value of the Company's assets or (ii) constituted more than 10%
of the Trust's voting interests.
<PAGE>10
2. INVESTMENT COMPANY ACT OF 1940
Under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), an investment company is required to register with the 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. However, as described below, companies that
are primarily engaged in the business of acquiring mortgages and other liens on
and interests in real estate ("Qualifying Interests") are excluded from these
requirements of the Investment Company Act.
To qualify for the Investment Company Act exclusion, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests
(the "55% Requirement") and is also required to maintain an additional 25% in
Qualifying Interests or other real estate-related assets ("Other Real Estate
Interests" and such requirement, the "25% Requirement"). According to current
SEC staff interpretations, CRIIMI MAE believes that its government insured
mortgage securities and originated loans constitute Qualifying Interests. In
accordance with current SEC staff interpretations, the Company believes that all
of its Subordinated CMBS constitute Other Real Estate Interests and that certain
of its Subordinated CMBS also constitute Qualifying Interests. On certain of the
Company's Subordinated CMBS, the Company, along with other rights, has the
unilateral right to direct foreclosure with respect to the underlying mortgage
loans. Based on such rights and its economic interest in the underlying mortgage
loans, the Company believes that the related Subordinated CMBS constitute
Qualifying Interests. As of June 30, 1999, the Company believes that it was in
compliance with both the 55% Requirement and the 25% Requirement.
If the SEC or its staff were to take a different position with respect to
whether such Subordinated CMBS constitute Qualifying Interests, the Company
could, among other things, be required either (i) to change the manner in which
it conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company, either of which could have
a material adverse effect on the Company. If the Company were required to change
the manner in which it conducts its business, it would likely have to dispose of
a significant portion of its Subordinated CMBS or acquire significant additional
assets that are Qualifying Interests. Alternatively, if the Company were
required to register as an investment company, it expects that its operating
expenses would significantly increase and that the Company would have to reduce
significantly its indebtedness, 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.
Further, if the Company were deemed an unregistered investment company, the
Company could be subject to monetary penalties and injunctive relief. The
Company would be unable to enforce contracts with third parties and third
parties could seek to obtain rescission of transactions undertaken during the
period the Company was deemed an unregistered investment company. In addition,
as a result of the Company's Chapter 11 filing, the Company is limited in
possible actions it may take in response to any need to modify its business plan
in order to register as an investment company, or avoid the need to register.
Certain dispositions or acquisitions of assets would require Bankruptcy Court
approval. Also, any forced sale of assets that occurs after the bankruptcy stay
is lifted would change the Company's asset mix, potentially resulting in the
need to register as an investment company under the Investment Company Act or
take further steps to change the asset mix. Any such results would be likely to
have a material adverse effect on the Company.
<PAGE>11
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In management's opinion, the accompanying unaudited consolidated financial
statements of CRIIMI MAE, CM Management, Holdings II, CRIIMI MAE Financial
Corporation, CRIIMI MAE Financial Corporation II, CRIIMI MAE Financial
Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI MAE CMBS Corp., CRIIMI MAE
Holding 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 balance sheets as of
June 30, 1999 and December 31, 1998, the consolidated results of its operations
for the three and six months ended June 30, 1999 and 1998 and its cash flows for
the six months ended June 30, 1999 and 1998.
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, 1998.
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 ("GAAP"). The preparation of financial statements in conformity with
GAAP 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 for the three and
six months ended June 30, 1998 have been reclassified to conform to the 1999
presentation.
Bankruptcy Accounting
Entering a reorganization, although a significant event, does not
ordinarily affect or change the application of GAAP followed by a company. The
accompanying financial statements have been prepared assuming that CRIIMI MAE
will continue as a going concern in accordance with SOP 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
As such, asset and liability carrying amounts do not purport to represent
realizable or settlement values as contemplated by the Bankruptcy Code.
Liabilities Subject to Chapter 11 Proceedings
Liabilities subject to Chapter 11 proceedings, including claims that become
known after the petition date, are reported at their expected allowed claim
amount in accordance with SFAS No. 5, "Accounting for Contingencies". To the
extent that the amounts of claims change as a result of actions in the
bankruptcy case or other factors, the recorded amount of liabilities subject to
Chapter 11 proceeding will be adjusted. The gain or loss resulting from the
entries to record the adjustment will be recorded as a reorganization item.
<PAGE>12
Reorganization Items
Reorganization items are items of income and expense that are realized or
incurred by CRIIMI MAE because it is in reorganization. These include, but are
not limited to the following:
o Short-term interest income that would not have been earned but for the
Bankruptcy.
o Professional fees and similar types of expenditures directly relating to the
Chapter 11 proceeding.
o Employee Retention Program costs and severance payments.
o Loss accruals or realized gains or losses resulting from activities of the
reorganization process.
For the three and six months ended June 30, 1999, reorganization items were
$5.4 million and $10.9 million. The components of these totals are as follows:
Reorganization Item Three months Six months
ended ended
June 30, 1999 June 30, 1999
------------- --------------
Short-term interest income $ (237,000) $ (469,400)
Professional fees 4,974,155 10,114,155
Employee Retention Program accrued
costs 202,605 745,502
Other 499,183 556,524
-------------- --------------
Total $ 5,438,943 $ 10,946,781
============== ==============
Condensed Financial Statements
In accordance with SOP 90-7, the three debtor entities, CRIIMI MAE, CM
Management and Holdings II, are required to present condensed financial
statements for the three and six months ended June 30, 1999. (See Note 18).
Cash and Cash Equivalents
Cash and cash equivalents consist of U.S. Government and agency securities,
certificates of deposit, time deposits and commercial paper with original
maturities of three months or less.
Transfer of Financial Assets
The Company transfers assets (mortgages and mortgage securities) in
securitization transactions where the transferred assets become the sole source
of repayment for newly issued debt. When both legal and control rights to a
financial asset are transferred, the transfer is treated as a sale. Transfers
are assessed on an individual component basis. In a securitization, the cost
basis of the original assets transferred is allocated to each of the new
financial components based upon the relative fair value of the new financial
components. For components where sale treatment is achieved, a gain or loss is
recognized for the difference between that component's allocated cost basis and
fair value. For components where sale treatment is not achieved, an asset is
recorded representing the allocated cost basis of the new financial components
retained and the related incurrence of debt is also recorded. In transactions
where none of the components are sold, the Company recognizes the incurrence of
debt and the character of the collateralizing assets remains unchanged.
Income Recognition and Carrying Basis
Subordinated CMBS
On May 8, 1998, CRIIMI MAE consummated a transaction which resulted in the
sale of a portion of its Subordinated CMBS portfolio (see Note 5). As a result
of the CBO-2 transaction and in accordance with GAAP, effective in the second
quarter of 1998, the Company no longer classifies CMBS securities as Held to
Maturity, but instead classifies CMBS as Available for Sale. CRIIMI MAE carries
its Subordinated CMBS at fair market value where changes in fair value are
recorded as a component of shareholders' equity (see Note 5). Prior to mid-1998
, such securities were carried at their amortized cost basis as the Company had
the ability and intent to hold these securities to maturity.
CRIIMI MAE recognizes income from Subordinated CMBS using the effective
interest method, using the anticipated yield over the projected life of the
investment. Changes in anticipated yields are generally due to revisions in
estimates of future credit losses, actual losses incurred, revisions in
estimates of future prepayments and actual prepayments received. Changes in
anticipated yield resulting from prepayments are recognized through a cumulative
catch-up adjustment at the date of the change which reflects the change in
income of the security from the date of purchase through the date of change in
anticipated yield. The new yield is then used for income recognition for the
remaining life of the investment. Changes in anticipated yield resulting from
reduced estimates of losses are recognized on a prospective basis.
<PAGE>13
Investment in Originated Loans
This portfolio consists of commercial loans originated and securitized by
CRIIMI MAE in CMO-IV. The origination fee income, application fee income and
costs associated with originating the loans were deferred ("deferred loan
costs") and the net amount was added to the basis of the loans on the balance
sheet upon acquisition. Income is recognized using the effective interest method
and consists of mortgage income from the loans and amortization of deferred loan
costs. Expenses of this portfolio consist of interest expense, discount
amortization on the bonds sold and amortization of costs incurred in connection
with the securitization. CRIIMI MAE has the intent to hold these loans for the
foreseeable future and therefore the originated loans are classified as Held for
Investment and recorded at amortized cost on the balance sheet.
Insured Mortgage Securities
CRIIMI MAE's consolidated investment in mortgage securities consists 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 Certificates") 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 U.S. 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.
As a result of the CBO-2 transaction involving the sale of a portion of its
Subordinated CMBS portfolio (see Note 5), the Company, in accordance with GAAP,
no longer classifies its insured mortgage securities as Held to Maturity. The
Company's mortgage securities are now classified as Available for Sale. As a
result, the Company now carries its mortgage securities at fair value where
changes in fair value are recorded as a component of shareholders' equity. Prior
to this time, the securities were carried at their amortized cost basis as the
Company had the ability and intent to hold these securities to maturity.
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 consists of amortization of the discount plus the stated
mortgage interest payments received or accrued less amortization of the premium.
Equity Investments
CRIIMI, Inc., a wholly owned subsidiary of CRIIMI MAE, owns all of the
general partnership interests in American Insured Mortgage Investors L.P,
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 (the "AIM Funds"). The AIM Funds own mortgage assets which are substantially
similar to Insured Mortgage Securities owned by CRIIMI MAE. 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 and CM Management each own 50% of the limited partnership
that owns a 20% 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 the 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.
CRIIMI MAE accounts for its investment in CRIIMI MAE Services, Inc.
("Services, Inc.") under the equity method because it does not own the voting
common stock of Services, Inc. As of June 30, 1999, Services, Inc. holds a 27%
general partner interest in CMSLP.
As of June 30, 1999, CRIIMI MAE, through CM Management, held a 73% limited
partnership interest in CMSLP. CRIIMI MAE's limited partner investment in CMSLP
is accounted for under the equity method as CRIIMI MAE does not control CMSLP.
However, because it owns 73% of the partnership and because it has certain
rights described below, it follows the equity method of accounting. As a limited
partner, CRIIMI MAE is entitled to all of the rights and benefits of being a
limited partner including the right to receive income and cash distributions in
accordance with its limited partner interest. In addition, CRIIMI MAE has the
right to approve the sale of the principal assets of CMSLP. Services, Inc. is
the general partner of CMSLP and manages the day to day affairs of CMSLP.
<PAGE>14
Impairment
Subordinated CMBS
CRIIMI MAE assesses each Subordinated CMBS for other than temporary
impairment when the fair market value of the asset declines below amortized cost
and when one of the following conditions also exists: 1) fair value has been
below amortized cost for a significant period of time and CRIIMI MAE concludes
that it no longer has the ability to hold the security for the period that fair
value is expected to be below amortized cost through the period of time CRIIMI
MAE expects the value to recover to amortized cost or 2) the credit quality of
its Subordinated CMBS is declining and the Company determines that the current
estimate of expected future credit losses exceeds credit losses as originally
projected. The amount of impairment loss is measured by comparing the fair
value, based on available market information, of a Subordinated CMBS to its
current amortized cost basis, the difference is recognized as a loss in the
income statement.
The Company assesses current economic events and conditions that impact the
value of its Subordinated CMBS and the underlying real estate in making
judgments as to whether or not other than temporary impairment has occurred. The
Company did not recognize any impairment for the six months ended June 30, 1999
and 1998.
Investment in Originated Loans
CRIIMI MAE recognizes impairment on the originated loans when it is
probable that CRIIMI MAE will not be able to collect all amounts due according
to the contractual terms of the loan agreement. CRIIMI MAE measures impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the collateral if the loan
is collateral dependent.
Insured Mortgage Securities
CRIIMI MAE assesses each Insured Mortgage Security for other than temporary
impairment when the fair market value of the asset declines below amortized cost
for a significant period of time and CRIIMI MAE concludes that it no longer has
the ability to hold the security through the market downturn. The amount of
impairment loss is measured by comparing the fair value of an Insured Mortgage
Security to its current carrying amount, the difference is recognized as a loss
in the income statement.
Equity Investments
Impairment is recognized on CRIIMI MAE's investments accounted for under
the equity method if a decline in the market value of the investment below its
carrying basis is judged to be "other than temporary". In this case an
unrealized loss is recognized as the difference between the fair value and
carrying amount.
Receivables
Receivables primarily consist of interest and principal receivables on the
Company's Subordinated CMBS, Insured Mortgage Securities and Originated Loan
portfolios. In addition, prepayments in the Insured Mortgage Securities
portfolio that have not yet been received by CRIIMI MAE are included.
<PAGE>15
Other Assets
Other Assets primarily include Merger assets and related costs, deferred
financing costs, deferred costs, investment in mezzanine loans and a deposit
account, as further discussed below. Additionally included in 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. CMSLP also serves as the special servicer
and CRIIMI MAE owns a portion of the subordinated tranches in the same trust. As
of June 30, 1999, CRIIMI MAE's investment in REO property totaled approximately
$3.9 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.
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
Funds' subadvisory contracts and the mortgage servicing contracts transferred to
CMSLP 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.
Deferred costs are costs incurred in connection with the establishment of
CRIIMI MAE's financing facilities and are amortized using the effective interest
method over the terms of the borrowings. Also included in deferred costs are
mortgage selection fees, which were paid to the Adviser or were paid to the
former general partners or adviser to the predecessor entities of 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 over the term of the
mortgage from 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. As a result of the Chapter 11
filing, CRIIMI MAE, in December 1998, wrote off all deferred costs in connection
with its financing facilities that are subject to the Chapter 11 filing.
Costs incurred in connection with the loan origination programs are netted
against any origination fees received and the net amount is deferred and will be
recognized using the effective interest method over the life of the intended
securitization of the loans. These costs include a one-time fee to the financial
institution and direct costs of originating the loans for the program. All net
deferred costs are written off if the Company and the financial institution
decide to sell the loans in the warehouse program. In addition, the Company is
required to fund the estimated subordinated levels for the securitization of the
loans originated through its loan origination programs. This subordinated level
is held as a deposit at the financing institution and is reflected in Other
Assets. Due to the financial institution taking title to the loans during the
warehousing period and bearing substantive risk for the investment portion of
each loan, the originated loans are not recorded on the Company's balance sheet
during the warehouse period. As a result of the Chapter 11 filing,
CRIIMI MAE, in December 1998, wrote off all capitalized costs in connection with
its warehouse programs.
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 included in other assets and are amortized over the
interest rate agreement term. To qualify for hedge accounting, the interest rate
protection agreement must meet two criteria: (i) the debt to be hedged exposes
CRIIMI MAE to interest rate risk and (ii) 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.
<PAGE>16
Per Share Amounts
Basic earnings per share amounts for the three and six months ended June
30, 1999 and 1998 represent net income available to common shareholders divided
by the weighted average common shares outstanding during each quarter. Diluted
earnings per share amounts for the three and six months ended June 30, 1999 and
1998 represent basic earnings per share adjusted for dilutive common stock
equivalents which for CRIIMI MAE include stock options and certain series of
preferred stock. See Note 13 for a reconciliation of basic earnings per share to
diluted earnings per share.
Consolidated Statements of Cash Flows
Cash payments made for interest for the six months ended June 30, 1999 and
1998, were $56,800,796, and $51,927,772, respectively.
Comprehensive Income
Comprehensive income is the change in shareholders' equity during a period
from transactions from nonowner sources. For CRIIMI MAE, this includes net
income before dividends paid or accrued on preferred shares adjusted for
unrealized gains and losses related to CRIIMI MAE's "Available for Sale"
Subordinated CMBS and mortgage securities carried at fair value. Net unrealized
gains and losses are reported in the shareholders' equity section of the balance
sheet.
New Accounting Statements
During 1998, FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and for Hedging Activities" ("FAS 133"). FAS 133 establishes
accounting and reporting standards for derivative investments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for the changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. FAS 133 is effective for the Company beginning January 1,
2001. The Company is evaluating the eventual impact of FAS 133 on its financial
statements.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of CRIIMI MAE's consolidated financial
instruments are presented in accordance with GAAP, which define fair value as
the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, in other than a forced sale or liquidation.
These values do not represent the liquidation value of the Company or the value
of the securities under a portfolio liquidation.
<TABLE>
<CAPTION>
As of June 30, 1999 As of December 31, 1998
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Subordinated CMBS $ 1,530,240,621 $ 1,244,388,630 $ 1,529,898,540 $1,274,185,678
Insured Mortgage Securities 424,629,693 420,940,390 483,637,668 488,095,221
Originated loans 486,686,694 451,267,018 499,076,030 480,485,570
Cash and cash equivalents 67,437,377 67,437,377 24,180,072 24,180,072
Accrued interest and principal receivable 70,877,253 70,877,253 46,992,337 46,992,337
Interest rate protection agreements 1,824,656 1,368,124
2,531,371 992,516
LIABILITIES:
Liabilities not Subject to Chapter 11
proceedings:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS $ 277,055,925 $ 259,540,721 $117,831,435 $105,799,081
Collateralized insured mortgage obligations 407,338,895 420,426,460 456,101,720 486,179,236
Collateralized mortgage obligations-
originated loans 393,887,835 376,064,628 386,752,951 381,481,150
Liabilities Subject to Chapter 11 proceedings:
Variable rate secured borrowings-CMBS 764,538,213 N/A 932,236,674 N/A
Senior unsecured notes 100,000,000 81,130,000 100,000,000 62,000,000
Other financing facilities 92,799,522 N/A 92,799,522 N/A
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
<PAGE>17
Subordinated CMBS
For periods prior to the year ended December 31, 1998, the fair market
value of the Company's portfolio of Subordinated CMBS was based upon quotes
obtained from, in most cases, the lender to which the security was pledged. The
lender also quoted the related unrated bonds even though the bonds did not serve
as collateral for CRIIMI MAE's obligations. The Company obtained "ask" quotes as
compared to "bid" quotes because it is the owner of the securities. Due to the
Chapter 11 filing, the Company's lenders were not willing to provide fair value
quotes for the CMBS portfolio as of June 30, 1999 and December 31, 1998. As a
result, the Company calculated the estimated fair market value of its
Subordinated CMBS portfolio as of June 30, 1999 and December 31, 1998. The
Company used a discounted cash flow methodology to estimate the fair value of
its Subordinated CMBS portfolio. The projected cash flows used by the Company
were the same collateral cash flows used to calculate the anticipated weighted
average unleveraged yield to maturity. See Note 5. The cash flows were then
discounted using a discount rate that, in the Company's view, was commensurate
with the market's perception of risk and value. The Company used a variety of
sources to determine its discount rate including: (i) institutionally-available
research reports, , and (ii) communications with dealers and active Subordinated
CMBS investors regarding the valuation of comparable securities. Since the
Company calculated the estimated fair market value of its Subordinated CMBS
portfolio as of June 30, 1999 and December 31, 1998, it has disclosed in Note 5
the range of discount rates by rating category used in determining these fair
market values.
The value of the Company's portfolio is based upon the combined yield of
current treasury rates and the current spread above treasury rates that an
investor would be willing to accept in a purchase transaction.
During the six months ended June 30, 1999, the required spread above
treasury rates declined on a total portfolio basis. However, this spread decline
was more than offset by an increase in treasury rates which caused an aggregate
$30.1 million decrease in the value of the Company's portfolio of CMBS from
December 31, 1998. In addition, since June 30, 1999, treasury rates have
increased further and other general market indices are indicating that certain
spreads have increased as well, which would cause a further reduction of the
Company's portfolio.
Insured Mortgage Securities
The fair value of the insured mortgage securities is based on the quoted
market price from an investment banking institution which trades these
instruments as part of its day-to-day activities.
During the six months ended June 30, 1999, the required spread above
treasury rates declined on a total portfolio basis. However, this spread decline
was more than offset by an increase in treasury rates which caused an $8.1
million decrease in the value of the Company's portfolio of FHA's and GNMA's
from December 31, 1998. In addition, since June 30, 1999, treasury rates have
increased further and other general market indices are indicating that certain
spreads have increased as well, which would cause a further reduction of the
Company's portfolio.
Originated Loans
Due to the Chapter 11 filing, the Company's lenders were not willing to
provide fair value quotes for the portfolio. As a result, the Company calculated
the estimated fair market value of its Originated Loan portfolio. The Company
used the same discounted cash flow methodology used in determining the fair
value of its Subordinated CMBS portfolio and further used cash flows projected
at a prepayment speed of 0% to 14% depending upon the call protection of the
loan. These cash flows were then discounted using a weighted average discount
rate of approximately 9%, which the Company believes was commensurate with the
market's perception of risk and value.
Cash and Cash Equivalents, Accrued Interest and Principal Receivable
The carrying amount approximates fair value because of the short maturity
of these instruments.
Obligations Under Financing Facilities
The fair value of the securitized mortgage obligations are calculated using
a discounted cash flow methodology. The fair value of the unsecured notes was
calculated using a quoted market price from Bloomberg. Management has determined
that fair value of the variable-rate secured borrowings-CMBS and other financing
facilities is not practicable to measure because there is no quoted market price
available and the facilities are in default and have been the subject of dispute
as discussed in Note 9. See Note 9 for a detailed discussion of these facilities
and the terms of the facilities.
Interest Rate Protection Agreements
The fair value of interest rate protection agreements (used to hedge CRIIMI
MAE's variable-rate debt) is the estimated amount that CRIIMI MAE would receive
to terminate the agreements as of June 30, 1999 and December 31, 1998, taking
into account current interest rates and the current creditworthiness of the
counterparties. The amount was determined based on a quote received from the
counterparty to each agreement.
<PAGE>18
5. SUBORDINATED CMBS
During 1997, FAS 125 "Accounting for Transfers and Servicing of Financial
Assets" became effective. This statement significantly changed the accounting
treatment for transfers of financial assets. FAS 125 changed accounting
standards to require transfers of assets to be accounted for on a component
basis instead of as an entire unit. Accordingly, in a securitization or
resecuritization, components (securities) are treated as sales or retained
interests based upon CRIIMI MAE's ability to control the component. Components
where control is not retained are treated as sales and those where control is
retained are treated as retained interests.
In May 1998, CRIIMI MAE completed its second resecuritization of CMBS
assets ("CBO-2"), with a combined face value of approximately $1.8 billion
involving 75 individual securities collateralized by 19 mortgage pools and three
of the retained securities from CBO-1. CBO-2 involved CRIIMI MAE's private
placement of securities with a face amount of $468 million. In CBO-2, CRIIMI MAE
initially retained securities with a face amount of approximately $1.3 billion.
Certain securities included call provisions to enable CRIIMI MAE to 1) call
bonds if market conditions warrant, and 2) call bonds when it is no longer cost
effective to service them. As a result, CBO-2 resulted in a sale of certain
securities and the retention of new securities. In accordance with FAS 125, the
assets collateralizing the resecuritization are "derecognized" and the combined
amortized cost basis of the collateralizing assets was allocated to the new
securities issued. CRIIMI MAE received $335 million for the $345 million face
amount of investment grade securities sold without call provisions which had an
allocated cost basis of $306 million, resulting in a gain of approximately $28.8
million. CRIIMI MAE recorded retained assets totaling $926 million representing
the allocated amortized cost basis for the $123 million face amount of
investment grade securities issued with call provisions and the $1.3 billion
face amount of non-investment grade retained securities in CBO-2. CBO-2
generated $160 million of net borrowing capacity primarily as a result of a
higher overall weighted average credit rating for its new securities as compared
to the weighted average credit rating on the related CMBS collateral. The net
excess borrowing capacity was used to obtain short-term, variable rate secured
borrowings which were used to acquire additional Subordinated CMBS during the
second quarter of 1998.
<PAGE>19
At June 30, 1999, CRIIMI MAE held the following securities with respect to
its CMBS portfolio:
<TABLE>
<CAPTION>
Original 6/30/99
Anticipated Anticipated
Unleveraged Unleveraged
Yield to Yield to
Pool (3) Maturity (1) Maturity (1)(2)
-------- ------------ ---------------
<S> <C> <C>
Retained Securities from
CRIIMI 1996 C1 (CBO-1) 19.5% 20.9%(5)
DLJ Mortgage Acceptance Corp.
Series 1997 CF2 Tranche B-30C 8.2% 8.1%
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 12.0% 12.0%
Retained Securities from
CRIIMI 1998 C1 (CBO-2) 10.3% 10.2%(4)
Mortgage Capital Funding, Inc.
Series 1998-MC1 8.9% 8.9%
Chase Commercial Mortgage Securities
Series 1998-1 8.8% 8.8%
First Union/Lehman Brothers
Series 1998 C2 8.9% 8.9%
Morgan Stanley Commercial Inc.
Series 1998-WF2 8.5% 8.5%(4)
Mortgage Capital Funding, Inc.
Series 1998-MC2 8.7% 8.7%
Weighted Average 9.7%(3) 10.1%(3)
</TABLE>
(1) Represents the anticipated weighted average unleveraged yield over the
expected average life of the Company's Subordinated CMBS portfolio as of the
date of acquisition and June 30, 1999, respectively, based on management's
estimate of the timing and amount of future credit losses and prepayments. As
discussed in (4) below, these yields may decrease as a result of certain
adversarial actions taken by the Company's lenders.
(2) Unless otherwise noted, changes in the June 30, 1999 anticipated yield
to maturity from that originally anticipated are primarily the result of changes
in prepayment assumptions relating to mortgage collateral.
(3) CRIIMI MAE, through CMSLP, performs servicing functions on commercial
mortgage loans with an unpaid principal balance of approximately $29.6 billion.
Of the $29.6 billion of mortgage loans, approximately $250.7 million are being
specially serviced as of August 1999, of which approximately $146.4 million are
being specially serviced due to payment default and the remainder are being
specially serviced due to nonfinancial covenant default. CMSLP, to date, has
resolved and transferred out of special servicing approximately $391.5 million
of the approximately $642.2 million that has been transferred into special
servicing. Actual losses on mortgage loans underlying the CMBS transactions
are lower than the Company's original loss estimates.
(4) On October 6, 1998, Morgan Stanley and Co. International Limited
("Morgan Stanley") advised CRIIMI MAE that it was exercising alleged ownership
rights over certain classes of CMBS it held as collateral. In the first quarter
of 1999, the Company agreed to cooperate in selling two classes of investment
grade CMBS issued by CRIIMI MAE Commercial Mortgage Trust Series 1998-C1 (CBO-2
BBB Bonds) and to suspend litigation with Morgan Stanley with respect to these
CMBS. On March 5, 1999, the CBO-2 BBB Bonds with $205.8 million face amount and
with a coupon rate of 7% were sold in a transaction that is accounted for as a
financing by the Company rather than a sale. Of the $159 million in proceeds,
$141.2 million was used to repay amounts due under the agreement with Morgan
Stanley, and $17.8 million was paid to CRIIMI MAE. CRIIMI MAE and Morgan
Stanley also agreed to a standstill period, now extended through September 10,
1999 , regarding seven classes of subordinated CMBS known as Morgan Stanley
Capital I Inc. Series 1998-WF2 (the "Wells Fargo Bonds"). At the end of this
standstill period, Morgan Stanley has until September 20, 1999 to respond to the
Company's complaint and resume litigation with respect to the Wells Fargo Bonds,
unless the standstill period is further extended by the parties or an agreement
between the parties is reached.
(5) The increase in the anticipated yield resulted from the reallocation of
CBO-1 asset basis in conjunction with the CBO-2 resecuritization.
<PAGE>20
The aggregate investment by the underlying rating of the Subordinated CMBS
is as follows:
<TABLE>
<CAPTION>
Weighted Range of Discount Amortized Amortized
Face Amount Average Weighted Fair Value Rates Used to Cost as of Cost as of
Security as of 6/30/99 Pass- Average as of 6/30/99 Calculate Fair 6/30/99 12/31/98
Rating (in millions) Through Rate Life (2) (in millions)(1) Value (1) (in millions) (in millions)
- --------- ------------- ------------ -------- ---------------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
A (5) $ 62.6 7.0 % 7 years $ 54.8 9.5% $ 57.2 $ 57.0
BBB (5) 150.6 7.0% 12 years 119.7 10.0% 127.3 126.9
BBB-(5) 115.2 7.0% 13 years 85.1 10.9% 93.1 92.8
BB+ 394.6 7.0% 13 years 266.4 10.3% - 12.6% 319.1 317.9
BB 277.4 6.9% 14 years 206.1 10.8% - 12.8% 260.4 259.1
BB- 89.1 6.8% 15 years 55.0 12.0% - 14.1% 72.8 72.6
B+ 128.7 6.7% 16 years 68.0 13.1% - 15.1% 93.2 93.0
B 300.2 6.6% 16 years 153.3 13.9% - 16.0% 209.8 208.9
B- 198.7 6.7% 17 years 89.1 15.2% - 18.4% 107.3 106.7
CCC 92.0 6.8% 20 years 24.5 24.0% - 28.0% 36.0 36.0
Unrated 478.1 6.2% 20 years 122.4 25.0% - 30.0% 154.0 159.0
--------- ---- -------- ---------- --------- ---------
Total (3)(4) $2,287.2 6.7% 16 years $ 1,244.4 $1,530.2 $1,529.9
========= ==== ======== ========== ========= =========
</TABLE>
(1) The estimated fair values of Subordinated CMBS represent the carrying
value of these assets. Due to the Chapter 11 filing, the Company's lenders were
not willing to provide fair value quotes for the portfolio as of June 30, 1999
and December 31, 1998. As a result, the Company calculated the estimated fair
market value of its Subordinated CMBS portfolio as of June 30, 1999 and December
31, 1998. The Company used a discounted cash flow methodology to estimate the
fair value of its Subordinated CMBS portfolio. The projected cash flows used by
the Company were the same collateral cash flows used to calculate the
anticipated weighted average unleveraged yield to maturity. The cash flows were
then discounted using a discount rate that, in the Company's view, was
commensurate with the market's perception of risk and value. The Company used a
variety of sources to determine its discount rate including: (i)
institutionally-available research reports, , and (ii) communications with
dealers and active Subordinated CMBS investors regarding the valuation of
comparable securities. Since the Company calculated the estimated fair market
value of its Subordinated CMBS portfolio as of June 30, 1999 and December 31,
1998, it has disclosed in the table the range of discount rates by rating
category used in determining these fair market values.
The CMBS market was adversely affected by the turmoil which occurred in the
capital markets commencing in late summer of 1998 that caused spreads between
CMBS yields and the yields on U.S. Treasury securities with comparable
maturities to widen, resulting in a decrease in the value of CMBS. As a result,
the creation of new CMBS and the trading of existing CMBS came to a near
standstill. In late November 1998, buying and trading activity in the CMBS
market began to recover, increasing liquidity in the CMBS market; however, these
improvements mostly related to investment grade CMBS. New issuances of CMBS also
returned in late November 1998. The market for Subordinated CMBS has, however,
been slower to recover and trading in this market is less liquid. It is
difficult, if not impossible, to predict when or if the CMBS market and, in
particular, the Subordinated CMBS market, will fully recover. Therefore
management's estimate of the value of its securities could vary significantly
from the value that could be realized in a current transaction between a willing
buyer and a willing seller in other than a forced sale or liquidation.
(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 prepayment rate used at the
time of acquisition.
(3) Refer to Note 8 for additional information regarding the total face
amount and purchase price of Subordinated CMBS for tax purposes.
(4) Similar to the Company's other sponsored CMOs, CMO-IV, as described in
Note 6, resulted in the creation of CMBS, of which the Company sold certain
tranches. Since the Company retained call options on the sold bonds, the Company
did not surrender control of the assets for purposes of FAS 125 and thus the
entire transaction is accounted for as a financing and not as a sale. Since the
transaction is recorded as a financing, the Subordinated CMBS are not reflected
in the Company's Subordinated CMBS portfolio. Instead the mortgage assets are
reflected in Investment in Originated Loans on the balance sheet.
<PAGE>21
(5) In connection with CBO-2, $62.6 million (A rated) and $60.0 million
(BBB rated) face amount of investment grade securities were issued with call
options and $345 million (A rated) face amount were issued without call options.
Since the Company retained call options on certain sold bonds, the Company did
not surrender control of those assets pursuant to the requirements of FAS 125
and thus these securities are accounted for as a financing and not a sale. Since
the transaction is recorded as a partial financing and a partial sale, CRIIMI
MAE has retained the securities with call options in its Subordinated CMBS
portfolio reflected on its balance sheet. In connection with CBO-2, in May 1998
the Company initially retained $90.6 million (BBB rated) and $115.2 million
(BBB- rated) face amount of securities, with the intention to sell the
securities at a later date. Such sale occurred March 5, 1999. See below for
further discussion.
As of June 30, 1999 and December 31, 1998, 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>
6/30/99 12/31/98 6/30/99 12/31/98
Property Type Percentage(1) Percentage(1) Geographic Location(2) Percentage(1) Percentage(1)
- ------------- ---------- ---------- ---------------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Multifamily... 32% 31% California........... 17% 16%
Retail........ 29% 28% Texas................ 14% 12%
Office........ 12% 15% Florida.............. 8% 7%
Hotel......... 14% 13% Other(3)............. 61% 65%
Other......... 13% 13% ---- ----
---- ---- Total............ 100% 100%
Total..... 100% 100% ==== ====
==== ====
</TABLE>
(1) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(2) No significant concentration by region.
(3) No other individual state makes up more than 5% of the total.
The Subordinated CMBS tranches owned by CRIIMI MAE provide credit support
to the more senior tranches of the related commercial securitization. Cash flow
from the underlying mortgages generally is allocated first to the senior
tranches, with the most senior tranche having a priority right to cash flow.
Then, any remaining cash flow is generally allocated among the other tranches in
order of their relative seniority. To the extent there are defaults and
unrecoverable losses on the underlying mortgages, resulting in reduced cash
flows, the subordinate tranche will bear this loss first. To the extent there
are losses in excess of the most subordinate tranche's stated right to principal
and interest, then the remaining tranches will bear such losses in order of
their relative subordination.
The accounting treatment under GAAP 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 method
can result in GAAP income recognition which is greater than or less than cash
received. For the three and six months ended June 30, 1999, the amount of income
recognized in excess of cash received due to the effective interest rate method
was approximately $209,000 and approximately $336,000, respectively. For the
three and six months ended June 30, 1998, the amount of income recognized in
excess of cash received due to the effective interest rate method was
approximately $738,000 and approximately $2.2 million, respectively.
Since the Petition Date, CRIIMI MAE and certain secured creditors have
disagreed about the effect of the stay provisions of the Bankruptcy Code on such
secured lenders and the subject assets. A summary of material litigation, and
agreements that have been reached with certain creditors, is disclosed in Note
16 Litigation - Bankruptcy Related Litigation. In addition, the Company has been
in discussions with certain other creditors not in litigation with the Company.
See Note 16 Litigation - Arrangements with Other Creditors.
The Company agreed to cooperate in selling the CBO-2 BBB Bonds and suspend
litigation with Morgan Stanley with respect to these CMBS. On March 5, 1999,
Morgan Stanley sold the $205.8 million face amount of CMBS with a coupon of 7%.
The proceeds of $159 million were used to pay off $141.2 million of the related
short-term, variable-rate debt due Morgan Stanley and the remaining net proceeds
of $17.8 million were remitted to CRIIMI MAE. CRIIMI MAE retained the right to
call each CMBS when the outstanding principal balance amortizes to 15% of its
original face balance. The 15% call option prevents CRIIMI MAE from surrendering
control of the assets pursuant to the requirements of FAS 125 and thus the
transaction is accounted for as a financing and not as a sale. This resulted in
CRIIMI MAE recognizing a fixed-rate liability for these bonds in the amount of
the gross proceeds, which was approximately $159 million.
<PAGE>22
CRIIMI MAE and Morgan Stanley also agreed to an extended standstill period
through September 10, 1999 regarding seven classes of Subordinated CMBS known as
Morgan Stanley Capital I, Inc. Series 1998-WF2. At the end of this standstill
period, Morgan Stanley has until September 20, 1999 to respond to the Company's
complaint and resume litigation with respect to such bonds, unless the
standstill period is further extended by the parties or an agreement is reached
between the parties.
The Company's CMBS portfolio currently generates monthly cash flow. As of
June 30, 1999 and December 31, 1998, certain lenders have withheld payment to
CRIIMI MAE of approximately $21.9 million and $8.3 million, respectively, with
respect to its CMBS portfolio (excluding those securities that are
match-funded). (Refer to Note 6 for payments due the Company in connection with
CMO-IV). The realizeability of these receivables is uncertain and is dependent
upon reaching successful agreements with the Company's lenders that do not
result in the loss of any collateral. A loss could occur if the lender fails to
remit interest payments to the Company. Furthermore, it is possible that CRIIMI
MAE may have to record impairment losses as a result of future adverse actions
taken against CRIIMI MAE by its lenders.
CMSLP did not file for protection under Chapter 11. However, because of the
related party nature of its relationship with CRIIMI MAE, CMSLP has been under a
high degree of scrutiny from servicing rating agencies. As a result of CRIIMI
MAE's Chapter 11 filing, CMSLP was declared in default under certain credit
agreements with First Union National Bank ("First Union"). In order to repay all
such credit agreement obligations and to increase its liquidity, CMSLP arranged
for ORIX Real Estate Capital Markets, LLC ("ORIX") formerly known as Banc One
Mortgage Capital Markets, LLC ("") to succeed it as master servicer on two
commercial mortgage pools on October 30, 1998. In addition, in order to allay
rating agency concerns stemming from CRIIMI MAE's Chapter 11 filing, in November
1998, CRIIMI MAE designated ORIX as special servicer on 33 separate CMBS
securitizations totaling approximately $29 billion, subject to certain
requirements contained in the respective servicing agreements. CMSLP will
continue to perform special servicing as sub-servicer for ORIX on all but five
of these securitizations. CRIIMI MAE remains the owner of the lowest rated
tranche of the related Subordinated CMBS and, as such, retains rights pertaining
to ownership, including the right to replace the special servicer. CMSLP lost
the right to specially service the DLJ MAC 95 CF-2 securitization when the
majority holder of the lowest rated tranches replaced CMSLP as special servicer.
<PAGE>23
6. LOAN ORIGINATION PROGRAM
Prior to the Petition Date, the Company originated mortgage loans
principally through mortgage loan conduit programs with major financial
institutions for the primary purpose of pooling such loans for securitization.
In June 1998, the Company securitized $496 million face amount of
commercial mortgage loans (a majority of which were no lock) originated or
acquired through the mortgage loan conduit program with Citicorp Real Estate,
Inc. , and through CRIIMI MAE CMBS Corp., issued Commercial Mortgage Loan Trust
Certificates, Series 1998-1 ("CMO-IV"). The original basis of the loans on the
balance sheet includes approximately $8 million of deferred loan and
securitization costs that are amortized over the life of the securitization and
recognized against income using the effective interest rate method.
Through this securitization, CRIIMI MAE sold $397 million face amount of
fixed-rate investment grade securities (see also Note 9). CRIIMI MAE retained
the remaining principal and interest cash flows from the mortgage loans that
collateralize the securitization. CRIIMI MAE has call rights on each of the
issued and sold securities and therefore has not surrendered control of the
collateral, thus requiring the transaction to be accounted for as a financing of
the mortgage loans collateralizing the investment grade CMBS sold in the
securitization.
On April 5, 1999, the Company finalized an agreement by which, Salomon
Smith Barney, in cooperation with CRIIMI MAE, will sell two classes of
investment grade CMBS from CMO-IV with a face amount of $45.9 million and an
average coupon rate of 6.96% constituting a portion of the collateral security
advances under financing agreements with Citicorp. CRIIMI MAE retains the right
to call each CMBS when the principal balance amortizes to 15% of its original
face balance. The 15% call option prevents CRIIMI MAE from surrendering control
of the assets pursuant to the requirements of FAS 125 and thus the transaction
will be accounted for as a financing and not a sale. A minimum sales price was
established in order to sell the bonds. Gross proceeds from the sale will be
used to pay off $39.6 million of secured debt, certain costs, and the remainder,
if any, remitted to CRIIMI MAE. This will result in CRIIMI MAE recognizing
fixed-rate debt for these bonds, when they are sold, in the amount of the gross
proceeds received. In May 1999, the Company sold $20 million face amount of
investment grade securities, with a coupon rate of 6.859% from CMO-IV in
accordance with the agreement noted above. Accordingly, the proceeds from the
sale of these securities will pay off a portion of the secured debt owed under
the Citicorp Financing agreements and the Company will recognize fixed rate debt
in the amount of gross proceeds received. The variable-rate secured borrowings
associated with these investment grade securities were proportionally reduced
(approximately $17 million) on the balance sheet to reflect the partial sale.
The balance of the investment grade securities will continue to be marketed for
sale.
Although CMO-IV is accounted for as a financing, economically, the Company
currently generates monthly cash flow from the subordinated CMBS tranches
created in the transaction. As of June 30, 1999 and December 31, 1998, payments
of approximately $8.1 million and $2.7 million, respectively, were withheld by
certain lenders, with respect to certain tranches of CMO-IV.
<PAGE>24
As of June 30, 1999 and December 31, 1998, the originated loans were
secured by properties of the types and at the locations identified below:
<TABLE>
<CAPTION>
6/30/99 12/31/98 6/30/99 12/31/98
Property Type Percentage(1) Percentage(1) Geographic Location(2) Percentage(1) Percentage(1)
- ------------- ---------- ---------- ---------------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Multifamily.. 37% 38% Michigan.............. 20% 20%
Hotel........ 27% 26% Texas................. 8% 8%
Retail....... 19% 20% Illinois.............. 7% 7%
Office....... 11% 11% California............ 6% 6%
Other........ 6% 5% Maryland.............. 6% 6%
---- ---- Connecticut........... 5% 6%
Total.... 100% 100% Florida............... 5% 5%
==== ==== Other(3).............. 43% 42%
---- ----
Total............. 100% 100%
==== ====
</TABLE>
(1) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(2) No significant concentration by region.
(3) No other individual state makes up more than 5% of the total.
Descriptions of the originated loans categorized by unpaid principal
balances as of June 30, 1999, are as follows:
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------
Weighted
Average
Number of Face Effective Weighted Average
Unpaid Principal Balance (2) Loans(3) Value(1)(4) Interest Rate Remaining Term
- ---------------------------- -------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$ 0 - $ 4.99 million 128 $ 267,619,390 7.43% 9.4 years
$ 5 - $ 9.99 million 18 131,205,739 7.35% 9.1 years
$10- $14.99 million 5 63,481,049 7.21% 9.1 years
$15- $20 million 1 17,155,867 7.15% 10.4 years
--------- ------------- --------- ------------
152 $479,462,045 7.37% 9.3 years
========= ============= ========= ============
</TABLE>
(1) All originated loans are collateralized by first or second liens on
multifamily, hotel, retail, office or other commercial properties. Approximately
79% of the loans originally included in the securitization are No-Lock loans.
(2) The carrying amount of the originated loans of $486,686,694 is
comprised of $479,462,045 face amount of loans plus $7,224,649 of deferred loan
costs.
(3) During the six months ended June 30, 1999, there were two prepayments
in CMO-IV. These prepayments generated net proceeds of approximately $7.6
million and resulted in a net financial statement gain of approximately
$160,200, which is included in gain on originated loan dispositions on the
accompanying consolidated statement of income for the six months ended June 30,
1999.
(4) The fair value of the originated loans at June 30, 1999 is $451,267,018.
<PAGE>25
Descriptions of the originated loans categorized by unpaid principal
balances as of December 31, 1998 , are as follows:
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------
Weighted
Average
Number Face Effective Weighted Average
Unpaid Principal Balance (2) of Loans Value(1) Interest Rate Remaining Term
- ---------------------------- -------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$ 0 - $ 4.99 million 130 $ 278,252,990 7.45% 9.9 years
$ 5 - $ 9.99 million 18 131,974,592 7.35% 9.6 years
$10- $14.99 million 5 63,821,315 7.21% 9.6 years
$15- $20 million 1 17,242,738 7.15% 10.9 years
--- ------------- ----- ----------
154 $ 491,291,635 7.38% 9.8 years
=== ============= ===== ==========
</TABLE>
(1) The fair value of the originated loans at December 31, 1998 is
$480,485,570.
At the time it filed for bankruptcy, the Company had a second mortgage loan
conduit program with Citicorp Real Estate, Inc. (the "Citibank Program") and a
loan conduit program with Prudential Securities Incorporated and Prudential
Securities Credit Corporation (the "Prudential Program") (together the
"Programs").
The agreements for both Programs provided that during the warehouse period,
the respective financial institution will fund and originate in its name all
mortgage loans under the Program, and CRIIMI MAE is required to deposit a
portion of each loan amount in a reserve account. In both facilities, the
respective financial institution is responsible for executing an interest rate
hedging strategy.
The Citibank Program provided for CRIIMI MAE to pay to Citibank the face
value of the loans originated through the Program, which were funded by Citibank
and not otherwise securitized, plus or minus any hedging loss or gain on
December 31, 1998. To secure this obligation, CRIIMI MAE was required to deposit
a portion of the principal amount of each originated loan in a reserve account.
At June 30, 1999, this reserve account was approximately $31.8 million.
Under the Prudential Program, the Company had an option to pay to
Prudential the face value plus or minus any hedging loss or gain, at the earlier
of June 30, 1999, or the date by which a stated quantity of loans for
securitization has been made. Under the Prudential Program, the Company was
required to fund a reserve account, which was approximately $2 million at June
30, 1999. Since, CRIIMI MAE was unable to exercise its option, the Company has
forfeited the amount of the reserve account.
<PAGE>26
On October 5, 1998, Citibank sent the Company a letter alleging that the
Company was in default under the Citibank Program and that it was terminating
the Citibank Program. The Company and Citibank negotiated a Stipulation and
Consent Order (the "Order"), entered by the Bankruptcy Court on April 5, 1999,
regarding the Citibank Program. The Order provides that Citibank will, with
CRIIMI MAE's cooperation, sell the loans originated under the Citibank Program
provided that the sale results in CRIIMI MAE receiving minimum net proceeds of
not less than $3.5 million, after satisfying certain amounts due to Citibank
under the Citibank Program from the amount held in the reserve account. The
minimum net proceeds provision may be waived by written agreement of the
Company, the Official Committee of Unsecured Creditors in the Company's Chapter
11 case (the "Unsecured Committee") and the Official Committee of Equity
Security Holders in the Company's Chapter 11 case (the "Equity Committee").
CRIIMI MAE is still in discussions with Prudential to sell the loan originated
under the Prudential Program. There can be no assurance that an agreement will
be reached with Prudential or, if reached, that such agreement would be approved
by the Bankruptcy Court.
As of September 30, 1998, the Company's obligation under the Citibank
Program was $14.8 million in excess of the fair value of the loans and the
Company's option under the Prudential Program was $2.8 million in excess of fair
value of the loan principally because of the turmoil in the capital markets. As
a result CRIIMI MAE recorded a $17.6 million unrealized loss related to the
Programs as of September 30, 1998. The Company calculated the unrealized losses
based upon an estimated value of the loans (based on proceeds that could be
raised in a securitization of the loans using market spreads for bonds that
would be issued if such a transaction occurred on September 30, 1998) as well as
hedging losses as of that date.
Subsequent to the Chapter 11 filing, CRIIMI MAE decided to sell the loans
originated in conjunction with the Programs. As a result of the Company's
decision to sell the loans and because a sale of the loans will result in less
proceeds than would ordinarily be realized in a securitization (which was the
Company's original intent), the Company recorded, during the fourth quarter of
1998, additional unrealized losses of $ 12.7 million.
The Company's potential loss amount for the Citibank Program decreased by
$3.9 million in the first quarter of 1999, which was primarily the result of an
improvement in the related hedging position. The $3.9 million was recognized as
an unrealized gain on warehouse obligation in the first quarter of 1999.
On August 5, 1999, all but three of the commercial loans originated under
the Citibank Program in 1998, were sold for gross proceeds of approximately $308
million. The loans sold had an aggregate unpaid principal balance of $339
million. The minimum net proceeds provision was waived by agreement of the
Company, the Unsecured Committee and the Equity Committee. As a result of the
valuation received in the sale, the Company recorded an additional $10.9 million
unrealized loss in the second quarter bringing its unrealized losses through
June 30, 1999 to $35.3 million. For income tax purposes, the portion of this
loss related to the loans that were sold (estimated at $33 million) is expected
to be recorded as a realized loss on the loan sale date in the third quarter of
1999. The unrealized losses recorded to date also include an estimate of losses
(approximately $2 million) related to the three loans (unpaid principal balance
of $32.7 million) not sold, all of which are currently being marketed for sale.
Prior to the actual sale of these loans the Company had recorded its unrealized
losses based on pricing data received from Citibank. (See also Footnote 8
regarding the impact of this transaction on tax basis income).
<PAGE>27
7. INSURED MORTGAGE SECURITIES
CRIIMI MAE's consolidated portfolio of mortgage securities is comprised of
FHA-Insured Certificates and GNMA Mortgage-Backed Securities. Additionally,
mortgage securities include Federal Home Loan Mortgage Corporation (Freddie Mac)
participation certificates which are collateralized by GNMA Mortgage-Backed
Securities, as discussed below. As of June 30, 1999, approximately 15% of CRIIMI
MAE's investment in mortgage securities were FHA-Insured Certificates and 85%
were GNMA Mortgage-Backed Securities (including certificates which collateralize
Freddie Mac participation certificates). FHA-Insured Certificates and GNMA
Mortgage-Backed Securities are collectively referred to herein as "mortgage
securities."
CRIIMI MAE owns the following mortgages directly or indirectly through its
wholly-owned subsidiaries:
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------
Weighted
Number of Average
Mortgage Fair Amortized Effective Weighted Average
Securities Value(1) Cost Interest Rate Remaining Term
---------- ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 1 $ 5,417,573 $ 5,442,690 8.00% 36 years
CRIIMI MAE Financial Corporation 37 131,405,033 132,123,556 8.38% 30 years
CRIIMI MAE Financial Corporation II 52 218,281,857 221,053,380 7.21% 28 years
CRIIMI MAE Financial Corporation III 24 65,835,927 66,010,067 7.87% 29 years
------------- ------------ -------- -----------
114 $420,940,390 $424,629,693 7.68%(3) 29 years(3)
============= ============ ======== ===========
As of December 31, 1998
-----------------------
Weighted
Number of Average
Mortgage Fair Amortized Effective Weighted Average
Securities Value(1) Cost Interest Rate Remaining Term
---------- ------------- ------------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 1 $ 5,511,707 $ 5,455,114 8.00% 36 years
CRIIMI MAE Financial Corporation(2) 40 161,382,142 158,832,182 8.26% 30 years
CRIIMI MAE Financial Corporation II(2) 55 232,560,966 231,973,794 7.18% 28 years
CRIIMI MAE Financial Corporation III(2) 27 88,640,406 87,376,578 8.00% 30 years
--- ------------- ------------ -------- -----------
123 $ 488,095,221 $483,637,668 7.69%(3) 29 years(3)
=== ============= ============ ======== ===========
</TABLE>
(1) See Note 4 for discussion of fair value methodology.
(2) During the six months ended June 30, 1999, there were nine prepayments
of mortgage securities held by CRIIMI MAE's financing subsidiaries. These
prepayments generated net proceeds of approximately $58.4 million and resulted
in net financial statement gains of approximately $1.6 million, which are
included in gains on mortgage securities dispositions on the accompanying
consolidated statement of income for the six months ended June 30, 1999.
(3) Weighted Average was computed using total amortized cost of the
mortgage securities.
As a result of the CBO-2 transaction (see Note 5), the Company, in
accordance with GAAP, no longer classifies its mortgage securities as Held to
Maturity. The Company's mortgage securities are now classified as Available for
Sale. As a result, the Company now carries its mortgage securities at fair
value. 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 securities, which is reported as a separate component of shareholders'
equity as of June 30, 1999 and December 31, 1998.
<PAGE>28
8. RECONCILIATION OF FINANCIAL STATEMENT NET LOSS INCOME TO TAX
BASIS INCOME
Reconciliations of the financial statement net loss income to the tax basis
income for the three and six months ended June 30, 1999 and 1998, are as
follows:
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consolidated financial statement
Net loss income $ (654,238) $ 45,344,383 $ 14,166,245 $ 59,239,811
Gain on sale of collateralized bond obligation -- (29,140,689) -- (29,140,689)
Reamortization of Subordinated CMBS 14,332,858 9,053,150 28,568,719 11,316,175
Interest expense adjustments for collateralized bond
obligation (8,723,443) (5,028,033) (17,491,178) (5,028,033)
Amortization and other interest expense adjustments (707,528) (354,120) (1,893,205) (830,532)
Equity in earnings from investments 459,845 3,334,922 1,756,263 3,422,740
Net gains on mortgage security dispositions 178,501 46,970 381,731 209,982
Gain on originated loan disposition 44,991 -- 117,526 --
Amortization of assets acquired in the Merger 719,394 719,394 1,438,788 1,438,788
Unrealized loss on warehouse obligation (1) 10,871,970 -- 6,925,495 --
Reorganization items (3,247,824) -- 296,196 --
Capital gain on installment note -- 331,831 -- 331,831
Other (16,584) (17,694) (32,035) (27,142)
------------- ------------- -------------- --------------
Tax basis income $ 13,257,942 $ 24,290,114 $ 34,234,545 $ 40,932,931
============= ============= ============== ==============
Dividends accrued or paid on preferred shares (1,378,961) (1,918,007) (2,782,495) (3,557,504)
------------- ------------- -------------- --------------
Tax basis income available to common
Shareholders $ 11,878,981 $ 22,372,107 $ 31,452,050 $ 37,375,427
============= ============= ============= ==============
Tax basis income per share $ 0.22 $ 0.47 $ 0.59 $ 0.81
============= ============= ============= ==============
Tax basis shares outstanding 53,553,161 47,795,989 53,553,161 46,113,921
============= ============= ============= ==============
</TABLE>
(1) The Company expects to record a realized loss in the third quarter
of 1999, estimated at $33 million, related to the August 1999 sale of
substantially all of the loans in its Citibank Program (See Footnote 6).
Differences between financial statement net income and the tax basis income
available to common shareholders principally relate to differences in the
methods of accounting for Subordinated CMBS (see also Note 5), timing and/or
deductibility of estimated reorganization costs , unrealized loss on warehouse
position, amortization of certain deferred costs and merger of the CRI Mortgage
Businesses.
The entire CBO-2 transaction was accounted for as a financing for tax
purposes. As such, the Company will recognize income for tax purposes from the
entire group of mortgage securitization pools (35 total) with an aggregate face
amount of $2.8 billion and purchase price of $2.0 billion and receive a
deduction for the interest expense on the outstanding debt.
<PAGE>29
9. OBLIGATIONS UNDER FINANCING FACILITIES
Default Declarations
As a result of the bankruptcy petition filed on October 5, 1998, certain
lenders have declared defaults or otherwise taken action against the Company
with respect to a number of CRIIMI MAE's financing facilities. SeeNote 16 for a
discussion of material litigation between the Company and various creditors and
agreements the Company has reached with certain of these creditors.
The following table summarizes CRIIMI MAE's debt outstanding as of June 30,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
Six months ended June 30, 1999 Year ended December 31, 1998
--------------------------------- ----------------------------
Stated
Balance Eff. Rate Avg Average Maturity Balance Eff. Rate Avg Avg
Type of Debt at Qtr End at Qtr. End Balance Eff. Rate Date (9) at Year End at Yr End Bal. Eff. Rate
- ------------ ------------ ----------- -------- --------- ----------- ----------- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securitized Mortgage
Obligations:
FHLMC Funding Note (1) $ 210,148,405 7.4% $215,953,507 7.4% Sept 2031 $ 220,822,380 7.4% $229,137,117 7.4%
FNMA Funding Note (2) 63,707,206 7.4% 72,229,539 7.4% March 2035 84,750,764 7.3% 119,316,182 7.3%
CMO (3) 133,483,284 7.5% 117,895,729 7.5% Jan 2033 150,528,576 7.4% 166,408,357 7.4%
CMO-Loan Originations (6) 393,887,835 6.5% 383,752,017 6.5% Oct 2001- 386,752,951 6.5% 222,114,163 6.5%
May 2008
Subordinated CMBS (7) 277,055,925 8.9% 188,945,100 8.5% Nov 2006- 117,831,435 (4) 7.7% 122,861,289 7.6%
Nov 2012
Variable-Rate Secured borrowings -
Subordinated CMBS (8) 764,538,213 6.1% 839,036,829 6.2% April 1999- 932,236,674 7.2% 802,562,377 6.8%
Sept 2000
Bank term loans 3,050,000 6.3% 3,050,000 6.3% Dec 1998 3,050,000 (5) 1.8% 3,000,238 3.9%
Working capital line
of credit 40,000,000 6.7% 40,000,000 6.8% Dec 1998 40,000,000 7.2% 21,918,727 7.3%
Bridge Loan 49,749,522 7.2% 49,749,522 7.2% Feb 1999 49,749,522 7.8% 19,765,489 7.7%
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002 100,000,000 9.1% 99,902,312 9.1%
--------------- --------------
Total $ 2,035,620,390 $2,085,722,302
=============== ==============
</TABLE>
(1) As of June 30, 1999 and December 31, 1998, the face amount of the note
was $218,125,911 and $229,005,558, respectively, with unamortized discount of
$7,977,506 and $8,183,178, respectively. During the six months ended June 30,
1999 and 1998, discount amortization of $205,672 and $193,994, respectively, was
recorded as interest expense.
(2) As of June 30, 1999 and December 31, 1998, the face amount of the note
was $65,424,049 and $86,620,792, respectively, with unamortized discount of
$1,716,843 and $1,870,028, respectively. During the six months ended June 30,
1999 and 1998, discount amortization of $153,185 and $159,312, respectively, was
recorded as interest expense.
<PAGE>30
(3) As of June 30, 1999 and December 31, 1998, the face amount of the note
was $137,477,970 and $154,840,829, respectively, with unamortized discount of
$3,994,686 and $4,312,253, respectively. During the six months ended June 30,
1999 and 1998, discount amortization of $367,567 and $156,821, respectively, was
recorded as interest expense.
(4) Balance represents face amount of notes, as the issuance did not
include any bond discount.
(5) The effective interest rate as of December 31, 1998 includes the impact
of a rate reduction agreement which was in place from July 1995 through December
31, 1998, providing for a reduction in the rate on a portion of the loans based
on balances maintained at the bank. The effective interest rate as of June 30,
1999 does not include the impact of the rate reduction agreement due to the
Company's Chapter 11 filing.
(6) As of June 30, 1999 and December 31, 1998, the face amount of the debt
was $401,029,914 and $392,752,908 with unamortized discount of $7,142,079 and
$5,999,957, respectively. During the six months ended June 30, 1999 and 1998,
discount amortization of $727,018 and $90,361, respectively, was recorded in
interest expense.
(7) As of June 30, 1999 and December 31, 1998, the face amount of the debt
was $328,446,000 and $122,612,000 with an unamortized discount of $51,390,075
and $4,780,565, respectively . During the six months ended June 30, 1999 and
1998, discount amortization of $715,283 and $35,390, respectively, was recorded
in interest expense.
<PAGE>31
Collaterized Bond Obligations - CMBS
In May 1998, CRIIMI MAE, through its wholly-owned subsidiary CRIIMI MAE
CMBS Corp., issued an aggregate of $468 million of longer-term, fixed-rate
investment grade debt securities to reduce an equivalent amount of short-term,
variable rate secured borrowings used to initially fund CMBS acquisitions. The
transaction was structured with a total of $468 million in investment grade
securities of which $345 million were non-callable securities and $123 million
were callable securities.
FAS 125 provides guidance as to whether a transfer of financial assets,
such as in a securitization, will qualify for sales treatment or secured
borrowing treatment. This distinction is made by concluding as to whether a
transferor relinquishes control over the transferred assets. If the transferor
is considered to no longer control the assets, the securities receive sales
treatment which calls for the de-recognition of all assets surrendered and
liabilities settled, the recognition of all assets received and liabilities
incurred and the recognition of a gain or loss through earnings. If the
transferor maintains control over the transferred assets, the assets remain on
the balance sheet and a corresponding amount of debt is recognized for all
securities not held by the transferor. The determination of control is made on a
security by security basis.
As a result of this transaction, control was retained over $123 million of
the securities because CRIIMI MAE has the right to call the securities. The $345
million of non-callable investment grade securities were treated as a sale, the
corresponding assets and debt were de-recognized from the balance sheet and a
gain of $28.8 million was recognized through earnings. The $123 million of
callable investment grade securities and the corresponding amount of debt are
recorded on the balance sheet.
On March 5, 1999, the CBO-2 BBB Bonds with $205.8 million face amount and a
coupon rate of 7% were sold in a transaction accounted for as a financing by the
Company rather than a sale. Of the $159 million of net sale proceeds, $141.2
million was used to repay variable-rate secured borrowings under the agreement
with Morgan Stanley and $17.8 million was remitted to CRIIMI MAE. This resulted
in CRIIMI MAE recognizing a fixed-rate liability for these bonds in the amount
of gross proceeds.
Collateralized Mortgage Obligations - Originated Loans
In the June 1998 CMO-IV transaction, through the securitization of $496
million of originated or acquired commercial mortgage loans, CRIIMI MAE sold
$397 million face amount of fixed-rate investment grade debt securities. CRIIMI
MAE retained call options on all of the securities such that control was not
relinquished. Therefore, the mortgage loans remain on CRIIMI MAE's balance sheet
as assets for accounting purposes, along with the related debt for all
securities sold by CRIIMI MAE.
The securities were issued at a discount of approximately $6.6 million.
Such discount, as well as approximately $6.7 million of deferred costs and
securitization transaction costs are amortized on a level yield basis over the
expected life of the related security. The securities not sold to third parties
were partially financed with secured borrowings. The lending agreements are
secured by certain of the CMO-IV securities retained by CRIIMI MAE with an
aggregate fair value of approximately $68.6 million as of June 30, 1999.
On April 5, 1999, the Company finalized an agreement by which, Salomon
Smith Barney, in cooperation with CRIIMI MAE, will sell two classes of
investment grade CMBS from CMO-IV (face amount of $45.9 million) constituting a
portion of the collateral security advances under the Citicorp financing
agreement. This transaction will be accounted for as a financing and not a sale.
This will result in the Company recognizing a fixed-rate liability for these
bonds, when they are sold, in the amount of gross proceeds. In May 1999, the
Company sold $20 million face amount of investment grade securities, with a
coupon rate of 6.859% from CMO-IV in accordance with the agreement. The
variable-rate secured borrowings associated with these investment grade
securities were proportionally reduced (approximately $17 million) on the
balance sheet to reflect the partial sale. The balance of the investment grade
securities will continue to be marketed for sale.
<PAGE>32
Variable Rate Secured Borrowings-CMBS
As previously discussed, when CRIIMI MAE purchased Subordinated CMBS, it
initially financed (generally through secured borrowings) a portion of the
purchase price of the Subordinated CMBS. These secured borrowings were either
provided by the issuer of the CMBS pool or through master secured borrowing
agreements, as discussed below. As of June 30, 1999, the secured borrowings on
Subordinated CMBS have interest rates that are generally based on the one-month
London Interbank Offered Rate (LIBOR), plus a spread ranging from 0.5% to 1.5%.
Due to the Chapter 11 filing and the automatic stay provisions granted under the
Bankruptcy Code, the actual maturity date is undeterminable for facilities that
have expired or will expire in 1999 per the stated maturities.
As discussed above, on March 5, 1999, the CBO-2 BBB Bonds were sold in a
transaction that was accounted for a financing rather than a sale. Of the $159.0
million of net sale proceeds, $141.2 million was used to repay variable rate
secured borrowings.
As discussed above, in May 1999, a portion of the CMO-IV securities were
sold in a transaction that was accounted for as a financing rather than a sale.
The variable-rate secured borrowings were proportionally reduced on the balance
sheet to reflect the partial sale.
The secured borrowing agreements are secured by certain rated CMBS security
tranches with an aggregate fair value of approximately $831.8 million as of June
30, 1999 and $1.1 billion as of December 31, 1998. CRIIMI MAE's short-term
variable rate financing facilities require that the value of the collateral
securing the facilities meet a minimum loan-to-value ratio. If the value of the
collateral is perceived such that the minimum loan-to-value ratio is not met,
then the lender may require the Company to post cash or additional collateral
with sufficient value to cure the perceived value deficiency. At June 30, 1999,
CRIIMI MAE had secured borrowing agreements with German American Capital
Corporation, Lehman ALI, Inc. First Union National Bank of North Carolina,
Morgan Stanley, Merrill Lynch and Citicorp Securities, Inc. ("Citicorp"). These
secured borrowing agreements qualify as financings under FAS 125 because CRIIMI
MAE is required to purchase the same securities collateralizing the borrowing
before their maturity. Citicorp and Morgan Stanley have each taken the position
that CMBS that were pledged to them by the Company were instead sold to them by
the Company because the transactions between the parties were documented using
Bond Market Association Master Repurchase Agreement forms. The Company disputes
the positions of both Citicorp and Morgan Stanley and has filed two complaints
contesting their claims of ownership. If, however, Citicorp and Morgan Stanley
prevail, the portfolio value of the Company's owned securities would decrease by
the amount of bonds that are deemed to have been sold to Citicorp or Morgan
Stanley and the corresponding obligations would also decrease. (See Note 16 ).
Senior Unsecured Notes
In November 1997, CRIIMI MAE issued senior unsecured notes ("Notes") due on
December 1, 2002 in an aggregate principal amount of $100 million. The Notes are
effectively subordinated to the claims of any secured lender to the extent of
the value of the collateral securing such indebtedness. Interest on the Notes is
payable semi-annually in arrears on June 1 and December 1, commencing June 1,
1998 at a fixed annual rate of 9.125%. The Notes are redeemable at any time, in
whole or in part, at the option of CRIIMI MAE.
The Indenture contains certain covenants which, among other things,
restricted 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 were subject to
exceptions and qualifications.
Under the terms of the Indenture, the Company could not incur additional
indebtedness (except for Permitted Debt, which included secured borrowings,
working capital lines of credit, and borrowings under facilities in place as of
November 21, 1997), unless at the time of such incurrence either (a) the ratio
of Adjusted Earnings Available for Fixed Charges to Adjusted Fixed Charges
giving proforma effect for the new borrowings is greater than 1.75 to 1.0 or (b)
the Adjusted Debt to Capital Ratio on a proforma basis after giving effect to
the incurrence of the new debt is less than 2.0 to 1.0.
<PAGE>33
Bank Term Loans
In connection with the Merger, CM Management assumed certain debt of
certain mortgage businesses affiliated with C.R.I., Inc. in the principal amount
of $9.1 million (the "Bank Term Loan"). The Bank Term Loan 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 required quarterly principal
payments of $650,000 and matured on December 31, 1998. The amount outstanding as
of June 30, 1999 and December 31, 1998 was $1.3 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%.
In addition, in connection with the Real Estate Owned Property, a
wholly-owned subsidiary has a loan secured by the Real Estate Owned Property and
guaranteed by CRIIMI MAE. The loan requires monthly interest payments and a
balloon principal payment at maturity. The loan was made January 22, 1998 and
matured on August 1, 1999. The Company received a default notice on August 3,
1999 from Citicorp. The amount outstanding as of June 30, 1999 and December 31,
1998 was $1.75 million. Interest on the loan is based on LIBOR, plus a spread of
1.5%. Currently, negotiations to sell the property to a third party are taking
place. Amounts received by any such sale will be used to pay off the outstanding
loan balance and the remaining proceeds will be retained by the Company.
Working Capital Line of Credit
In late 1996, CRIIMI MAE entered into an unsecured working capital line of
credit provided by two lenders which provided for up to $40 million in
borrowings. The credit facility matured on December 31, 1998. Outstanding
borrowings under this line of credit are based on interest at one-month LIBOR,
plus a spread of 1.75%. As of June 30, 1999 and December 31, 1998, $40 million
in borrowings were outstanding under this facility.
Bridge Loan
In August 1998, CRIIMI MAE entered into a bridge loan for $50 million
provided by a lender. The total unpaid principal balance and accrued interest
was due in February 1999. Outstanding borrowings under this facility are based
on interest at one-month LIBOR, plus a spread of 2.25%. As of June 30, 1999 and
December 31, 1998, approximately $50 million in borrowings was outstanding under
this loan.
Other Debt Related Information
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 58%
of CRIIMI MAE's consolidated debt as of June 30, 1999. Fluctuations in interest
rates will continue to impact the value of 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 variable-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
variable-rate debt. When CRIIMI MAE's cap agreements expire, CRIIMI MAE will
have interest rate risk to the extent interest rates increase on any
variable-rate borrowings unless the caps are replaced or other steps are taken
to mitigate this risk. Furthermore, CRIIMI MAE has interest rate risk to the
extent that the LIBOR interest rate increases between the current rate and the
cap rate. However, CRIIMI MAE's investment policy requires that at least 75% of
variable-rate debt be hedged. As of June 30, 1999, 90% of CRIIMI MAE's
variable-rate debt is hedged.
For the six months ended June 30, 1999, CRIIMI MAE's weighted average cost
of borrowing, including amortization of discounts and deferred financing fees of
approximately $4.0 million, was approximately 7.25%. This does not include the
write-off of costs and discounts related to liabilities subject to Chapter 11.
As of June 30, 1999 , CRIIMI MAE's debt-to-equity ratio was approximately 7.2 to
1.0 and CRIIMI MAE's non-match-funded debt-to-equity ratio was approximately 3.4
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, among other
requirements.
<PAGE>34
10. INTEREST RATE PROTECTION AGREEMENTS
CRIIMI MAE has entered into interest rate protection agreements to
partially limit the adverse effects of rising interest rates on its
variable-rate borrowings. Interest rate caps ("caps"), as shown below, 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. All of the caps qualify for hedge accounting treatment.
Therefore the related cost, as well as gains or losses on terminated positions,
have been deferred as a component of the related debt. At June 30, 1999, CRIIMI
MAE held caps with a notional amount of $775 million and the caps are used to
hedge $775 million of the Company's variable rate debt.
<TABLE>
<CAPTION>
Notional
Amount Effective Date Maturity Date (2) Cap (2) Index
- --------------- --------------- ---------------- ------- ----------
<S> <C> <C> <C>
$ 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
100,000,000 December 7, 1997 November 7, 2000 6.6563% 1M LIBOR
50,000,000 December 23, 1997 December 23, 2000 6.9688% 1M LIBOR
100,000,000 March 11, 1998 March 10, 2001 6.6875% 1M LIBOR
100,000,000 March 31, 1998 March 31, 2001 6.6875% 1M LIBOR
100,000,000 June 4, 1998 June 4, 2001 6.6563% 1M LIBOR
100,000,000 June 26, 1998 June 26, 2001 6.6563% 1M LIBOR
25,000,000 September 6, 1998 August 6, 2001 6.6523% 1M LIBOR
- ----------------
$775,000,000 (1)
================
</TABLE>
(1) CRIIMI MAE's designated interest rate protection agreements hedge
CRIIMI MAE's variable-rate borrowing costs. (2) The weighted average strike
price is approximately 6.7% and the weighted average remaining term for these
interest rate cap agreements is approximately 1.5 years.
CRIIMI MAE is exposed to credit loss in the event of non-performance by the
counterparties to the interest rate protection agreements should interest rates
exceed the caps. However, management does not anticipate non-performance 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. 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.
<PAGE>35
11. COMMON STOCK
Shelf Registration Statement
The Company has on file with the Securities and Exchange Commission a Shelf
Registration Statement on Form S-3 registering for sale of Debt Securities,
Preferred Shares, Warrants, and Common Shares. CRIIMI MAE may, from time to
time, offer in one or more series the securities in amounts, at prices and on
terms set forth in supplements to the Registration Statement. As of June 30,
1999, a total amount of approximately $340 million remains available under the
Shelf Registration Statement.
Stock Purchase Plan
In December 1997, CRIIMI MAE registered with the Securities and Exchange
Commission up to 3 million shares of CRIIMI MAE common stock ("Common Shares")
in connection with a new Dividend Reinvestment and Stock Purchase Plan (the
"Plan"). Subsequently, in May 1998, the shareholders approved the issuance of up
to 4.7 million common shares in connection with the Plan. The Plan allows
investors the opportunity to purchase additional CRIIMI MAE Common Shares
through the reinvestment of CRIIMI MAE's dividends, optional cash payments and
initial cash investments.
In October 1998, due to the filing under Chapter 11, the Company suspended
the initial cash investment and optional cash payment portion of the Plan until
further notice.
Dividends
During the pendency of the bankruptcy proceedings, the Company is
prohibited from paying dividends without first obtaining Bankruptcy Court
approval. (See Note 1-Effect of Chapter 11 Filing on REIT Status and other Tax
Matters).
<PAGE>36
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 designated as Series A
Cumulative Convertible Preferred Shares, 3,000,000 shares have been designated
as Series B Cumulative Convertible Preferred Shares, 300,000 shares have been
designated as Series C Cumulative Convertible Preferred Shares and 300,000
shares have been designated as Series D Cumulative Convertible Preferred Shares
as of June 30, 1999.
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 Shares, 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 (i) $0.68 per share per quarter plus (ii) the product of the excess
over $0.30, if any, of the quarterly cash dividend declared and paid with
respect to each share of common stock times a conversion ratio of 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 tenth 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. There were 1,593,982 Series B Preferred
Shares outstanding as of June 30, 1999. Dividends accrued on Series B Preferred
Shares totaled $3,251,724 as of June 30, 1999 (of which, $2,167,816 was accrued
for the first half of 1999 and $1,083,908 was accrued for the fourth quarter of
1998, but not paid to date as a result of the Chapter 11 filing).
Series C Cumulative Convertible Preferred Stock
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 Series C Cumulative
Convertible Preferred Stock, par value $.01 per share, through June 1998 at a
price of $100 per share. The Series C Cumulative Convertible Preferred stock
pays a dividend at an annual rate equal to the sum of (i) 75 basis points plus
(ii) LIBOR as of the second LIBOR Market Day preceding the commencement of the
calendar quarter which includes such quarterly dividend payment. The preferred
stock is convertible into shares of common stock at the option of the holders
and is subject to redemption by CRIIMI MAE. Each Series C Preferred Share is
convertible into common shares based on the following formula: the numerator is
$100 and the denominator is a closing trade price within the conversion period
on the average of the closing trade price or the applicable twenty-one day
period immediately preceding the date of delivery, whichever is mutually
acceptable. The liquidation preference and redemption price on the Series C
Preferred Shares equals $100 and $106, respectively, per share plus an amount
equal to all dividends accrued and unpaid thereon. On September 23, 1997,
150,000 shares were issued under this agreement, resulting in net proceeds of
approximately $15 million. On February 23, 1998, 150,000 Series C Preferred
Shares were issued under this agreement, resulting in net proceeds of
approximately $15 million. These proceeds were used to fund purchases of
Subordinated CMBS. During the six months ended June 30, 1999, 20,000 Series C
Preferred Shares were converted into 653,061 common shares, resulting in 103,000
Series C Preferred Shares outstanding at June 30, 1999. Dividends accrued on
Series C Preferred Shares as of June 30, 1999 totaled $582,820 as of June 30,
1999 (of which $323,681 was accrued for the first half of 1999 and $259,139 for
the fourth quarter of 1998, but not paid to date as a result of the Chapter 11
filing).
Series D Cumulative Convertible Preferred Stock
In July 1998, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company had the right to sell, and such investor
was obligated to purchase, up to 300,000 shares of Cumulative Convertible
Preferred Stock par value $.01 per share at price of $100 per share. The Series
D Cumulative Convertible Preferred Stock pays a dividend at an annual rate equal
to the sum of (i) 75 basis points plus (ii) LIBOR as of the second LIBOR Market
Day preceding the commencement of the calendar quarter which includes such
quarterly dividend payment. The preferred stock is convertible into shares of
common stock at the option of the holders and is subject to redemption by CRIIMI
MAE. Each Series D Preferred Share is convertible into common shares based on
the following formula: the numerator is $100 and the denominator is a closing
trade price within the conversion period on the average of the closing trade
price or the applicable twenty-one day period immediately preceding the date of
delivery, whichever is mutually acceptable. The liquidation preference and
redemption price on the Series D Preferred Shares equals $100 and $106,
respectively, per share plus an amount equal to all dividends accrued and unpaid
thereon. On July 31, 1998, 100,000 Series D Preferred Shares were issued under
this agreement, resulting in net proceeds of approximately $10 million. There
were no shares converted to common shares during the first half of 1999,
resulting in 100,000 shares outstanding at June 30, 1999. Dividends accrued on
Series D Preferred Shares totaled $445,930 as of June 30, 1999 (of which,
$290,999 was accrued for the first half of 1999 and $154,931 for the fourth
quarter of 1998, but not paid to date as a result of the Chapter 11 filing).
<PAGE>37
13. EARNINGS PER SHARE
The following table reconciles basic and diluted earnings per share under
FAS 128 for the three and six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
For the three months ended June 30, 1999 For the three months ended June 30, 1998
--------------------------------------------- ---------------------------------------------
Income Income
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net (loss)
Income
Available to
Common
Shareholders $(2,033,199) 53,553,161 $ (0.04) $ 43,426,376 47,274,908 $ 0.92
------------
Effect of
Dilutive
Securities (1)
Net effect of
assumed
exercise of
stock options -- -- -- -- 877,779
Convertible
Preferred
Stock (2) (3) -- -- $ 1,918,007 5,426,079
------------ ----------
Diluted EPS
Income
available to
Common
Shareholders
and assumed
conversions $(2,033,199) 53,553,161 $ (0.04) $ 45,344,383 53,578,766 $ 0.85
============ ========== ========= ============ ========== =======
</TABLE>
<PAGE>38
<TABLE>
<CAPTION>
For the six months ended June 30, 1999 For the six months ended June 30, 1998
--------------------------------------------- ---------------------------------------------
Income Income
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net Income
Available to
Common
Shareholders $ 11,383,750 53,282,424 $ 0.21 $55,682,307 45,101,762 $ 1.23
Effect of
Dilutive
Securities
Net effect of
assumed
exercise of
stock options -- -- -- 926,102
Convertible
Preferred
Stock (2) (3) 614,680 7,606,685 3,557,504 5,177,520
------------ ---------- ----------- ----------
Diluted EPS
Income
available to
Common
Shareholders
and assumed
conversions $ 11,998,430 60,889,109 $ 0.20 $59,239,811 51,205,384 $ 1.16
============ ========== ======= =========== ========== ========
</TABLE>
(1) SFAS 128 states that no common stock equivalents should be considered
in the calculation of diluted EPS in a period that there is a net loss.
(2) 1,593,982 and 1,629,582 shares of Series B Preferred Shares were
outstanding at June 30, 1999 and 1998, respectively. The common stock
equivalents for these shares were not included in the calculation of diluted EPS
because the effect would be anti-dilutive.
(3) Common stock equivalents are computed using the average common stock
price. For the three and six months ended June 30, 1999, the average common
stock prices were $2.29 and $2.78 per share, respectively. For 1998, the average
common stock prices were $15.03 and $15.25 per share for the three and six
months ended June 30, 1998, respectively.
<PAGE>39
14. EMPLOYEE RETENTION PLAN
On December 18, 1998, the Company obtained Bankruptcy Court approval to
adopt and implement an employee retention program ("the Employee Retention
Plan") with respect to all employees of the Company other than certain key
executives. On February 28, 1999, the Company received Bankruptcy Court approval
authorizing it to extend the Employee Retention Plan to the key executives
initially excluded, including modifying existing employment agreements and
entering into new employment agreements with such key executives. The Employee
Retention Plan provides for retention payments aggregating up to approximately
$4.6 million, including payments to certain executives. Retention payments are
payable semiannually over a two-year period. The first retention payment vested
on April 5, 1999 and was paid on April 15, 1999. The entire unpaid portion of
the retention payments will become immediately due and payable (i) upon the
effective date of a plan of reorganization and, with respect to certain key
executives, court approval or (ii) upon termination without cause. William B.
Dockser, Chairman of the Board of the Company, and H. William Willoughby,
President, are not currently entitled to receive any retention payments. Subject
to the terms of their respective employment agreements, certain key executives
will be entitled to severance benefits if they resign or their employment is
terminated following a change of control. The other employees will be entitled
to severance benefits if they are terminated without cause subsequent to a
change of control of the Company and CM Management. In addition, options granted
by the Company after October 5, 1998 will, subject to Bankruptcy Court approval,
become exercisable upon a change of control.
In addition, in March 1999, the Company granted 520,750 options to purchase
shares at a price of $3.125 to eligible employees. Such options vest annually
over a three period.
<PAGE>40
15. TRANSACTIONS WITH RELATED PARTIES
Below is a summary of the related party transactions which occurred during
the three and six months ended June 30, 1999 and 1998. These items are described
further in the text which follows:
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
-------------------------------------- ----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Amounts received or accrued from related
parties:
CRIIMI Inc.
Income(2) $ 205,255 $ 322,666 $ 482,292 $ 676,114
Return of Capital(6) 1,656,155 1,526,333 3,165,773 2,341,104
---------- ---------- ---------- ----------
Total $1,861,410 $1,848,999 $3,648,065 $3,017,218
========== ========== ========== ==========
CRI/AIM Investment Limited
Partnership (2) $ 103,858 $ 149,543 $ 235,669 $ 308,715
========== ========== ========== ==========
CRIIMI MAE Services Limited
Partnership (8) $ -- $3,114,000 $ -- $3,164,000
========== ========== ========== ==========
Expense reimbursements to CRIIMI Management:
AIM Funds and CRI Liquidating (1)(4) $ 91,278 $ 56,624 $ 122,346 $ 124,452
CMSLP (1) 249,821 -- 543,280 --
---------- ---------- ---------- ----------
Total $ 341,099 $ 56,624 $ 665,626 $ 124,452
========== ========== ========== ==========
Payments to CRI:
Expense reimbursement - CRIIMI MAE(1)(3) $ 48,600 $ 93,577 $ 97,376 $ 158,287
========== ========== ========== ==========
Capital Hotel Group(5) $ 17,096 $ 15,456 $ 28,899 $ 25,297
========== ========== ========== ==========
Other(7) $ -- $ -- $ -- $ --
========== ========== ========== ==========
</TABLE>
(1) Included in general and administrative expenses on the accompanying
consolidated statements of income.
(2) Included as equity in earnings from investments on the accompanying
consolidated statements of income.
(3) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were
paid to C.R.I., Inc. as reimbursement for expenses incurred by the Adviser on
behalf of CRIIMI MAE. In connection with the Merger, on June 30, 1995, CRIIMI
MAE was no longer required to reimburse the Adviser, as these expenses are now
directly incurred by CRIIMI MAE. However, pursuant to an agreement between
CRIIMI MAE and C.R.I., Inc. (the "CRI Administrative Services Agreement"),
C.R.I., Inc. 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 C.R.I., Inc.
Administrative Services Agreement to the extent such services are not performed
by CM Management or provided by another service provider. The CRI Administrative
Services Agreement is terminable on 30 days notice at any time by CRIIMI MAE.
<PAGE>41
(4) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were
paid to C.R.I., Inc. 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 C.R.I., Inc. are, effective June 30, 1995, paid to CM Management.
(5) 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.
(6) Included as a reduction of equity investments on the accompanying
consolidated balance sheets.
(7) The Principals have certain management interests and equity investments
in two borrowers whose mortgage loans have an aggregate balance of approximately
$22 million which were included in CMO-IV. These two mortgage loans were
originated and underwritten by Citicorp Real Estate, Inc. and were made to CRI
Hotel Income Partners, L.P. (the "CRI Hotel Loan") and Arboretum Village, L.P.
(the "Arboretum Village Loan"). The Principals are the Chairman and President,
respectively, of, and holders of a 100% equity interest in C.R.I., Inc., which
is the general partner of CRICO Hotel Associates I, L.P., the general partner of
CRI Hotel Income Partners, L.P. C.R.I., Inc. is also the managing general
partner of Capital Realty Investors III Limited Partnership which is a limited
partner in Arboretum Villages, L.P. The Principals are also the Chairman and
President, respectively and holders of a 100% equity interest in C.R.H.C.
Incorporated which is the general partner of Arboretum Villages, L.P.
(8) This is a distribution included in the balance sheet as a decrease in
the investment in CMSLP.
<PAGE>42
16. LITIGATION
Bankruptcy Proceedings
On the Petition Date, the Debtors each filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. These cases are
being jointly administered for procedural purposes. None of the cases has been
substantively consolidated. Under the Bankruptcy Code, the Debtors are
authorized to manage their respective affairs and operate their businesses as
debtors-in-possession while they attempt to develop a reorganization plan that
will restructure their financial affairs and allow them to emerge from
bankruptcy. As a debtor-in-possession under the Bankruptcy Code, no Debtor may
engage in any transaction outside the ordinary course of business without the
approval of the Bankruptcy Court. The following discussion describes certain
aspects of the Chapter 11 cases of the Debtors (the "Chapter 11 Cases"), but it
is not intended to be a complete summary.
Pursuant to the Bankruptcy Code, the commencement of the Chapter 11 Cases
created an automatic stay, applicable generally to creditors and other parties
in interest, but subject to certain limited exceptions, of: (i) the commencement
or continuation of judicial, administrative or other actions or proceedings
against the Debtors that were or could have been commenced prior to the
commencement of the Chapter 11 Cases; (ii) the enforcement against the Debtors
or their property of any judgments obtained prior to the commencement of the
Chapter 11 Cases; (iii) the taking of any action to obtain possession of
property of the Debtors or to exercise control over such property; (iv) the
creation, perfection or enforcement of any lien against the property of the
bankruptcy estates of the Debtors; (v) any act to create, perfect or enforce
against the property of the Debtors any lien that secures a claim that arose
prior to the commencement of the Chapter 11 Cases; (vi) the taking of any action
to collect, assess or recover claims against the Debtors that arose before the
commencement of the Chapter 11 Cases; (vii) the set-off of any debt owing to the
Debtors that arose prior to the commencement of the Chapter 11 Cases against any
claim against the Debtors; or (viii) the commencement or continuation of a
proceeding before the United States Tax Court concerning the Debtors. Any entity
may apply to the Bankruptcy Court, upon appropriate showing of cause, for relief
from the automatic stay.
As noted above, the Debtors are authorized to manage their respective
properties and operate their respective businesses pursuant to the Bankruptcy
Code. During the course of the Chapter 11 Cases, the Debtors will be subject to
the jurisdiction and supervision of the Bankruptcy Court. The United States
Trustee has appointed (i) an official committee of Unsecured Creditors in the
CRIIMI MAE Chapter 11 case, (ii) an official committee of Unsecured Creditors in
the Management Chapter 11 case and (iii) an official committee of Equity
Security Holders in the CRIIMI MAE Chapter 11 case (collectively, the
"Committees"). The Committees are expected to participate in the formulation of
the plans of reorganization for the respective Debtors. The Debtors are required
to pay certain expenses of the Committees, including professional fees, to the
extent allowed by the Bankruptcy Court.
Under the Bankruptcy Code, for 120 days following the Petition Date, only
the debtor-in-possession has the right to propose and file a plan of
reorganization with the Bankruptcy Court. If a debtor-in-possession files a plan
of reorganization during this exclusivity period, no other party may file a plan
of reorganization until 180 days following the Petition Date, during which
period the debtor-in-possession has the exclusive right to solicit acceptances
of the plan. If a debtor-in-possession fails to file a plan during the
exclusivity period or such additional exclusivity period as may be ordered by
the Bankruptcy Court or, after such plan has been filed, fails to obtain
acceptance of such plan from impaired classes of creditors and equity security
holders during the exclusive solicitation period, any party in interest,
including a creditors' committee, an equity security holders' committee, a
creditor or an equity security holder may file a plan of reorganization for such
debtor. Additionally, if the Bankruptcy Court were to appoint a trustee, the
exclusivity period, if not previously terminated, would terminate.
<PAGE>43
The Debtors did not file a plan of reorganization during the initial
exclusivity period. However, the Bankruptcy Court has granted the motion to
extend the Company's exclusive right to file a plan of reorganization through
September 10, 1999 and to solicit acceptances thereof through November 10, 1999.
After a plan of reorganization has been filed with the Bankruptcy Court, it
will be sent, together with a disclosure statement approved by the Bankruptcy
Court after notice and a hearing, to members of all classes of impaired
creditors and equity security holders for acceptance or rejection. Following
acceptance or rejection of any plan by impaired classes of creditors and equity
security holders, the Bankruptcy Court, after notice and a hearing, will
consider whether to confirm the plan. To confirm a plan, the Bankruptcy Court is
required to find among other things: (i) with respect to each class of impaired
creditors and equity security holders, that each holder of a claim or interest
of such class either (A) will, pursuant to the plan, receive or retain property
of a value as of the effective date of the plan, that is at least as much as
such holder would have received in a liquidation on such date of the Debtors or
(B) has accepted the plan, (ii) with respect to each class of claims or equity
security holders, that such class has accepted the plan or is not impaired under
the plan, and (iii) confirmation of the plan is not likely to be followed by the
liquidation or need for further financial reorganization of the Debtors or any
successor unless such liquidation or reorganization is proposed in the plan.
If any impaired class of creditors or equity security holders does not
accept a plan, the proponent of the plan may invoke the so-called "cramdown"
provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court
may confirm a plan, notwithstanding the non-acceptance of the plan by an
impaired class of creditors or equity security holders, if certain requirements
of the Bankruptcy Code are met. These requirements include: (i) the plan does
not discriminate unfairly and (ii) the plan is fair and equitable, with respect
to each class of claims or interests that is impaired under, and has not
accepted, the plan. As used in the Bankruptcy Code, the phrases "discriminate"
and "fair and equitable" have narrow and specific meanings and their use herein
is qualified in its entirety by reference to the Bankruptcy Code.
Bankruptcy Related Litigation
The following is a summary of material litigation matters between the
Company and certain of its secured creditors that was commenced since the
Petition Date. The Company has reached agreement with certain of these
creditors, as set forth in greater specificity below.
<PAGE>44
Merrill Lynch
As of the Petition Date, the Company owed Merrill Lynch approximately
$274.8 million with respect to advances to the Company under an assignment
agreement pursuant to which the Company pledged Subordinated CMBS. Borrowings
under this assignment agreement are secured by a first priority security
interest in certain CMBS issued by CBO-2, together with all proceeds,
distributions and amounts realized therefrom (the "Distributions") (the CMBS
pledged to Merrill Lynch and the Distributions are hereafter referred to
collectively as the "Merrill Collateral").
On October 16, 1998, Merrill Lynch filed a motion with the Bankruptcy Court
for relief from the automatic stay or, in the alternative, for entry of an order
directing the Company to provide adequate protection for its interest in the
Merrill Collateral. On October 21, 1998, the Company filed a complaint against
Merrill Lynch for turnover of Distributions remitted to Merrill Lynch on October
2, 1998 by LaSalle National Bank, as well as other relief.
On December 4, 1998, the Bankruptcy Court approved a consent order entered
into between the Company and Merrill Lynch. Among other things, pursuant to the
consent order, the pending litigation with Merrill Lynch was dismissed without
prejudice. The consent order also preserved the portfolio of CMBS pledged as
collateral to Merrill Lynch and provided for the Company to receive
distributions of 50 percent of the monthly cash flow from those CMBS net of
interest payable to Merrill Lynch. The 50 percent of distributions received by
Merrill Lynch is to be applied to reduce principal. Such arrangement will remain
in effect until the earlier of a further order of the Bankruptcy Court affecting
the arrangement or the effective date of a plan of reorganization of the
Company.
Morgan Stanley
As of the Petition Date, the Company owed Morgan Stanley approximately
$182.4 million with respect to advances to the Company under an agreement
pursuant to which the Company pledged CMBS. The borrowings under this agreement
are secured by certain CMBS, including (i) CRIIMI MAE Commercial Mortgage Trust,
Series 1998-C1, Class B and C Certificates (collectively or any portion thereof,
the "CBO-2 BBB Bonds") and (ii) Morgan Stanley Capital I Inc., Series 1998-W2,
Class F, G, H, J, K, L and M Certificates (collectively or any portion thereof,
the "Wells Fargo Bonds" and, together with the CBO-2 BBB Bonds, the "Morgan
Collateral").
On October 6, 1998, Morgan Stanley advised the Company that it was
exercising alleged ownership rights over the Morgan Collateral. On October 20,
1998, the Company filed an adversary proceeding against Morgan Stanley alleging,
among other things, that Morgan Stanley violated the automatic stay and seeking
turnover of the Morgan Collateral.
On January 12, 1999, the Company and Morgan Stanley agreed upon and filed
with the Bankruptcy Court a stipulation and consent order, which was approved by
the Bankruptcy Court and entered on January 26, 1999. The consent order
provided, among other things, for the following: (i) an agreed sale procedure
for the CBO-2 BBB Bonds during a specified sale period; (ii) the payment of a
portion of the sale proceeds of the CBO-2 BBB Bonds to the Company; (iii) a
standstill period relating to the Wells Fargo Bonds through March 31, 1999
unless otherwise extended by the Company and Morgan Stanley, during which time
Morgan Stanley may not sell, pledge, encumber or otherwise transfer the Wells
Fargo Bonds and (iv) the postponement of the litigation with Morgan Stanley
while the parties seek a permanent resolution of their disputes. On March 5,
1999, the CBO-2 BBB Bonds were sold. Of the $159 million in net sale proceeds,
$141.2 million was used to repay the Company's borrowings under the agreement
with Morgan Stanley, and $17.8 million was remitted to CRIIMI MAE. As a result
of the transaction, CRIIMI MAE's litigation against Morgan Stanley has been
resolved with respect to the CBO-2 BBB Bonds to the satisfaction of both
parties. The Company and Morgan Stanley have agreed to extend the standstill
period with respect to the Wells Fargo Bonds through September 10, 1999. At the
end of this standstill period, Morgan Stanley has until September 20, 1999 to
respond to the Company's complaint and resume litigation with respect to the
Wells Fargo Bonds, unless the standstill period is further extended by the
parties or an agreement between the parties is reached.
<PAGE>45
Citicorp and Citibank
In addition to the Citibank Program pursuant to which the Company
originated loans, as previously discussed, the Company also has a financing
arrangement with Citicorp pursuant to which the Company pledged CMBS.
On October 13, 1998, Citicorp demanded from Norwest Bank Minnesota, N.A.
("Norwest") the immediate transfer of certain CMBS (the "Retained Bonds") issued
pursuant to CMO-IV. Norwest served as indenture trustee. The Retained Bonds are
collateral for amounts advanced to the Company by Citicorp under the financing
arrangement. As of the Petition Date, the Company owed Citicorp $79.1 million
under the facility.
On October 15, 1998, the Company filed an emergency motion to enforce the
automatic stay against Norwest and Citicorp. Pursuant to an Order dated October
23, 1998, the Bankruptcy Court prohibited Citicorp from selling the Retained
Bonds without further order of the Bankruptcy Court. On October 23, 1998,
Citicorp requested an emergency hearing regarding the October 23 Order, and on
November 2, 1998, the Company filed a complaint against Citicorp seeking, among
other things, a declaratory judgment as to whether the automatic stay applies to
actions taken by Citicorp with respect to the Retained Bonds.
On March 11, 1999, the Company finalized agreements with Citicorp and
Citibank, pursuant to which the parties agreed to adjourn the pending litigation
for a four month period. One of the agreements also provides that Salomon Smith
Barney, in cooperation with CRIIMI MAE, will sell two classes of investment
grade CMBS from CMO-IV constituting a portion of the collateral securing
advances under the Citicorp financing arrangement. In May 1999, Salomon Smith
Barney sold $20 million of the CMO-IV securities held by Holdings II. This sale
reduced the amounts owed from Holdings II to Citicorp by approximately $17
million. Holdings II and Salomon Smith Barney have agreed to extend the sale
period for the remaining CMO-IV securities through October 2, 1999. In addition,
Citibank, in cooperation with CRIIMI MAE, will sell commercial mortgages
originated last year under the Citibank Program, provided that the sale results
in CRIIMI MAE receiving minimum net proceeds of not less than $3.5 million,
after satisfying certain amounts due to Citibank, from the amount held in the
reserve account. The minimum net proceeds provision may be waived by agreement
of the Company, the Unsecured Committee and the Equity Committee. On August 5,
1999, all but three of the commercial loans,originated last year under the
Citibank Agreement in 1998, with an aggregate unpaid principal balance of
approximately $339 million, were sold for gross proceeds of approximately $308
million. The minimum net proceeds provision was waived by agreement of the
Company, the Unsecured Committee and the Equity Committee. Citibank will
continue to market the remaining loans for sale pursuant to the stipulation. The
agreements with Citicorp and Citibank were approved by the Bankruptcy Court by
stipulations and consent orders entered on April 5, 1999. On July 7, 1999, the
Bankruptcy Court agreed to a request by CRIIMI MAE, Citibank and the Unsecured
Committee to further postpone the trial which has been rescheduled for September
21 and 22, 1999.
A related interpleader action between Norwest, the Company and Citicorp,
which was initiated on October 20, 1998 by Norwest to determine whether the
Company or Citicorp is the rightful owner of funds that were to have been paid
by Norwest, as indenture trustee, remains pending before the Bankruptcy Court.
During the pendency of this matter, certain payments on the retained bonds are
held in an account controlled by the Bankruptcy Court. No trial date has been
set for this matter.
<PAGE>46
First Union
. First Union National Bank ("First Union"), a creditor of both the Company
and CM Management, is asserting substantial secured and unsecured claims. On or
about March 23, 1999, First Union filed in each of the Company's and CM
Management's Chapter 11 cases a motion for relief from the automatic stay
pursuant to section 362(d) of the United States Bankruptcy Code. On or about
March 26, 1999, First Union requested that the Court dismiss without prejudice
both motions. On April 20, 1999, First Union refiled its motions for relief from
the Automatic Stay. The hearing was originally scheduled for May 14, 1999, but
has been adjourned by consent.
On or about July 1, 1999, the Company entered into an agreement with First
Union resolving its motion for relief from the automatic stay and authorizing
use of First Union's cash collateral. The agreement provides for the following:
(i) First Union has a valid, perfected, first priority security interest in
certain assignment securities and the assignment securities income constitutes
First Union's cash collateral;
(ii) First Union shall receive adequate protection payments of
post-petition interest at the non-default contract rate plus payments to be
applied to principal equal to 50% of the difference between the assignment
income and the Company's non-default contract interest obligation. First Union
has the option of using a portion of the assignment income earmarked for
principal to purchase a hedging program;
(iii) The Company shall be entitled to use the assignment income not paid
to First Union in the ordinary course of its business subject to certain
limitations; and
(iv) First Union shall not seek relief from the automatic stay in the
Company's chapter 11 case to foreclose upon the assignment securities and/or the
assignment income and none of the Company, the Company's Committees or First
Union shall seek modification of the adequate protection arrangements set forth
in the agreement for a period commencing upon which the Bankruptcy Court
approves the agreement and terminating on December 31, 1999, subject to certain
exceptions.
The agreement was approved and entered by the Bankruptcy Court on August 5,
1999. The Company's Creditors Committee has agreed to the arrangement with First
Union.
In addition, on or about July 1, 1999, CM Management and First Union
entered into an agreement resolving its motion for relief from the automatic
stay. Based upon an objection filed by the CM Management's Unsecured Creditors
Committee the parties are discussing a modification to the agreement and
continue to negotiate accordingly. The agreement has been presented to the
Bankruptcy Court for approval.
Arrangements with Other Creditors
In addition to the foregoing, the Company has had discussions with other
secured creditors against whom the Company was not engaged in litigation. One
such creditor is German American Capital Corporation ("GACC"). On February 3,
1999, the Bankruptcy Court approved an Amended Consent Order between the Company
and GACC that provides for the following: (a) acknowledgement that GACC has a
valid perfected security interest in its collateral; (b) authority for GACC to
hedge its loan, subject to a hedge cost cap; and (c) as adequate protection,
sharing of cash collateral on a 50/50 basis, after payment of interest expense,
with the percentage received by GACC to be applied to reduce principal and pay
certain hedge costs, if any. In addition, the Company is prohibited from using
GACC's cash collateral for certain purposes, including loan originations and
Subordinated CMBS acquisitions. The Amended Consent Order expired April 28,
1999. The Company and GACC agreed to extend the Amended Consent Order until
August 2, 1999, and a stipulation to that effect was signed by the Company and
GACC and approved by the Court on May 11,1999. Currently, the Company and GAAC
have negotiated a further extension of the stipulation through September 10,
1999.
<PAGE>47
Shareholder Litigation
The Company is aware that certain plaintiffs filed 20 separate class action
civil lawsuits (the "Complaints") in the United States District Court for the
District of Maryland (the "District Court") against certain officers and
directors of the Company between October 7, 1998 and November 30, 1998. On March
9, 1999, the District Court ordered the consolidation of the Complaints into a
single action entitled "In Re CRIIMI MAE, Inc. Securities Litigation." On April
23, 1999, a group of thirteen putative members of the class of individuals who
allegedly suffered damages during the class period between February 20, 1998 and
October 5, 1998 (collectively, the "Plaintiffs") filed an Amended and
Consolidated class action Complaint alleging violations of federal securities
laws (the "Consolidated Amended Complaint"). The Consolidated Amended Complaint
names as defendants William B. Dockser, as Chairman of the Board of Directors of
CRIIMI MAE, H. William Willoughby as a member of the Board of Directors and/or
an officer of CRIIMI MAE, and Cynthia O. Azzara as an officer of CRIIMI MAE
(collectively, the "Defendants"). Although CRIIMI MAE and CM Management have not
been named as defendants, both companies are subject to indemnity obligations to
the Defendants under the provisions of their respective constituent documents,
the Defendants' employment contracts and applicable state law. CRIIMI MAE has
directors and officers liability insurance policies that have a combined
coverage limit of $20 million.
The Consolidated Amended Complaint alleges generally that the Defendants
violated Section 10(b) of the Securities and Exchange Act of 1934 as amended
(the "Exchange Act") by, among other things, making false statements of material
fact and failing to disclose certain material facts concerning, among other
things, CRIIMI MAE's business strategy and its ability to meet collateral calls
from lenders. The Consolidated Amended Complaint also generally alleges that the
Defendants violated Section 20(a) of the Exchange Act because each Defendant was
allegedly a "controlling person" as that term is defined under Section 20(a).
The relief sought in the Consolidated Amended Complaint includes all or
substantially all of the following: (i) certification of a class under Rule 23
of the Federal Rules of Civil Procedure; (ii) certification of the Plaintiffs as
class representatives and as lead plaintiffs and their counsel as lead counsel;
(iii) award of monetary damages, including compensatory and rescissionary
damages and interest thereon; (iv) a judgment awarding the Plaintiffs and the
Class their counsel fees, experts' fee and other costs of suit; (v) award to the
Plaintiffs such other relief as the District Court deems just and proper or as
the District Court otherwise requires; and (vi) trial by jury.
The motion by the Plaintiffs requesting the District Court to appoint the
Plaintiffs as lead plaintiffs under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act") and to approve, among other things, certain law firms
as counsel to the lead plaintiffs (the "Motion") remains pending. Defendants
Dockser, Willoughby and Azzara have opposed the Motion. The District Court has
deferred a decision on the Motion until a later date.
On July 9, 1999, the Defendants filed a Motion to Dismiss, with prejudice,
the Consolidated Amended Complaint. The Defendants filed the motion under Rule
12(b)(6) of the Federal Rules of Civil Procedure on the grounds that the
Plaintiffs have failed to plead sufficient facts with the requisite
particularity to establish a claim for securities fraud under the Reform Act.
The Plaintiffs must file their opposition to the Motion to Dismiss by September
24, 1999. CRIIMI MAE cannot predict with any degree of certainty the ultimate
outcome of such litigation.
<PAGE>48
17. Segment Reporting
During 1997, FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for the way that public business enterprises report information about operating
segments and related disclosures about products and services, geographical areas
and major customers.
Management assesses Company performance and allocates capital principally
on the basis of two lines of business: portfolio investment and mortgage
servicing. These two lines of business are managed separately as they provide
different sources and types of revenues for the Company.
Portfolio investment primarily includes (i) acquiring non-investment grade
subordinated securities (rated below BBB-) or unrated securities backed by pools
of mortgage loans on multifamily, retail and other commercial real estate
("Subordinated CMBS"), (ii) originating and underwriting commercial mortgage
loans, (iii) securitizing pools of commercial mortgage loans and resecuritizing
pools of Subordinated CMBS. The Company's income is primarily generated from
these investments.
Mortgage servicing, which consists of all the operations of CMSLP, includes
performing servicing functions with respect to the Company's mortgage loans and
the mortgage loans underlying the Company's Subordinated CMBS. CMSLP performs a
variety of servicing including special, master, direct and loan management as
well as advisory services. For these services, CMSLP earns a servicing fee which
is calculated as a percentage of the principal amount of the servicing portfolio
typically paid when the related service is rendered. These services may include
either routine monthly services, non-monthly periodic services or
event-triggered services. In acting as a servicer, CMSLP also earns interest
income on the investment of escrows held on behalf of borrowers and other income
which includes, among other things, assumption fees and modification fees. CMSLP
is an unconsolidated affiliate of CRIIMI MAE. The results of its operations are
reported in the Company's income statement in equity in earnings from
investments.
Revenues, expenses and assets are accounted for in accordance with the
accounting policies set forth in Note 3, "Summary of Significant Accounting
Policies." Overhead expenses, such as administrative expenses, are allocated
either directly to each business line or through estimates based on factors such
as number of personnel or square footage of office space.
<PAGE>49
The following table details the Company's financial performance by these
two lines of business for the three and six months ended June 30, 1999, and
1998. The basis of accounting used in the table is GAAP.
<TABLE>
<CAPTION>
For the three months ended June 30,
1999
------
Portfolio Mortgage
Investment Servicing Elimination(1) Consolidated
------------- --------- ------------- --------------
<S> <C> <C> <C> <C>
Interest Income - Subordinated CMBS $ 38,418,611 -- $ -- $ 38,418,611
Interest Income-Insured Mortgage
Securities 8,489,030 -- -- 8,489,030
Interest Income-Originated Lo ans 8,647,815 -- -- 8,647,815
Interest Income-Other -- 979,299 (979,299) --
Servicing Income -- 1,906,579 (1,906,579) --
Gain on mortgage security dispositions 778,608 -- -- 778,608
Gain on originated loan disposition 58,810 -- -- 58,810
Other income 995,976 737,344 (824,796) 908,524
--------------- ----------- -------------- ---------------
Total Revenue 57,388,850 3,623,222 (3,710,674) 57,301,398
=============== =========== ============== ===============
General and Administrative (3,617,040) (3,058,507) 3,058,507 (3,617,040)
Interest Expense (37,308,289) (166,783) 166,783 (37,308,289)
Other expenses (719,394) (500,244) 500,244 (719,394)
Unrealized loss on warehouse obligation (10,871,970) -- -- (10,871,970)
Reorganization Items (5,438,943) -- -- (5,438,943)
--------------- ------------ -------------- ---------------
Total Expenses (57,955,636 (3,725,534) 3,725,534 (57,955,636)
Net(Loss)/Income (566,786) (102,312) 14,860 (654,238)
Preferred dividends accrued (1,378,961) -- -- (1,378,961)
--------------- ------------ -------------- ---------------
Net(Loss)/Income Available to common
Shareholders $ (1,945,747) $ (102,312) $ 14,860 $ (2,033,199)
=============== ============ ============== ===============
Total Assets $2,363,929,463 $23,898,795 $ (2,083,056) $2,385,745,202
=============== ============ ============== ===============
For the three months ended June 30,
1998
------
Portfolio Mortgage
Investment Servicing Elimination(1) Consolidated
------------- --------- ------------- ----------------
<S> <C> <C> <C> <C>
Interest Income - Subordinated CMBS $ 35,547,939 $ -- $ -- $ 35,547,939
Interest Income-Insured Mortgage
Securities 11,277,667 -- -- 11,277,667
Interest Income - Originated Loans 2,749,695 -- -- 2,749,695
Interest Income-Other -- 889,841 (889,841) --
Servicing Income -- 1,726,389 (1,726,389) --
Loss on mortgage security dispositions (92,283) -- -- (92,283)
Gain on sale of CMBS 29,140,689 -- -- 29,140,689
Other income 1,980,681 1,699,636 (1,114,674) 2,565,643
--------------- ------------ -------------- ---------------
Total Revenue 80,604,388 4,315,866 (3,730,904) 81,189,350
--------------- ------------ -------------- ---------------
General and Administrative (3,047,234) (2,674,097) 2,674,097 (3,047,234)
Interest Expense (32,063,284) (103,519) 103,519 (32,063,284)
Other expenses (734,449) (779,529) 779,529 (734,449)
--------------- ------------ -------------- ---------------
Total Expenses (35,844,967) (3,557,145) 3,557,145 (35,844,967)
--------------- ------------ -------------- ---------------
Net Income/(Loss) 44,759,421 758,721 (173,759) 45,344,383
Preferred dividends accrued or paid (1,918,007) -- -- (1,918,007)
--------------- ------------ -------------- ---------------
Net Income Available to common
shareholders $ 42,841,414 $ 758,721 $ (173,759) $ 43,426,376
=============== ============ ============== ===============
Total Assets $2,818,039,704 $31,348,563 $ (7,332,752) $2,842,055,515
=============== ============ ============== ===============
</TABLE>
(1) The Company performs the mortgage servicing function through CMSLP
which is accounted for under the equity method. The elimination column
reclassifies CMSLP under the equity method as it is accounted for in the
Company's consolidated financial statements.
<PAGE>50
<TABLE>
<CAPTION>
For the six months ended June 30,
1999
------
Portfolio Mortgage
Investment Servicing Elimination(1) Consolidated
------------- --------- ------------- --------------
<S> <C> <C> <C> <C>
Interest Income - Subordinated CMBS $ 76,903,756 $ -- $ -- $ 76,903,756
Interest Income-Insured Mortgage
Securities 17,389,338 -- -- 17,389,338
Interest Income-Originated Loans 17,488,642 -- -- 17,488,642
Interest Income-Other -- 1,552,054 (1,552,054) --
Servicing Income -- 3,520,524 (3,520,524) --
Gain on mortgage security dispositions 1,585,812 -- -- 1,585,812
Gain on originated loan dispositions 160,210 -- -- 160,210
Other income 1,940,211 2,023,624 (4,025,911) (62,076)
-------------- ----------- -------------- ---------------
Total Revenue 115,467,969 7,096,202 (9,098,489) 113,465,682
-------------- ----------- -------------- ---------------
General and Administrative (6,251,154) (7,540,790) 7,540,790 (6,251,154)
Interest Expense (73,737,219) (181,231) 181,231 (73,737,219)
Other expenses (1,438,788) (1,503,206) 1,503,206 (1,438,788)
Unrealized loss on warehouse obligation (6,925,495) (6,925,495)
Reorganization Items (10,946,781) -- -- (10,946,781)
--------------- ------------ -------------- ---------------
Total Expenses (99,299,437) (9,225,227) 9,225,227 (99,299,437)
--------------- ------------ -------------- ---------------
Net Income 16,168,532 (2,129,025) 126,738 14,166,245
Preferred dividends accrued (2,782,495) -- -- (2,782,495)
--------------- ------------ -------------- ---------------
Net Income Available to common
shareholders $ 13,386,037 $(2,129,025) $ 126,738 $ 11,383,750
=============== ============ ============== ===============
Total Assets $2,363,929,463 $23,898,795 $ (2,083,056) $2,385,745,202
=============== ============ ============== ===============
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30,
1998
------
Portfolio Mortgage
Investment Servicing Elimination(1) Consolidated
------------- --------- ------------- --------------
<S> <C> <C> <C> <C>
Interest Income - Subordinated CMBS $ 66,438,960 $ -- $ -- $ 66,438,960
Interest Income-Insured Mortgage
Securities 22,865,904 -- -- 22,865,904
Interest Income - Originated Loans 2,749,695 -- -- 2,749,695
Interest Income-Other -- 1,626,915 (1,626,915) --
Servicing Income -- 3,180,292 (3,180,292) --
Loss on mortgage security dispositions (45,834) -- -- (45,834)
Gain on sale of CMBS 29,140,689 -- -- 29,140,689
Other income 3,564,866 2,634,923 (1,143,112) 5,056,677
--------------- ------------- -------------- ---------------
Total Revenue 124,714,280 7,442,130 (5,950,319) 126,206,091
=============== ============= ============== ===============
General and Administrative (6,030,991) (4,328,852) 4,328,852 (6,030,991)
Interest Expense (59,455,137) (229,146) 229,146 (59,455,137)
Other expenses (1,480,152) (1,187,,412) 1,187,412 (1,480,152)
--------------- ------------- -------------- ---------------
Total Expenses (66,966,280) (5,745,410) 5,745,410 (66,966,280)
Net Income 57,748,010 1,696,720 (204,909) 59,239,811
Preferred dividends accrued or paid (3,557,504) -- -- (3,557,504)
--------------- ------------- -------------- ---------------
Net Income Available to common
shareholders $ 54,190,496 $ 1,696,720 $ (204,909) $ 55,682,307
=============== ============ ============== ===============
Total Assets $2,818,039,704 $31,348,563 $ (7,332,752) $2,842,055,515
=============== ============ ============== ===============
</TABLE>
(1) The Company performs the mortgage servicing function through CMSLP
which is accounted for under the equity method. The elimination column
reclassifies CMSLP under the equity method as it is accounted for in the
Company's consolidated financial statements.
<PAGE>51
18. Financial Statements for the Debtor Entities
The following are unconsolidated financial statements for CRIIMI MAE, CM
Management and Holdings II:
CRIIMI MAE Inc.
BALANCE SHEET
(Unconsolidated)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Subordinated CMBS, at fair value $ 877,558,606 $ 1,071,872,143
Insured Mortgage security, at fair value 5,417,573 5,511,707
Receivables and Other Assets 78,023,932 74,226,682
Cash and Cash Equivalents 64,975,663 22,714,828
Investment in Subsidiaries 240,452,927 246,817,957
----------------- -----------------
Total Assets $ 1,266,428,701 $ 1,421,143,317
================= =================
Liabilities
Accounts Payable and other Accrued Expenses $ 17,495,330 $ 7,374,281
Liabilities Subject to Chapter 11 Proceedings 967,951,576 1,105,892,131
----------------- -----------------
Total Liabilities 985,446,906 1,113,266,412
================= =================
Shareholders' Equity
Convertible Preferred Stock 17,970 18,170
Common Stock 535,532 528,981
Additional paid-in capital 527,336,061 525,621,510
Accumulated Other Comprehensive Income (246,907,768) (218,291,756)
Shareholders' Equity 280,981,795 307,876,905
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 1,266,428,701 $ 1,421,143,317
================= =================
</TABLE>
<PAGE>52
CRIIMI MAE Inc.
STATEMENT OF NET INCOME
AND COMPREHENSIVE INCOME
(Unconsolidated)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, 1999* June 30, 1999*
-------------- --------------
<S> <C> <C>
Interest Income $ 24,736,124 $ 54,986,974
Interest Expense (15,288,982) (32,092,608)
---------------- ----------------
Net Interest Margin 9,447,142 22,894,366
================ ================
Equity in Earnings from Subsidiaries 6,233,334 8,568,440
Other Income 643,711 1,030,956
General and Administrative Expenses (283,432) (424,875)
Amortization of Assets Acquired in Merger (719,394) (1,438,788)
Unrealized loss on warehouse obligation (10,871,970) (6,925,495)
Reorganization Items (5,103,629) (9,538,359)
---------------- -----------------
Subtotal (10,101,380) (8,728,121)
---------------- -----------------
Net (Loss)/Income $ (654,238) $ 14,166,245
================ ================
Other Comprehensive Loss (27,029,587) (28,616,012)
---------------- ----------------
Comprehensive Loss $ (27,683,825) $ (14,449,767)
================ ================
</TABLE>
* The Debtor filed a petition for relief under Chapter 11 on October 5,
1998. Therefore, comparable information for the three and six months ended June
30, 1998 is not presented.
<PAGE>53
CRIIMI MAE Inc.
Notes to Financial Statements
June 30, 1999
(Unconsolidated)
1. BASIS OF PRESENTATION
GAAP requires that certain entities that meet specific criteria be
consolidated with CRIIMI MAE including: CM Management and Holdings II (Debtors)
and CRIIMI MAE Financial Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI MAE
Holdings Inc. (currently inactive), CRIIMI MAE Holdings L.P. (currently
inactive), CRIIMI, Inc., and CRIIMI MAE CMBS Corporation (Non-Debtors). For
purposes of this presentation CRIIMI MAE accounts for all subsidiaries (those
consolidated under GAAP and those accounted for under the equity method under
GAAP) using the equity method of accounting.
All entities that CRIIMI MAE would normally consolidate for GAAP purposes
are being accounted for under the equity method of accounting. The equity method
of accounting consists of recording an original investment in an investee as the
amount originally contributed. Subsequently this investment is
increased/(decreased) for CRIIMI MAE's share of the investee's income/(losses)
and increased for additional contributions and decreased for distributions
received from the investee. CRIIMI MAE's share of the investee's income is
recognized as "Equity in earnings from subsidiaries" on the income statement.
In management's opinion, with the exception of the matter discussed above,
the financial statements of CRIIMI MAE contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of CRIIMI MAE as of June 30, 1999 and December 31, 1998, and the
unconsolidated results of its operations for the three and six months ended June
30, 1999.
<PAGE>54
CRIIMI MAE Management, Inc.
BALANCE SHEET
<TABLE>
<CAPTION>
Assets June 30, 1999 December 31, 1998
-------------- ------------------
<S> <C> <C>
Note Receivable $ 3,376,468 $ 3,376,468
Cash and Cash Equivalents 1,019,494 958,175
Other Assets 3,286,444 3,332,116
Investment in Subsidiaries 17,482,404 19,209,778
------------- -------------
Total Assets $ 25,164,810 $ 26,876,537
============= =============
Liabilities
Accounts Payable and other Accrued Expenses $ 2,542,456 $ 2,367,277
Liabilities Subject to Chapter 11 Proceedings 6,860,964 6,150,787
------------- -------------
Total Liabilities 9,403,420 8,518,064
============= =============
Shareholders' Equity 15,761,390 18,358,473
------------- -------------
Total Liabilities and Sharholders' Equity $ 25,164,810 $ 26,876,537
============= =============
</TABLE>
<PAGE>55
CRIIMI MAE Management, Inc.
STATEMENT OF NET LOSS
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, 1999* June 30, 1999*
-------------- --------------
<S> <C> <C>
Income
- ------
Interest Income - Note Receivable and short term interest $ 73,156 $ 164,602
income
Expenses
Net Equity in Loss from Subsidiaries 73,082 1,537,000
Interest Expense 93,460 205,324
Depreciation and Amortization 130,105 264,445
General and Administrative Expenses 2,966,019 5,088,867
Reorganization Items 94,023 973,800
------------- ------------
Total Expenses 3,356,689 8,069,436
============= ============
Net Loss $ (3,283,533) $(7,904,834)
============= ============
</TABLE>
* CRIIMI MAE Management, Inc. filed a petition for relief under Chapter 11
on October 5, 1998. Therefore, comparable information for the three and six
months ended June 30, 1998 is not presented.
<PAGE>56
CRIIMI MAE Management, Inc.
Notes to Financial Statements
June 30, 1999
1. BASIS OF PRESENTATION
In management's opinion, the accompanying unaudited financial statements of
CM Management contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of CM Management
on a stand-alone basis as of June 30, 1999 and December 31, 1998 and the results
of its operations for the three and six months ended June 30, 1999.
<PAGE>57
Holdings II, L.P.
BALANCE SHEET
<TABLE>
<CAPTION>
Assets June 30, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Subordinated CMBS, at fair value $ 39,989,450 $ 43,001,454
Receivables 3,360,393 1,064,071
Cash 100 100
--------------- --------------
Total Assets $ 43,349,943 $ 44,065,625
=============== ==============
Liabilities
Liabilities Not subject to Chapter 11 Proceedings $ 18,575,529 $ 209,213
Liabilities Subject to Chapter 11 Proceedings 23,924,880 40,132,693
--------------- --------------
Total Liabilities 42,500,409 40,341,906
=============== ==============
Partners' Equity
Contributed Capital 6,061,314 5,927,429
Accumulated Other Comprehensive Income (5,211,780) (2,203,710)
Partners' Equity 849,534 3,723,719
-------------- --------------
Total Liabilities and Partners' Equity $ 43,349,943 $ 44,065,625
============== ==============
</TABLE>
<PAGE>58
Holdings II, L.P.
STATEMENT OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, 1999* June 30, 1999*
-------------- --------------
<S> <C> <C>
Interest Income:
Subordinated CMBS $ 796,630 $ 1,593,299
Interest Expense:
Fixed-rate collateralized mortgage obligations-originated 145,838 145,838
loans
Variable rate secured borrowings - CMBS 542,804 1,102,717
------------- ------------
Total Interest Expense 688,642 1,248,555
============= ============
Net Interest Margin 107,988 344,744
------------- ------------
Reorganization Expense 223,044 416,372
------------- ------------
Net Loss $ (115,056) $ (71,628)
============= =============
Other Comprehensive Loss (2,396,210) (3,008,070)
------------- -------------
Comprehensive Loss $ (2,511,266) $(3,079,698)
============= =============
* Holdings II L.P. filed a petition for relief under Chapter 11 on October
5, 1998. Therefore, comparable information for the three and six months ended
June 30, 1998 is not presented.
</TABLE>
<PAGE>59
Holdings II, L.P.
Notes to Financial Statements
June 30, 1999
1. BASIS OF PRESENTATION
Holdings II's CMBS (2 tranches from CMO-IV) are carried as investments in
loans at amortized cost basis in CRIIMI MAE's June 30, 1999 10-Q's consolidated
financial statements. (See Notes 3 and 6 for discussion of this accounting.) On
a stand-alone basis, GAAP requires that Holdings II's investment in CMBS be
carried as securities (as opposed to loans) at fair value.
In management's opinion, the accompanying unaudited financial statements of
Holdings II contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of Holdings II
on a stand-alone basis as of June 30, 1999 and December 31, 1998 and the results
of its operations for the three and six months ended June 30, 1999 .
2. COLLATERALIZED MORTGAGE OBLIGATIONS - ORIGINATED LOANS
On April 5, 1999, the Company finalized an agreement by which, Salomon
Smith Barney, in cooperation with CRIIMI MAE, will sell the two classes of
investment grade CMBS from CMO-IV held by Holdings II constituting a portion of
the collateral security advances under the Citicorp Financing Agreements. This
transaction will be accounted for as a financing rather than a sale. This will
result in the Company recognizing a fixed rate liability for these bonds, when
they are sold, in the amount of gross proceeds. In May 1999, the Company sold
$20 million face amount of investment grade securities, with a coupon rate of
6.859%, in accordance with the agreement. The variable-rate secured borrowing
associated with these investment grade securities were proportionally reduced on
the balance sheet to reflect the partial sale. The balance of the investment
grade securities will continue to be marketed for sale.
<PAGE>60
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS. When used in this Quarterly Report on Form
10-Q, the words "believes," "anticipates," "expects," "contemplates" and similar
expressions are intended to identify forward-looking statements. Statements
looking forward in time are included in this Quarterly Report on Form 10-Q
pursuant to the "safe harbor" provision of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially, including,
but not limited to the continued instability of the capital markets, the trends
in the CMBS market, the ability of CRIIMI MAE to obtain additional capital,
competition pressures, the effect of future losses on CRIIMI MAE's need for
liquidity, the effects of the bankruptcy proceedings on CRIIMI MAE's ongoing
business, the actions of CRIIMI MAE's creditors, the ability to obtain exit
financing, the provisions of any plan of reorganization approved by the
bankruptcy court, the outcome of litigation to which CRIIMI MAE is a party, as
well as, the risk factors contained below and in the Company's reports filed
with the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, including its Annual Report on Form 10-K for the year ended
December 31, 1998. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
General
CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless the
context otherwise indicates, "CRIIMI MAE" or the "Company") is a fully
integrated commercial mortgage company structured as a self-administered real
estate investment trust ("REIT"). Prior to the filing by CRIIMI MAE Inc.
(unconsolidated) and two of its operating subsidiaries for relief under Chapter
11 of the U.S. Bankruptcy Code on October 5, 1998 (the "Petition Date") as
described below, CRIIMI MAE's primary activities included (i) acquiring
non-investment grade securities (rated below BBB-) or unrated securities backed
by pools of mortgage loans on multifamily, retail and other commercial real
estate ("Subordinated CMBS"), (ii) originating and underwriting commercial
mortgage loans, (iii) securitizing pools of commercial mortgage loans and
resecuritizing pools of Subordinated CMBS, and (iv) through the Company's
servicing affiliate, CRIIMI MAE Services Limited Partnership ("CMSLP"),
performing servicing functions with respect to the mortgage loans underlying the
Company's Subordinated CMBS.
Since filing for Chapter 11 protection, CRIIMI MAE has suspended its
Subordinated CMBS acquisition, origination and securitization programs. The
Company continues to hold a substantial portfolio of Subordinated CMBS,
originated loans and mortgage securities and, through CMSLP, acts as a servicer
for its own as well as third party securitized mortgage loan pools. Despite the
turmoil in the capital markets commencing in late summer of 1998, the mortgage
loans underlying CRIIMI MAE's portfolio of Subordinated CMBS have experienced no
losses of principal from defaults.
In addition to the two operating subsidiaries which filed for Chapter 11
protection with the Company, the Company owns 100% of multiple financing and
operating subsidiaries as well as various interests in other entities (including
CMSLP) which either own or service mortgage and mortgage-related assets (the
"Non-Debtor Affiliates"). See Note 3 to Notes to Consolidated Financial
Statements. None of the Non-Debtor Affiliates has filed for bankruptcy
protection.
The Company was incorporated in Delaware in 1989 under the name CRI Insured
Mortgage Association, Inc. ("CRI Insured"). In July 1993, CRI Insured changed
its name to CRIIMI MAE Inc. and reincorporated in Maryland. In June 1995,
certain mortgage businesses affiliated with C.R.I., Inc. were merged into CRIIMI
MAE (the "Merger"). The Company is not a government sponsored entity or in any
way affiliated with the United States government or any United States government
agency.
<PAGE>61
Chapter 11 Filing
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate financing
facilities secured by the Company's CMBS. The agreements governing these
financing arrangements typically required the Company to maintain collateral
with a market value not less than a specified percentage of the outstanding
indebtedness ("loan-to-value ratio"). The agreements further provided that the
creditors could require the Company to provide cash or additional collateral if
the market value of the existing collateral fell below this minimum amount.
As a result of the turmoil in the capital markets commencing in late summer
of 1998, the spreads between CMBS yields and yields on Treasury securities with
comparable maturities began to widen substantially and rapidly. Due to this
widening of CMBS spreads, the market value of the CMBS securing the Company's
short-term, variable-rate financing facilities declined. CRIIMI MAE's short-term
secured creditors perceived that the value of the CMBS securing their facilities
with the Company had fallen below the minimum loan-to-value ratio described
above and, consequently, made demand upon the Company to provide cash or
additional collateral with sufficient value to cure the perceived value
deficiency. In August and September of 1998, the Company received and met
collateral calls from its secured creditors. At the same time, CRIIMI MAE was in
negotiations with various third parties in an effort to obtain additional debt
and equity financing that would provide the Company with additional liquidity.
On Friday afternoon, October 2, 1998, the Company was in the closing
negotiations of a refinancing with one of its unsecured creditors that would
have provided the Company with additional borrowings when it received a
significant collateral call from Merrill Lynch Mortgage Capital Inc. ("Merrill
Lynch"). The basis for this collateral call, in the Company's view, was
unreasonable. After giving consideration to, among other things, this collateral
call and the Company's concern that its failure to satisfy this collateral call
would cause the Company to be in default under a substantial portion of its
financing arrangements, the Company reluctantly concluded on Sunday, October 4,
1998 that it was in the best interests of creditors, equity holders and other
parties in interest to seek Chapter 11 protection.
On October 5, 1998, CRIIMI MAE (unconsolidated) and two of its consolidated
operating subsidiaries, CRIIMI MAE Management, Inc. ("CM Management"), and
CRIIMI MAE Holdings II, L.P. ("Holdings II" and, together with CRIIMI MAE and CM
Management, the "Debtors") filed for relief under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the District of
Maryland, Southern Division, in Greenbelt, Maryland (the "Bankruptcy Court").
These related cases are being jointly administered under the caption "In re
CRIIMI MAE Inc., et al.," Ch. 11 Case No. 98-2-3115-DK.
While in bankruptcy, CRIIMI MAE has streamlined its operations. The Company
significantly reduced the number of employees in its origination and
underwriting operations in October 1998, but has retained key employees in each
of these operational areas. In connection with these reductions, the Company
closed its five regional loan origination offices, retaining only a core
presence in Rockville, Boston, Houston, Chicago and San Francisco.
<PAGE>62
Although the Company has significantly reduced its work force, the Company
recognizes that retention of its executives and other remaining employees is
essential to the efficient operation of its business and to its reorganization
efforts. Accordingly, the Company has, with Bankruptcy Court approval, adopted
an employee retention plan. See Note 14 to Notes to Consolidated Financial
Statements.
The Company is working diligently toward the preparation of a plan of
reorganization. The Bankruptcy Court has granted the motion to extend the
Company's exclusive right to file a plan of reorganization through September 10,
1999 and to solicit acceptances thereof through November 10, 1999. Management
expects to file a plan of reorganization during September1999, which would
contemplate the Company's emergence from bankruptcy in 1999. There can be no
assurance at this time, however, that a plan of reorganization will be proposed
by the Company during such time or that such plan will be confirmed and
consummated. See Note 16 to Notes to Consolidated Financial Statements for a
general discussion of the bankruptcy process.
On July 13, 1999, the Company indicated that it was in negotiations with a
substantial party (which involves two institutions) with respect to an equity
investment of up to $200 million. This investment would be part of an
approximately $900 million funding of a plan of reorganization consisting of
private placement of equity, bank financing and the issuance of high yield debt.
To address possible changes in the financial markets, the Company is discussing
modifications to the above proposal, as well as a different proposal with
another large institution, which would involve the sale of a significant portion
of the Company's assets and would require less capital. There can be no
assurance that the Company will be able to finalize any of the above
reorganization financings or that, if the recapitalization is successful, it
will take the forms described above.
<PAGE>63
Effect of Chapter 11 Filing on REIT Status and Other Tax Matters
REIT Status. CRIIMI MAE is required to meet income, asset, ownership and
distribution tests to maintain its REIT status. The Company has satisfied the
REIT requirements for all years through, and including, 1998. However, due to
the uncertainty resulting from its Chapter 11 filing, there can be no assurance
that CRIIMI MAE will retain its REIT status for 1999 or subsequent years. If the
Company fails to retain its REIT status for any taxable year, it will be taxed
as a regular domestic corporation subject to federal and state income tax in the
year of disqualification and for at least the four subsequent years.
The Company's 1999 Taxable Income. As a REIT, CRIIMI MAE is generally
required to distribute at least 95% of its "REIT taxable income" to its
shareholders each tax year. For purposes of this requirement, REIT taxable
income excludes certain excess noncash income such as original issue discount
("OID"). In determining its federal income tax liability, CRIIMI MAE, as a
result of its REIT status, is entitled to deduct from its taxable income
dividends paid to its shareholders. Accordingly, to the extent the Company
distributes its net income to shareholders, it effectively reduces taxable
income, on a dollar-for-dollar basis, and eliminates the "double taxation" that
normally occurs when a corporation earns income and distributes that income to
shareholders in the form of dividends. The Company, however, still must pay
corporate level tax on any 1999 taxable income not distributed to shareholders.
Unlike the 95% distribution requirement, the calculation of the Company's
federal income tax liability does not exclude excess noncash income such as OID.
Should CRIIMI MAE terminate or fail to maintain its REIT status during the year
ended December 31, 1999, the tax liability on the taxable income for the six
months ended June 30, 1999 of approximately $31.5 million would be approximately
$12.6 million.
In determining the Company's taxable income for 1999, distributions
declared by the Company on or before September 15, 2000 and actually paid by the
Company on or before December 31, 2000 will be considered as dividends paid for
the 1999 year. The Company is exploring a method for distributing some or all of
its 1999 and subsequent years' taxable income in a noncash form, including the
potential distribution of securities such as convertible preferred stock. There
can be no assurance that the Company will be able to make distributions with
respect to its 1999 taxable income.
1999 Excise Tax Liability. Apart from the requirement that the Company
distribute at least 95% of its REIT taxable income to maintain REIT status,
CRIIMI MAE is also required each calendar year to distribute an amount at least
equal to the sum of 85% of its "REIT ordinary income" and 95% of its "REIT
capital gain income" to avoid incurring a nondeductible excise tax. Unlike the
95% distribution requirement, the 85% distribution requirement is not reduced by
excess noncash income items such as OID. In addition, in determining the
Company's excise tax liability, only dividends actually paid in 1999 will reduce
the amount of income subject to this excise tax.
<PAGE>64
The Company's 1998 Taxable Income. For 1998, the Company has approximately
$15.7 million in undistributed taxable income, which will result in a tax
liability of up to $6.3 million for state and federal taxes, unless the Company
declares a dividend of approximately $15.7 million by September 15, 1999 and
pays such dividend by December 31, 1999. The Company is exploring a method for
distributing some or all of its 1998 undistributed taxable income in a noncash
form, including the distribution of securities such as convertible preferred
stock. Any such noncash distribution would be taxable to the recipient. There
can be no assurance that the Company will be able to make distributions with
respect to its 1998 taxable income.
Taxable Mortgage Pool Risks. An entity that constitutes a "taxable mortgage
pool" as defined in the Tax Code ("TMP") is treated as a separate corporate
level taxpayer for federal income tax purposes. In general, for an entity to be
treated as a TMP (i) substantially all of the assets must consist of debt
obligations and a majority of those debt obligations must consist of mortgages;
(ii) the entity must have more than one class of debt securities outstanding
with separate maturities and (iii) the payments on the debt securities must bear
a relationship to the payments received from the mortgages. The Company
currently owns all of the equity interests in three trusts that constitute TMPs
(CBO-1, CBO-2 and CMO-IV, collectively the "Trusts"). See Notes 5 and 6 for
descriptions of CBO-1, CBO-2 and CMO-IV. The statutory provisions and
regulations governing the tax treatment of TMPs (the "TMP Rules") provide an
exemption for TMPs that constitute "qualified REIT subsidiaries" (that is,
entities whose equity interests are wholly owned by a REIT). As a result of this
exemption and the fact that the Company owns all of the equity interests in each
Trust, the Trusts currently are not required to pay a separate corporate level
tax on income they derive from their underlying mortgage assets.
The Company also owns certain securities structured as bonds (the "Bonds")
issued by each of the Trusts. Certain of the Bonds owned by the Company serve as
collateral (the "Pledged Bonds") for short-term, variable-rate borrowings used
by the Company to finance their initial purchase. If the creditors holding the
Pledged Bonds were to seize or sell this collateral and the Pledged Bonds were
deemed to constitute equity interests (rather than debt) in the Trusts, then the
Trusts would no longer qualify for the exemption under the TMP Rules provided
for qualified REIT subsidiaries. The Trusts would then be required to pay a
corporate level federal income tax. As a result, available funds from the
underlying mortgage assets that would ordinarily be used by the Trusts to make
payments on certain securities issued by the Trust (including the equity
interests and the Pledged Bonds) would instead be applied to tax payments. Since
the equity interests and Bonds owned by the Company are the most subordinated
securities and, therefore, would absorb payment shortfalls first, the loss of
the exemption under the TMP rules could have a material adverse effect on their
value and the payments received thereon.
In addition to causing the loss of the exemption under the TMP Rules, a
seizure or sale of the Pledged Bonds and a characterization of them as equity
for tax purposes could also jeopardize the Company's REIT status if the value of
the remaining ownership interests in any Trust held by the Company (i) exceeded
5% of the total value of the Company's assets or (ii) constituted more than 10%
of the Trust's voting interests.
<PAGE>65
Investment Company Act Risk
Under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), an investment company is required to register with the 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. However, as described below, companies that
are primarily engaged in the business of acquiring mortgages and other liens on
and interests in real estate ("Qualifying Interests") are excluded from these
requirements of the Investment Company Act.
To qualify for the Investment Company Act exclusion, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests
(the "55% Requirement") and is also required to maintain an additional 25% in
Qualifying Interests or other real estate-related assets ("Other Real Estate
Interests" and such requirement, the "25% Requirement"). According to current
SEC staff interpretations, CRIIMI MAE believes that its government insured
mortgage securities and originated loans constitute Qualifying Interests. In
accordance with current SEC staff interpretations, the Company believes that all
of its Subordinated CMBS constitute Other Real Estate Interests and that certain
of its Subordinated CMBS also constitute Qualifying Interests. On certain of the
Company's Subordinated CMBS, the Company, along with other rights, has the
unilateral right to direct foreclosure with respect to the underlying mortgage
loans. Based on such rights and its economic interest in the underlying mortgage
loans, the Company believes that the related Subordinated CMBS constitute
Qualifying Interests. As of June 30, 1999, the Company believes that it was in
compliance with both the 55% Requirement and the 25% Requirement.
If the SEC or its staff were to take a different position with respect to
whether such Subordinated CMBS constitute Qualifying Interests, the Company
could, among other things, be required either (i) to change the manner in which
it conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company, either of which could have
a material adverse effect on the Company. If the Company were required to change
the manner in which it conducts its business, it would likely have to dispose of
a significant portion of its Subordinated CMBS or acquire significant additional
assets that are Qualifying Interests. Alternatively, if the Company were
required to register as an investment company, it expects that its operating
expenses would significantly increase and that the Company would have to reduce
significantly its indebtedness, 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.
Further, if the Company were deemed an unregistered investment company, the
Company could be subject to monetary penalties and injunctive relief. The
Company would be unable to enforce contracts with third parties and third
parties could seek to obtain rescission of transactions undertaken during the
period the Company was deemed an unregistered investment company. In addition,
as a result of the Company's Chapter 11 filing, the Company is limited in
possible actions it may take in response to any need to modify its business plan
in order to register as an investment company, or avoid the need to register.
Certain dispositions or acquisitions of assets would require Bankruptcy Court
approval. Also, any forced sale of assets that occurs after the bankruptcy stay
is lifted would change the Company's asset mix, potentially resulting in the
need to register as an investment company under the Investment Company Act or
take further steps to change the asset mix. Any such results would be likely to
have a material adverse effect on the Company.
<PAGE>66
Year 2000
The Year 2000 issue is a computer programming issue that may affect many
electronic processing systems. Until relatively recently, in order to minimize
the length of data fields, most date-sensitive programs eliminated the first two
digits of the year. This issue could affect information technology ("IT")
systems and date sensitive embedded technology that controls certain systems
(such as telecommunications systems, security systems, etc.) leaving them unable
to properly recognize or distinguish dates in the twentieth and twenty-first
centuries. This treatment could result in significant miscalculations when
processing critical date-sensitive information relating to dates after December
31, 1999.
CRIIMI MAE has substantially completed the Year 2000 testing and
remediation of its IT systems, which include software systems to service
mortgage loans, administer securitizations and manage mortgage assets, as well
as software systems used for internal accounting purposes. A majority of the IT
systems used by the Company are licensed from third parties. These third parties
have either provided upgrades to existing systems or have indicated that their
systems are Year 2000 compliant. CRIIMI MAE has applied upgrades and has
substantially completed compliance testing and remediation as of August 1999.
There can be no assurance, however, that the Company's IT systems will be Year
2000 compliant by December 31, 1999.
The Year 2000 issue may also affect CRIIMI MAE's date-sensitive embedded
technology, which controls systems such as the telecommunications systems,
security systems, etc. The failure of any such systems to be Year 2000 compliant
could be material to the Company. The Company does not currently believe that it
has any significant exposure for failure of any such systems to be Year 2000
compliant or that the cost to modify or replace any such technology to make it
Year 2000 compliant will be material.
The potential impact of the Year 2000 issue depends not only on the
corrective measures CRIIMI MAE has undertaken and will undertake, but also on
the ways in which the Year 2000 issue is addressed by third parties with whom
CRIIMI MAE directly interfaces or whose financial condition or operations are
important to CRIIMI MAE, including government agencies, financial institutions,
creditors, borrowers and others involved in the CMBS industry. CRIIMI MAE
continues to ommunicate with third parties with which it directly interfaces to
evaluate the risk of their failure to be Year 2000 compliant and the extent to
which CRIIMI MAE may be vulnerable to such failure. Although the Company has
received positive responses from those third parties that have been contacted,
there can be no assurance that the systems of these third parties or those who
have not yet been contacted will be Year 2000 compliant by December 31, 1999.
The failure of these third parties to be Year 2000 compliant could have a
material adverse effect on the operations of CRIIMI MAE.
<PAGE>67
The Company believes that its greatest risk with respect to the Year 2000
issue relates to failures by third parties to be Year 2000 compliant. In
addition to risks posed by third parties with which the Company interfaces
directly, risks are created by third parties (i.e., tenants in mortgage
collateral, borrowers, building service providers to mortgage collateral, banks
and other financial institutions, etc.) providing services to large segments of
society. The failure of third parties to be Year 2000 compliant could, among
other things, cause disruptions in the capital and real estate markets and
borrower defaults on real estate loans underlying mortgage-backed securities.
With respect to the systems used directly by the Company, the Company
believes that its greatest internal exposure to the Year 2000 issue involves the
Company's loan servicing operations, which rely on computers to process and
manage loans. The Company has applied a vendor upgrade and has completed
compliance testing on the upgrade. The Company believes that the results of such
testing indicate that this risk has been substantially mitigated. However, any
failure of these systems to be Year 2000 compliant could have a material adverse
effect on the Company's loan servicing operations.
The cost of IT and embedded technology systems testing and upgrades is not
expected to be material to CRIIMI MAE's consolidated operating results. The
Company estimates incurring total costs of approximately $350,000 for the Year
2000 assessment and compliance testing, which will be recorded as noninterest
expense. Currently, the Company also estimates the cost of system upgrades
purely in relation to the Year 2000 issue will be immaterial.
Although CRIIMI MAE has substantially completed its organizational
compliance testing and remediation, it has drafted contingency plans for the
risks of the failure of the Company or third parties to be Year 2000 compliant.
Management intends to complete contingency plans for the Year 2000 issue in late
1999. Due to the inability to predict all of the potential problems that may
arise from the Year 2000 issue, there can be no assurance that all contingencies
will be adequately addressed by such plans.
<PAGE>68
Results of Operations
1999 versus 1998
Interest Income - Subordinated CMBS
Income from Subordinated CMBS increased by approximately $2.9 million, or
8%, to approximately $38.4 million during the three months ended June 30, 1999
as compared to $35.5 million for the corresponding period in 1998. Interest
income from subordinated CMBS increased by approximately $10.5 million or 16% to
approximately $76.9 million for the six months ended June 30, 1999 from $66.4
million for the corresponding period in 1998. During the first three quarters of
1998, the Company increased its CMBS portfolio by acquiring Subordinated CMBS at
purchase prices aggregating approximately $853 million , of which $516 million
was purchased after the first quarter of 1998. This overall increase in income
from Subordinated CMBS was partially offset by a reduction in income from
Subordinated CMBS due to the de-recognition of $132 million face amount of CMBS
from CBO-1 in connection with CBO-2 and also the de-recognition of $345 million
face amount of CMBS in connection with CBO-2. See Note 5 to Notes to
Consolidated Financial Statements.
Generally accepted accounting principles ("GAAP") require that interest
income generated by Subordinated CMBS be recorded based on the effective
interest method using the anticipated yield over the expected life of the
Subordinated CMBS. This currently results in income which is lower for financial
statement purposes than for tax purposes. Based upon the timing and amount of
future credit losses and certain other assumptions estimated by management, as
discussed below, the estimated weighted average anticipated unleveraged yield
for CRIIMI MAE's Subordinated CMBS for financial statement purposes as of June
30, 1999 was approximately 10.1% . These returns were determined based on the
anticipated yield over the expected weighted average life of the Subordinated
CMBS, which considers, among other things, anticipated losses.
Interest Income-Insured Mortgage Securities
Interest income from Insured Mortgage Securities decreased by approximately
$2.8 million or 25% to approximately $8.5 million for the three months ended
June 30, 1999 from $11.3 million for the corresponding period in 1998. Interest
income from Insured Mortgage Securities decreased by approximately $5.5 million
or 24% to approximately $17.4 million for the six months ended June 30, 1998
from approximately $22.9 million for the corresponding period in 1998. This
decrease was principally due to the prepayment of nine mortgage securities
during the first half of 1999, and due to the sale or prepayment of 27 mortgage
securities held by CRIIMI MAE and certain of its wholly owned subsidiaries
during the year ended 1998. The prepayments aggregated approximately $58.4
million and $117.4 million in net proceeds for the six months ended June 30,
1999 and the year ended December 31, 1998, respectively.
<PAGE>69
Interest Income-Originated Loans
Interest income from originated loans increased by approximately $5.9
million or 215% to approximately $8.6 million for the three months ended June
30, 1999 as compared to $2.7 million for the corresponding period in 1998.
Interest income from originated loans increased by approximately $14.7 million
or 536% to approximately $17.5 million as compared to approximately $2.7 million
for the corresponding period in 1998. The interest income from originated loans
was derived from originated loans included in the CMO-IV securitization which
closed in June 1998. The CMO-IV securitization, where loans were simultaneously
acquired and securitized, totaled $496 million face value of conduit loans, a
majority of which were no-lock loans. During the first half of 1999, two
mortgages prepaid resulting in net proceeds of approximately $7.6 million.CMO-IV
Interest Expense
Total interest expense increased by approximately $5.2 million or 16% to
approximately $37.3 million for the three months ended June 30, 1999 from
approximately $32.1 million for the corresponding period in 1998. Total interest
expense increased by approximately $14.3 million or 24% to approximately $73.7
million for the six months ended June 30, 1999 compared to approximately $59.5
million for the corresponding period in 1998. This increase was principally a
result of increased borrowings in connection with the acquisition of
Subordinated CMBS during 1998. Additionally, CRIIMI MAE incurred interest
expense in connection with the issuance of collateralized mortgage obligations
in connection with CMO-IV. These increases were partially offset by the impact
of $477 million face amount of debt de-recognized from the financial statements
in conjunction with CBO-2 in May 1998. Due to the Chapter 11 filing, certain
lenders declared defaults or otherwise took action against the Company with
respect to a number of CRIIMI MAE's financing facilities. See Note 16 to Notes
to Consolidated Financial Statements for a discussion of material litigation
between the Company and various creditors and agreements the Company has reached
with certain of these creditors.
Net Interest Margin
Net interest margin increased by approximately $735,000 or 4% for the three
months ended June 30, 1999 to approximately $18.2million from approximately
$17.5 million for the corresponding period in 1998. For the six months ended
June 30, 1999, net interest margin increased by approximately $5.4 million or
17% to approximately $38 million from approximately $32.6 million for the
corresponding period in 1998. The net interest margin increase was due primarily
to the increase in Subordinated CMBS and, to a lesser extent, income from
originated loans, as previously discussed.
Gain on Sale of CMBS
In May 1998, CRIIMI MAE completed CBO-2 pursuant to which it sold $468
million of investment grade securities created through the resecuritization of
approximately $1.8 billion of its Subordinated CMBS. CRIIMI MAE recognized a
gain of approximately $29 million on the sale of $345 million face amount
investment grade securities sold without call provisions, recognizing CRIIMI
MAE's transfer of control on those securities. The sale of $123 million face
amount investment grade securities with significant call provisions was treated
as a financing and resulted in an unrealized gain of approximately $26 million.
These securities and certain other securities in the transaction included call
provisions to enable CRIIMI MAE to 1) repurchase bonds if market conditions
warrant, and 2) call bonds when it is no longer cost effective to service them.
The sold investment grade securities treated as a financing, as well as
approximately $1.3 billion face amount of investment grade and non-investment
grade securities retained by CRIIMI MAE, are now required to be reflected on
CRIIMI MAE's balance sheet at their fair market value. Additionally, due to the
sale treatment under FAS 125, all remaining Subordinated CMBS and insured
mortgage securities are required to be carried at fair market value.
Additionally, as part of CBO-2, in May 1998, CMSLP sold trustee servicing
rights for $4.2 million, resulting in a gain of $4.2 million for tax purposes,
and approximately $400,000 for financial reporting purposes.
<PAGE>70
Equity in Earnings from Investments
Equity in earnings decreased to approximately $121,000 during the second
quarter of 1999 as compared to equity in earnings of $942,000 for the second
quarter of 1998. Equity in earnings decreased by approximately $3.7 million
during the six months ended June 30, 1999 due to a net loss of approximately
$1.5 million as compared to equity in earnings of $2.2 million for the
corresponding period in 1998. This decrease included an $860,000 expense for a
prepayment penalty shortfall during the first quarter of 1999 and an increase in
general and administrative expenses due to the growth of CMSLP during 1998 and
personnel costs related to a retention program. In addition, as stated in the
Company's 1998 Annual Report on Form 10-K, during the fourth quarter of 1998,
due to CRIIMI MAE's Chapter 11 filing and its relationship with CRIIMI MAE,
CMSLP arranged for ORIX to succeed CMSLP as master servicer on two commercial
mortgage pools. The remaining servicing portfolio was approximately $30.6
billion as of June 30, 1999 as compared to approximately $31.5 billion as of
June 30, 1998.
Other Income
Other income decreased by approximately $836,000 or 52% during the second
quarter of 1999 as compared to approximately $1.6 million for the corresponding
period in 1998. Other income decreased by approximately $1.4 million or 49%
during the six months ended June 30, 1999 as compared to approximately $2.8
million for the corresponding period in 1998. This decrease was primarily
attributable to a decrease in short-term interest and other income earned during
the first half of 1999 on the amounts deposited in the loan origination reserve
account, which had an average balance of $45 million during the first half of
1998. Approximately $682,000 and $1.4 million of short-term interest income and
net-carry income were earned on these deposits for the three and six months
ended June 30, 1998, respectively. This decrease was partially offset by
interest income earned on cash deposits in the first half of 1999 as compared to
the first half of 1998.
Net Gains on Mortgage Securities Dispositions
During the second quarter of 1999 and 1998, net gains/(losses) on mortgage
dispositions were approximately $779,000 and $(92,000), respectively. For the
six months ended June 30, 1999 and 1998, net gains/(losses) on mortgage
dispositions were approximately $1.6 million and $(46,000), respectively. For
the six months ended June 30, 1999, the prepayments of mortgage securities
represented approximately 12% of CRIIMI MAE's beginning of the year portfolio
balance. For any period, 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.
Gains on Originated Loan Mortgage Disposition
During the second quarter of 1999, net gain on originated loan disposition
was approximately $59,000, which was a result of one prepayment of a mortgage in
the originated loan portfolio. During the six months ended June 30, 1999, net
gains on originated loan dispositions was approximately $160,000, which was a
result of two prepayments in the originated loan portfolio.
<PAGE>71
General and Administrative Expenses
General and administrative expenses increased by approximately $570,000, or
19%, to approximately $3.6 million for the second quarter of 1999 as compared to
approximately $3.0 million for the second quarter of 1998. General and
administrative expenses increased by approximately $221,000 or 4% to
approximately $6.3 million for the six months ended June 30, 1999 as compared to
approximately $6.0 million for the corresponding period in 1998. The increase in
general and administrative expenses was primarily due to an increase in
professional fees related to general corporate matters. This increase was
partially offset by the suspension of certain business activities and the
dismissal of employees involved in suspended activities following the Chapter 11
filing in the fourth quarter of 1998.
Unrealized Loss on Warehouse Obligation
During the three and six months ended June 30, 1999, the Company recorded
an unrealized loss of approximately $10.9 million and $6.9 million respectively,
primarily due to a decrease in the selling price of the loans in the Company's
warehouse line with Citibank.
As a result of the valuation received for the sale of the Citibank
warehouse loans on August 5, 1999, the Company recorded an additional $10.9
million unrealized loss in the second quarter bringing its unrealized losses
through June 30, 1999 to $35.3 million. The unrealized losses recorded to date
also includes an estimate of losses related to the three loans (approximately $2
million) the Company did not sell, all of which are currently being marketed for
sale. Prior to the actual sale of these loans the Company had recorded its
unrealized losses based on pricing data received from Citibank. (See also "Tax
Basis Income" discussion, which follows).
Reorganization Items
During the three and six months ended June 30, 1999 the Company recorded
approximately $5.4 million and $10.9 million, respectively in reorganization
items due to the Chapter 11 filings of CRIIMI MAE, CM Management and Holdings
II.
<TABLE>
<CAPTION>
Reorganization Item For the three months For the six months ended
ended June 30, 1999 ended June 30, 1999
-------------------- ------------------------
<S> <C> <C>
Short-term interest income $ (237,000) $ (469,400)
Professional fees 4,974,155 10,114,155
Employee Retention Program accrued costs 202,605 745,502
Other 499,183 556,524
------------- -------------
Total $ 5,438,943 $ 10,946,781
============= =============
</TABLE>
<PAGE>72
Financial Statement Net Income
As a result of the foregoing, net loss available to common shareholders for
financial statement purposes was approximately $2 million for the three months
ended June 30, 1999 from approximately $43.4 million as of June 30, 1998. On a
per basic share basis, financial statement net loss decreased to $0.04 per basic
share for the second quarter of 1999 from net income of $0.92 per basic share
for the second quarter of 1998. Net income available to common shareholders for
financial statement purposes was approximately $11.4 million for the six months
ended June 30, 1999, a 80% decrease from approximately $55.7 million for the six
months ended June 30, 1998.
Tax Basis Income
CRIIMI MAE earned approximately $11.9 million in tax basis income available
to common shareholders during the second quarter of 1999 or $0.22 per share,
compared to approximately $22.4 million or $0.47 per share for the second
quarter of 1998. CRIIMI MAE earned approximately $31.5 or $0.59 per share for
the six months ended June 30, 1999, compared to approximately $37.4 or $0.81 per
share for the six months ended June 30, 1998.
The primary factors resulting in the net decrease in tax basis income were
the deduction of reorganization costs and net decreases in earnings from equity
investments. In the second quarter of 1998, as part of CBO-2, CMSLP sold
servicing rights for $4.2 million resulting in a gain of $4.2 million for tax
purposes which was included in equity in earnings in 1998. Partially offsetting
the decreases was an increase in net interest margin due to the growth of CRIIMI
MAE's portfolio of Subordinated CMBS and, to a lesser extent, earnings from
CMO-IV.
As previously discussed, through the second quarter of 1999, the Company
recorded cumulative unrealized losses of approximately $35 million in connection
with the sale of the loans in the Company's warehouse line with Citibank. On a
tax basis, the loss related to the loans that were sold is estimated to be
approximately $33 million, which will be recorded in the third quarter as a
realized loss.
<PAGE>73
Cash Flow
1999 versus 1998
Net cash provided by operating activities increased for the six months
ended June 30, 1999 as compared to the six months ended June 30, 1998. The
increase was primarily due to an increase in payables incurred due to the
reorganization of the Company and an increase in net interest margin resulting
from the Company's acquisitions of Subordinated CMBS.
Net cash provided by investing activities increased for the six months
ended June 30, 1999 as compared to the six months ended June 30, 1998. The
increase was primarily due to the suspension of the Company's Subordinated CMBS
acquisition and origination programs as a result of the Chapter 11 filing in
October 1998.
Net cash used in financing activities increased for the six months ended
June 30, 1999 as compared to the six months ended June 30, 1998. The increase
was primarily due to the suspension of the Company's Subordinated CMBS
acquisition activities, suspension of equity and debt offerings, payment of
principal paydowns per the stipulation areements with secured lenders and, to a
lesser extent, the suspension of dividends paid as a result of the Chapter 11
filing in October 1998.
Liquidity and Capital Resources
Prior to the Petition Date, CRIIMI MAE used proceeds from long-term,
fixed-rate match-funded debt refinancings, short-term, variable-rate, secured
borrowings, securitizations, other borrowings, issuances of common and preferred
shares and unsecured borrowings to meet the capital requirements of its business
plan. Since the Chapter 11 filing, the Company has suspended its Subordinated
CMBS acquisition, origination and securitization operations, but continues to
service mortgage loans through CMSLP.
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable rate borrowings
secured by the Company's Subordinated CMBS. The agreements governing these
financing arrangements typically required the Company to maintain loan-to-value
ratios. The agreements further provided that the lenders could require the
Company to post cash or additional collateral if the value of the existing
collateral fell below this minimum amount.
<PAGE>74
In order to refinance a portion of its short-term, variable rate secured
borrowings with long-term, fixed rate debt, the Company entered into
resecuritization transactions. In May 1998, CRIIMI MAE completed CBO-2, its
second resecuritization of its Subordinated CMBS portfolio, which under FAS 125,
qualified for both sale and financing accounting. Through CBO-2, CRIIMI MAE
refinanced $468 million of its variable rate debt with fixed-rate, match-funded
debt. The debt is considered match-funded because the maturities and principal
requirements of the debt match those of the related collateral. The transaction
also generated additional borrowing capacity of approximately $160 million,
which was used primarily to fund additional Subordinated CMBS purchases. In June
1998, CRIIMI MAE securitized $496 million of originated or acquired commercial
mortgage loans by selling $397 million face amount of fixed-rate investment
grade securities. The tranches not sold to the public were partially financed
with variable-rate, secured financing agreements.
After the above structured finance transactions, the Company continued to
have a substantial amount of short-term, variable rate, secured financing
facilities which were subject to the previously discussed collateral
requirements based on CMBS security prices. As a result of the turmoil in the
capital markets commencing in late summer of 1998, the spreads between CMBS
yields and the yields on Treasury securities with comparable maturities began to
increase substantially and rapidly. CRIIMI MAE's short-term secured creditors
perceived that the value of the Subordinated CMBS securing their facilities with
the Company had fallen below the minimum loan-to-value ratio and, consequently,
made demand upon the Company to provide cash or additional collateral with
sufficient value to cure the perceived value deficiency. In August and September
of 1998, the Company received and met collateral calls from its secured
creditors. At the same time, CRIIMI MAE was in negotiations with various third
parties in an effort to obtain additional debt and equity financing that would
provide the Company with additional liquidity.
On Friday afternoon, October 2, 1998, the Company was in the closing
negotiations of a refinancing with one of its unsecured creditors that would
have provided the Company with additional borrowings, when it received a
significant collateral call from Merrill Lynch. The basis for this collateral
call, in the Company's view, was unreasonable. After giving consideration to,
among other things, this collateral call and the Company's concern that its
failure to satisfy this collateral call would cause the Company to be in default
under a substantial portion of its financing arrangements, the Company
reluctantly concluded on Sunday, October 4, 1998 that it was in the best
interests of creditors, equity holders and other parties in interest to seek
Chapter 11 protection. Accordingly, the Company filed for relief under Chapter
11 on Monday, October 5, 1998.
As of June 30, 1999, CRIIMI MAE had secured financing agreements with GACC,
Lehman ALI, Inc., First Union, Morgan Stanley, Merrill Lynch, and Citicorp.
Certain of these lenders have registered the pledged securities in their own
names. As a result, the trustee makes payments on such securities to the
registered holder. During the fourth quarter of 1998 and first half of 1999,
certain registered holders withheld payments related to securities not
registered to CRIIMI MAE. The Company has negotiated and finalized agreements
with four of its lenders. CRIIMI MAE Inc.'s cash position has increased from
approximately $7 million on October 5, 1998 to approximately $76 million as of
August 10, 1999. Based on present information, the Company believes that it will
have sufficient cash flow to fund its current operations while in bankruptcy
during 1999. However, due to the uncertainty of the effects of the Chapter 11
filing on the business of the Company, pending litigation, material
reorganization items to be incurred during the pendency of the bankruptcy and
numerous other factors beyond the Company's control, no assurance can be given
that the Company's cash flow will be sufficient to fund operations while the
Company is in bankruptcy during 1999.
The value of the Company's portfolio is based upon the combined yield of
current treasury rates and the current spread above treasury rates that an
investor would be willing to accept in a purchase transaction. During the six
months ended June 30, 1999, the required spread above treasury rates declined on
a total portfolio basis. However, this spread decline was more than offset by an
increase in treasury rates which caused an aggregate $38.3 million decrease in
the value of the Company's portfolio of CMBS and FHA's and GNMA's from December
31, 1998. In addition, since June 30, 1999, treasury rates have increased
further and other general market indices are indicating that certain spreads
have increased as well, which would cause a further reduction of the Company's
portfolio.
<PAGE>75
In addition, on March 5, 1999, Morgan Stanley sold the CBO-2 BBB Bonds
which have a face amount of $205.8 million and a coupon of 7%. The proceeds of
$159 million were used to pay off $141.2 million of the related short-term,
variable-rate debt due Morgan Stanley and the remaining net proceeds of $17.8
million were remitted to CRIIMI MAE. CRIIMI MAE retained the right to call each
CMBS when the outstanding principal balance amortizes to 15% of its original
face balance. The 15% call option prevents CRIIMI MAE from surrendering control
of the assets pursuant to the requirements of FAS 125 and thus the transaction
is accounted for as a secured borrowing and not a sale. This resulted in CRIIMI
MAE recognizing a fixed-rate liability for these bonds in the amount of the
gross proceeds, which was approximately $159 million.
On April 5, 1999, the Company finalized an agreement by which, Salomon
Smith Barney, in cooperation with CRIIMI MAE, will sell two classes of
investment grade CMBS from CMO-IV with a face amount of $45.9 million and an
average coupon rate of 6.96% constituting a portion of the collateral security
advances under financing agreements with Citicorp. CRIIMI MAE retains the right
to call each CMBS when the principal balance amortizes to 15% of its original
face balance. The 15% call option prevents CRIIMI MAE from surrendering control
of the assets pursuant to the requirements of FAS 125 and thus the transaction
will be accounted for as a secured borrowing and not a sale. A minimum sales
price was established in order to sell the bonds. Proceeds from the sale will be
used to pay off $39.6 million of secured debt, certain costs, and the remainder,
if any, remitted to CRIIMI MAE. This will result in CRIIMI MAE recognizing a
fixed-rate liability for these bonds, when they are sold, in the amount of the
gross proceeds. During May 1999, the Company sold $20 million face amount of
investment grade CMBS from CMO-IV in accordance with the agreement noted above.
Accordingly, the proceeds from the sale of these CMBS will pay off a portion of
the secured debt owed under the Citicorp Financing agreements and the Company
will recognize fixed rate debt in the amount of the gross proceeds received. The
variable rate secured borrowings associated with these investment grade
securities were proportionally reduced (approximately $17 million) on the
balance sheet to reflect the partial sale. The balance of the investment grade
CMBS from CMO-IV will continue to be marketed for sale.
On August 5, 1999, all but three of the commercial loans originated under
the Citibank Program in 1998, were sold for gross proceeds of approximately $308
million. The loans sold had an aggregate unpaid principal balance of $339
million. The minimum net proceeds provision was waived by agreement of the
Company, the Unsecured Committee and the Equity Committee. As a result of the
valuation received in the sale, the Company recorded an additional $10.9 million
unrealized loss in the second quarter bringing its unrealized losses through
June 30, 1999 to $35.3 million. For income tax purposes, the portion of this
loss related to the loans that were sold (estimated at $33 million) is expected
to be recorded as a realized loss on the loan sale date in the third quarter of
1999. The unrealized losses recorded to date also include an estimate of losses
(approximately $2 million) related to the three loans in the Citibank warehouse
program (unpaid principal balance of $32.7 million) not sold, all of which are
currently being marketed for sale. Prior to the actual sale of these loans the
Company had recorded its unrealized losses based on pricing data received from
Citibank.
The Company's ability to resume the acquisition of Subordinated CMBS, as
well as its loan origination and securitization programs, depends on its ability
to obtain additional capital and emerge from bankruptcy as a successfully
reorganized company. 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 perception in the capital markets of the
Company's business, covenants under the Company's current and future debt
securities and credit facilities, results of operations, leverage, financial
condition and business prospects. The Company can give no assurances as to
whether it will obtain capital or the terms upon which capital can be obtained.
<PAGE>76
Dividends
During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy Court
approval. Among the other factors which impact CRIIMI MAE's cash dividends are
(i) the level of income earned on uninsured mortgage assets, such as
Subordinated CMBS (including, but not limited to, the amount of OID income and
losses, if any, on Subordinated CMBS), and, to the extent applicable, originated
loans, which varies depending on prepayments, defaults, etc., (ii) the level of
income earned on CRIIMI MAE's or its subsidiaries' insured mortgage security
collateral depending on prepayments, defaults, etc., (iii) the fluctuating
yields on short-term, variable rate, 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 rate at which cash flows from mortgage assets, mortgage
dispositions, and, to the extent applicable, loan origination reserves, escrow
deposits and distributions from its subsidiaries can be reinvested, (v) changes
in operating expenses (including those related to the Chapter 11 filing), (vi)
to the extent applicable, cash dividends paid on preferred shares, (vii) to the
extent applicable, whether the Company's taxable mortgage pools continue to be
exempt from corporate level taxes, (viii) the timing and amounts of cash flows
attributable to its other lines of business - mortgage servicing, advisory, to
the extent applicable, origination services and, (ix) to the extent applicable,
realized losses on certain transactions.
Due to the Chapter 11 filing on October 5, 1998, dividends were not paid in
the first half of 1999 on common or preferred shares. However, since dividends
on the Company's Series B, C and D Preferred Shares are cumulative, the
dividends payable at June 30, 1999 were accrued in the financial statements. For
the three and six months ended June 30, 1998, dividends paid on Series B were
approximately $1.5 million and approximately $2.9 million or $0.915 and $1.76
per share, respectively and dividends paid on Series C Preferred Shares were
approximately $407,061 and $689,440 for the three and six months ended June 30,
1998, respectively. There were no Series D Preferred Shares outstanding during
the six months ended June 30, 1998.
REIT Status
CRIIMI MAE has elected to qualify as a REIT for tax purposes under Sections
856-860 of the Internal Revenue Code for the 1998 tax year. To qualify for tax
treatment as a REIT under the Internal Revenue Code, CRIIMI MAE must satisfy
certain criteria, including certain requirements regarding the nature of its
ownership, assets, income and distributions of taxable income. For a discussion
of the effect of the Chapter 11 filing on REIT status and related risks. See
"Management's Discussion and Analysis- Effect of Chapter 11 Filing on REIT
Status and Certain Tax Matters".
<PAGE>77
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk is exposure to changes in interest
rates related to the US Treasury market as well as the LIBOR market. The Company
will experience fluctuations in the market value of its assets related to
changes in the interest rates of US Treasury bonds as well as increases in the
spread between US Treasury bonds and CMBS. The Company will also have an
increase in the amount of interest expense paid on its variable rate obligations
primarily due to increases in One-Month LIBOR.
CRIIMI MAE has entered into interest rate protection agreements to mitigate
the adverse effects of rising interest rates on its variable-rate borrowings.
The caps provide protection to CRIIMI MAE to the extent interest rates, based on
a readily determinable interest rate index (typically One-Month LIBOR), increase
above the stated interest rate cap, in which case, CRIIMI MAE will receive
payments based on the difference between the index and the cap. The term of the
cap as well as the stated interest rate of the cap, which in most cases is
currently above the current rate of the index, will limit to some degree the
amount of protection that the caps offer.
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable rate borrowings
secured by the Company's CMBS. The agreements governing these financing
arrangements typically required the Company to maintain collateral at all times
with a market value not less than a specified percentage of the outstanding
indebtedness. The agreements further provided that the lenders could require the
Company to post cash or additional collateral if the value of the existing
collateral fell below this threshold amount. These financing arrangements were
used by CRIIMI MAE to provide financing during the period of time from the
acquisition or creation of the Subordinated CMBS to the date when CRIIMI MAE
would resecuritize the portfolio in order to match-fund a significant portion of
the portfolio with fixed rate debt, thereby eliminating interest rate risk on
this portion of the CMBS. CRIIMI MAE, in limited cases, entered into
transactions to hedge the value of securities it intended to sell by selling
short Treasury or government insured securities the Company did not own. These
transactions are marked to market with unrealized gains or losses reflected in
the Company's income statement.
Management has determined that there has not been a material change as of
June 30, 1999 in market risk from December 31, 1998 as reported in the Company's
Annual Report on Form 10-K as of December 31, 1998. The value of the Company's
portfolio is based upon the combined yield of current treasury rates and the
current spread above treasury rates that an investor would be willing to accept
in a purchase transaction. During the six months ended June 30, 1999, the
required spread above treasury rates declined on a total portfolio basis.
However, this spread decline was more than offset by an increase in treasury
rates which caused an aggregate $38.3 million decrease in the value of the
Company's portfolio of CMBS and FHA's and GNMA's from December 31, 1998. In
addition, since June 30, 1999, treasury rates have increased further and other
general market indices are indicating that certain spreads have increased as
well, which would cause a further reduction of the Company's portfolio.
<PAGE>78
PART II
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 16 of Notes to Consolidated Financial
Statements of CRIIMI MAE Inc. which is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Reference is made to Notes 1, 9, 12 and 16 to Notes to Consolidated
Financial Statements of CRIIMI MAE which are incorporated herein by reference.
Such Notes contain a description of alleged defaults asserted by certain of the
Company's secured lenders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (filed herewith)
99(a) Amended Stipulation and Agreed Order
Authorizing Use of Cash Collateral
(German American Capital Corporation)
entered May 11, 1999 (filed herewith)
99(b) Stipulation Extending Wells Fargo
Standstill (Morgan Stanley and Co.
International Limited) entered April 8,
1999 (filed herewith)
99(c) Stipulation Extending Wells Fargo
Standstill (Morgan Stanley and Co.
Internation Limited) entered April 23,
1999 (filed herewith)
99(d) Stipulation Extending Wells Fargo
Standstill (Morgan Stanley and Co.
International Limited) entered May 10,
1999 (filed herewith)
99(e) Stipulation Extending Wells Fargo
Standstill (Morgan Stanley and Co.
Internation Limited) entered May 24,
1999 (filed herewith)
99(f) Stipulation Extending Wells Fargo
Standstill (Morgan Stanley and Co.
Internation Limited) entered June 24,
1999 (filed herewith)
(b) Reports on Form 8-K
Date Purpose
---- -------
May 3, 1999 To report April 23, 1999
press release regarding
CRIIMI MAE receiving bid
proposals for equity
investment in CRIIMI MAE.
<PAGE>79
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CRIIMI MAE INC.
/s/ August 17, 1999 /s/ Cynthia O. Azzara
- --------------------------- ----------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer
<PAGE>80
UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
Southern Division
In re
CRIIMI MAE Inc., et al.,
Case No. 9823115
Debtors. (Jointly Administered)
Chapter 11
AMENDED STIPULATION AND AGREED
ORDER AUTHORIZING USE OF CASH COLLATERAL
----------------------------------------
This Amended Stipulation and Agreed Order is entered into this 10th day of
May, 1999 by and between CRIIMI MAE Inc. ("CMI") and German American Capital
Corporation ("GACC"):
WHEREAS, on or about December 29, 1998, CMI and GACC entered into that
certain Stipulation and Agreed Order Authorizing Use of Cash Collateral (the
"Stipulation") which was "So Ordered' by the Court on or about February 2, 1999;
and
WHEREAS CMI and GACC desire to extend the duration of the Stipulation and
continue all other terms and conditions thereof;
NOW, THEREFORE, in consideration of the mutual premises set forth herein,
the parties hereto stipulate, agree and the Court finds and orders as follows:
1. The Stipulation is hereby amended as follows:
a.The Standstill Period (as defined in paragraph 4(a) of the Stipulation)
shall be "for a period commencing on the date hereof and terminating on August
2, 1999."
b.Termination of the Stipulation, as referenced in paragraph 7 thereof,
shall be "extended to August 2, 1999, unless otherwise extended in writing by
the parties."
2. Except as expressly modified hereby, the Stipulation shall remain in full
force and effect and is hereby ratified and confirmed.
3. This Amended Stipulation is not intended to constitute, and shall not be
construed as, a consent by GACC to any other motion made or action taken by CMI
in its Chapter 11 case.
CONSENTED TO:
GERMAN AMERICAN CAPITAL CORP.
By: /s/ Michael B. Benner
-----------------------
Michael B. Benner
Richard G. Mason
WACHTELL, LIPTON ROSEN & KATZ
51 West 52nd Street
New York, NY 10019
(212) 403-1000
Counsel for German American
Capital Corp.
CRIIMI MAE INC.
By: /s/ Stanley J. Samorajczyk
---------------------------
Stanley J. Samorajczyk
Michael S. Stamer
AKIN, GUMP, STRAUSS, HAUER &
FELD, L.L.P.
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
(202) 887-4000
Counsel for CRIIMI MAE Inc.
So Ordered this 11th day of
May, 1999
/s/ Duncan Keir
Hon. Duncan Keir
United States Bankruptcy Judge
<PAGE>81
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
CRIIMI MAE INC., et al., 98-2-3115-DK
(Chapter 11)
Debtors. (Jointly Administered)
CRIIMI MAE INC.,
Plaintiff,
v.
MORGAN STANLEY & CO.
INTERNATIONAL LIMITED, Adversary Proceeding
No. 98-1565-DK
Defendant.
STIPULATION EXTENDING WELLS FARGO STANDSTILL
CRIIMI MAE Inc. ("CRIIMI MAE") and Morgan Stanley & Co. International
Limited ("MSIL"), by their undersigned counsel, hereby stipulate and agree
pursuant to paragraph two of the Stipulation and Consent Order Regarding
Adversary Proceeding among CRIIMI MAE, MSIL and the Official Committee of
Unsecured Creditors of CRIIMI MAE that the Wells Fargo Standstill Period shall
be extended up through and including April 15, 1999.
/s/ /s/
- ----------------------------- --------------------------
Richard L. Wasserman, Esquire Stanley J. Reed, Esquire
(Federal Bar No. 02784) (Federal Bar No. 00315)
Gregory A. Cross, Esquire Lauri Cleary, Esquire
(Federal Bar No. 04571-G) (Federal Bar No. 06599)
Venable, Baetjer and Howard, LLP Tamara A. Stoner, Esquire
1800 Mercantile Bank & Trust Bldg. (Federal Bar No. 08014)
2 Hopkins Plaza 3 Bethesda Metro Center
Baltimore, Maryland 21201 Suite 380
(410) 244-7400 Bethesda, Maryland 20814
(301) 986-1300
Co-Counsel for CRIIMI MAE Inc.
Of Counsel:
Thomas P. Ogden, Esquire
Anne Berry Howe, Esquire
Barbara D. Diggs, Esquire
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Counsel for Defendant
Morgan Stanley & Co.
International Limited
<PAGE>82
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
CRIIMI MAE INC., et al., 98-2-3115-DK
(Chapter 11)
Debtors. (Jointly Administered)
CRIIMI MAE INC.,
Plaintiff,
v.
MORGAN STANLEY & CO.
INTERNATIONAL LIMITED, Adversary Proceeding
No. 98-1565-DK
Defendant.
STIPULATION EXTENDING WELLS FARGO STANDSTILL
CRIIMI MAE Inc. ("CRIIMI MAE") and Morgan Stanley & Co. International
Limited ("MSIL"), by their undersigned counsel, hereby stipulate and agree
pursuant to paragraph two of the Stipulation and Consent Order Regarding
Adversary Proceeding among CRIIMI MAE, MSIL and the Official Committee of
Unsecured Creditors of CRIIMI MAE that the Wells Fargo Standstill Period shall
be extended up through and including April 30, 1999.
/s/ /s/
- ----------------------------- --------------------------------
Richard L. Wasserman, Esquire Thomas P. Ogden, Esquire
(Federal Bar No. 02784) Anne Berry Howe, Esquire
Gregory A. Cross, Esquire Barbara D. Diggs, Esquire
(Federal Bar No. 04571-G) Davis Polk & Wardwell
Venable, Baetjer and Howard, LLP 450 Lexington Avenue
1800 Mercantile Bank & Trust Bldg New York, New York 10017
2 Hopkins Plaza (212) 450-4000
Baltimore, Maryland 21201
(410) 244-7400 Of Counsel for Defendant
Morgan Stanley & Co.
Co-Counsel for CRIIMI MAE Inc. International Limited
Stanley J. Reed, Esquire
(Federal Bar No. 00315)
Lauri Cleary, Esquire
(Federal Bar No. 06599)
Tamara A. Stoner, Esquire
(Federal Bar No. 08014)
Lerch, Early & Brewer, Chartered
3 Bethesda Metro Center, Suite 380
Bethesda, Maryland 20814
(301) 986-1300
Counsel for Defendant
Morgan Stanley & Co.
International Limited
<PAGE>83
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
CRIIMI MAE INC., et al., 98-2-3115-DK
(Chapter 11)
Debtors. (Jointly Administered)
CRIIMI MAE INC.,
Plaintiff,
v.
MORGAN STANLEY & CO.
INTERNATIONAL LIMITED, Adversary Proceeding
No. 98-1565-DK
Defendant.
STIPULATION EXTENDING WELLS FARGO STANDSTILL
CRIIMI MAE Inc. ("CRIIMI MAE") and Morgan Stanley & Co. International
Limited ("MSIL"), by their undersigned counsel, hereby stipulate and agree
pursuant to paragraph two of the Stipulation and Consent Order Regarding
Adversary Proceeding among CRIIMI MAE, MSIL and the Official Committee of
Unsecured Creditors of CRIIMI MAE that the Wells Fargo Standstill Period shall
be extended up through and including May 15, 1999.
/s/ /s/
- ----------------------------- -------------------------------
Richard L. Wasserman, Esquire Thomas P. Ogden, Esquire
(Federal Bar No. 02784) Anne Berry Howe, Esquire
Gregory A. Cross, Esquire Barbara D. Diggs, Esquire
(Federal Bar No. 04571-G) Davis Polk & Wardwell
Venable, Baetjer and Howard, LLP 450 Lexington Avenue
1800 Mercantile Bank & Trust Bldg New York, New York 10017
2 Hopkins Plaza (212) 450-4000
Baltimore, Maryland 21201
(410) 244-7400 Of Counsel for Defendant
Morgan Stanley & Co.
Co-Counsel for CRIIMI MAE Inc. International Limited
Stanley J. Reed, Esquire
(Federal Bar No. 00315)
Lauri Cleary, Esquire
(Federal Bar No. 06599)
Tamara A. Stoner, Esquire
(Federal Bar No. 08014)
Lerch, Early & Brewer, Chartered
3 Bethesda Metro Center, Suite 380
Bethesda, Maryland 20814
(301) 986-1300
Counsel for Defendant
Morgan Stanley & Co.
International Limited
<PAGE>84
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
CRIIMI MAE INC., et al., 98-2-3115-DK
(Chapter 11)
Debtors. (Jointly Administered)
CRIIMI MAE INC.,
Plaintiff,
v.
MORGAN STANLEY & CO.
INTERNATIONAL LIMITED, Adversary Proceeding
No. 98-1565-DK
Defendant.
STIPULATION EXTENDING WELLS FARGO STANDSTILL
CRIIMI MAE Inc. ("CRIIMI MAE") and Morgan Stanley & Co. International
Limited ("MSIL"), by their undersigned counsel, hereby stipulate and agree
pursuant to paragraph two of the Stipulation and Consent Order Regarding
Adversary Proceeding among CRIIMI MAE, MSIL and the Official Committee of
Unsecured Creditors of CRIIMI MAE that the Wells Fargo Standstill Period shall
be extended up through and including June 15, 1999.
/s/ /s/
- ----------------------------- ------------------------
Richard L. Wasserman, Esquire Thomas P. Ogden, Esquire
(Federal Bar No. 02784) Anne Berry Howe, Esquire
Gregory A. Cross, Esquire Barbara D. Diggs, Esquire
(Federal Bar No. 04571-G) Davis Polk & Wardwell
Venable, Baetjer and Howard, LLP 450 Lexington Avenue
1800 Mercantile Bank & Trust Bldg New York, New York 10017
2 Hopkins Plaza (212) 450-4000
Baltimore, Maryland 21201
(410) 244-7400 Of Counsel for Defendant
Morgan Stanley & Co.
Co-Counsel for CRIIMI MAE Inc. International Limited
Stanley J. Reed, Esquire
(Federal Bar No. 00315)
Lauri Cleary, Esquire
(Federal Bar No. 06599)
Tamara A. Stoner, Esquire
(Federal Bar No. 08014)
Lerch, Early & Brewer, Chartered
3 Bethesda Metro Center, Suite 380
Bethesda, Maryland 20814
(301) 986-1300
Counsel for Defendant
Morgan Stanley & Co.
International Limited
<PAGE>85
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
CRIIMI MAE INC., et al., 98-2-3115-DK
(Chapter 11)
Debtors. (Jointly Administered)
CRIIMI MAE INC.,
Plaintiff,
v.
MORGAN STANLEY & CO.
INTERNATIONAL LIMITED, Adversary Proceeding
No. 98-1565-DK
Defendant.
STIPULATION EXTENDING WELLS FARGO STANDSTILL
CRIIMI MAE Inc. ("CRIIMI MAE") and Morgan Stanley & Co. International
Limited ("MSIL"), by their undersigned counsel, hereby stipulate and agree
pursuant to paragraph two of the Stipulation and Consent Order Regarding
Adversary Proceeding among CRIIMI MAE, MSIL and the Official Committee of
Unsecured Creditors of CRIIMI MAE that the Wells Fargo Standstill Period shall
be extended up through and including June 30, 1999.
/s/ /s/
- ----------------------------- -------------------------
Richard L. Wasserman, Esquire Thomas P. Ogden, Esquire
(Federal Bar No. 02784) Anne Berry Howe, Esquire
Gregory A. Cross, Esquire Barbara D. Diggs, Esquire
(Federal Bar No. 04571-G) Davis Polk & Wardwell
Venable, Baetjer and Howard, LLP 450 Lexington Avenue
1800 Mercantile Bank & Trust Bldg New York, New York 10017
2 Hopkins Plaza (212) 450-4000
Baltimore, Maryland 21201
(410) 244-7400 Of Counsel for Defendant
Morgan Stanley & Co.
Co-Counsel for CRIIMI MAE Inc. International Limited
Stanley J. Reed, Esquire
(Federal Bar No. 00315)
Lauri Cleary, Esquire
(Federal Bar No. 06599)
Tamara A. Stoner, Esquire
(Federal Bar No. 08014)
Lerch, Early & Brewer, Chartered
3 Bethesda Metro Center, Suite 380
Bethesda, Maryland 20814
(301) 986-1300
Counsel for Defendant
Morgan Stanley & Co.
International Limited
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THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE QUARTERLY REPORT
ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
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