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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
GREENBELT DIVISION
-------------------------------
)
IN RE ) CHAPTER 11
)
CRIIMI MAE INC., ET AL., )
) CASE NOS. 98-2-3115 THROUGH 98-2-3117 (DK)
DEBTORS. ) (JOINTLY ADMINISTERED)
)
-------------------------------
DEBTORS' SECOND AMENDED JOINT DISCLOSURE STATEMENT
VENABLE, BAETJER AND HOWARD, LLP AKIN, GUMP, STRAUSS, HAUER & FELD, LLP
Richard L. Wasserman Stanley J. Samorajczyk
Gregory A. Cross Michael S. Stamer
1800 Mercantile Bank &Trust Building 1333 New Hampshire Avenue, N.W.
Two Hopkins Plaza Washington, D.C. 20036
Baltimore, Maryland 21201 (202) 887-4000
(410) 244-7400
Co-Counsel to CRIIMI MAE Inc. and
CRIIMI MAE Holdings II, L.P.
SHULMAN, ROGERS, GANDAL, PORDY & COVINGTON & BURLING
ECKER, P.A. Michael St. Patrick Baxter
Morton A. Faller Dennis B. Auerbach
11921 Rockville Pike 1201 Pennsylvania Avenue, N.W.
Third Floor Washington, D.C. 20004-2401
Rockville, MD 20852-2753 (202) 662-6000
(301) 231-0928
Counsel to CRIIMI MAE Management, Inc. Counsel to the Official Committee of
Equity Security Holders of
CRIIMI MAE Inc.
Dated: August 24, 2000
IMPORTANT: THIS SECOND AMENDED JOINT DISCLOSURE STATEMENT CONTAINS INFORMATION
THAT MAY BEAR UPON YOUR DECISION TO ACCEPT OR REJECT THE DEBTORS' THIRD AMENDED
JOINT PLAN OF REORGANIZATION. PLEASE READ THIS DOCUMENT WITH CARE.
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TABLE OF CONTENTS
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I. INTRODUCTION.............................................................................................2
II. PLAN SUMMARY AND KEY CONSIDERATIONS......................................................................4
A. Plan Summary.........................................................................................5
B. Recommendation......................................................................................18
C. Voting Instructions.................................................................................18
III. GENERAL INFORMATION.....................................................................................21
A. The Debtors and Chapter 11 Filing and Other Chapter 11 Events.......................................21
B. Business............................................................................................26
C. The Portfolio.......................................................................................35
D. Legal Proceedings...................................................................................39
E. Selected Historical Consolidated Financial Data.....................................................47
F. Management's Discussion and Analysis of Financial Condition and Results of Operations...............50
G. Quantitative and Qualitative Disclosures About Market Risk..........................................62
H. Market and Trading Information......................................................................64
I. Management..........................................................................................65
IV. BUSINESS PLAN...........................................................................................74
V. PLAN OF REORGANIZATION..................................................................................76
A. Overview of the Plan................................................................................76
B. Treatment of Claims and Interests Under the Plan....................................................81
C. Confirmation and Effective Date Conditions..........................................................91
D. The Reorganized Debtors.............................................................................92
E. Recapitalization Financing Including Issuance of New Securities.....................................94
F. Sale of the CMBS Portfolio..........................................................................94
G. Affiliate Reorganization............................................................................95
H. Potential New Equity Investment and Rights Offering.................................................95
I. Distributions Under the Plan........................................................................97
J. General Information Concerning the Plan............................................................101
VI. CONFIRMATION AND CONSUMMATION PROCEDURES...............................................................109
A. Solicitation of Acceptances........................................................................109
B. Confirmation Hearing...............................................................................109
C. Confirmation.......................................................................................110
D. Consummation.......................................................................................114
E. Conditions to Effective Date.......................................................................114
VII. CERTAIN RISK FACTORS...................................................................................114
VIII. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.............................................................123
IX. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN..............................................128
A. Alternative Chapter 11 Plans.......................................................................128
B. Liquidation Under Chapter 7........................................................................128
X. CONCLUSION AND RECOMMENDATION..........................................................................128
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EXHIBITS
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Exhibit A Third Amended Joint Plan of Reorganization of CRIIMI MAE Inc.,
CRIIMI MAE Management, Inc. and CRIIMI MAE Holdings II, L.P. Under
Chapter 11 of the Bankruptcy Code..............................................................A-1
Exhibit B Unaudited Pro Forma Consolidated Financial Statements and Projected Financial Information......B-1
Exhibit C Liquidation Analysis...........................................................................C-1
Exhibit D CRIIMI MAE Financial Statements from Form 10-K for the Year Ended December 31, 1999............D-1
Exhibit E Reorganized CMI Amended and Restated Articles of Incorporation.................................E-1
Exhibit F Reorganized CMI Amended and Restated Bylaws....................................................F-1
Exhibit G Reorganized CMI Second Amended and Restated Stock Option Plan for Key Employees................G-1
Exhibit H Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000..............................H-1
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CRIIMI MAE INC., CRIIMI MAE MANAGEMENT, INC. AND CRIIMI MAE HOLDINGS
II, L.P. (COLLECTIVELY, THE "DEBTORS") AND THE OFFICIAL COMMITTEE OF EQUITY
SECURITY HOLDERS OF CRIIMI MAE INC. (THE "CMI EQUITY COMMITTEE") URGE ALL
HOLDERS OF CLAIMS AND INTERESTS IN IMPAIRED CLASSES TO VOTE TO ACCEPT THE
DEBTORS' THIRD AMENDED JOINT PLAN OF REORGANIZATION (THE "PLAN"). THE CMI
EQUITY COMMITTEE HAS JOINED THE DEBTORS AS A CO-PROPONENT OF THE DEBTORS'
PLAN. THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF CMI (THE "UNSECURED
CREDITORS' COMMITTEE") ALSO SUPPORTS THE PLAN AND ENCOURAGES ALL HOLDERS OF
CLAIMS AND INTERESTS IN IMPAIRED CLASSES TO VOTE IN SUPPORT OF THE PLAN. IT
SHOULD BE UNDERSTOOD THAT THE UNSECURED CREDITORS' COMMITTEE'S SUPPORT OF
THIS PLAN AS EXPRESSED IN THIS SECOND AMENDED JOINT DISCLOSURE STATEMENT
(TOGETHER WITH ALL EXHIBITS HERETO, THE "DISCLOSURE STATEMENT") IS
CONDITIONED UPON AND SUBJECT TO THE COMPLETION OF MUTUALLY ACCEPTABLE DEBT
AND RELATED DOCUMENTATION, WHICH THE DEBTORS, THE CMI EQUITY COMMITTEE AND
THE UNSECURED CREDITORS' COMMITTEE ALL BELIEVE WILL BE COMPLETED BEFORE THE
CONFIRMATION HEARING.
THIS DISCLOSURE STATEMENT IS DESIGNED TO PROVIDE ADEQUATE
INFORMATION TO ENABLE HOLDERS OF CLAIMS AGAINST AND INTERESTS IN THE DEBTORS
TO MAKE AN INFORMED JUDGMENT ON WHETHER TO ACCEPT OR REJECT THE DEBTORS'
PLAN. ALL HOLDERS OF CLAIMS AND INTERESTS ARE HEREBY ADVISED AND ENCOURAGED
TO READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY BEFORE
VOTING TO ACCEPT OR REJECT THE PLAN. THE PLAN SUMMARY AND STATEMENTS MADE IN
THIS DISCLOSURE STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE
PLAN, WHICH IS INCLUDED HEREWITH AS EXHIBIT A, OTHER EXHIBITS TO THIS
DISCLOSURE STATEMENT, EXHIBITS TO THE PLAN AND OTHER DOCUMENTS REFERENCED AS
FILED WITH THE BANKRUPTCY COURT. FURTHERMORE, THE PRO FORMA FINANCIAL
STATEMENTS AND PROJECTED FINANCIAL INFORMATION CONTAINED HEREIN ARE
UNAUDITED. THERE CAN BE NO ASSURANCE THAT THE INFORMATION AND STATEMENTS
CONTAINED HEREIN WILL CONTINUE TO BE ACCURATE SUBSEQUENT TO THE DATE HEREOF
OR THAT THIS DISCLOSURE STATEMENT CONTAINS ALL MATERIAL INFORMATION.
ALTHOUGH THE CMI EQUITY COMMITTEE IS A CO-PROPONENT OF THE DEBTORS'
PLAN, THIS DISCLOSURE STATEMENT WAS PREPARED BY THE DEBTORS. NEITHER THE CMI
EQUITY COMMITTEE NOR ANY OF ITS PROFESSIONALS WARRANT THE ACCURACY OR
COMPLETENESS OF ANY INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT,
INCLUDING, WITHOUT LIMITATION, ANY INFORMATION ABOUT THE DEBTORS, THE
DEBTORS' BUSINESSES, RISK FACTORS, TAX CONSEQUENCES OR THE APPLICABILITY OF
SECURITIES LAWS.
ALL HOLDERS OF IMPAIRED CLAIMS AND INTERESTS SHOULD READ AND
CONSIDER THE MATTERS DESCRIBED IN THIS DISCLOSURE STATEMENT AS A WHOLE,
INCLUDING THE SECTION ENTITLED "RISK FACTORS", PRIOR TO VOTING ON THE PLAN.
IN MAKING A DECISION TO ACCEPT OR REJECT THE PLAN, EACH CLAIM AND INTEREST
HOLDER MUST RELY ON ITS OWN EXAMINATION OF THE DEBTORS AS DESCRIBED IN THIS
DISCLOSURE STATEMENT AND THE PLAN.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH
Section 1125 OF THE BANKRUPTCY CODE AND RULE 3016(b) OF THE FEDERAL RULES OF
BANKRUPCY PROCEDURE AND NOT IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES
LAWS. THIS DISCLOSURE STATEMENT HAS NEITHER BEEN APPROVED NOR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). NOR HAS THE SEC PASSED
UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN. THIS
DISCLOSURE STATEMENT WAS PREPARED TO PROVIDE HOLDERS OF CLAIMS AGAINST AND
INTERESTS IN THE DEBTORS WITH "ADEQUATE INFORMATION" (AS DEFINED IN THE
BANKRUPTCY CODE) SO THAT THEY CAN MAKE AN INFORMED JUDGMENT ABOUT THE PLAN.
PERSONS OR ENTITIES TRADING IN, OR OTHERWISE
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PURCHASING, SELLING, OR TRANSFERRING, CLAIMS AGAINST OR SECURITIES OF THE
DEBTORS SHOULD NOT RELY UPON THIS DISCLOSURE STATEMENT FOR SUCH PURPOSES AND
SHOULD EVALUATE THIS DISCLOSURE STATEMENT AND THE PLAN IN LIGHT OF THE
PURPOSE FOR WHICH THEY WERE PREPARED.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER PENDING OR
THREATENED ACTIONS, THIS DISCLOSURE STATEMENT AND THE INFORMATION CONTAINED
HEREIN SHALL NOT BE CONSTRUED AS AN ADMISSION OF ANY FACT, CLAIM OR
LIABILITY, AS A STIPULATION OR AS A WAIVER, BUT RATHER AS STATEMENTS MADE IN
SETTLEMENT NEGOTIATIONS. NOR SHALL THE STATEMENTS SET FORTH HEREIN BE USED AS
EVIDENCE OR BIND ANY PARTY IN CONNECTION WITH ANY SECURITIES CLAIMS (AS THAT
TERM IS DEFINED IN THE PLAN).
THIS DISCLOSURE STATEMENT SHALL NOT BE ADMISSIBLE IN ANY
NON-BANKRUPTCY PROCEEDING INVOLVING THE DEBTORS OR ANY OTHER PARTY NOR SHALL
IT BE CONSTRUED TO BE CONCLUSIVE ADVICE ON THE TAX, SECURITIES OR OTHER LEGAL
EFFECTS OF THE PLAN AS TO HOLDERS OF CLAIMS AGAINST OR INTERESTS IN THE
DEBTORS.
I. INTRODUCTION
On October 5, 1998, CRIIMI MAE Inc. ("CMI"), CRIIMI MAE Management,
Inc. ("CMM") and CRIIMI MAE Holdings II, L.P. ("Holdings") filed voluntary
petitions for relief under Chapter 11 of title 11 of the United States Code
(the "Bankruptcy Code"). The Debtors and the CMI Equity Committee hereby
submit this Disclosure Statement pursuant to Section 1125 of the Bankruptcy
Code in connection with their solicitation of acceptances of their Plan, a
copy of which is annexed hereto as Exhibit A. The purpose of this Disclosure
Statement, in accordance with the requirements of Section 1125 of the
Bankruptcy Code, is to provide "adequate information" concerning the Plan, of
a kind and in sufficient detail to enable a hypothetical, reasonable
investor, typical of holders of the classes of claims or interests being
solicited, to make an informed judgment whether to accept or reject the Plan.
This Disclosure Statement should be read in conjunction with the Plan and the
other exhibits to this Disclosure Statement and to the Plan. All capitalized
terms contained in this Disclosure Statement shall, unless otherwise defined
herein, have the meanings ascribed to such capitalized terms in the Plan.
References herein to the "Company" or "CRIIMI MAE" refer to CRIIMI MAE Inc.
and its consolidated subsidiaries, unless the context otherwise indicates.
References herein to Notes to Consolidated Financial Statements refer to the
Notes to Consolidated Financial Statements constituting a part of CRIIMI
MAE's financial statements for the year ended December 31, 1999.
The Plan is being distributed, with Ballots, to holders of Claims
and Interests in Classes A1, A2, A3, A4, A5, A6, A7, A9, A10, A11, A13, A14,
A16, A18, A20, A21, B1, B2, B5, B6, C1, C2, C5 and C6, the Classes of Claims
and Interests that are Impaired and entitled to vote under the Plan, in order
to solicit their acceptance of the Plan. Holders of Claims and Interests in
Classes A8, A12, A15, A17, A19, A22, A23, B3, B4, B7, C3, C4 and C7 are
deemed to have accepted the Plan because their respective Claims are not
Impaired, and such Holders are therefore not entitled to vote on the Plan.
Accordingly, the votes of Holders of Claims and Interests in such Classes are
not being solicited. For a description of the Classes of Claims and Interests
and their treatment under the Plan, see "THE PLAN OF REORGANIZATION --
Treatment of Claims and Interests Under the Plan."
The Debtors and the CMI Equity Committee are seeking the acceptance
of the Plan by Holders of Claims and Interests in Classes A1, A2, A3, A4, A5,
A6, A7, A9, A10, A11, A13, A14, A16, A18, A20, A21, B1, B2, B5, B6, C1, C2,
C5 and C6. The Debtors and the CMI Equity Committee have prepared this
Disclosure Statement in connection with their solicitation of acceptances of
the Plan. The United States Bankruptcy Court for the District of Maryland,
Greenbelt Division, Maryland ("the "Bankruptcy Court") has entered an order
dated August 24, 2000 approving this Disclosure Statement as containing
information of a kind and in sufficient detail to enable a hypothetical,
reasonable investor, typical of each of the holders of the Classes of Claims
and Interests being solicited, to make an informed judgment whether to accept
the Plan. Such approval by the Bankruptcy Court does not constitute a
recommendation of the Plan by the Bankruptcy Court.
2
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Section 1129(a) of the Bankruptcy Code allows the Bankruptcy Court
to confirm a plan if certain conditions have been met and if each class of
claims and interests that is impaired under the plan has voted to accept the
plan. Under Section 1126(c) of the Bankruptcy Code, a class of claims has
accepted a plan if such plan has been accepted by creditors in that class
that hold at least two-thirds in dollar amount and more than one-half in
number of the allowed claims of such class held by creditors that have voted
to accept or reject such plan, excluding holders whose acceptances or
rejections were found not to be in good faith. Under Section 1126(d) of the
Bankruptcy Code, a class of equity interests has accepted a plan if such plan
has been accepted by holders of such interests that hold at least two-thirds
in amount of the allowed interests of such class held by holders of such
interests that have voted to accept or reject such plan, excluding holders
whose acceptances or rejections were found not to be in good faith.
Under the Bankruptcy Code, only those Claims, the holders of which
vote to accept or reject the Plan, will be counted for purposes of
determining acceptance or rejection by any Impaired Class of Claims.
Therefore, the Plan could be approved by any Impaired Class of Claims with
the affirmative vote of significantly less than two-thirds in total dollar
amount and one-half in total number of such Claims. However, even if the
Holders of all Claims in Impaired Classes and entitled to vote under the Plan
accept or are deemed to have accepted the Plan, the Plan is subject to
certain requirements under the Bankruptcy Code and might not be confirmed by
the Bankruptcy Court.
Section 1129(b) of the Bankruptcy Code permits the confirmation of a
plan notwithstanding the non-acceptance of such plan by one or more of the
classes of claims or interests impaired thereunder if (i) at least one
impaired class of claims accepts the plan (such acceptance to be determined
without giving effect to any acceptances of "insiders," as such term is
defined in Section 101 of the Bankruptcy Code) and (ii) the Bankruptcy Court
finds that, with respect to the non-accepting class or classes, the plan does
not discriminate unfairly and is fair and equitable. The Debtors and the CMI
Equity Committee reserve the right to seek confirmation of the Plan under
Section 1129(b) of the Bankruptcy Code if any class of Claims entitled to
vote on the Plan votes to reject the Plan.
If more than one plan is submitted to creditors and equity security
holders for voting, the Bankruptcy Court may confirm only one such plan. If
the confirmation requirements set forth in the Bankruptcy Code are met with
respect to more than one plan, the Bankruptcy Court will consider the
preferences of creditors and equity security holders in determining which
plan to confirm. The Debtors and the CMI Equity Committee urge all creditors
and equity security holders to vote in favor of the Plan. The Unsecured
Creditors' Committee also recommends that all unsecured creditors vote in
favor of the Plan. The Debtors and the CMI Equity Committee believe that
confirmation of the Debtors' Plan is in the best interest of all creditors
and equity security holders. As set forth in more detail in the Plan and this
Disclosure Statement, the Debtors' Plan provides for the payment in full of
all creditors, preservation of value for equity security holders and a
reorganization of the Debtors and continuation of the business of CRIIMI MAE
as a going concern.
The Debtors and the CMI Equity Committee are soliciting votes for
the acceptance of the Plan from the Holders of Claims and Interests in
Classes A1, A2, A3, A4, A5, A6, A7, A9, A10, A11, A13, A14, A16, A18, A20,
A21, B1, B2, B5, B6, C1, C2, C5 and C6. The Debtors and the CMI Equity
Committee believe that the Plan provides the best possible result for all
Holders of Claims and Interests. The Debtors and the CMI Equity Committee
believe further that, under the Plan, Holders of Claims and Interests will
receive a greater recovery than such Holders would receive if the Debtors'
Chapter 11 cases were converted to cases under Chapter 7 of the Bankruptcy
Code or an alternative plan were confirmed by the Bankruptcy Court.
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IMPORTANT INFORMATION
EXCEPT FOR PERSONS WHO ARE BENEFICIAL OWNERS OF OLD SENIOR NOTES OR
INTERESTS HELD IN STREET NAME, TO BE COUNTED, YOUR BALLOT MUST BE RECEIVED BY
5:00 P.M. EASTERN TIME, ON OCTOBER 20, 2000. BALLOTS SHOULD BE MAILED OR
DELIVERED TO: CRIIMI MAE INC., CRIIMI MAE MANAGEMENT, INC. AND CRIIMI MAE
HOLDINGS II, L.P., C/O BANKRUPTCY SERVICES LLC, BALLOT PROCESSING, P.O. BOX
5204, FDR STATION, NEW YORK, NEW YORK, 10150-5204. ALL BENEFICIAL OWNERS OF
OLD SENIOR NOTES OR INTERESTS WHOSE NOTES OR INTERESTS ARE HELD IN STREET
NAME MUST RETURN THEIR BALLOTS TO THE MASTER BALLOTING AGENT FROM WHOM THEY
RECEIVED THEIR BALLOTS NO LATER THAN 2:00 P.M. EASTERN TIME ON OCTOBER 20,
2000 AT THE ADDRESS AND IN ACCORDANCE WITH THE INSTRUCTIONS FOR RETURN OF
SAID BALLOTS SET FORTH IN SUCH BALLOTS.
PLEASE REFER TO YOUR BALLOT FOR SPECIFIC INSTRUCTIONS. SEE ALSO
"PLAN SUMMARY AND KEY CONSIDERATIONS - VOTING INSTRUCTIONS" FOR A DISCUSSION
OF VOTING PROCEDURES AND CONTACT INFORMATION.
THE DEBTORS BELIEVE THAT THE PLAN PROVIDES THE BEST POSSIBLE RESULT
FOR ALL HOLDERS OF CLAIMS AND INTERESTS.
THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED.
THIS DISCLOSURE STATEMENT IS PROVIDED FOR USE SOLELY BY HOLDERS OF
CLAIMS AND INTERESTS, AND THEIR ADVISORS, IN CONNECTION WITH THEIR
DETERMINATION TO ACCEPT OR REJECT THE PLAN.
HOLDERS OF CLAIMS AND INTERESTS SHOULD NOT CONSTRUE THE CONTENTS OF
THIS DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL, BUSINESS, FINANCIAL OR TAX
ADVICE. EACH SUCH HOLDER SHOULD, THEREFORE, CONSULT WITH HIS, HER OR ITS OWN
LEGAL, BUSINESS, FINANCIAL AND/OR TAX ADVISORS AS TO ANY SUCH MATTERS
CONCERNING THE PLAN AND THE TRANSACTIONS CONTEMPLATED THEREBY.
THE SUMMARY OF THE PLAN CONTAINED HEREIN DOES NOT PURPORT TO BE
COMPLETE AND IS SUBJECT, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE
PROVISIONS OF THE PLAN, WHICH IS ATTACHED HERETO AS EXHIBIT A.
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT, INCLUDING
THE INFORMATION UNDER THE HEADINGS III. GENERAL INFORMATION, IV. BUSINESS
PLAN AND VII. CERTAIN RISK FACTORS, IS UPDATED, MODIFIED AND SUPPLEMENTED BY
THE INFORMATION CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED JUNE 30, 2000, A COPY OF WHICH IS ATTACHED HERETO AS
EXHIBIT H AND MADE A PART HEREOF.
II. PLAN SUMMARY AND KEY CONSIDERATIONS
The following summary is qualified in its entirety by reference to
the more detailed information appearing elsewhere in this Disclosure
Statement, to the Plan and to the exhibits to this Disclosure Statement and
to the Plan. This summary does not purport to be complete and should not be
relied upon for voting purposes. Terms not otherwise defined herein shall
have the meanings ascribed to them in the Plan. A more complete description
of the Plan is provided in "PLAN OF REORGANIZATION."
4
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All Holders of Claims and Interests whose votes are being solicited
are hereby advised and encouraged to read this Disclosure Statement, the Plan
and the exhibits to this Disclosure Statement and to the Plan in their
entirety before voting to accept or reject the Plan.
A. PLAN SUMMARY
The Plan contemplates the payment in full of all of the Allowed
Claims of CMI, CMM and Holdings primarily through recapitalization financing
aggregating at least $857 million (the "Recapitalization Financing"). A
significant portion of such Recapitalization Financing is expected to consist
of debt financing from existing debtholders (the "New Debt") and the balance
is expected to result from the sale of selected CMBS (the "CMBS Sale") and
the sale or refinance of the Company's interest in CMO-IV (the "CMO-IV
Sale"). In particular, CMI has agreed to restructure its secured debt with
two of its largest creditors, Merrill Lynch Mortgage Capital Inc. ("Merrill")
and German American Capital Corporation ("GACC"), in accordance with the term
sheet attached as Exhibit 1 to the Plan (the "Merrill/GACC Term Sheet"). In
addition, CMI has agreed with the Unsecured Creditors' Committee to
restructure its unsecured debt including its Old Senior Notes in accordance
with the term sheet attached as Exhibit 2 to the Plan (the "Unsecured
Creditors' Term Sheet"). The Merrill/GACC and Unsecured Creditors
restructurings set forth in Exhibits 1 and 2 to the Plan are the cornerstones
of CMI's New Debt financing as it emerges from Chapter 11 under the Debtors'
Plan. Although not required to fund the Plan, the Debtors may seek new equity
capital from one or more investors to partially fund the Plan. Any such new
equity will constitute Recapitalization Financing. See "PLAN OF
REORGANIZATION" for a further discussion of potential new equity capital.
The Plan provides for distributions to creditors as summarized below:
CLAIMS AGAINST AND INTERESTS IN CMI
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CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
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N/A Administrative Claims (Unclassified) Each Holder will be paid Cash equal to the 100%
amount of such Claim on the later of the
Effective Date or the day on which such
Claim becomes an Allowed Claim, unless (i)
the Holder and Reorganized CMI,
Reorganized CMM or Reorganized Holdings,
as the case may be, agree to other
treatment, or (ii) an order of the
Bankruptcy Court provides for other terms.
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N/A Priority Tax Claims (Unclassified) Each Holder will receive, at the sole 100%
option of Reorganized CMI, Reorganized CMM
or Reorganized Holdings, as the case may
be, (i) Cash equal to the unpaid portion
of such Claim on the later of the
Effective Date and the date on which such
Claim becomes an Allowed Priority Tax
Claim, or (ii) equal quarterly Cash
payments in an aggregate amount equal to
such Claim, together with interest at a
fixed annual rate to be determined by the
Bankruptcy Court or otherwise agreed to by
Reorganized CMI, Reorganized CMM or
Reorganized Holdings, as the case may be,
and such
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CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
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Holder over a period through the sixth anniversary
of the date of assessment of such Claim, or
upon such other terms determined by the Bankruptcy
Court.
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A1 Citicorp Secured Claims IMPAIRED. The Holder of the Allowed 100%
Class A1 Claim will receive on the
Effective Date the treatment of its
Allowed Secured Claim set forth on Exhibit
4 to the Plan, or such other treatment as
may be agreed to by CMI and the Holder.
As set forth in Exhibit 4 to the Plan, the
treatment set forth therein resolves all
Claims of the Holder of the Allowed Class
A1 Claim, and the affiliates thereof
referenced in Exhibit 4, against
each of the Debtors, the Reorganized
Debtors and CRIIMI MAE Brick Church, Inc.
Class A1 is Impaired and, accordingly, the
Holder of such Claim will be entitled to
vote on the Plan.
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A2 First Union Secured Claim IMPAIRED. The Holder of the Allowed 100%
Class A2 Claim will receive on the
Effective Date payment in full in Cash of
any remaining balance of such Claim with
interest on the principal balance of such
Allowed Claim calculated at the Plan
Rate. Class A2 is Impaired and,
accordingly, the Holder of such Claim will
be entitled to vote on the Plan.
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A3 GACC Secured Claim IMPAIRED. The Holder of the Allowed 100%
Class A3 Claim will receive on the
Effective Date the treatment of its
Allowed Secured Claim set forth on Exhibit
1 to the Plan, or such other treatment as
may be agreed to by CMI and the Holder.
Class A3 is Impaired and, accordingly, the
Holder of such Claim will be entitled to
vote on the Plan.
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A4 Lehman Secured Claim IMPAIRED. The Holder of the Allowed 100%
Class A4 Claim will receive on the
Effective Date payment in full in Cash of
any remaining balance of such Claim with
interest on the principal balance of such
Allowed Claim calculated at the Plan
Rate. Class A4 is Impaired and,
accordingly, the Holder of such Claim will
be entitled to vote on the Plan.
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A5 Merrill Secured Claim IMPAIRED. The Holder of the Allowed 100%
Class A5 Claim will receive on the
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CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
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Effective Date the treatment of its
Allowed Secured Claim set forth on Exhibit
1 to the Plan, or such other treatment as
may be agreed to by CMI and the Holder.
Class A5 is Impaired and, accordingly, the
Holder of such Claim will be entitled to
vote on the Plan.
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A6 Morgan Stanley Secured Claim IMPAIRED. The Holder of the Allowed 100%
Class A6 Claim will receive on the
Effective Date payment in full in Cash of
any remaining balance of such Claim with
interest on the principal balance of such
Allowed Claim calculated at the Plan
Rate. Class A6 is Impaired and,
accordingly, the Holder of such Claim will
be entitled to vote on the Plan.
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A7 Other Secured Claims IMPAIRED. Each Holder (if any) of an 100%
Allowed Class A7 Claim will receive
on the Effective Date either (i)
payment in full in Cash of any such
Claim with interest on the
principal balance of any such
Allowed Claim calculated at the
Plan Rate; (ii) if CMI so elects,
the collateral securing the Allowed
Class A7 Claim (if any) in full
satisfaction of such Claim; or
(iii) such other treatment as may
be agreed to by CMI and the Holder
(if any). Class A7 is Impaired and,
accordingly, Holders of such Claims
(if any) will be entitled to vote
on the Plan.
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A8 Priority Claims UNIMPAIRED. Each Holder of an Allowed 100%
Class A8 Claim will receive on the
Effective Date payment in full in
Cash of such Claim including Plan
Interest thereon. Class A8 is
Unimpaired and, accordingly, is not
entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A9 Old Senior Note Claims IMPAIRED. Each Holder of an Allowed Class 100%
A9 Claim will receive on the
Effective Date the treatment of its
Allowed Claim as set forth on
Exhibit 2 to the Plan. Class A9 is
Impaired and, accordingly, Holders
of such Claims will be entitled to
vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A10 CMI General Unsecured Claims IMPAIRED. Each Holder of an Allowed Class 100%
A10 Claim, other than those electing the
convenience class option described
hereinafter, will be paid in full through
a combination of an initial cash payment and
---------- ------------------------------------------------- -------------------------------------------- ------------
7
<PAGE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
two notes as further set forth in
Exhibit 2 to the Plan. In addition, as
referred to in Exhibit 2 to the Plan,
there will be a convenience class option
with respect to Class A10, as follows: any
Holder of an Allowed Class A10 Claim whose
Allowed Claim is for $150,000 or less and
elects the convenience class treatment on
its ballot, or whose Allowed Claim is for
an amount in excess of $150,000 and elects
in writing on its ballot to reduce its
Claim to $150,000 and accept convenience
class treatment thereof, shall be entitled
to receive payment in Cash on the
Effective Date of the allowed amount of
such Holders' Allowed Class A10 Claim in
full satisfaction of said claim, with
accrued and unpaid pre-petition and
post-petition interest thereon calculated
at the non-default contract rate of
interest in such Holders' documents for
those Holders of Allowed Class A10 Claims
electing convenience class treatment who
have a contract, the invoice rate (capped
at 9-1/8%) for those Holders of Allowed
Class A10 Claims electing convenience
class treatment who have an invoice rate,
and 6% for all others. For purposes of
calculating the $150,000 amount in the
preceding sentence, the amount of allowed
post-petition interest on any such Claim
(which interest shall be paid as part of
such Claim) will be excluded from such
calculation. Class A10 is Impaired and,
accordingly, Holders of such Claims will
be entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A11 Guarantee Claims IMPAIRED. If, and only to the extent 100%
that, an Allowed Class A11 Claim is not
fully treated with respect to such
Holder's underlying Allowed Claim under
the Plan treatment for Claims against CMM
or Holdings, as the case may be, any
remaining Allowed Class A11 Claim (if any)
will be included as part of the CMI
General Unsecured Claims and treated for
all purposes as part of Class A10. Class
A11 is Impaired and, accordingly, is
entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A12 Freddie Mac Claims UNIMPAIRED. CMI's obligation under the 100%
Freddie Mac Agreement shall be deemed
---------- ------------------------------------------------- -------------------------------------------- ------------
8
<PAGE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
reaffirmed on the Effective Date, and the
Claims of Freddie Mac numbered 335 and 497
on the July 2, 1999 claims register, each
in the amount of $230,448,487.24, shall be
deemed withdrawn and thereby disallowed as
of the Effective Date. Class A12 is
Unimpaired and, accordingly, is not
entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A13 Intercompany Claims IMPAIRED. Holders of Class A13 Claims No payment
will not receive any payment under the shall be
Plan on account of such Claims. Class A13 made under
is Impaired and, accordingly, Holders of the Plan
such Claims will be entitled to vote on but the
the Plan. claim
amounts
will
remain on
the
financial
books of
the
respective
Debtors.
---------- ------------------------------------------------- -------------------------------------------- ------------
A14 Series B Preferred Stock IMPAIRED. Each Holder of an Allowed 100%
Class A14 Interest as of the Effective
Date will retain its Series B Preferred
Stock; provided that if the Holders of
Series B Preferred Stock as of the Voting
Record Date vote as a Class by the
requisite amount to accept the Plan, the
Articles Supplementary relating to the
Series B Preferred Stock will be deemed
amended (and, as amended, to be part of
the Reorganized CMI Amended and Restated
Articles of Incorporation) to permit the
payment of dividends on Series B Preferred
Stock, including accrued and unpaid
dividends, in CMI Common Stock or Cash (or
a combination thereof), at the election of
Reorganized CMI, with such payment of
dividends to be consistent with Exhibits 1
and 2 to the Plan. It is contemplated
that such dividends will be paid in CMI
Common Stock. See Exhibit 2 to the Plan
regarding limitations on cash dividends.
Holders of Series B Preferred Stock who
are not affiliates or "underwriters" may
publicly trade the CMI
---------- ------------------------------------------------- -------------------------------------------- ------------
9
<PAGE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
Common Stock issued to them on the Effective
Date as payment for dividends accrued and
payable. Class A14 is Impaired and,
accordingly, is entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A15 Series B Preferred Stock Securities Claims UNIMPAIRED. Each Holder (if any) of an 100%
Allowed Class A15 Claim will, if, as and
when any such Claim is Allowed by Final
Order, receive in full satisfaction of any
such Allowed Class A15 Claim its share of
any Insurance Proceeds applicable thereto
plus, if such Allowed Class A15 Claim (if
any) is not paid in full from such
Insurance Proceeds, CMI Common Stock in an
amount equal in value, as of the date of
issuance thereof, to the balance (if any)
of such Allowed Class A15 Claim, provided
that any such Claim not timely filed (and
in any event not filed before the
Confirmation Date) shall be released and
discharged under the Plan and Confirmation
Order. Class A15 is Unimpaired and,
accordingly, is not entitled to vote on
the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A16 Former Series C Preferred Stock IMPAIRED. Former Series C Preferred 100%
Stock has been exchanged for Series E
Preferred Stock. Each Holder of Series E
Preferred Stock as of the Distribution
Record Date shall retain its Series E
Preferred Stock and such Series E
Preferred Stock shall have the terms,
rights and preferences summarized in
Exhibit 3 to the Plan and as set forth in
the Articles Supplementary relating to the
Series E Preferred Stock, as such Articles
Supplementary shall be amended as of the
Effective Date, expected to be
substantially in the form of Exhibit B
(Series E Preferred Stock Articles) to
Exhibit E (Reorganized CMI Amended and
Restated Articles of Incorporation) to the
Disclosure Statement. All accrued and
past due dividends from February 23, 2000
through the Effective Date on Series E
Preferred Stock will be paid on the
Effective Date in CMI Common Stock. All
other accrued and past due dividends on
Former Series C Preferred Stock (prior to
February 23, 2000) shall be paid on the
Effective Date in CMI Common Stock or
Cash, at the election of Reorganized CMI,
with such
---------- ------------------------------------------------- -------------------------------------------- ------------
10
<PAGE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
payment of dividends to be consistent with
Exhibits 1 and 2 to the Plan. It is
contemplated that such dividends will be
paid in CMI Common Stock. See Exhibit 2
to the Plan regarding limitations on cash
dividends. Class A16 is Impaired and,
accordingly, Holders of such Interests will
be entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A17 Former Series C Preferred Stock Securities UNIMPAIRED. Each Holder (if any) of 100%
Claims an Allowed Class A17 Claim will, if, as
and when any such Claim is allowed
by Final Order, receive in full
satisfaction of any such Allowed
Class A17 Claim its share of any
Insurance Proceeds applicable
thereto plus, if such Allowed Class
A17 Claim (if any) is not paid in
full from such Insurance Proceeds,
CMI Common Stock in an amount equal
in value, as of the date of
issuance thereof, to the balance
(if any) of such Allowed Class A17
Claim, provided that any such Claim
not timely filed (and in any event
not filed before the Confirmation
Date) shall be released and
discharged under the Plan and
Confirmation Order. Class A17 is
Unimpaired and, accordingly, is not
entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A18 Old Series D Preferred Stock IMPAIRED. Each Holder of an Allowed 100%
Class A18 Interest as of the Distribution
Record Date, if not previously exchanged,
will receive on the Effective Date in
exchange for its Old Series D Preferred
Stock an identical number of shares of
Series E Preferred Stock issued effective
as of the Effective Date, and such Series
E Preferred Stock shall have the terms,
rights and preferences summarized in
Exhibit 3 to the Plan and as set forth in
the Articles Supplementary relating to the
Series E Preferred Stock, as such Articles
Supplementary shall be amended as of the
Effective Date, expected to be
substantially in the form of Exhibit B
(Series E Preferred Stock Articles) to
Exhibit E (Reorganized CMI Amended and
Restated Articles of Incorporation) to the
Disclosure Statement. All shares of Old
Series D Preferred Stock, if not
previously exchanged and cancelled, shall
be deemed cancelled as of the Effective
Date. All accrued and past due dividends
on Old
---------- ------------------------------------------------- -------------------------------------------- ------------
11
<PAGE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
Series D Preferred Stock shall be paid on
the Effective Date in CMI Common Stock or
Cash, at the election of Reorganized CMI,
with such payment of dividends to be
consistent with Exhibits 1 and 2 to the
Plan. It is contemplated that such
dividends will be paid in CMI Common
Stock. See Exhibit 2 to the Plan
regarding limitations on cash dividends.
Class A18 is Impaired and, accordingly,
Holders of such Interests will be entitled
to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A19 Old Series D Preferred Stock Securities Claims UNIMPAIRED. Each Holder (if any) of an 100%
Allowed Class A19 Claim will, if, as and
when any such Claim is Allowed by Final
Order, receive in full satisfaction of any
such Allowed Class A19 Claim its share of
any Insurance Proceeds applicable thereto
plus, if such Allowed Class A19 Claim (if
any) is not paid in full from such
Insurance Proceeds, CMI Common Stock in an
amount equal in value, as of the date of
issuance thereof, to the balance (if any)
of such Allowed Class A19 Claim, provided
that any such Claim not timely filed (and
in any event not filed before the
Confirmation Date) shall be released and
discharged under the Plan and Confirmation
Order. Class A19 is Unimpaired and,
accordingly, is not entitled to vote on
the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A20 Series F Dividend Preferred Stock IMPAIRED. Each Holder of an Allowed 100%
Class A20 Interest as of the Effective
Date shall retain its Series F Dividend
Preferred Stock; provided that if the
Holders of Series F Dividend Preferred
Stock as of the Voting Record Date vote as
a Class by the requisite amount to accept
the Plan, the Articles Supplementary
relating to the Series F Dividend
Preferred Stock will be deemed amended
(and, as amended, to be part of the
Reorganized CMI Amended and Restated
Articles of Incorporation) to permit the
payment of dividends on Series F Dividend
Preferred Stock, including any accrued and
unpaid dividends, in CMI Common Stock or
Cash (or a combination thereof), at the
election of Reorganized CMI, with such
payment of dividends to be consistent with
Exhibits 1 and 2 to the Plan. It is
possible that such dividends
---------- ------------------------------------------------- -------------------------------------------- ------------
12
<PAGE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
may be paid in CMI Common Stock. See
Exhibit 2 to the Plan regarding limitations
on cash dividends. Holders of Series F
Dividend Preferred Stock who are not
affiliates or "underwriters" may publicly
trade the CMI Common Stock issued to them
on the Effective Date as payment for
dividends accrued and payable. Class A20 is
Impaired and, accordingly, is entitled to
vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A21 CMI Common Stock IMPAIRED. Each Holder of an Allowed 100%
Class A21 Interest as of the Effective
Date will retain its CMI Common Stock.
Class A21 is Impaired and, accordingly,
Holders of such Interests will be entitled
to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A22 Stock Options UNIMPAIRED. Each Holder of a Stock 100%
Option as of the Effective Date will
retain its Stock Option. Class A22 is
Unimpaired and, accordingly, is not
entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
A23 CMI Common Stock Securities Claims UNIMPAIRED. All Holders (if any) of 100%
Allowed Class A23 Claims will receive in
full satisfaction of any such Allowed
Class A23 Claims their share of any
Insurance Proceeds applicable thereto
plus, if such Allowed Class A23 Claims (if
any) are not paid in full from such
Insurance Proceeds, CMI Common Stock in an
amount equal in value, as of the date of
issuance thereof, to the balance (if any)
of such Allowed Class A23 Claims. Class
A23 is Unimpaired and, accordingly, is not
entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
</TABLE>
13
<PAGE>
CLAIMS AGAINST AND INTERESTS IN CMM
<TABLE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
B1 First Union Secured Claims IMPAIRED. The Holder of the Allowed 100%
Class B1 Claim will receive on the
Effective Date payment in full in Cash of
any remaining balance of such Claim with
interest on the principal balance of such
Allowed Claim calculated at the Plan
Rate. Class B1 is Impaired and,
accordingly, the Holder of such Claims
will be entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
B2 Other Secured Claims IMPAIRED. Each Holder (if any) of an 100%
Allowed Class B2 Claim will receive on the
Effective Date either (i) payment in full
in Cash of such Claim with interest on the
principal balance of any such Allowed
Claim calculated at the Plan Rate; (ii) if
CMM so elects, the collateral securing the
Allowed Class B2 Claim (if any) in full
satisfaction of such Claim; or (iii) such
other treatment as may be agreed to by CMM
and the Holder(s) (if any) of Allowed
Class B2 Claim(s). Class B2 is Impaired
and, accordingly, Holders of such Claims
will be entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
B3 Priority Claims UNIMPAIRED. Each Holder of an Allowed 100%
Class B3 Claim will receive on the
Effective Date payment in full in
Cash of such Claim including Plan
Interest thereon. Class B3 is
Unimpaired and, accordingly, is not
entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
B4 Guarantee Claims UNIMPAIRED. Each Holder (if any) of an 100%
Allowed Class B4 Claim shall be paid, if,
as and when any such Claim is allowed by
Final Order, in Cash in full by CMM or
Reorganized CMM including Plan Interest
thereon if, and only to the extent not
fully treated with respect to such
Holder's underlying Allowed Claim under
the Plan treatment for Claims against CMI
or Holdings, as the case may be. Class B4
is Unimpaired and, accordingly, is not
entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
14
<PAGE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
B5 CMM General Unsecured Claims IMPAIRED. Each Holder of an Allowed 100%
Class B5 Claim will receive on the
Effective Date payment in full in
Cash of such Claims, with accrued
and unpaid pre-petition and
post-petition interest thereon
calculated at the non-default
contract rate of interest in such
Holder's documents for those
Holders of Allowed Class B5 Claims
who have a contract, the invoice
rate (capped at 9-1/8%) for those
Holders of Allowed Class B5 Claims
who have an invoice rate, and 6% for
all other Holders of Allowed Class
B5 Claims. Class B5 is Impaired
and, accordingly, Holders of such
Claims will be entitled to vote on
the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
B6 Intercompany Claims IMPAIRED. Each Holder of a Class B6 No payment
Claim will not receive any payment under shall be
the Plan on account of such Claim. Class made under
B6 is Impaired and, accordingly, Holders the Plan
of such Claims will be entitled to vote on but the
the Plan. claim
amounts
will
remain on
the
financial
books of
the
respective
Debtors.
---------- ------------------------------------------------- -------------------------------------------- ------------
B7 CMI's Interests in CMM UNIMPAIRED. The Holder will retain its 100%
Interest. Class B7 is Unimpaired and,
accordingly, is not entitled to vote on
the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
</TABLE>
15
<PAGE>
CLAIMS AGAINST AND INTERESTS IN HOLDINGS
<TABLE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
C1 Citicorp Secured Claims IMPAIRED. Each Holder (if any) of any 100%
remaining Allowed Class C1 Claim (if any)
shall be included in and satisfied as part
of the treatment of the Holder of the
Allowed Class A1 Claim as set forth on
Exhibit 4 to the Plan. Class C1 is
Impaired and, accordingly, the Holder of
such Claim (if any) will be entitled to
vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
C2 Other Secured Claims IMPAIRED. Each Holder (if any) of an 100%
Allowed Class C2 Claim will receive on the
Effective Date either (i) payment in full
in Cash of such Claim with interest on the
principal balance of any such Allowed
Claim calculated at the Plan Rate; (ii) if
Holdings so elects, the collateral
securing the Allowed Class C2 Claim (if
any) in full satisfaction of such Claim;
or (iii) such other treatment as may be
agreed to by Holdings and the Holder(s)
(if any) of Allowed Class C2 Claim(s).
Class C2 is Impaired and, accordingly,
Holders of such Claims will be entitled to
vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
C3 Priority Claims UNIMPAIRED. Each Holder of an Allowed 100%
Class C3 Claim will receive on the
Effective Date payment in full in
Cash of such Claim including Plan
Interest thereon. Class C3 is
Unimpaired and, accordingly, is not
entitled to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
C4 Guarantee Claims UNIMPAIRED. Each Holder (if any) of an 100%
Allowed Class C4 Claim will receive if, as
and when any such Claim is allowed
by Final Order payment in Cash in
full including Plan Interest
thereon if, and only to the extent
not fully treated with respect to
such Holder's underlying Allowed
Claim under the Plan treatment for
Claims against CMI or CMM, as the
case may be. Class C4 is Unimpaired
and, accordingly, is not entitled
to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
16
<PAGE>
<CAPTION>
---------- ------------------------------------------------- -------------------------------------------- ------------
CLASS DESCRIPTION TREATMENT ESTIMATED
RECOVERY
---------- ------------------------------------------------- -------------------------------------------- ------------
<S> <C> <C> <C>
C5 Holdings General Unsecured Claims IMPAIRED. Each Holder (if any) of an 100%
Allowed Class C5 Claim will if, as and
when any such Claim is allowed by Final
Order, receive payment in full in Cash of
any such Allowed Class C5 Claim with any
accrued and unpaid pre-petition and
post-petition interest thereon calculated
at the non-default contract rate of
interest in such Holder's documents for
any Holders of Allowed Class C5 Claims who
have a contract, the invoice rate (capped
at 9-1/8%) for any such Holders who
have an invoice rate, and 6% for any
other Holders of Allowed C5 Claims.
Class C5 is Impaired and, accordingly,
Holders of such Claims will be entitled
to vote on the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
C6 Intercompany Claims IMPAIRED. Each Holder of a Class C6 No payment
Claim will not receive any payment under shall be
the Plan on account of such Claim. Class made under
C6 is Impaired and, accordingly, Holders the Plan
of such Claims will be entitled to vote on but the
the Plan. claim
amounts
will
remain on
the
financial
books of
the
respective
Debtors.
---------- ------------------------------------------------- -------------------------------------------- ------------
C7 Interests in Holdings UNIMPAIRED. The Holder will retain its 100%
Interest. Class C7 is Unimpaired and,
accordingly, is not entitled to vote on
the Plan.
---------- ------------------------------------------------- -------------------------------------------- ------------
</TABLE>
The Debtors and the CMI Equity Committee presently intend to seek to
consummate the Plan and to cause the Effective Date to occur in late November
or early December, 2000. There can be no assurance, however, as to when the
Effective Date actually will occur.
In making investment decisions, Holders of Claims and Interests in
solicited Classes must rely on their own examination of the Debtors and the
terms of the reorganization, including the merits and risks involved. Each
Holder in a solicited Class should consult with its own legal, business,
financial and tax advisors with respect to any such matters concerning this
Disclosure Statement, the Plan and the transactions contemplated hereby and
thereby.
17
<PAGE>
B. RECOMMENDATION
THE DEBTORS, THE CMI EQUITY COMMITTEE AND THE UNSECURED CREDITORS'
COMMITTEE, ALL RECOMMEND THAT EACH HOLDER OF CLAIMS OR INTERESTS ENTITLED TO
VOTE ON THE PLAN VOTE TO ACCEPT THE PLAN.
The Debtors, the CMI Equity Committee and the Unsecured Creditors'
Committee believe that:
1. The Plan provides the best possible result for the Holders of
Claims and Interests;
2. With respect to each Impaired Class of Claims and Interests, the
distributions under the Plan are the same as or greater than the amounts that
would be received if the Debtors were liquidated under Chapter 7 of the
Bankruptcy Code; and
3. Acceptance of the Plan is in the best interests of the Holders of
Claims and Interests.
Prior to deciding whether to vote in favor of the Plan, Holders of
Claims and Interests in the solicited Classes should consider carefully all
of the information contained in this Disclosure Statement, including the risk
factors described in "CERTAIN RISK FACTORS."
C. VOTING INSTRUCTIONS
The Debtors and the CMI Equity Committee are seeking the acceptance
of the Plan by Holders of Claims and Interests in Classes A1, A2, A3, A4, A5,
A6, A7, A9, A10, A11, A13, A14, A16, A18, A20, A21, B1, B2, B5, B6, C1, C2,
C5 and C6.
A Ballot to be used to accept or reject the Plan has been enclosed
with all copies of this Disclosure Statement mailed to Holders of Claims and
Interests whose Claims and Interests are Impaired by provisions of the Plan
and who are entitled to vote on the Plan. Accordingly, this Disclosure
Statement (and the exhibits hereto), together with the accompanying Ballot
and the related materials delivered together herewith, are being furnished to
Holders of Claims and Interests in Classes A1, A2, A3, A4, A5, A6, A7, A9,
A10, A11, A13, A14, A16, A18, A20, A21, B1, B2, B5, B6, C1, C2, C5 and C6 and
may not be relied upon or used for any purpose other than to determine
whether or not to vote to accept or reject the Plan.
Ballots with respect to the Plan will be accepted by the Debtors
until 5:00 p.m., Eastern Time, on October 20, 2000 (the "Voting Deadline").
Except to the extent the Debtors so determine or as permitted by the
Bankruptcy Court pursuant to Bankruptcy Rule 3018, Ballots that are received
after the Voting Deadline will not be accepted or used by the Debtors in
connection with the Debtors' request for confirmation of the Plan.
The Debtors have retained Bankruptcy Services LLC as their voting
and tabulation agent in connection with the Plan (the "Balloting Agent").
Consistent with the provisions of Rule 3018 of the Bankruptcy Rules,
the Court has fixed the Voting Record Date (the close of business, Eastern
Time, on September 5, 2000) as the time and date for the determination of
Holders of record of Interests in Classes A9, A14, A16, A18, A20 and A21 who
are entitled to vote on the Plan. If the Holder of record of any solicited
Interest is not also the beneficial owner of such Interest, the vote to
accept or reject the Plan must be cast by the beneficial owner of such
Interest.
For purposes of voting by Classes A9, A14, A16, A18, A20 and A21 to
accept or reject the Plan, the term "Holder" means a beneficial owner of
Common Stock, Old Senior Notes, Series B Preferred Stock, Former Series C
Preferred Stock, Old Series D Preferred Stock, or Series F Dividend Preferred
Stock (the "Securities") on the Voting Record Date. A "beneficial owner" is
the person who enjoys the benefits of ownership of the securities (i.e., has
a pecuniary interest in the securities) even though title of the securities
may be in another name. The term "Holder" with respect to other Claims and
Interests means the person who holds such Claim or Interest in such Person's
capacity as the holder of such Claim or Interest. Only beneficial owners (or
their authorized signatories) of the Securities and Holders of Classes A1,
A2, A3, A4, A5, A6, A7, A9, A10, A11, A13, A14, A16, A18, A20, A21, B1,
18
<PAGE>
B2, B5, B6, C1, C2, C5 and C6 Claims as of the Petition Date (or transferees
thereof) are eligible to vote on the Plan.
ALL VOTES TO ACCEPT OR REJECT THE PLAN MUST BE CAST BY USING A
BALLOT. VOTES WHICH ARE CAST IN ANY MANNER OTHER THAN BY USING A BALLOT WILL
NOT BE COUNTED. BALLOTS THAT ARE NOT PROPERLY SIGNED WILL NOT BE COUNTED.
BALLOTS THAT PARTIALLY ACCEPT AND PARTIALLY REJECT THE PLAN WILL NOT BE
COUNTED. BALLOTS THAT ARE PROPERLY SIGNED BUT DO NOT INDICATE EITHER
ACCEPTANCE OR REJECTION OF THE PLAN WILL BE COUNTED AS AN ACCEPTANCE.
PROCEDURES FOR CLASSES A9, A14, A16, A18, A20 AND A21:
For purposes of voting to accept or reject the Plan, if you hold
Securities in physical certificated form that are registered in your own
name, you can vote on the Plan by completing the information requested on the
ballot, signing, dating, and indicating your vote on the ballot, and
returning the completed original ballot in the enclosed, pre-addressed,
postage-paid envelope so that it is actually received by the Balloting Agent
before the Voting Deadline. Any beneficial owner holding Securities in
"street name" can vote on the Plan by completing the information requested on
the ballot issued to you by your nominee (your broker, banker, bank, other
nominee or their agent), signing, dating and indicating your vote on the
ballot, and returning the completed original ballot to your nominee in
sufficient time for your nominee then to forward your vote to the Balloting
Agent so that it is actually received by the Balloting Agent before the
Voting Deadline.
If you are a brokerage firm, commercial bank, trust company or other
nominee which is the registered holder of Securities, please forward a copy
of this Disclosure Statement, the appropriate ballot or ballots, and any
other enclosed materials to each beneficial owner (all reasonable forwarding
expenses to be reimbursed by the Company), AND collect the ballot and
complete the master ballot, and deliver the completed original master ballot
to the Balloting Agent so that it is actually received by the Balloting Agent
before the Voting Deadline.
Clearing Systems should arrange for their respective participants to
vote by executing an omnibus proxy, assignment letter form, or similar
document, in such participants' favor.
If your Ballot is damaged or lost, or if you do not receive a
Ballot, you may request a replacement by contacting:
Bankruptcy Services LLC
70 East 55th Street, 6th Floor
New York, New York 10022
Attn: Alex Houghton
GENERAL INSTRUCTIONS FOR CLASSES A1, A2, A3, A4, A5, A6, A7, A9,
A10, A11, A13, A14, A16, A18, A20, A21, B1, B2, B5, B6, C1, C2, C5 AND C6:
After carefully reviewing the Plan, including all exhibits thereto,
and this Disclosure Statement and its exhibits, please indicate your vote on
the enclosed Ballot and return it in the envelope provided. In voting to
accept or reject the Plan, please use only the Ballot sent to you with this
Disclosure Statement. Please complete and sign your Ballot in accordance with
the instructions set forth on the Ballot and return it in the enclosed
envelope.
ANY BALLOT RECEIVED WHICH DOES NOT INDICATE EITHER AN ACCEPTANCE OR
REJECTION OF THE PLAN WILL BE DEEMED AN ACCEPTANCE OF THE PLAN. ANY BALLOT
RECEIVED WHICH INDICATES BOTH AN ACCEPTANCE AND A REJECTION OF THE PLAN WILL
NOT BE COUNTED.
This Disclosure Statement has been approved by order of the
Bankruptcy Court dated August 24, 2000, as containing information of a kind
and in sufficient detail to enable a hypothetical, reasonable investor,
typical of a
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holder of an Interest, to make an informed judgment whether to accept or
reject the Plan. Approval of this Disclosure Statement by the Bankruptcy
Court does not constitute a ruling as to the fairness or merits of the Plan.
NO STATEMENTS OR INFORMATION CONCERNING THE DEBTORS OR REORGANIZED
DEBTORS OR ANY OF THE ASSETS OR THE BUSINESS OF THE DEBTORS MAY BE MADE OR
SHOULD BE RELIED UPON, OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT
OR AS MAY HEREAFTER BE AUTHORIZED BY THE BANKRUPTCY COURT. THE STATEMENTS AND
INFORMATION ABOUT THE DEBTORS AND THEIR BUSINESSES IN THIS DISCLOSURE
STATEMENT, INCLUDING, WITHOUT LIMITATION, THE DISCUSSION OF SECURITIES LAWS,
RISK FACTORS, FEDERAL INCOME TAX CONSIDERATIONS AND OTHER TAX-RELATED MATTERS
HAVE BEEN PREPARED BY THE DEBTORS. THE CMI EQUITY COMMITTEE HAS NOT
PARTICIPATED IN THE PREPARATION OF SUCH STATEMENTS AND INFORMATION AND, AS A
RESULT, DOES NOT MAKE OR JOIN IN SUCH STATEMENTS AND INFORMATION.
The Bankruptcy Court will hold a confirmation hearing at which the
Bankruptcy Court will consider objections to confirmation, if any, commencing
at 10:00 a.m., Eastern Time, on November 15, 2000, United States Bankruptcy
Court, District of Maryland, Greenbelt Division (the "Confirmation Hearing").
The Confirmation Hearing may be adjourned from time to time without notice
other than the announcement of an adjourned date at the Confirmation Hearing.
Objections to Confirmation of the Plan, if any, must be in writing and served
and filed as described in the Plan and "PLAN OF REORGANIZATION --
Confirmation And Consummation Procedures -- Confirmation Hearing."
EXCEPT FOR PERSONS WHO ARE BENEFICIAL OWNERS OF OLD SENIOR NOTES OR
INTERESTS HELD IN STREET NAME, IN ORDER FOR YOUR BALLOT TO BE COUNTED, YOUR
BALLOT MUST BE COMPLETED AS SET FORTH ABOVE AND RECEIVED BY THE VOTING
DEADLINE (5:00 P.M., EASTERN TIME, ON OCTOBER 20, 2000). BALLOTS SHOULD BE
MAILED TO:
CRIIMI MAE Inc. et. al., c/o Bankruptcy Services LLC
Ballot Processing
P.O. Box 5204
FDR Station
New York, New York 10150-5204
OR IF DELIVERED BY COURIER OR BY HAND, TO:
Bankruptcy Services LLC
70 East 55th Street, 6th Floor
New York, New York 10022
Attn: Alex Houghton
ALL BENEFICIAL OWNERS OF OLD SENIOR NOTES OR INTERESTS WHOSE NOTES OR
INTERESTS ARE HELD IN STREET NAME MUST RETURN THEIR BALLOTS TO THE MASTER
BALLOTING AGENT FROM WHOM THEY RECEIVED THEIR BALLOTS NO LATER THAN 2:00 P.M.
EASTERN TIME ON OCTOBER 20, 2000 AT THE ADDRESS AND IN ACCORDANCE WITH THE
INSTRUCTIONS FOR RETURN OF SAID BALLOTS SET FORTH IN SUCH BALLOTS.
THE FOREGOING IS A SUMMARY. THIS DISCLOSURE STATEMENT AND THE
EXHIBITS HERETO SHOULD BE READ IN THEIR ENTIRETY BY ALL HOLDERS OF CLAIMS AND
INTERESTS IN CLASSES A1, A2, A3, A4, A5, A6, A7, A9, A10, A13, A14, A16, A18,
A20, A21, B1, B2, B5, B6, C1, C2, C5 AND C6 IN DETERMINING WHETHER TO ACCEPT
OR REJECT THE PLAN.
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III. GENERAL INFORMATION
FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS DISCLOSURE STATEMENT, THE WORDS
"BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THE RISK FACTORS CONTAINED UNDER
THE HEADINGS "CERTAIN RISK FACTORS," "BUSINESS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS
PLAN" AND IN EXHIBITS B (UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS AND PROJECTED FINANCIAL INFORMATION) AND C (LIQUIDATION ANALYSIS)
SET FORTH IN THIS DISCLOSURE STATEMENT. 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.
THE INFORMATION CONTAINED IN THIS PART III. "GENERAL INFORMATION,"
IS UPDATED, MODIFIED AND SUPPLEMENTED BY THE INFORMATION CONTAINED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000,
A COPY OF WHICH IS ATTACHED HERETO AS EXHIBIT H.
The Debtors have prepared this Disclosure Statement in connection
with the solicitation by the Debtors and the CMI Equity Committee of
acceptances of the Plan. No statements or information concerning the Debtors
or the Reorganized Debtors or their operations, or with respect to the
distributions to be made under the Plan, may be made or should be relied upon
other than as set forth in this Disclosure Statement or as may hereafter be
authorized by the Bankruptcy Court.
A. THE DEBTORS AND CHAPTER 11 FILING AND OTHER CHAPTER 11 EVENTS
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. 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.
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On October 5, 1998, the Debtors filed for relief under Chapter 11 of
the U.S. Bankruptcy Code.
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 and has closed its five regional loan
origination offices. See "BUSINESS-Employees."
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 "BUSINESS - Employee
Retention Plan."
See "GENERAL INFORMATION - Legal Proceedings" for a discussion of
bankruptcy related litigation and other matters.
RETENTION OF PROFESSIONALS BY THE DEBTORS
The Debtors have retained the following professionals to represent
and advise them in connection with their Chapter 11 cases:
Reorganization Counsel:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Venable, Baetjer and Howard, LLP
Shulman, Rogers, Gandal, Pordy & Ecker, P.A.
Corporate Counsel:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Venable, Baetjer and Howard, LLP
Restructuring Advisors:
Wasserstein, Perella & Co.
Independent Public Accountants:
Arthur Andersen LLP
APPOINTMENT OF OFFICIAL COMMITTEES
To date, three committees have been participating in these cases. The
members of the committees and their respective attorneys and advisors, as of the
date of the filing of this Disclosure Statement, are set forth below:
The Unsecured Creditors' Committee:
Prudential Securities Credit Corporation
Riggs Bank, NA
Conseco Capital Management, Inc.
RER Resources L.P.
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Counsel:
Arnold & Porter
Financial Advisors:
The Blackstone Group
Accountants:
PricewaterhouseCoopers LLP
CMI Equity Committee:
Charles Koehler
Michael Wurst
Elliot Kapstein
Howard Landis
Saul Yarmak
Counsel:
Covington & Burling
Financial Advisor:
Ernst & Young LLP
Ernst & Young Restructuring LLC
AMJ Advisors LLC
The Official Committee of Unsecured Creditors of CMM (the "CMM
Creditors' Committee"):
Dunn and Bradstreet
Andrews Office Products
Ad Solution
Counsel:
Whiteford, Taylor & Preston
Financial Advisor:
Penta Advisory Services, LLC
OTHER RELIEF GRANTED
In addition to obtaining Bankruptcy Court orders in connection with
proceedings involving creditors and an employee retention plan (also
addressing assumption of certain employment agreements) as discussed in
"GENERAL INFORMATION - Legal Proceedings," "GENERAL INFORMATION - Business -
Employee
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Retention Plan," and "GENERAL INFORMATION - Management - Executive
Compensation," the Debtors, in conjunction with filing their petitions, filed
various other motions seeking orders that were entered by the Bankruptcy
Court. The relief sought included:
Application for Authority to Pay Prepetition Trade Creditors in the
Ordinary Course. The Debtors obtained authority from the Bankruptcy Court to
pay trade claims in the ordinary course of their business with respect to
those vendors that continued to ship goods on customary trade terms.
Assumption and Rejection of Executory Contracts and Unexpired
Leases. Since the Petition Date, the Debtors have undertaken a comprehensive
review and evaluation of their various unexpired real property leases and
various executory contracts. Based on this review and because of the
substantial downsizing of the Debtors' business, the Debtors have rejected
five leases of real property and 21 equipment leases and equipment
maintenance and service contracts. In the event the Debtors determine, in
their business judgment, that they no longer need other leases and contracts,
the Debtors will file the appropriate motion(s) to reject such leases or
contracts with the Bankruptcy Court, or such leases or contracts will be
deemed rejected in the Plan.
DEADLINE TO FILE PROOFS OF CLAIM
On October 7, 1998, the Clerk of the Bankruptcy Court (the "Clerk of
the Court") issued a notice (the "Bar Date Notice") setting February 14,
1999, (the "Bar Date"), as the date and time by which proofs of claim of
non-governmental units against the Debtors' Chapter 11 estates had to be
filed. Governmental units were given until April 3, 1999 (the "Government
Unit Bar Date") to file such proofs. The Bar Date Notice required each person
or entity (including, without limitation, each individual, partnership, joint
venture, corporation, estate, trust and governmental unit) that asserted a
"claim" (as such term is defined in Section 101(5) of the Bankruptcy Code)
against any or all of the Debtors which claim arose on or prior to the
Petition Date to file an original written proof of claim so as to be received
on or before the Bar Date or the Government Unit Bar Date, as applicable, in
each case at 5:00 p.m. by the Clerk of the Court. The Bar Date Notice further
provided that if a claim is listed on the schedule of claims filed by the
Debtors with the Bankruptcy Court and is not listed as disputed, contingent
or unliquidated, the claim will be allowed only in the amount scheduled
unless the claimant files a proof of claim by the Bar Date or the Government
Unit Bar Date, as applicable, and that if a claim is not listed on the
schedule of claims filed by the Debtors with the Bankruptcy Court or if a
claim is listed as disputed, contingent or unliquidated, the claimant must
file a proof of claim with the Bankruptcy Court by the Bar Date or the
Government Unit Bar Date, as applicable, or the claimant may not be able to
recover on its claim against the Debtors' Chapter 11 estates.
Over 850 claims with a face amount of nearly $2.5 billion have been
filed in these cases, including approximately $355 million in unsecured
claims and approximately $2.2 billion in secured claims. Many of these claims
are duplicate claims filed by the same creditors in each of the three cases.
The Debtors scheduled liabilities of approximately $1.18 billion. The Debtors
have devoted substantial effort to reducing the total amount of allowed
claims. In connection with an extensive claims analysis they have: (a)
established a detailed database; (b) prepared objections to claims; and (c)
undertaken extensive negotiations with creditors regarding reduction or
withdrawal of claims.
These efforts have resulted in the reduction to date of
approximately $1.76 billion from the claims pool through disallowance,
withdrawal of claims, agreements to withdraw and negotiated settlements,
assuming implementation of the Debtors' Plan. This process has led to the
resolution of almost all employee, real and personal property lease
rejection, broker and borrower claims. CMI anticipates only a few remaining
claims disputes in these areas.
Three of the large claims are summarized below: (1) the claim of
Andrew N. Friedman on behalf of a class of shareholders in the amount of $100
million ("Claim Number 330"); (2) the claim of the Capital Corporation of
America, LLC for approximately $18 million (the "CCA Claim"); and (3) the
claim of GP Properties Group, Inc., for approximately $882,000 (the "GP
Properties Claim"). The Debtors believe they have substantial defenses to the
remaining disputed claims, but there can be no assurance of the outcome of
the claims resolution process.
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Claim Number 330 related to shareholder litigation against CMI's
officers and directors. On March 20, 2000, CMI moved to withdraw reference of
the litigation relating to Claim Number 330 to the United States District
Court for the District of Maryland, and on March 30, 2000, CMI filed an
objection to Claim Number 330. On April 27, 2000, the District Court withdrew
the reference of the contested matter relating to Claim Number 330, and on
July 19, 2000, the District Court entered a consent order disallowing Claim
Number 330 with prejudice. The shareholder litigation was dismissed on March
30, 2000 by the District Court. See "GENERAL INFORMATION - Legal Proceedings
- Shareholder Litigation" for background information related to the
shareholder litigation. The dismissal of the shareholder litigation was
appealed by the plaintiffs on May 1, 2000. On July 10, 2000, the United
States Court of Appeals for the Fourth Circuit dismissed the appeal by
agreement of the parties.
The CCA Claim relates to an August 14, 1998 letter of intent between
CMI and CCA for the purchase of subordinated CMBS. The letter of intent
included financing and due diligence contingencies. CMI's position is that
neither of these contingencies was fulfilled. After preliminary due
diligence, CMI expressed concern regarding the quality of the mortgage loans
underlying the CMBS. CMI's further due diligence confirmed this preliminary
view, and CMI exercised its right not to go forward with the purchase because
of its due diligence concerns. CCA refused to withdraw its claim, and on
August 31, 1999, CMI filed an objection to the CCA Claim. The CCA Claim was
filed for an amount in excess of $17 million on February 11, 1999. On October
9, 1999, CCA responded to the objection. By letter dated January 7, 2000, CCA
indicated that the amount of its claim was $18.8 million. On March 27, 2000,
CCA filed a motion with the Bankruptcy Court revising the amount of its claim
to $18.2 million. Litigation is continuing with respect to the CCA claims and
CMI's objection thereto. On July 26, 2000, the Bankruptcy Court entered an
Order temporarily allowing CCA's claims in the amount of $11,390,548 for
purposes of voting on the Plan. This Order did not determine the allowed
amount of CCA's claim, if any, for purposes of treatment and distributions
under the Plan. The allowed amount of CCA's claim, if any, will be determined
after a full evidentiary hearing.
The GP Properties Claim related to CMI's loan origination program.
In August and September 1998, CMI and GP Properties were involved in the
preliminary loan application process. These preliminary steps did not give
rise to a loan commitment. On October 7, 1998, GP Properties advised CMI that
it closed on alternative lending. GP Properties refused CMI's request that it
withdraw its claim, and on October 26, 1999, CMI objected to the GP
Properties Claim. GP Properties did not respond to the objection on or prior
to the objection deadline. On May 9, 2000, the Bankruptcy Court entered an
order disallowing and expunging the GP Properties Claim.
The Debtors have been asked by the Unsecured Creditors' Committee to
make reference to the Objection filed by the Unsecured Creditors' Committee
to the $10 million proof of claim filed by the CMM Creditors' Committee
against CMI. The CMM Creditors' Committee is vigorously defending the
objection. The Debtors believe that if the Plan is confirmed including the
treatment of the CMM creditors in Class B5 as provided therein, the claim
filed by the CMM Creditors' Committee and the objection thereto filed by the
Unsecured Creditors' Committee will thereby be resolved.
The Debtors estimate the principal amount of allowed unsecured
claims will be approximately $195 million and allowed secured claims will be
approximately $760 million, subject to agreed sales of certain collateral.
APPOINTMENT OF SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF CMI
In May 1999, a Special Reorganization Committee of the Board of
Directors of CMI (the "Committee") was established to evaluate proposals
received from major financial institutions for private equity investments
that would be part of a plan of reorganization. The Committee, composed of
the Company's four outside directors, was also assigned the responsibility of
overseeing the ongoing development of the entire plan of reorganization under
which the Company could emerge from Chapter 11. Robert E. Woods was appointed
Lead Director of the Committee. Mr. Woods is Managing Director and head of
loan syndications for the Americas at Societe Generale. Prior to that, he was
Managing Director and head of the Real Estate Capital Markets and
Mortgage-Backed Securities Division of Citicorp.
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PAYMENT OF NON-CASH DIVIDEND TO COMMON SHAREHOLDERS
On September 14, 1999, the Company declared a dividend to common
shareholders of approximately 1.61 million shares of a new series of junior
preferred stock (the "junior preferred stock" or "Series F Preferred Stock")
with a face value of $10 per share. The Company paid the junior preferred
stock dividend on November 5, 1999. Dividends are payable, in cash, when and
if declared, at a rate of 12% per annum, with the first dividend payable no
earlier than the end of the calendar quarter in which the Plan becomes
effective, and thereafter not more than quarterly, as determined by the Board
of Directors of CMI (the "Board of Directors" or "Board"). See "PLAN OF
REORGANIZATION" and Exhibit C (Series F Preferred Stock Articles) to Exhibit
E to this Disclosure Statement regarding amended dividend treatment
contemplated by the Plan. See "BUSINESS -- Effect of Chapter 11 Filing on
REIT Status and Other Tax Matters --The Company's 1998 Taxable Income."
EXCHANGE OF SERIES D PREFERRED STOCK FOR SERIES E PREFERRED STOCK
On July 26, 2000, 100,000 shares of Series D Preferred Stock
(representing all outstanding shares of Series D Preferred Stock) were
exchanged for 100,000 shares of Series E Preferred Stock. The principal
purpose of such exchange was to effect an extension of the July 31, 2000
mandatory conversion date, upon which the Series D Preferred Stock would have
converted into common stock. The relative rights and preferences of the
Series E Preferred Stock differ from those of the Series D Preferred Stock in
certain material respects relating primarily to dividend and conversion
matters. See Exhibit B (Series E Preferred Stock Articles) to Exhibit E to
this Disclosure Statement.
EMPLOYMENT AGREEMENT EXTENSIONS
The Company's employment agreements with Messrs. Dockser and
Willoughby expired on June 30, 2000. Subject to Bankruptcy Court approval,
the Company approved an extension of such employment agreements until the
earlier of the Effective Date of the Plan or February 1, 2001, with such
extensions to be effective as of June 29, 2000. A motion seeking Bankruptcy
Court approval of the foregoing was filed with the Court on July 11, 2000,
and the Court by order entered on July 18, 2000 granted the motion.
B. BUSINESS
THE INFORMATION CONTAINED IN THIS SECTION B OF PART III, WITHOUT
LIMITATION, IS UPDATED, MODIFIED, AND SUPPLEMENTED BY THE INFORMATION
CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED JUNE 30, 2000, A COPY OF WHICH IS ATTACHED HERETO AS EXHIBIT H.
GENERAL
CRIIMI MAE 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 the Petition Date as described below, CRIIMI MAE's primary activities
included (i) acquiring non-investment grade securities (rated below BBB- or
unrated) backed by pools of commercial 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.
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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. The Company's principal executive offices
are located at 11200 Rockville Pike, Rockville, Maryland 20852 and its
telephone number is (301) 816-2300.
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 year ended December
31, 1999 of approximately $37.5 million would generate a tax liability of up
to $15.0 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 year ended December 31, 1999. The
Company anticipates distributing all of its 1999 taxable income in the form
of non-cash taxable dividends. 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. The Company has accrued approximately $1.1 million for the excise tax
payable for 1999. The accrual was calculated based on the taxable income for
the year ended December 31, 1999.
THE COMPANY'S 1998 TAXABLE INCOME. On September 14, 1999, the
Company declared a dividend payable to common shareholders of approximately
1.61 million shares of a new series of junior preferred stock with a face
value of $10 per share. The purpose of the dividend was to distribute
approximately $15.7 million in undistributed 1998 taxable income. To the
extent that it is determined that such amount was not distributed, the
Company would bear a corporate level income tax on the undistributed amount.
There can be no assurance that all
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of the Company's tax liability was eliminated by payment of such junior
preferred stock dividend. The Company paid the junior preferred stock
dividend on November 5, 1999. The junior preferred stock dividend was taxable
to common shareholder recipients. Junior preferred shareholders were
permitted to convert their shares of junior preferred stock into common
shares during two separate conversion periods. During these conversion
periods, an aggregate 1,020,241 shares of junior preferred stock were
converted into 8,798,009 shares of common stock.
TAXABLE INCOME DISTRIBUTIONS. The recently issued Internal Revenue
Service Revenue Procedure 99-17 provides securities and commodities traders
with the ability to elect mark-to-market treatment for 2000 by including an
election with their timely filed 1999 federal tax extension. The election
applies to all future years as well, unless revoked with the consent of the
Internal Revenue Service. On March 15, 2000, the Company determined to elect
mark-to-market treatment as a securities trader for 2000 and, accordingly,
will recognize gains and losses prior to the actual disposition of its
securities. Moreover, some if not all of those gains and losses, as well as
some if not all gains or losses from actual dispositions of securities, will
be treated as ordinary in nature and not capital, as they would be in the
absence of the election. Therefore, any net operating losses generated by the
Company's trading activity will offset the Company's ordinary taxable income,
and thereby reduce required distributions to shareholders by a like amount.
See "CERTAIN RISK FACTORS-Risks Associated with Trader Election" for further
discussion. If the Company does have a REIT distribution requirement (and
such distributions would be permitted under the Plan), a substantial portion
of the Company's distributions would be in the form of non-cash taxable
dividends.
THE CMBS MARKET
Historically, traditional lenders, including commercial banks,
insurance companies and savings and loans, have been the primary holders of
commercial mortgages. The real estate market of the late 1980s and early
1990s created business and regulatory pressure to reduce the real estate
assets held on the books of these institutions. As a result, there has been
significant movement of commercial real estate debt from private
institutional holders to the public markets. Consequently, the supply of
private sector multifamily and other CMBS has increased dramatically over
recent years. According to COMMERCIAL MORTGAGE ALERT, CMBS issuances in the
U.S. equaled approximately $58.3 billion in 1999, $77.7 billion in 1998,
$40.4 billion in 1997 and $28.8 billion in 1996.
CMBS are generally created by pooling commercial mortgage loans and
directing the cash flow from such mortgage loans to various tranches of
securities. The tranches consist of investment grade (AAA to BBB-),
non-investment grade (BB+ to CCC) and unrated. The first step in the process
of creating CMBS is loan origination. Loan origination occurs when a
financial institution lends money to a borrower to refinance or to purchase a
commercial real estate property, and secures the loan with a mortgage on the
property that the borrower owns or purchases. Commercial mortgage loans are
typically non-recourse to the borrower. A pool of these commercial real
estate-backed mortgage loans is then accumulated, often by a large commercial
bank or other financial institution. One or more rating agencies then analyze
the loans and the underlying real estate to determine their credit quality.
The mortgage loans are then deposited into an entity that is not subject to
taxation, often a real estate mortgage investment conduit ("REMIC") or, in
the case of the Company, a TMP. The investment vehicle then issues securities
backed by the commercial mortgage loans, or CMBS.
The CMBS are divided into tranches, which are afforded certain
priority rights to the cash flow from the underlying mortgage loans. Interest
payments typically flow first to the most senior tranche until it receives
all of its accrued interest and then to the junior tranches in order of
seniority until all available interest is exhausted. Principal payments
typically flow first to the most senior tranche until it is retired. Tranches
are then retired in order of seniority, based on available principal. Losses,
if any, are generally first applied against the principal balance of the
lowest rated or unrated tranche. Losses are then applied in reverse order of
seniority. Each tranche is assigned a credit rating by one or more rating
agencies based on the agencies' assessment of the likelihood of the tranche
receiving its stated right to payment of principal. The CMBS are then sold to
investors through either a public offering or a private placement. The
Company has primarily focused on acquiring or retaining non-investment grade
and unrated tranches, issued by mortgage conduits, where the Company believes
its market knowledge and real estate expertise allow it to earn attractive
risk-adjusted returns.
At the time of a securitization, one or more entities are appointed
as "servicers" for the pool of mortgage loans, and are responsible for
performing servicing duties which include collecting payments (master or
direct
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servicing), monitoring performance (loan management) and working out or
foreclosing on defaulted loans (special servicing). Each servicer receives a
fee and other financial incentives based on the type and extent of servicing
duties.
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 weighted average 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 and
continued throughout 1999 with the issuance of newly created CMBS totaling
approximately $58.3 billion for 1999. The market for Subordinated CMBS has,
however, been slower to recover. It is difficult, if not impossible, to
predict when, or if, the CMBS market and, in particular, the Subordinated
CMBS market, will recover. Even if the market for subordinated CMBS recovers,
the liquidity of such market has historically been limited. Additionally,
during adverse market conditions, the liquidity of such market has been
severely limited. Therefore, management's estimate of the value of the
Company's CMBS could vary significantly from the value that could be realized
in a transaction between a willing buyer and a willing seller in other than a
forced sale or liquidation.
SUBORDINATED CMBS ACQUISITIONS
As of December 31, 1999, the Company's $2.3 billion portfolio of
assets included $1.2 billion of Subordinated CMBS (representing approximately
51% of the Company's total consolidated assets). See CRIIMI MAE Financial
Statements to be attached hereto as Exhibit D.
The Company did not acquire any Subordinated CMBS in 1999. In 1998,
CRIIMI MAE acquired Subordinated CMBS from offerings with a total face amount
of $13.5 billion. These offerings comprised 17.2% of the total ($58.3 billion
face amount according to COMMERCIAL MORTGAGE ALERT) CMBS market for 1998. For
the year ended December 31, 1998, the Company acquired Subordinated CMBS with
an aggregate face amount of approximately $1.2 billion, making the Company a
leading purchaser of Subordinated CMBS in 1998. As of December 31, 1999,
approximately 42% of the Company's CMBS (based on fair value) were rated BB+,
BB or BB-, 27% were B+, B, B- or CCC and 10% were unrated. The remaining
approximately 21% represents investment grade securities that the Company
reflects on its balance sheet as a result of CBO-2 (herein defined). See "The
Portfolio -- CMBS."
The Company generally acquired Subordinated CMBS in privately
negotiated transactions, which allowed it to perform due diligence on a
substantial portion of the mortgage loans underlying the Subordinated CMBS as
well as the underlying real estate prior to consummating the purchase. In
connection with its Subordinated CMBS acquisitions, the Company targeted
diversified mortgage loan pools with a mix of property types, geographic
locations and borrowers. 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 Company's business strategy was
to periodically refinance a substantial portion of the Subordinated CMBS in
its portfolio through a resecuritization of such Subordinated CMBS primarily
to attain a better matching of the maturities of its assets and liabilities
through the refinancing of short-term, variable-rate, recourse financing with
long-term, fixed-rate, non-recourse financing. See "BUSINESS -
Resecuritizations," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," and Notes 5 and 9 to Notes to
Consolidated Financial Statements.
The Company generally enters into interest rate protection
agreements to mitigate the adverse effects of rising short-term interest
rates on the interest payments due on its variable-rate financing facilities.
It is the Company's policy to hedge at least 75% of the principal balance of
its variable-rate debt with interest rate protection agreements that limit
the cash flow exposure to increases in interest rates beyond a certain level
on the amount of interest expense the Company must pay. As of December 31,
1999, approximately 94% of the Company's variable-rate debt was hedged with
interest rate caps, a form of interest rate protection agreement. Interest
rate caps provide
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<PAGE>
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 would receive payments based on the difference
between the index and the cap. The payments would serve to reduce the
interest payments due under the variable-rate secured financing agreements.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and Notes 9 and 10 to Notes to Consolidated Financial
Statements for a further discussion of the Company's short-term,
variable-rate, secured financing facilities and interest rate protection
agreements. If the treasury rates increase and/or spreads widen from the
December 31, 1999 levels, the value of the Company's portfolio of securities
would decrease.
RESECURITIZATIONS
The Company initially funded a substantial portion of its
Subordinated CMBS acquisitions with short-term, variable-rate secured
financing facilities. To further mitigate the Company's exposure to interest
rate risk, the Company's business strategy was to periodically refinance a
significant portion of this short-term debt with fixed-rate, non-recourse
debt having maturities that matched those of the Company's mortgage assets
securing such debt ("match-funded"). The Company effected such refinancing by
pooling Subordinated CMBS once a sufficient pool of Subordinated CMBS had
been accumulated, and issuing newly created CMBS backed by the pooled
Subordinated CMBS. The CMBS issued in such resecuritizations were fixed-rate
obligations with maturities that matched the maturities of the Subordinated
CMBS backing the new CMBS. These resecuritizations also increased the amount
of borrowings available to the Company due to the increased collateral value
of the new CMBS relative to the pooled Subordinated CMBS. The increase in
collateral value was principally attributable to the seasoning of the
underlying mortgage loans, and the diversification that occurred when such
Subordinated CMBS were pooled. The Company generally used the cash proceeds
from the investment-grade CMBS that were sold in the resecuritization to
reduce the amount of its short-term, variable-rate secured borrowings. The
Company then used the net excess borrowing capacity created by the
resecuritization to obtain new short-term, variable-rate secured borrowings
which were used with additional new short-term, variable-rate secured
borrowings typically provided by the Subordinated CMBS seller and, to a
lesser extent, cash, to purchase additional Subordinated CMBS. Although the
Company's resecuritizations have mitigated the Company's exposure to interest
rate risk through match-funding, the Company's short-term, variable-rate
secured borrowings increased from December 31, 1996 to December 31, 1998, as
a result of the Company's continued acquisitions of Subordinated CMBS during
that period.
In December 1996, the Company completed its first resecuritization
of Subordinated CMBS ("CBO-1") with a combined face value of approximately
$449 million involving 35 individual securities collateralized by 12 mortgage
securitization pools. The Company sold, in a private placement, securities
with a face amount of $142 million and retained securities with a face amount
of approximately $307 million. Through CBO-1, the Company refinanced
approximately $142 million of short-term, variable-rate, secured borrowings
with fixed-rate, non-recourse, match-funded debt. CBO-1 generated excess
borrowing capacity of approximately $22 million primarily as a result of a
higher overall weighted average credit rating for the new CMBS, as compared
to the weighted average credit rating on the related CMBS collateral.
In May 1998, the Company completed its second resecuritization of
Subordinated CMBS ("CBO-2") with a combined face value of approximately $1.8
billion involving 75 individual securities collateralized by 19 mortgage
securitization pools and three of the retained securities from CBO-1. In
CBO-2, the Company initially sold in a private placement securities with a
face amount of $468 million and retained securities with a face amount of
approximately $1.3 billion. Through CBO-2, the Company refinanced
approximately $468 million of short-term, variable-rate secured borrowings
with fixed-rate, non-recourse, match-funded debt. CBO-2 generated net excess
borrowing capacity of approximately $160 million primarily as a result of a
higher overall weighted average credit rating for the new CMBS, as compared
to the weighted average credit rating on the related CMBS collateral. See
"GENERAL INFORMATION - Legal Proceedings" regarding the sale of additional
CBO-2 CMBS.
As of December 31, 1999, the Company's total debt was approximately
$2.0 billion, of which approximately 53% was fixed-rate, match-funded debt
and approximately 47% was short-term, variable-rate or fixed-rate debt that
recourse to the Company and not match-funded. For the year ended December 31,
1999, the Company's weighted average cost of borrowing (including
amortization of discounts and deferred financing fees of approximately $8.7
million) was approximately 7.64%. See "BUSINESS - Subordinated CMBS
Acquisitions,"
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"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and Notes 5, 9 and 10 to Notes to Consolidated Financial
Statements for further information regarding the Company's resecuritizations,
short-term, variable-rate secured financings, and interest rate caps.
LOAN ORIGINATIONS AND SECURITIZATIONS
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. The Company viewed a securitization as a means of extracting
the maximum value from the mortgage loans originated. A portion of the
mortgage loans originated was financed through the creation and sale of
investment-grade CMBS to third parties in connection with the securitization.
The Company received net cash flow on the CMBS not sold to third parties
after payment of amounts due to secured creditors who had provided
acquisition financing. Additionally, the Company received origination and
servicing fees related to the mortgage loan conduit programs.
A majority of the mortgage loans originated under the Company's loan
conduit programs were "No Lock" mortgage loans. Unlike most commercial
mortgage loans originated for the CMBS market which contain "lock-out"
clauses (that is, provisions which prohibit the prepayment of a loan for a
specified period after the loan is originated or impose costly yield
maintenance provisions), the Company's No Lock loans allowed borrowers the
ability to prepay loans at any time by paying a prepayment penalty.
Prior to the Petition Date, the Company had originated over $900
million in aggregate principal amount of loans. In June 1998, the Company
securitized approximately $496 million of the commercial mortgage loans
acquired through a mortgage loan conduit program with Citicorp Real Estate,
Inc. ("Citibank"), and through CRIIMI MAE CMBS Corp., issued Commercial
Mortgage Loan Trust Certificates, Series 1998-1 ("CMO-IV"). A majority of
these mortgage loans were "No Lock" loans. In CMO-IV, CRIIMI MAE initially
sold $397 million face amount of fixed-rate, investment-grade CMBS. The
Company originally intended to sell all of the investment grade tranches of
CMO-IV; however, the two investment grade tranches were not sold until 1999.
CRIIMI MAE has call rights on each of the issued securities and therefore has
not surrendered control of the bonds, thus requiring the transaction to be
accounted for as a financing of the mortgage loans collateralizing the
investment-grade CMBS sold in the securitization. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-Liquidity and Capital Resources" and Notes 6 and 9 to Notes to
Consolidated Financial Statements for additional information regarding this
securitization, including the 1999 sales of the two remaining investment
grade tranches and certain financial and accounting effects of such sales.
At the time it filed for bankruptcy, the Company had a second
mortgage loan conduit program with Citibank (the "Citibank Program") and a
loan conduit program with Prudential Securities Incorporated and Prudential
Securities Credit Company (collectively "Prudential") (the "Prudential
Program").
Each Program provided that during the warehouse period, the
financial institution party would fund and originate in its name all mortgage
loans under the Program, and CRIIMI MAE would deposit a portion of each loan
amount in a reserve account. In each Program, the financial institution was
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.
On April 5, 1999, the Bankruptcy Court entered a Stipulation and
Consent Order (the "Order"), negotiated by the Company and Citibank. The
negotiations were in response to a letter Citibank sent to the Company on
October 5, 1998 alleging that the Company was in default under the Citibank
Program and that it was terminating the Citibank program. The Order provided
that Citibank would, with the Company's cooperation, sell the loans
originated under the Citibank Program pursuant to certain specified terms and
conditions. All of the commercial loans originated under the Citibank Program
were sold in 1999 at a loss to the Company. See "MANAGEMENT'S
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources" and Notes 6 and 9 to the Notes to
Consolidated Financial Statements for a further discussion of these
commercial loan sales and certain financial and accounting effects of such
sales.
Under the Prudential Program, the Company had an option to pay
Prudential the face value of the loan, 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 had been made. Under the Prudential Program, the
Company was required to fund a reserve account, which was approximately $2
million for the sole loan originated under this Program. Since the Company
was unable to exercise its option under the Prudential Program, the Company
forfeited the amount of the reserve account. CRIIMI MAE intends 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.
SERVICING
CRIIMI MAE conducts its mortgage loan servicing and advisory
operations through its affiliate, CMSLP. At the time of the Chapter 11
filing, CMSLP was responsible for certain servicing functions on a mortgage
loan portfolio of approximately $32 billion, as compared to approximately
$16.5 billion as of December 31, 1997. Prior to the Petition Date, CRIIMI MAE
increased its mortgage loan servicing and advisory operations primarily
through its purchases of Subordinated CMBS by acquiring certain servicing
rights for the mortgage loans collateralizing the Subordinated CMBS, as well
as providing servicing on the loans originated through the CRIIMI MAE loan
origination programs.
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 also 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
("BOMCM") 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. As of December 31, 1999, CMSLP
continued to perform special servicing as sub-servicer for ORIX on all but
five of these securitizations. Also, as of December 31, 1999, CRIIMI MAE
remained 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. As of December 31,
1999 and 1998, CMSLP's remaining servicing portfolio was $28.0 billion and
$31.0 billion, respectively. As part of CRIIMI MAE's Plan, certain of the
Company's non-securitized CMBS are intended to be sold. As such, CMSLP will
lose its special servicing rights related to these CMBS. In 1999, CMSLP
generated gross revenues of $1.1 million in fees on these CMBS.
CMSLP's principal servicing activities are described below.
SPECIAL SERVICING. A special servicer typically provides asset
management and resolution services with respect to nonperforming or
underperforming loans within a pool of mortgage loans. When acquiring
Subordinated CMBS, CRIIMI MAE typically required that it retain the right to
appoint the special servicer for the related mortgage pools. When serving as
special servicer of a CMBS pool, CMSLP has the authority to deal directly
with any borrower that fails to perform under certain terms of its mortgage
loan, including the failure to make payments, and to manage any loan workouts
and foreclosures. As special servicer, CMSLP earns fee income on services
provided in connection with any loan servicing function transferred to it
from the master servicer. CRIIMI MAE believes that because it owns the lowest
rated or unrated tranche (first loss position) of the Subordinated CMBS,
CMSLP has an incentive to quickly resolve any loan workouts. During the year
ended December 31, 1999, CMSLP successfully resolved $174.1 million of CMBS
loan workouts. As of December 31, 1999, CMSLP was designated as
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the special servicer (or sub-special servicer) for approximately 4,978
commercial mortgage loans, representing an aggregate principal amount of
approximately $27.0 billion. Such commercial mortgage loans represent
substantially all of the mortgage loans underlying CRIIMI MAE's Subordinated
CMBS portfolio.
As of December 31, 1999, CMSLP had a special servicer rating of
"above average" from Fitch IBCA and had been approved on a transactional
basis by Moody's Investors Service, Inc. ("Moody's") and Duff & Phelps Credit
Rating Co. However, CMSLP lost an "acceptable" special servicer rating by
Standard & Poor's ("S&P") in October 1998 as a result of the Chapter 11
filing of CRIIMI MAE. Also, as a result of the Chapter 11 filing, Fitch IBCA
placed CMSLP's special servicing rating on "rating watch."
MASTER SERVICING. A master servicer typically provides
administrative and reporting services to the trustee with respect to a
particular issuance of CMBS. Mortgage loans underlying CMBS generally are
serviced by a number of primary servicers. Under most master servicing
arrangements, the primary servicers retain primary responsibility for
administering the mortgage loans and the master servicer acts as an
intermediary in overseeing the work of the primary servicers, monitoring
their compliance with the standards of the issuer of the related CMBS and
consolidating the servicers' respective periodic accounting reports for
transmission to the trustee. When acting as master servicer of a CMBS pool,
CMSLP has greater control over the mortgage assets underlying its
Subordinated CMBS, including the authority to (i) collect monthly principal
and interest payments (either from a direct servicer or directly from
borrowers) on loans comprising a CMBS pool and remit such amounts to the pool
trustee, (ii) oversee the performance of sub-servicers and (iii) report to
trustees. As master servicer, CMSLP is usually paid a fee and can earn float
income on the deposits it holds. In addition to this float and fee income,
the master servicer typically has more direct and regular contact with
borrowers than the special servicer. As of December 31, 1998 and September
30, 1999, CMSLP remained master servicer on three CMBS portfolios
representing commercial mortgage loans with an aggregate principal amount of
approximately $2.3 billion.
As of December 31, 1999, CMSLP had a master servicer rating of
"acceptable" from Fitch IBCA and had been approved on a transactional basis
by Moody's. However, CMSLP lost an acceptable master servicer rating from S&P
in October 1998 as a result of the Chapter 11 filing of CRIIMI MAE. Also, as
a result of the Chapter 11 filing, Fitch IBCA placed CMSLP's Master Servicer
rating on "rating watch".
DIRECT (OR PRIMARY) SERVICING. Direct (or primary) servicers
typically perform certain functions for the master servicer. Direct serviced
loans are those loans for which CMSLP collects loan payments directly from
the borrower (including tax and insurance escrows and replacement reserves).
The loan payments are remitted to the master servicer for the loan (which may
be the same entity as the direct servicer), usually on a fixed date each
month. The direct servicer is usually paid a fee to perform these services,
and is eligible to earn float income on the deposits held. In addition to
this fee and float income, the direct servicer, like the master servicer,
typically has more direct and regular contact with borrowers than the special
servicer. As of December 31, 1999, CMSLP was designated direct servicer for
approximately 502 commercial mortgage loans, representing an aggregate
principal amount of approximately $2.4 billion. This number excludes loans
that are both direct and master serviced, which are included in the master
servicing figures above.
LOAN MANAGEMENT. In certain cases, CMSLP acts as loan manager and
monitors the ongoing performance of properties securing the mortgage loans
underlying its Subordinated CMBS portfolio by continuously reviewing the
property level operating data and regular site inspections. For approximately
half of these loans, CMSLP performs these duties on a contractual basis; for
the remaining loans, as part of its routine asset monitoring process, it
reviews the analysis performed by other servicers. This allows CMSLP to
identify and resolve potential issues that could result in losses. As of
December 31, 1999, CMSLP served as loan manager for approximately 2,464
commercial mortgage loans, representing an aggregate principal amount of
approximately $12.0 billion. As of December 31, 1999, CMSLP performed
surveillance on analyses performed by other servicers for approximately 2,456
commercial mortgage loans representing an aggregate principal amount of $14.8
billion.
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UNDERWRITING PROCEDURES
CRIIMI MAE believes that its experience in underwriting has enabled
it to maintain the overall quality of assets underlying its CMBS portfolio
and to properly manage certain of the risks associated with mortgage loans
underlying acquired Subordinated CMBS and loan originations. Since the
Company generally acquired CMBS through privately negotiated transactions and
originated commercial mortgage loans through its regional offices, it was
able to perform extensive due diligence on a majority of the mortgage loans
as well as the underlying real estate prior to consummating any purchase or
origination. The Company underwrote every loan it originated and
re-underwrote a substantial portion of the loans underlying the Subordinated
CMBS it acquired. Furthermore, the Company's credit committee, composed of
members of senior management, reviewed originated loans and Subordinated CMBS
acquisitions. The Company also placed underwriting personnel in its regional
origination offices, not only to provide a timely response to the originators
but also to achieve a thorough understanding of local markets and demographic
trends.
CRIIMI MAE's underwriting guidelines were designed to assess the
adequacy of the real property as collateral for the loan and the borrower's
creditworthiness. The underwriting process entailed a full independent review
of the operating records, appraisals, environmental studies, market studies
and architectural and engineering reports, as well as site visits to
properties representing a majority of the CMBS portfolio. The Company then
tested the historical and projected financial performance of the properties
to determine their resiliency to a market downturn and applied varying
capitalization rates to assess collateral value. To assess the borrower's
creditworthiness, the Company reviewed the borrower's financial statements,
credit history, bank references and managerial experience. The Company
purchased Subordinated CMBS when the loans it believed to be problematic
(I.E., that did not meet its underwriting criteria) were excluded from the
CMBS pool and when satisfactory arrangements existed that enabled the Company
to closely monitor the underlying mortgage loans and provided the Company
with appropriate workout and foreclosure rights.
EMPLOYEES
As of March 15, 2000, the Company had 44 full-time employees, and
CMSLP had 110 full-time employees. Prior to the Petition Date on September
30, 1998, the Company had 170 full-time employees, and CMSLP had 113
full-time employees.
EMPLOYEE RETENTION PLAN
Upon commencement of the Chapter 11 cases, the Company believed it
was essential to both the efficient operation of the Company's business and
the reorganization effort that the Company maintain the support, cooperation
and morale of its employees. The Company obtained Bankruptcy Court approval
to pay certain pre-petition employee obligations in the nature of wages,
salaries and other compensation and to continue to honor and pay all employee
benefit plans and policies.
In addition, to ensure the Company's continued retention of its
executives and other employees and to provide meaningful incentives for these
employees to work toward the Company's financial recovery and reorganization,
the Company's management and Board of Directors developed a comprehensive and
integrated program to retain its executives and other employees throughout
the reorganization. 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 permitted the Company to approve
ordinary course employee salary increases beginning in March 1999, subject to
certain limitations, and to grant options to its employees after the Petition
Date, up to certain limits. The Employee Retention Plan also provides for
retention payments aggregating up to approximately $3.5 million, including
payments to certain executives. Retention payments are payable semiannually
over a two-year period. The first retention payment of approximately $909,000
vested on April 5, 1999, and was paid on April 15, 1999. The second
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retention payment of approximately $865,000 vested on October 5, 1999 and was
paid on October 15, 1999. The third retention payment of approximately
$653,000 vested on April 5, 2000, and was paid on April 14, 2000. The entire
unpaid portion of the retention payments will become due and payable (i) upon
the effective date of a plan of reorganization of the Company and, with
respect to certain key executives, court approval or (ii) upon termination
without cause. William B. Dockser, Chairman of the Board of Directors, 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
CMM. In addition, options granted by the Company after October 5, 1998 will,
subject to Bankruptcy Court approval, become exercisable upon a change of
control. For a discussion of the Employee Retention Plan as it relates to
named key executives of the Company, see "MANAGEMENT - Employment Agreements."
C. THE PORTFOLIO
THE INFORMATION CONTAINED IN THIS SECTION C OF PART III, WITHOUT
LIMITATION, IS UPDATED, MODIFIED, AND SUPPLEMENTED BY THE INFORMATION
CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED JUNE 30, 2000, A COPY OF WHICH IS ATTACHED HERETO AS EXHIBIT H.
CMBS
FAIR VALUE. As of December 31, 1999, the Company owned, for purposes
of generally accepted accounting principles ("GAAP"), CMBS rated from A to
CCC and unrated with a total fair value amount of approximately $1.2 billion
(representing approximately 51% of the Company's total consolidated assets)
and an aggregate amortized cost of approximately $1.4 billion.
<TABLE>
<CAPTION>
Weighted Range of Discount Amortized Amortized
Face Amount Average Weighted Fair Value Rates Used to Cost as of Cost as of
as of 12/31/99 Pass-Through Average as of 12/31/99 Calculate Fair 12/31/99 12/31/98
Security Rating (in millions) Rate Life (1) (in millions) Value (2) (in millions) (in millions)
---------------- ------------ ----------- --------- ------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
A (3) $ 62.6 7.0% 6 years $ 54.5 9.8% $57.4 $ 57.0
BBB (3) 150.6 7.0% 12 years 116.1 10.5% 127.7 126.9
BBB-(3) 115.2 7.0% 12 years 82.6 11.4% 93.5 92.8
BB+ 394.6 7.0% 13 years 255.3 11.4%-13.2% 305.5 317.9
BB 279.0 6.9% 14 years 192.8 11.8%-13.9% 206.1 259.1
BB- 89.1 6.8% 14 years 51.2 13.2%-14.9% 58.6 72.6
B+ 128.7 6.7% 16 years 63.7 14.5%-15.9% 82.1 93.0
B 300.2 6.6% 16 years 141.3 15.5%-17.2% 178.2 208.9
B- 198.7 6.7% 17 years 84.9 16.0%-19.4% 98.1 106.7
CCC 92.0 6.8% 19 years 23.2 25.0%-30.0% 32.5 36.0
Unrated (4) 477.4 5.9% 20 years 113.7 26.0%-32.0% 134.4 159.0
------------ ----------- --------- ------------- ----------- -----------
Total (5)(6) $2,288.1 6.7% 15 years $1,179.3 $1,374.1 (7) $1,529.9
============ =========== ========= ============= =========== ===========
</TABLE>
-------------------------------
(1) Weighted average life represents the weighted average expected life of the
Subordinated CMBS prior to consideration of losses, extensions or
prepayments.
(2) 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 December
31, 1999. As a result, the Company calculated the estimated fair market
value of its Subordinated CMBS portfolio as of December 31, 1999. The
Company used a discounted cash flow methodology to estimate the fair value
of its Subordinated CMBS portfolio. The cash flows for each bond were
projected assuming no prepayments and no losses, as is the market
convention. The cash flows were then discounted using a discount rate that,
in the Company's
35
<PAGE>
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 institutionally available research reports and 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
December 31, 1999, it has disclosed in the table the range of discount
rates by rating category used in determining these fair market values.
(3) In connection with CBO-2, $62.6 million (A rated) and $60.0 million (BBB
rated) face amount of investment grade securities were sold with call
options and $345 million (A rated) face amount were sold without call
options. 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, both with call options, with the intention to sell
the securities at a later date. Such sale occurred March 5, 1999. 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. See "Legal
Proceedings" for further discussion.
(4) The unrated bond from CBO-1 experienced an approximately $1.6 million
principal write down in 1999 due to a loss on the foreclosure of two
underlying loans. Management believes that the current loss estimates used
to recognize income related to this bond remain adequate to cover losses.
(5) Refer to Note 8 to Notes to Consolidated Financial Statements for
additional information regarding the total face amount and purchase price
of Subordinated CMBS for tax purposes.
(6) Similar to the Company's other sponsored CMOs, CMO-IV, as further described
in "BUSINESS-Loan Originations and Securitizations" and Note 6 to Notes to
the Consolidated Financial Statements, 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 a sale. Since the entire transaction is recorded
as a financing, the Subordinated CMBS are not reflected in the Company's
Subordinated CMBS portfolio. Instead, the underlying mortgage loans
contributed to CMO-IV are reflected in Investment in Originated Loans on
the balance sheet
(7) Amortized cost reflects the $156.9 million impairment loss write-down
related to the CMBS subject to the CMBS Sale. See Note 5 of the Notes to
Consolidated Financial Statements.
TYPE AND GEOGRAPHIC LOCATION OF LOANS. As of December 31, 1999 and
1998, the mortgage loans underlying the Company's CMBS portfolio were secured by
properties of the types and at the locations identified below:
<TABLE>
<CAPTION>
Property Type 1999(1) 1998(1) Geographic Location(2) 1999(1) 1998(1)
-------------------------- ------- ------- ------------------------ ------- -------
<S> <C> <C> <C> <C> <C>
Multifamily............... 32% 31% California.............. 17% 16%
Retail.................... 29% 28% Texas................... 13% 12%
Office.................... 13% 15% Florida................. 8% 7%
Hotel..................... 14% 13% New York................ 5% 6%
Other..................... 12% 13% Other(3)................ 57% 59%
------- ------- ------- -------
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.
CMBS POOLS. The following table summarizes information relating to
the Company's CMBS on an aggregate basis by pool as of December 31, 1999. See
also Note 5 to Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Amortized Original December 31, 1999
Face Amount Fair Value (2) Cost Anticipated Yield Anticipated Yield to
Pool (1) (in millions) (in millions) (in millions) to Maturity (3) Maturity (3)(4)
----------------------------------- ------------- ------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Retained Securities from
CRIIMI 1996 C1 (CBO-1) $111.3 $42.4 $45.0 19.5% 20.6%(5)
DLJ Mortgage Acceptance Corp.
Series 1997 CF2 Tranche B-30C(7) 6.2 17.4 17.4 8.2% 8.2%
36
<PAGE>
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 46.5 10.8 16.9 12.0% 12.0%
Retained Securities from
CRIIMI 1998 C1 (CBO-2) 1,427.2 741.0 927.1 10.3% 10.2%(6)
Mortgage Capital Funding, Inc.
Series 1998-MC1 (7) 151.8 89.8 89.8 8.9% 9.0%
Chase Commercial Mortgage
Securities Corp. 8.8% 8.8%
Series 1998-1 (7) 81.8 44.3 44.3
First Union/Lehman Brothers
Series 1998 C2 (7) 289.7 141.3 141.3 8.9% 9.0%
Morgan Stanley Capital I., Inc.
Series 1998-WF2 (7) 87.0 47.2 47.2 8.5% 8.6%(6)
Mortgage Capital Funding, Inc.
Series 1998-MC2 (7) 85.8 45.1 45.1 8.7% 8.8%
------------- ------------- ------------ ---------------- ------------
$2,287.3 $1,179.3 $1,374.1 9.7%(1) 10.1%(1)
============= ============= ============ ================ ============
</TABLE>
-------------------------------
(1) CRIIMI MAE, through CMSLP, performs servicing functions on a total CMBS
pool of approximately $28 billion as of December 31, 1999. Of the $28
billion of mortgage loans, approximately $273.3 million are being specially
serviced, of which approximately $167.5 million are being specially
serviced due to payment default (including $26.8 million of Real Estate
Owned) and the remainder is being specially serviced due to non-financial
covenant default. Through December 31, 1999, CMSLP has resolved and
transferred out of special servicing approximately $439.9 million of the
approximately $713.1 million that has been transferred into special
servicing. Through December 31, 1999, actual losses on mortgage loans
underlying the CMBS transactions are lower than the Company's original loss
estimates. See "BUSINESS-Servicing" for a discussion of the transfer of
special servicing to ORIX, and Note 5 of the Notes to Consolidated
Financial Statements for a discussion of the transfer of special servicing
to ORIX.
(2) Fair value has been calculated as described above in footnote (1) to the
table on CMBS Fair Value.
(3) 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 December 31, 1999, respectively, based on
management's estimate of the timing and amount of future credit losses and
prepayments.
(4) Unless otherwise noted, changes in the December 31, 1999 anticipated yield
to maturity from that originally anticipated are primarily the result of
changes in prepayment assumptions relating to mortgage collateral.
(5) The increase in the anticipated yield resulted from the reallocation of a
portion of the CBO-1 asset basis in conjunction with the CBO-2
resecuritization. In addition, while it had no impact on the anticipated
yield, the unrated bond from CBO-1 experienced an approximately $1.6
million principal write-down in 1999 due to a loss on the foreclosure of
two underlying loans.
(6) 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 (the "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 a $205.8 million face amount and a coupon rate of 7% were sold in a
transaction that was accounted for as a financing by the Company rather
than a sale. Of the $159.0 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 reached an
agreement that called for the sale of seven classes of subordinated CMBS
and a related unrated bond, issued by Morgan Stanley Capital Inc. Series
1998-WF2 (the "Wells Fargo Bonds"). The agreement was approved by the
Bankruptcy Court on February 24, 2000. On February 29, 2000, the Wells
Fargo Bonds were sold. Of the approximately $45.9 million in net sale
proceeds, $37.5 million was used to pay off all outstanding borrowings owed
to Morgan Stanley and the remaining proceeds of approximately $8.4 million
will be used primarily to help fund the Plan.
(7) As discussed further in Note 5 of the Notes to Consolidated Financial
Statements, under the Plan the Company intends to sell these CMBS pools and
as such, impairment was recognized as of December 31, 1999 related to these
CMBS. The impairment resulted in the cost basis being written down to fair
value as of December 31, 1999. As a result of this new basis, these bonds
have new yields effective the first quarter of 2000.
37
<PAGE>
INSURED MORTGAGE SECURITIES
As of December 31, 1999 and 1998, the Company had $394.9 million and
$488.1 million (at fair value), respectively, invested in mortgage
securities, consisting of GNMA Mortgage-Backed Securities and FHA-Insured
Certificates, as well as Freddie Mac participation certificates that are
collateralized by GNMA Mortgage-Backed Securities. As of December 31, 1999,
approximately 15% of CRIIMI MAE's investment in mortgage securities were
FHA-Insured Certificates and 85% were GNMA Mortgage-Backed Securities
(including certificates that collateralize Freddie Mac participation
certificates). See Notes 3 and 7 of the Notes to Consolidated Financial
Statements for a further discussion.
INVESTMENT IN ORIGINATED LOANS
As of December 31, 1999 and 1998, the Company had $470.2 million and
$499.1 million (at amortized cost), respectively, invested in commercial
mortgage loans primarily originated through the Company's mortgage loan
conduit programs and subsequently securitized in CMO-IV. Because the bonds
sold in CMO-IV are subject to certain call options, under FAS 125, the entire
transaction is accounted for as a financing instead of a sale and the
mortgage loans are reflected on the Company's balance sheet. See
"BUSINESS-Loan Originations and Securitizations" and Notes 3 and 6 of the
Notes to Consolidated Financial Statements for further discussion.
As of December 31, 1999 and 1998, the originated mortgage loans were
secured by properties of the types and at the locations identified below:
<TABLE>
<CAPTION>
Property Type 1999(1) 1998(1) Geographic Location(2) 1999(1) 1998(1)
-------------------------------- ------- --------- -------------------------------- ------- -------
<S> <C> <C> <C> <C> <C>
Multifamily..................... 37% 38% Michigan........................ 20% 20%
Hotel........................... 26% 26% Texas........................... 7% 8%
Retail.......................... 20% 20% Illinois........................ 7% 7%
Office.......................... 11% 11% California...................... 6% 6%
Other........................... 6% 5% Maryland........................ 6% 6%
----- -------- Connecticut..................... 6% 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 related
loans.
(2) No significant concentration by region.
(3) No other state makes up more than 5% of the total.
EQUITY INVESTMENTS
As of December 31, 1999 and 1998, the Company had approximately $34.9
million and $42.9 million, respectively, in investments accounted for under the
equity method of accounting. Included in equity investments are (a) the general
partnership interests in American Insured Mortgage Investors, American Insured
Mortgage Investors-Series 85, L.P., American Insured Mortgage Investors
L.P.-Series 86 and American Insured Mortgage Investors L.P.-Series 88
(collectively the "AIM Funds"), owned by CRIIMI, Inc., a wholly owned subsidiary
of CRIIMI MAE, (b) a 20% limited partnership interest in the adviser to the AIM
Funds, 50% of which is owned by CRIIMI MAE and 50% of which is owned by CM
Management, (c) CRIIMI MAE's interest in CRIIMI MAE Services Inc., and (d)
CRIIMI MAE's interest in CMSLP. See Note 3 to Notes to Consolidated Financial
Statements.
PROPERTIES
CRIIMI MAE leases its corporate offices at 11200 Rockville Pike,
Rockville, Maryland. As of March 24, 2000, these offices occupy approximately
68,500 square feet.
38
<PAGE>
D. LEGAL PROCEEDINGS
THE INFORMATION CONTAINED IN THIS SECTION D OF PART III, WITHOUT
LIMITATION, IS UPDATED, MODIFIED, AND SUPPLEMENTED BY THE INFORMATION
CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED JUNE 30, 2000, A COPY OF WHICH IS ATTACHED HERETO AS EXHIBIT H.
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 confirm and
consummate a plan of reorganization 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) the Unsecured Creditors' Committee,
(ii) the CMM Creditors' Committee and (iii) the CMI Equity Committee
(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.
The Debtors' initial exclusivity period to file a plan of
reorganization ended on February 2, 1999. The Bankruptcy Court extended this
period through August 2, 1999 and again through September 10, 1999. The
Debtors sought a third extension of exclusivity through November 10, 1999 and
on September 20, 1999, the Bankruptcy
39
<PAGE>
Court entered an order (i) extending the Debtors' right to file a plan of
reorganization through October 16, 1999, (ii) providing the Unsecured
Creditors' Committee and the CMI Equity Committee the right to jointly file a
plan of reorganization through October 16, 1999 and (iii) providing that any
party in interest may file a plan of reorganization after October 16, 1999.
The Debtors filed (i) a Joint Plan of Reorganization on September 22, 1999,
(ii) an Amended Joint Plan of Reorganization and proposed Joint Disclosure
Statement on December 23, 1999, (iii) a Second Amended Joint Plan of
Reorganization and proposed Amended Joint Disclosure Statement on March 31,
2000, and (iv) a Third Amended Joint Plan of Reorganization and proposed
Second Amended Joint Disclosure Statement with respect thereto on April 25,
2000, with amendments thereto filed on July 13, 14 and 21 and August 18,
2000. As noted above, the Debtors' Third Amended Joint Plan of Reorganization
is fully supported by the CMI Equity Committee, which is a co-proponent of
the Plan.
On December 20, 1999, the Unsecured Creditors' Committee filed its
own plan of reorganization and proposed disclosure statement with the
Bankruptcy Court. On January 11, 2000 and February 11, 2000, the Unsecured
Creditors' Committee filed its first and second amended plan of
reorganization, respectively, with the Bankruptcy Court and its amended
proposed disclosure statements with respect thereto. However, as a result of
the successful negotiations of the treatment of the unsecured creditors of
CMI in Classes A9 and A10 as set forth in Exhibit 2 to the Plan, the
Unsecured Creditors' Committee is now supporting confirmation of the Debtors'
Plan and has asked the Bankruptcy Court to defer consideration of its plan
pending approval of the Debtors' Plan and the completion of mutually
acceptable final documentation. Accordingly, the Debtors, the CMI Equity
Committee and the Unsecured Creditors' Committee are together presenting the
Debtors' Plan for approval by all Holders of Claims and Interests in Impaired
Classes.
Following approval of the Disclosure Statement by the Bankruptcy
Court, the Debtors' Plan, accompanied by the Disclosure Statement, has been
sent to members of all classes of impaired creditors and equity security
holders for acceptance or rejection. After receiving the votes of impaired
classes of creditors and equity security holders, the Bankruptcy Court will
hold a hearing at which it will consider whether to confirm the Plan before
it. 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. The Bankruptcy Court has set November 15, 2000 as the
date for a confirmation hearing on the Debtors' 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 since the Petition Date. The
Company has reached agreement with certain of these creditors, as set forth
in greater specificity below and in Exhibits 1 and 4 to the Plan. See
"GENERAL INFORMATION - The Debtors and Chapter 11 Filing and Other Chapter 11
Events -Deadline to File Proofs of Claims" for information regarding claims
filed in the Debtors' Chapter 11 proceeding.
40
<PAGE>
MERRILL
As of the Petition Date, the Company owed Merrill 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 and the Distributions are hereafter referred to
collectively as the "Merrill Collateral").
On October 16, 1998, Merrill 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 for turnover of Distributions remitted to Merrill
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. Among other things, pursuant to
the consent order, the pending litigation with Merrill was dismissed without
prejudice. The consent order also preserved the portfolio of CMBS pledged as
collateral to Merrill 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 (the "Company's Distribution Share"). The 50 percent of
distributions received by Merrill 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.
On September 7, 1999, the Company filed a Motion to Approve
Stipulation and Consent Order Providing for Adequate Protection. On or about
September 27, 1999 the Unsecured Creditors' Committee and the CMI Equity
Committee filed a joint objection to the Motion. On December 3, 1999, the
Bankruptcy Court entered the Stipulation and Consent Order Providing for
Adequate Protection (the "Adequate Protection Order"), certain provisions of
which were effective retroactively. Pursuant to the Adequate Protection
Order, a segregated interest bearing debtor-in-possession account was created
(the "Cash Collateral Account") into which the Company's Distribution Share
was deposited during the months of August through December 1999. An
additional 50% of the Company's Distribution Share was deposited in said
account between January and March 2000. The Adequate Protection Order
provides Merrill with a first priority lien on the Cash Collateral Account.
Subject to certain material adverse changes defined in the Adequate
Protection Order, Merrill agreed not to seek further adequate protection or
relief from the automatic stay before March 31, 2000.
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 were 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
41
<PAGE>
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 reached an agreement to sell the
Wells Fargo Bonds (the "Morgan Stanley Agreement"). CRIIMI MAE filed a motion
with the Bankruptcy Court to approve the Morgan Stanley Agreement on February
1, 2000. The motion was approved by the Bankruptcy Court on February 24,
2000. On February 29, 2000 the Wells Fargo Bonds were sold. Of the
approximately $45.9 million in net sale proceeds, $37.5 million was used to
pay off all outstanding borrowings owed to Morgan Stanley, and the remaining
proceeds of approximately $8.4 million will be used primarily to help fund
CRIIMI MAE's Plan. Pursuant to the terms of the Morgan Stanley Agreement, the
Company and Morgan Stanley mutually released any claims that they may have
against each other and filed a stipulation of dismissal with prejudice of the
October 20, 1998 adversary proceeding.
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. The Bankruptcy Court agreed to a request
by CRIIMI MAE, Citibank and the Unsecured Creditors' Committee to further
postpone the pending litigation on July 7, 1999, and again on September 10,
1999. The trial has not yet been rescheduled.
The agreements reached by the Company with Citicorp and Citibank on
March 11, 1999 were approved by the Bankruptcy Court through stipulations and
consent orders entered on April 5, 1999. One of the agreements also provided
that Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to 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. This sale reduced the amounts owed from Holdings to Citicorp by
approximately $17 million. On October 8, 1999, the remaining CMO-IV
securities held by Holdings were sold. This sale reduced the amounts owed
from Holdings to Citicorp by approximately $22 million and Holdings received
net proceeds of approximately $315,000. In addition, Citibank, in cooperation
with CRIIMI MAE, agreed to sell commercial mortgages originated in 1998 under
the Citibank Program, provided that the sale resulted 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. On
August 5, 1999, all but three of the commercial loans originated under the
Citibank Program in 1998, with an aggregate unpaid principal balance of
approximately $339 million, were sold for gross proceeds of approximately
$308 million. On September 16, 1999, Citibank sold the remaining three loans,
with an aggregate unpaid principal balance of approximately $32.7 million,
for gross proceeds of approximately $27.2 million. In the case of each sale
of the commercial loans, the minimum net proceeds provision was waived by
agreement of the Company, the Unsecured Creditors' Committee and the CMI
Equity Committee.
42
<PAGE>
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.
FIRST UNION
First Union National Bank ("First Union"), a creditor of both the
Company and CMM, is asserting substantial secured and unsecured claims. On or
about March 23, 1999, First Union filed in each of the Company's and CMM's
Chapter 11 Case 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 9agreement 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 Unsecured Creditors' Committee, the CMI Equity
Committee or First Union shall seek modification of the
adequate protection arrangements set forth in the agreement
for a period commencing upon the date 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 Unsecured Creditors' Committee has consented to
the agreement with First Union.
In addition, on or about July 1, 1999, CMM and First Union entered
into an agreement resolving its motion for relief from the automatic stay. On
July 1, 1999, CMM filed a motion for approval of the agreement resolving
First Union's motion for relief from the automatic stay. Based upon an
objection filed by the CMM Creditors' Committee, the parties are discussing a
possible modification to the agreement and continue to negotiate accordingly.
On October 22, 1999, to provide the parties with more time to negotiate a
modification to the agreement, CMM, with the consent of First Union and the
CMM Creditors' Committee, advised the Bankruptcy Court that it would be
withdrawing the motion for approval of the agreement, without prejudice to
CMM's right to refile once an agreement has been reached with First Union and
the CMM Creditors' Committee. The motion was subsequently withdrawn.
On or about February 18, 2000, the Company, the Unsecured Creditors'
Committee and First Union entered into a Second Stipulation and Agreed Order:
(i) Authorizing Use of Cash Collateral and (ii) Granting Other Relief (the
"Second Stipulation"). The Second Stipulation provides for, among other
things, the following:
43
<PAGE>
(i) the reaffirmation of all of the terms contained in the July 1,
1999 agreement except as expressly provided in the Second
Stipulation;
(ii) the extension from January 1, 2000 through March 31, 2000 of
the provisions in the July 1, 1999 agreement relating to use
of the assignment securities income;
(iii) the extension from December 31, 1999 to March 31, 2000 of the
provisions in the July 1, 1999 agreement relating to (i) First
Union's agreement not to seek relief from the automatic stay
to foreclose on the assignment securities or the assignment
securities income and (ii) the agreement by First Union, the
Company and the Unsecured Creditors' Committee not to seek
modification of the adequate protection arrangements contained
in the July 1, 1999 agreement; and
(iv) the consummation of the Stipulation and Consent Order Selling
the Wells Fargo Bonds to Morgan Stanley, which occurred in
February 2000. See "Legal Proceedings - Morgan Stanley" for
further discussion.
On February 22, 2000, the Company filed a motion with the Bankruptcy
Court for approval of the Second Stipulation. CRIIMI MAE, First Union and
Lehman also reached an agreement that called for the sale of seven classes of
Subordinated CMBS known as First Union Lehman Brothers Series 98 C-2 (the
"First Union Lehman Bonds"). The agreement was filed with the Bankruptcy
Court on March 21, 2000 for approval. On March 28, 2000, the Bankruptcy Court
approved the Second Stipulation. On April 20, 2000, the First Union Lehman
Bonds were sold. Of approximately $140 million in net sale proceeds,
approximately $113 million was used to retire the debt associated with these
securities owed to Lehman and First Union and the remaining proceeds of
approximately $27 million was remitted to CRIIMI MAE.
First Union has asserted a first priority security interest in
certain bonds that are or were in its possession, and the distributions made
on those bonds since the Petition Date, pursuant to an agreement dated as of
October 10, 1997 by and between the Company and First Union. The Company
disputes First Union's claim to a security interest in those bonds and the
distributions made thereon. The bonds in issue are (i) the Morgan Stanley
Capital, Series 1998-WF2 Class N bond, (ii) the Chase Comm. Mtg, Series
1998-1 Class J bond, and (iii) the Nomura Asset Sec. Corp, Series 1998-B7
Class N bond. The Morgan Stanley Capital Bond has been sold, and certain
proceeds from the sale thereof are being held in a segregated account in the
name of First Union pending further order of the Bankruptcy Court and
resolution of the claim of First Union thereto. If the issues between the
Company and First Union are not otherwise resolved, an adversary proceeding
will be commenced to resolve the dispute between the Company and First Union
with respect to the foregoing bonds and/or the distributions made on those
bonds. If First Union's claim with respect to those bonds and/or the
distributions made on those bonds is determined to be an Allowed Secured
Claim, such Claim will be treated as part of Class A2 under the Plan. If
First Union's Claim is determined to be an unsecured claim, it will be
included in the Claims subject to Class A10 under the Plan.
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 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 Bankruptcy Court on
May 11,1999. The Company and GACC had negotiated a further extension of the
stipulation through September 10, 1999, which has now expired. On September
9, 1999, GACC contacted the Company and requested similar provisions afforded
to Merrill in its most recent stipulation. See "Legal Proceedings -
Bankruptcy Related Litigation - Merrill" for further discussion.
44
<PAGE>
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, Southern Division (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" (see below regarding dismissal of this
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, 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, CMM and Holdings have not been named as defendants, each
company is 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.
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. Plaintiffs filed their Opposition to Defendants' Motion to
Dismiss on September 24, 1999.
On September 13, 1999, the Court denied Plaintiffs' motions for
appointment of lead plaintiffs and for approval of selected counsel. The
Court also ordered Plaintiffs' counsel to provide notice of the putative
claims to institutional investors identified by Defendants. Finally, the
Court ordered that Plaintiffs nominate no more than three persons to serve as
lead plaintiffs, and that any potential lead plaintiff nominate only one
attorney or law firm to serve as lead counsel.
On October 19, 1999, the Court approved the form of the renewed
Notice to potential class members that the Plaintiffs submitted to the Court.
The Court also ordered the Defendants to provide a list of certain
institutional investors who had invested in the Company to the Plaintiffs to
whom the renewed Notice is to be sent.
On December 10, 1999, the Defendants filed their Reply Brief to the
Plaintiffs' Opposition to the Motion to Dismiss.
On December 20, 1999, the Plaintiffs sent a notice of the
Consolidated Amended Complaint to certain institutional investors of their
right to move the Court to serve as lead plaintiffs of the class within sixty
(60) days of
45
<PAGE>
the notice. On March 9, 2000, the Plaintiffs filed a motion to approve the
nomination of three (3) plaintiffs and one (1) law firm to serve as lead
counsel.
On March 23, 2000, the Defendants filed a Response to the
Plaintiffs' Motion to Approve the Nomination of Lead Plaintiffs and Lead
Counsel. Although the Defendants did not oppose the Plaintiffs' Motion, the
Defendants expressly reserved their rights under Rule 23 of the Federal Rules
of Civil Procedure to challenge, among other things, whether the action could
be maintained as a class action.
On March 30, 2000, the Court granted the Defendants' Motion to
Dismiss the Consolidated and Amended Complaint and as a result entered an
Order and Memorandum Opinion dismissing the Consolidated and Amended
Complaint (the "Dismissal Order"). The Court concluded that the Plaintiffs
failed to state a claim for relief under Section 10(b) of the Exchange Act.
The Court concluded that because the Plaintiffs failed to state a claim for a
"primary violation" of Section 10(b) of the Exchange Act, they likewise
failed to state a claim against the individual Defendants as controlling
persons under Section 20(a) of the Exchange Act. This dismissal may or may
not dispose of other pending shareholder lawsuits and/or claims in bankruptcy
which may affect the Company, as more fully described elsewhere in this
Disclosure Statement. See "GENERAL INFORMATION --The Debtors and Chapter 11
Filing and Other Chapter 11 Events -- Deadline to File Proofs of Claim."
EDGE PARTNERS SETTLEMENT
In February 1996, Edge Partners, L.P. ("Edge Partners"), on behalf
of CRIIMI MAE, filed a First Amended Class and Derivative Complaint (the
"Derivative Complaint") in the District Court. The Derivative Complaint named
as defendants each of the individuals who served on the Board of Directors at
the time of the Merger and CRIIMI MAE as a nominal defendant. The Company was
subject to indemnity obligations to the directors under provisions of its
constituent documents. In addition, the Company had directors and officers
liability insurance policies with a combined coverage limit of $5 million.
Count I of the Derivative Complaint alleged violations of Section
14(a) of the Exchange Act for issuing a materially false and misleading proxy
in connection with the Merger and alleged derivatively on behalf of CRIIMI
MAE a breach of fiduciary duty owed to CRIIMI MAE and its shareholders. Edge
Partners sought, among other relief, that unspecified damages be accounted to
CRIIMI MAE, that the shareholder vote in connection with the Merger be null
and void and that certain salaries and other remuneration paid to the
directors be returned to the Company.
On June 16, 1998, the District Court approved a settlement agreement
(the "Settlement Agreement"). Under the terms of the Settlement Agreement,
the Company agreed to make certain disclosures relating to alleged conflicts
between two directors and the Company in connection with the Merger
transaction and adopted a non-binding policy relating generally to the
approval of certain interested transactions. Among other things, the
non-binding policy adopted by the Board of Directors imposes certain
conditions on the Board's approval of transactions between the Company and
any director, officer or employee who owns greater than 1% of the outstanding
common shares of the Company. Such conditions generally include: (1) approval
by written resolution of any transaction involving an amount in excess of $5
million in any year adopted by a majority of the members of the Board having
no personal stake in the transaction; and (2) in the case of any such
transaction in excess of $15 million in any year, consideration by the Board
as to the formation of a special committee of the Board, to be comprised of
at least two directors having no personal stake in such transaction.
OTHER LITIGATION
The Company is aware that an alleged shareholder, on behalf of
himself and all others similarly situated, who purchased common stock in a
registered common stock offering made by the Company in January 1998, filed a
class action lawsuit against Prudential Securities Incorporated
("Prudential") and the Company's independent public accountants (the
"Recupito Complaint") in the United States District Court for the District of
Maryland. Neither the Company nor any officer or director of the Company was
named as a defendant in this lawsuit.
46
<PAGE>
The Recupito Complaint alleges generally that the registration
statement dated October 21, 1997, including a prospectus dated January 20,
1998 and supplemented on January 23, 1998, contained materially false and
misleading statements about the Company and its condition.
The Company may be subject to potential exposure to Prudential under
contractual provisions and to both defendants under applicable law.
Prudential may assert that it is entitled to indemnification from the Company
based upon an indemnification provision contained in the underwriting
agreement entered into with the Company in connection with the common stock
offering. Certain courts have held and it is the position of the SEC that
indemnification for liabilities arising under the Securities Act of 1933 (the
"Securities Act") is against public policy and unenforceable.
The Company cannot predict with any certainty the ultimate outcome
of such litigation or its potential exposure to one or both of the defendants.
CLAIMS
The Debtors have undertaken extensive efforts to reduce the claims
pool. See "GENERAL INFORMATION The Debtors and Chapter 11 Filing and Other
Chapter 11 Events - Deadline to File Proofs of Claim" for further discussion
of this process.
E. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
THE INFORMATION CONTAINED IN THIS SECTION E OF PART III, WITHOUT
LIMITATION, IS UPDATED, MODIFIED, AND SUPPLEMENTED BY THE INFORMATION
CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED JUNE 30, 2000, A COPY OF WHICH IS ATTACHED HERETO AS EXHIBIT H.
<TABLE>
<CAPTION>
TAX BASIS For the years ended
ACCOUNTING December 31,
1999 1998 1997 1996 1995
-------------------------------------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $210,332 $184,947 $86,166 $43,632 $11,846
Insured mortgage securities 33,405 43,063 49,342 54,827 62,020
Originated loans 34,713 20,588 - - -
------------ ----------- ----------- ---------- ----------
Total interest income 278,450 248,598 135,508 98,459 73,866
Interest and related expense 186,766 161,860 79,574 64,503 52,231
------------ ----------- ----------- ---------- ----------
Net interest margin 91,684 86,738 55,934 33,956 21,635
Equity in earnings from investments 1,577 8,031 4,104 4,293 3,100
Other income 3,024 4,238 2,152 2,117 1,838
Capital gains 3,276 1,746 7,815 9,618 5,442
Other operating expenses (12,117) (14,445) (9,464) (7,451) (6,727)
Unrealized loss on warehouse obligation (36,328) - - - -
Other reorganization items (12,950) (4,819) - - -
Loss on property foreclosures (621) - - - -
Realized loss on reverse repurchase obligation - (4,503) - - -
Write-off of capitalized origination costs - (3,284) - - -
------------ ----------- ----------- ---------- ----------
(54,139) (13,036) 4,607 8,577 3,653
47
<PAGE>
Tax basis income before preferred dividends 37,545 73,702 60,541 42,533 25,288
Dividends paid or accrued on preferred shares (5,840) (6,998) (6,473) (3,526) -
------------ ----------- ----------- ---------- ----------
Tax basis income available to common
shareholders $31,705 $66,704 $54,068 $39,007 $25,288
============ =========== =========== ========== ==========
Tax basis income per share:
Income before gains from CRI Liquidating $ 0.57 $ 1.38 $ 1.24 $ 1.00 $ 0.70
Capital gains from CRI Liquidating - - 0.21 0.27 0.19
------------ ----------- ----------- ---------- ----------
Total tax basis income per share $ 0.57 $ 1.38 $ 1.45 $ 1.27 $ 0.89
============ =========== =========== ========== ==========
Tax basis shares 55,167 48,503 37,334 30,774 28,537
============ =========== =========== ========== ==========
Dividends paid on common shares (1) $ - $ 1.47 $ 1.42 $ 1.22 $ 0.92
============ =========== =========== ========== ==========
</TABLE>
-------------------------
(1) During 1999, the Company paid a dividend of $0.30 per common share for the
1998 taxable year in the form of junior preferred stock.
<TABLE>
<CAPTION>
ACCOUNTING UNDER GENERALLY For the years ended December 31,
ACCEPTED ACCOUNTING PRINCIPLES
1999 1998 1997 1996 1995
-------------------------------------- ----------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Interest income:
Subordinated CMBS $154,205 $143,656 $79,670 $41,713 $11,105
Insured mortgage securities 33,405 43,063 49,425 56,912 66,115
Originated loans 34,713 20,588 - - -
------------- ----------- ---------- ----------- ----------
Total interest income 222,323 207,307 129,095 98,625 77,220
Interest and related expense 151,337 136,268 77,919 63,079 49,853
------------- ----------- ---------- ----------- ----------
Net interest margin 70,986 71,039 51,176 35,546 27,367
------------- ----------- ---------- ----------- ----------
Equity in (losses) earnings from investments (1,243) 2,618 3,612 4,432 2,585
Other income 3,024 4,279 2,610 2,898 2,919
Gain on mortgage securities dispositions 2,128 1,196 17,343 9,601 1,502
Gain on originated loan dispositions 403 - - - -
Other operating expenses (12,049) (14,623) (9,610) (7,970) (9,583)
Amortization of assets acquired in the Merger (2,878) (2,878) (2,878) (2,882) (1,435)
Losses on warehouse obligations (8,000) (30,378) - - -
Reorganization items:
Impairment on CMBS (1) (156,897) - - - -
Other (22,003) (9,857) - - -
Gain on sale of CMBS - 28,800 - - -
Loss on reverse repurchase obligation - (4,503) - - -
Write-off of capitalized origination costs - (3,284) - - -
------------- ----------- ---------- ----------- ----------
48
<PAGE>
(197,515) (28,630) 11,077 6,079 (4,012)
------------- ----------- ---------- ----------- ----------
Net (loss) income before minority interest (126,529) 42,409 62,253 41,625 23,355
Minority interest in net income of
consolidated subsidiary - (40) (8,065) (6,386) (4,821)
Dividends paid or accrued on preferred
shares (5,840) (6,998) (6,473) (3,526) -
------------- ----------- ---------- ----------- ----------
Net (loss) income available to common
shareholders $(132,369) $35,371 $47,715 $31,713 $18,534
============= =========== ========== =========== ==========
GAAP basis (loss) income per share - basic $ (2.45) $ 0.75 $ 1.29 $ 1.03 $ 0.65
============= =========== ========== =========== ==========
GAAP basis (loss) income per share - diluted $ (2.45) $ 0.74 $ 1.25 $ 1.03 $ 0.65
============= =========== ========== =========== ==========
Weighted average shares outstanding 54,000 47,280 36,993 30,665 28,414
============= =========== ========== =========== ==========
</TABLE>
------------------------------------
(1) Under the Plan, a portion of the Recapitalization Financing is expected
to result from the CMBS Sale. The CMBS subject to the CMBS Sale had a
fair value of $385.1 million as of December 31, 1999. The Company first
filed a plan with the Bankruptcy Court in the fourth quarter of 1999
and during that same quarter CRIIMI MAE began marketing for sale the
CMBS subject to the CMBS Sale. The Company entered into agreements in
February and April 2000 to sell a portion of these bonds and intends to
enter into one or more additional agreements during the first half of
2000 to sell the remaining CMBS subject to the CMBS Sale, although
there can be no assurance such bonds will be sold. As the Company no
longer had the intent to hold these bonds to maturity, and it did and
does not expect the value of these bonds to significantly recover
before their sale, the Company has recognized approximately $157
million of other than temporary impairment related to the CMBS subject
to the CMBS Sale through earnings in the fourth quarter of 1999. As
result of this impairment, the amortized cost basis of these CMBS was
written down to their fair value of $385.1 million. See "Legal
Proceedings" for further discussion.
<TABLE>
<CAPTION>
As of December 31,
1999 1998 1997 1996 1995
------------- -------------- -------------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Mortgage Assets:
Subordinated CMBS $ 1,179,270 $ 1,274,186 $1,114,480 $564,335 $278,401
Insured mortgage securities 394,857 488,095 605,114 691,110 807,113
Investment in originated loans 470,205 499,076 - - -
Total assets 2,293,661 2,437,918 1,873,305 1,367,245 1,203,303
Total debt 1,982,350 2,085,722 1,414,932 982,258 854,436
Shareholders' equity 219,349 307,877 44,981 346,671 285,704
</TABLE>
The selected consolidated statement of income data presented above
for the years ended December 31, 1999, 1998 and 1997, and the selected
consolidated balance sheet data as of December 31, 1999 and 1998, were
derived from, and are qualified by, reference to CRIIMI MAE's consolidated
financial statements, which have been included elsewhere in this Disclosure
Statement. The selected consolidated statement of income data for the years
ended December 31, 1996 and 1995, and the selected consolidated balance sheet
data as of December 31, 1997, 1996 and 1995, were derived from audited
financial statements not included as part of this Disclosure Statement. This
data should be read in conjunction with the consolidated financial statements
and the notes thereto.
49
<PAGE>
F. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE INFORMATION CONTAINED IN THIS SECTION F OF PART III, WITHOUT
LIMITATION, IS UPDATED, MODIFIED, AND SUPPLEMENTED BY THE INFORMATION
CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED JUNE 30, 2000, A COPY OF WHICH IS ATTACHED HERETO AS EXHIBIT H.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VERSUS 1998
For the year ended December 31, 1999, the Company reported a net
loss for financial statement purposes of approximately $132.4 million as
compared to net income available to common shareholders of approximately
$35.4 million for the year ended December 31, 1998. On a basic per share
basis, the financial statement net (loss) income decreased to $(2.45) per
share for 1999 from $0.75 per share for 1998.
The primary factor resulting in the net loss for the year ended
December 31, 1999 was the recognition of $157 million of other than temporary
impairment on certain Subordinated CMBS. The impairment is discussed further
below. Other factors contributing to the change in earnings from 1998 to 1999
were an increase in other reorganization costs and other items as more fully
discussed below.
INTEREST INCOME - SUBORDINATED CMBS
Income from Subordinated CMBS increased by approximately $10.5
million, or 7%, to $154.2 million during 1999 as compared to $143.7 million
during 1998. There were no CMBS acquisitions or sales in 1999. However,
during 1998, the Company increased its CMBS portfolio by acquiring
Subordinated CMBS at purchase prices aggregating approximately $853 million.
The overall increase 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 of the Notes
to Consolidated Financial Statements for further discussion.
GAAP requires 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 has resulted in income
that 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 yield for CRIIMI MAE's Subordinated CMBS for
financial statement purposes as of December 31, 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.
As discussed further below, impairment was recognized as of December
31, 1999 on the Subordinated CMBS that are intended to be sold in 2000 as
part of the CMBS Sale under the Plan. This resulted in the cost basis being
written down to fair value as of December 31, 1999. As a result of this new
basis, these CMBS will have new yields effective the first quarter of 2000.
In addition, total interest income will decrease after the effective date of
the Plan as a result of the CMBS Sale.
INTEREST INCOME - INSURED MORTGAGE SECURITIES
Interest income from insured mortgage securities decreased by
approximately $9.7 million or 22% to $33.4 million for 1999 from $43.1
million for 1998. This decrease was principally due to the prepayment of 14
mortgage securities held by CRIIMI MAE and its wholly owned subsidiaries for
net proceeds aggregating approximately $74.0 million during the year ended
1999.
50
<PAGE>
INTEREST INCOME - ORIGINATED LOANS
Interest income from originated loans increased by approximately
$14.1 million or 69% to approximately $34.7 million for 1999 as compared to
$20.6 million for 1998. Interest income from originated loans was derived
from originated loans included in the CMO-IV securitization, which resulted
in the securitization of $496 million face value of conduit loans in June
1998. The increase between 1998 and 1999 was primarily due to only six months
of interest income recognized in 1998, partially reduced by the prepayment of
five originated loans in 1999.
INTEREST EXPENSE
Total interest expense increased by approximately $15.0 million or
11% to approximately $151.3 million for 1999 from approximately $136.3 million
for 1998. This increase was principally a result of certain financing
facilities that were outstanding for the entire year ended December 31, 1999
as compared to a partial year in 1998. Such financing facilities increased in
connection with the acquisition of Subordinated CMBS in 1998 and the issuance
of collateralized mortgage obligations in connection with CMO-IV during June
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 "LEGAL PROCEEDINGS" for a discussion of
material litigation between the Company and various creditors and agreements
the Company has reached with certain of these creditors.
EQUITY IN (LOSSES) EARNINGS FROM INVESTMENTS
Equity in earnings decreased by approximately $3.8 million during
1999 due to a net loss of approximately $1.2 million as compared to equity in
earnings of $2.6 million in 1998. The decrease is primarily due to a
reduction in revenue and an increase in certain expenses at CMSLP. The
decrease in revenue is primarily due to CMSLP's loss of certain servicing
rights and the assignment of ORIX as the successor servicer on those pools
during the fourth quarter of 1998. The increase in expenses includes an
$821,000 expense for a prepayment penalty shortfall incurred by CMSLP and an
increase in general and administrative expenses, including a long-term
incentive program for CMSLP, effective in the fourth quarter of 1998, and
other payroll costs. In addition, expenses increased due to a $500,000
write-off of a remaining investment balance associated with a now dissolved
affiliated entity. The servicing portfolio was approximately $28 billion as
of December 31, 1999 as compared to approximately $31 billion as of December
31, 1998.
OTHER INCOME
Other income decreased by approximately $1.3 million or 29% to $3.0
million during 1999 as compared to $4.3 million during 1998. This decrease
was primarily attributable to a decrease in short-term interest and other
income earned during 1999 on the amounts deposited in the loan origination
reserve account, due to suspension of the origination loan program in 1998.
No interest income was earned on the origination reserve account for the year
ended December 31, 1999 as compared to approximately $1.9 million of
short-term interest income and net-carry income for the corresponding period
in 1998. The decrease was partially offset by an increase in other short-term
interest income of approximately $600,000 in 1999 versus 1998.
NET GAIN ON MORTGAGE SECURITY DISPOSITIONS
During 1999, net gains on mortgage dispositions were approximately
$2.1 million as a result of 14 prepayments of mortgage securities held by
CRIIMI MAE's subsidiaries, or approximately 15% of its portfolio. During
1998, net gains on mortgage dispositions were approximately $1.2 million, of
which approximately $666,000 was a result of 22 prepayments of mortgage
securities held by CRIIMI MAE's subsidiaries, or approximately 17% of its
portfolio. The remaining $531,000 was the result of the sale of four
unencumbered mortgage securities and the partial sale of a fifth unencumbered
mortgage security. For any year, 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.
51
<PAGE>
GAIN ON ORIGINATED LOAN DISPOSITIONS
During 1999, gains on originated loan dispositions were approximately
$403,000, which was a result of five prepayments in the originated loan
portfolio. No originated loans were disposed of during 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by approximately $2.5
million, or 18%, to $12.1 million for 1999 as compared to $14.6 million for
1998. The decrease in general and administrative expenses was primarily due
to the closing of regional offices, suspension of certain business activities
and the dismissal of employees following the Chapter 11 filing in the fourth
quarter of 1998.
LOSSES ON WAREHOUSE OBLIGATIONS
During the year ended December 31, 1999, the Company recorded losses
of $8.0 million on its warehouse obligation, primarily due to a decrease in
the selling price of the loans in the Company's warehouse line with Citibank,
when the loans were sold in the third quarter of 1999. As of December 31,
1998, the unrealized loss recorded on the obligation under the Citibank
Program was $28.4 million. The Company recorded, in total, a loss of $36.3
million for this transaction for both GAAP and tax purposes. See "Tax Basis
Income" discussion that follows.
During the year ended December 31, 1998, the Company recorded an
unrealized loss of $2.0 million for its loss exposure under the Prudential
Program. The Company calculated the Prudential loss based upon the assumption
that the Company would not exercise its option with Prudential. As of
December 31, 1999, the sole loan originated under the Prudential Program had
not yet been sold.
REORGANIZATION ITEMS
IMPAIRMENT ON CMBS. As discussed in Note 1 of the Notes to
Consolidated Financial Statements, under the Plan, a portion of the
Recapitalization Financing is expected to result from the CMBS Sale. The CMBS
subject to the CMBS Sale had a fair value and amortized cost of $385.1
million and $542.0 million, respectively, as of December 31, 1999. The
Company first filed a plan with the Bankruptcy Court in the fourth quarter of
1999 and during that same quarter CRIIMI MAE began marketing for sale the
CMBS subject to the CMBS Sale. CRIIMI MAE sold a portion of these bonds in
February and April 2000 and intends to enter into one or more additional
agreements during the first half of 2000 to sell the remaining CMBS subject
to the CMBS Sale, although there can be no assurance such bonds will be sold.
GAAP states that when the fair market value of an investment
declines below its amortized cost for a significant period of time and the
entity no longer has the ability or intent to hold the investment for the
period the entity anticipates is required for the value to recover to
amortized cost, other than temporary impairment on the investment should be
recognized. This other than temporary impairment is recognized through the
income statement as the difference between amortized cost and fair value.
Additional accounting guidance states that other than temporary impairment
should be recognized in the period the decision to sell any investment is
made if the entity does not expect the fair value to recover before the sale
date. As the Company decided in the fourth quarter of 1999 to sell the CMBS
subject to the CMBS Sale and it did not expect the value of these bonds to
significantly recover before the future sale dates, the Company has
recognized approximately $157 million of other than temporary impairment
related to these CMBS through earnings in the fourth quarter of 1999.
Unrealized losses related to the CMBS subject to the CMBS Sale were
previously recognized through other comprehensive income in the equity
section of the balance sheet. The other than temporary impairment loss on
CMBS is a part of the reorganization items on the income statement as the
impairment was recognized as part of the reorganization.
OTHER REORGANIZATION ITEMS. During 1999 and 1998, the Company
recorded $22.0 million and $9.9 million, respectively, in other
reorganization items due to the Chapter 11 filings of CMI, CMM and Holdings.
52
<PAGE>
<TABLE>
<CAPTION>
OTHER REORGANIZATION ITEMS 1999 1998
----------------------------------------------- -------------- ----------------
<S> <C> <C>
Short-term interest income $(1,518,667) $ --
Professional fees 17,822,154 5,219,000
Write-off of debt discounts and deferred costs -- 2,835,210
Employee Retention Program accrued costs 1,589,236 612,885
Excise tax accrued 1,105,000 300,000
Other 3,005,405 889,852
-------------- ----------------
Total $ 22,003,128 $ 9,856,947
============== ================
</TABLE>
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 $28.8 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.
Certain of these securities 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. The Company completed no additional
resecuritizations during 1999.
LOSS ON REVERSE REPURCHASE OBLIGATION
During 1998, the Company realized a loss of $4.5 million due to the
impact of financial market volatility on hedge positions. As part of CMO-IV,
the Company intended to sell certain of the investment grade tranches that
were not initially sold to the public (the "CMO-IV BBB bonds"). In
anticipation of this sale, the Company entered into a transaction to hedge
the value of those securities in June 1998. This transaction did not qualify
for hedge accounting purposes because it involved the purchase and sale of a
cash instrument and therefore was required to be recorded at market value
("marked to market"). Because Treasury rates declined in the third quarter of
1998, the Company recorded a $4.1 million unrealized loss as of September 30,
1998. CRIIMI MAE borrowed and then sold a 10-year Treasury Note in the amount
of $44 million to close the position and the loss was realized in the fourth
quarter of 1998.
WRITE-OFF OF CAPITALIZED LOAN ORIGINATION COSTS
Since the Company no longer had the intention to securitize the
remaining loans originated through the Citibank and Prudential Programs in
warehouse facilities, the net deferred costs of $3.3 million associated with
the warehoused loans were written off in 1998.
TAX BASIS INCOME
CRIIMI MAE earned approximately $31.7 million in tax basis income
available to common shareholders in 1999 or $0.57 per share, compared to
approximately $66.7 million or $1.38 per share in 1998.
The primary factor resulting in the decrease in taxable income from
1999 to 1998 was the approximately $36.3 million tax basis loss realized on
the loans sold in the third quarter of 1999 from the warehouse line with
Citibank. Other factors contributing to the decline 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
53
<PAGE>
in earnings in 1998. Partially offsetting the aforementioned items was an
increase in net interest margin due to recognition of a full year of interest
income and interest expense in 1999 as compared to a partial year in 1998 as
previously discussed.
The recently issued Internal Revenue Service Revenue Procedure 99-17
provides securities and commodities traders with the ability to elect
mark-to-market treatment for 2000 by including an election with their timely
filed 1999 federal tax extension. The election applies to all future years as
well, unless revoked with the consent of the Internal Revenue Service. On
March 15, 2000, the Company determined to elect mark-to-market treatment as a
securities trader for 2000 and, accordingly, will recognize gains and losses
prior to the actual disposition of its securities. Moreover, some if not all
of those gains and losses, as well as some if not all gains or losses from
actual dispositions of securities, will be treated as ordinary in nature and
not capital, as they would be in the absence of the election. Therefore, any
net operating losses generated by the Company's trading activity will offset
the Company's taxable income, and reduce any required distributions to
shareholders by a like amount. See "CERTAIN RISK FACTORS-Risks Associated
with Trader Election" for further discussion. If the Company does have a REIT
distribution requirement (and such distributions would be permitted under the
Plan), a substantial portion of the Company's distributions would be in the
form of non-cash taxable dividends.
YEAR ENDED DECEMBER 31, 1998 VERSUS 1997
INTEREST INCOME - SUBORDINATED CMBS
Income from Subordinated CMBS increased by approximately $64
million, or 80%, to $143.7 million during 1998 as compared to $79.7 million
during 1997. During 1998, the Company increased its CMBS portfolio by
acquiring Subordinated CMBS at purchase prices aggregating approximately $853
million during 1998 as compared to the $554 million during 1997. This
increase 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.
GAAP requires 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 December 31, 1998 and 1997, was
approximately 10% and 11%, respectively. The decrease in anticipated
unleveraged yield is primarily due to five Subordinated CMBS acquisitions in
1998 with anticipated unleveraged yields between 8.5% and 8.9% which reduced
the overall average of the CMBS portfolio. 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
and interest expense attributable to the financing of the rated tranches at
current interest rates and current borrowing amounts.
INTEREST INCOME-INSURED MORTGAGE SECURITIES
Interest income from insured mortgage securities decreased by
approximately $6.3 million or 13% to $43.1 million for 1998 from $49.4
million for 1997. This decrease was principally due to the prepayment of 22
mortgage securities held by CRIIMI MAE and its wholly owned subsidiaries for
net proceeds aggregating approximately $104.0 million and the sale of four
mortgage securities and a portion of a fifth mortgage security for net
proceeds aggregating approximately $13.4 million during 1998.
INTEREST INCOME-ORIGINATED LOANS
Interest income from originated loans of approximately $20.6 million
for 1998 was derived from originated loans included in the CMO-IV
securitization. The CMO-IV securitization totaled $496 million face value of
conduit loans, a majority of which were "No Lock".
54
<PAGE>
INTEREST EXPENSE
Interest expense increased by approximately $58.4 million or 75% to
approximately $136.3 million for 1998 from approximately $77.9 million for
1997. 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 $100
million aggregate principal amount of senior unsecured notes issued during
the fourth quarter of 1997 and 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 and the decrease
in the Company's weighted average cost of borrowing to 7.37% in 1998 from
7.68% in 1997, primarily due to a decrease in one-month LIBOR, based on the
average, for the year 1997 as compared to the year 1998. Due to the Chapter
11 filing, certain lenders have declared defaults or otherwise taken action
against the Company with respect to a number of CRIIMI MAE's financing
facilities. See "LEGAL PROCEEDINGS" 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 $19.8 million or 39%
for 1998 to approximately $71.0 million from approximately $51.2 million for
1997. 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 $28.8 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. Certain of these securities
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. This reclassification resulted in a cumulative net
decrease to shareholders' equity of approximately $251.3 million (a $174.0
million decrease from September 30, 1998).
Additionally, as part of CBO-2, 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.
EQUITY IN EARNINGS FROM INVESTMENTS
Equity in earnings from investments decreased by approximately $1.0
million or 28% to $2.6 million during 1998 as compared to $3.6 million during
1997. This decrease included impairment losses on purchased mortgage
servicing rights recorded by CMSLP since their fair value was less than their
amortized cost at December 31, 1998. The general market turmoil commencing in
late summer of 1998 resulted in the use of higher yields in determining the
servicing rights' fair value which caused the fair value to be less than the
amortized cost. At September 30, 1998, CMSLP was responsible for certain
servicing functions on a mortgage loan portfolio of approximately $32
billion. However, due to CRIIMI MAE's Chapter 11 filing and its relationship
with CRIIMI MAE, CMSLP arranged for ORIX (formerly known as BOMCM) to succeed
it as master servicer on two commercial mortgage pools during the fourth
quarter of 1998, which resulted in a loss of approximately $1.4 million for
the recorded value of the rights, of which substantially all of the loss
flowed through to CRIIMI MAE. These decreases were partially offset by
increases in servicing fee streams and float income earned on escrow balances
derived from the remaining servicing portfolio, which grew to approximately
$31.0 billion as of December 31, 1998 as compared to approximately $16.5
billion as of December 31, 1997.
55
<PAGE>
OTHER INCOME
Other income increased by approximately $1.7 million or 65% to $4.3
million during 1998 as compared to $2.6 million during 1997. This increase
was primarily attributable to an increase in short-term interest and other
income earned during 1998 on the amounts deposited in the loan origination
reserve account, which had an average balance of approximately $38 million
for the year ended December 31, 1998. Approximately $1.9 million of
short-term interest income and net-carry income were earned on these deposits
for the year ended December 31, 1998. Amounts earned on the origination
reserve account for the year ended December 31, 1997 were immaterial.
NET GAIN ON MORTGAGE SECURITY DISPOSITIONS
During 1998, net gains on mortgage dispositions were approximately
$1.2 million, of which approximately $666,000 was a result of 22 prepayments
of mortgage securities held by CRIIMI MAE's subsidiaries, or approximately
17% of its portfolio. In addition, CRIIMI MAE sold four unencumbered mortgage
securities and a portion of a fifth mortgage security, which resulted in a
financial statement gain of $531,000. During 1997, CRI Liquidating's
disposition of its remaining 11 mortgage assets and its interest in three
limited partnership participation agreements resulted in net gains of
approximately $17.4 million (before minority interests) for financial
statement purposes. These 1997 net gains were partially offset by nine
prepayments of mortgage assets held by CRIIMI MAE's subsidiaries, which
resulted in financial statement losses of $52,000. For any year, 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by approximately $5.0
million, or 52%, to $14.6 million for 1998 as compared to $9.6 million for
1997. The increase in general and administrative expenses during these
periods was primarily the result of the significant growth of CRIIMI MAE's
commercial mortgage operations during the first nine months of 1998. This
increase was partially offset in the fourth quarter due to the closing of
regional offices, the suspension of certain business activities and the
dismissal of employees involved in suspended activities following the Chapter
11 filing.
REALIZED LOSS ON REVERSE REPURCHASE OBLIGATION AND UNREALIZED LOSSES
ON WAREHOUSE OBLIGATIONS
During 1998, the Company recorded realized and unrealized losses
aggregating $4.5 million and $30.4 million, respectively, primarily due to
the impact of financial market volatility on losses on hedge positions and
commitments related to commercial mortgage loans in the Company's
securitization pipeline.
As part of CMO-IV, the Company intended to sell certain of the
security tranches that were not initially sold to the public (the "CMO-IV BBB
Bonds"). In anticipation of this sale, the Company entered into a transaction
to hedge the value of those securities. As a result, CRIIMI MAE borrowed and
then sold a 10-year Treasury Note in the amount of $44 million. The Company
was informed by Citibank that the position was closed on October 8, 1998.
This transaction did not qualify for hedge accounting purposes because it
involved the purchase and sale of a cash instrument and therefore is required
to be recorded at market ("marked to market"). Because Treasury rates
declined from the date of the transaction to the liquidation of the position,
the Company recorded a realized loss of approximately $4.5 million, of which
approximately $4.1 million was recognized as of September 30, 1998 with the
remaining $400,000 loss recognized in the fourth quarter.
The parties who fund the Company's loan originations are required
under the relevant agreements to hedge the related loans and to provide
timely written hedge position reporting. As of December 31, 1998, the
Company's obligation under the Citibank Program was $28.4 million (based
primarily on information provided by Citibank) in excess of the fair value of
the loans and the Company's loss exposure under the Prudential Program was $2
million if the Company does not exercise its option. As a result, CRIIMI MAE
recorded an aggregate $30.4 million unrealized loss on its obligations as of
December 31, 1998. The unrealized loss of $28.4 million relating to the
Citibank Program as of December 31, 1998, was based on the estimated fair
value of the loans offset by the unpaid principal balance of the loans at
December 31, 1998, hedge losses and certain estimated fees and other costs.
Depending on
56
<PAGE>
market conditions, including interest rate movements, these losses could
materially increase or decrease in subsequent reporting periods. The Company
calculated the Prudential loss based upon the assumption that the Company
would not exercise its option with Prudential.
WRITE-OFF OF CAPITALIZED ORIGINATION COSTS
Since the Company no longer has the intention to securitize the
remaining loans in warehouse that were originated through the Citibank and
Prudential Programs, the net deferred costs of $3.3 million associated with
the warehoused loans were written off in 1998.
REORGANIZATION ITEMS
During the fourth quarter of 1998, the Company recorded $9.9 million
in reorganization items due to the Chapter 11 filings of CRIIMI MAE, CMM and
Holdings.
<TABLE>
<CAPTION>
REORGANIZATION ITEM AMOUNT
<S> <C>
Professional fees $5,219,000
Write-off of debt discounts and
deferred costs 2,835,210
Employee Retention Program accrued costs 612,885
Excise Tax 300,000
Other 889,852
----------
Total $9,856,947
==========
</TABLE>
FINANCIAL STATEMENT NET INCOME
As a result of the foregoing, net income available to common
shareholders for financial statement purposes was approximately $35.4 million
for 1998, a 26% decrease from approximately $47.7 million for 1997. On a per
basic share basis, financial statement net income decreased to $0.75 per
basic share for 1998 from $1.29 per basic share in 1997.
TAX BASIS INCOME
CRIIMI MAE earned approximately $66.7 million in tax basis income
available to common shareholders in 1998 or $1.38 per share, compared to
approximately $54.1 million or $1.45 per share in 1997.
The primary factors resulting in the $14.7 million increase in tax
basis income from 1997 to 1998 was due to the growth of CRIIMI MAE's
portfolio of Subordinated CMBS and, to a lesser extent, earnings from CMO-IV.
Also contributing to the increase in tax basis income was a $4.2 million gain
on the sale of the trustee servicing rights associated with CBO-2. (See Note
5 to Notes to Consolidated Financial Statements). Partially offsetting the
increases in the foregoing were increases in interest expense, general and
administrative expenses, reorganization items and the write-off of certain
net deferred costs related to the Citibank and Prudential Programs. Although,
in absolute dollars, tax basis income increased from 1997 to 1998, tax basis
income per share decreased due to the increase in the average number of
shares outstanding from 37,334,034 in 1997 to 48,502,522 in 1998. Total tax
basis income per share for 1997 included $0.21 of non-recurring income from
the mortgage dispositions of a subsidiary, CRI Liquidating, which completed
its scheduled liquidation in late 1997.
CASH FLOW
YEAR ENDED 1999 VERSUS 1998
Net cash provided by operating activities decreased in 1999 as
compared to 1998. The decrease was primarily due to a significant increase in
the amount of cash that is restricted due to stipulations entered into in
connection with the Chapter 11 proceedings or due to agreements that require
certain CMBS interest income payments and/or CMBS sales proceeds to be held
in segregated accounts. Partially offsetting this decrease was an overall
increase in net payables in 1999 as compared to 1998.
57
<PAGE>
Net cash provided by investing activities increased for 1999 as
compared to 1998 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 in 1999 as compared
to 1998. The increase was primarily due to the suspension of the Company's
Subordinated CMBS acquisition activities, suspension of equity and debt
offerings and payment of principal paydowns per the stipulation agreements
with secured lenders.
YEAR ENDED 1998 VERSUS 1997
Net cash provided by operating activities increased for 1998 as
compared to 1997 primarily due to the increase in the net interest margin
resulting from the Company's acquisitions of Subordinated CMBS and, to a
lesser extent, CMO-IV (as previously discussed in Results of Operations).
This increase in net interest margin was partially offset primarily by an
increase in net receivables associated with the Chapter 11 filing.
Net cash used in investing activities increased for 1998 as compared
to 1997. The increase was primarily a result of increased purchases of
Subordinated CMBS. Also contributing to the increase in cash used in
investing activities was the purchase of $496 million of commercial loans in
connection with CMO-IV. These increases were partially offset by
approximately $335 million of proceeds received from the sale of collateral
bond obligations in connection with CBO-2 and from mortgage securities
disposition proceeds.
Net cash provided by financing activities increased for 1998 as
compared to 1997 primarily due to proceeds from debt issuances related to the
sale of the collateralized mortgage obligations in connection with CMO-IV,
collateralized bond obligations in connection with CBO-2, and variable-rate
secured borrowings, net of principal payments, and increased proceeds from
equity offerings. These increases were partially offset by payments made in
connection with collateral calls made by lenders primarily in the latter part
of the third quarter.
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, unsecured and other borrowings, securitizations and issuances of
common and preferred shares 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 the minimum amount required.
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 closely 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 and 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 values. 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
58
<PAGE>
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, creating a value deficiency as
measured by the 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. 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 December 31, 1999, CRIIMI MAE had secured financing agreements
with GACC, Lehman ALI, Inc., First Union, Merrill, Morgan Stanley, 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 throughout
1999, certain registered holders withheld payments related to securities not
registered to CRIIMI MAE. The Company has negotiated and finalized agreements
with five of its lenders. CRIIMI MAE Inc.'s unrestricted cash position has
increased from approximately $7 million on October 5, 1998 to approximately
$53.6 million as of December 31, 1999. 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 for any specified period while the Company is in bankruptcy.
Under the Plan, a portion of the Recapitalization Financing is
expected to result from the CMBS Sale. The CMBS subject to the CMBS Sale had
a fair value and amortized cost of $385.1 million and $542.0 million,
respectively, as of December 31, 1999. The Company first filed a plan with
the Bankruptcy Court in the fourth quarter of 1999 and during that same
quarter CRIIMI MAE began marketing for sale the CMBS subject to the CMBS
Sale. CRIIMI MAE sold a portion of these bonds in February and April 2000 and
intends to enter into one or more additional agreements during the first half
of 2000 to sell the remaining CMBS subject to the CMBS Sale, although there
can be no assurance that such bonds will be sold. As the Company decided in
the fourth quarter of 1999 to sell the CMBS subject to the CMBS Sale and its
does not expect the value of these bonds to significantly recover before the
future sale dates, the Company has recognized approximately $157 million of
other than temporary impairment related to these CMBS through earnings in the
fourth quarter of 1999.
The value of the Company's subordinated CMBS and government-insured
securities is based upon the combined yield of current treasury rates and the
current spread above treasury rates that an investor would require in a
purchase transaction. During the year ended December 31, 1999, the required
spreads above treasury rates were substantially unchanged on a total
portfolio basis. However, treasury rates increased significantly from
December 31, 1998 which, when combined with the required spreads, resulted in
an aggregate $113.1 million decrease in the value of the Company's portfolio
of CMBS and FHA's and GNMA's from December 31, 1998 to December 31, 1999.
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 financing and not
59
<PAGE>
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, agreed to sell the
remaining 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 sold these two classes of CMBS in May and October 1999. CRIIMI MAE
retained 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 has been accounted for as a financing and not a
sale. Gross proceeds from the sale were used to pay off $39.6 million of
secured debt and certain costs, and the remainder of approximately $315,000
was remitted to CRIIMI MAE. This resulted in CRIIMI MAE recognizing a
fixed-rate liability for these bonds in the amount of the gross proceeds
received.
On August 5, 1999, all but three of the commercial loans originated
under the Citibank Program were sold for gross proceeds of approximately
$308.0 million. The loans sold had an aggregate unpaid principal balance of
$339.0 million. On September 16, 1999, the remaining three loans were sold
for gross proceeds of approximately $27.2 million. The loans sold had an
aggregate principal balance of $32.7 million. Prior to the actual sale of
these loans the Company had recorded its unrealized losses based on pricing
data received from Citibank. In the case of each sale of the commercial
loans, the minimum net proceeds provision was waived by agreement of the
Company, the Unsecured Creditors' Committee and the Equity Committee. For
GAAP purposes, the Company realized $36.3 million in losses from the third
quarter of 1998 through the third quarter of 1999.
The Company's ability to resume the acquisition of Subordinated
CMBS, as well as its loan origination and securitization programs, depends
first on its ability to obtain the requisite recapitalization proceeds,
obtain confirmation and approval of a plan reorganization and emerge from
bankruptcy as a successfully reorganized company and second, on its ability
to access additional capital once it has successfully emerged from
bankruptcy. Factors which could affect the Company's ability to access
additional capital include, among other things, the cost and availability of
such capital, changes in interest rates and interest rate spreads, changes in
the commercial mortgage industry and the commercial real estate market,
general economic conditions, perceptions in the capital markets of the
Company's business, covenants under the Company's debt securities and credit
facilities, results of operations, leverage, financial condition, and
business prospects. The Company can give no assurance as to whether it will
be able to obtain additional capital or the terms of any such capital.
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 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. See "GENERAL INFORMATION - Business -Effect of Chapter
11 Filing on REIT Status and Other Tax Matters" regarding the payment of a
junior preferred stock dividend with respect to 1998 taxable income and the
anticipated distribution of all of its 1999 taxable income in the form of
non-cash taxable dividends. Under the Plan, no cash dividends other than a
maximum of $4.1 million to preferred shareholders can be paid to existing
shareholders. See
60
<PAGE>
also "-- REIT STATUS," "PLAN SUMMARY AND KEY CONSIDERATIONS Plan Summary -
Claims Against and Interests in CMI," "BUSINESS PLAN," and "PLAN OF
REORGANIZATION - Treatment of Claims and Interests Under the Plan."
Due to the Chapter 11 filing on October 5, 1998, cash dividends were
not paid during 1999 on common or preferred shares. However, since dividends
on the Company's Series B, C and D Preferred stock are cumulative, the
dividends payable at December 31, 1999 were accrued in the financial
statements.
Dividends paid or accrued per share on the Company's common stock,
Series B Preferred Stock and Series F Preferred Stock are summarized below:
<TABLE>
<CAPTION>
For the three months ended For the twelve months ended
December 31, December 31,
1999 (1) 1998 (1) 1999 (1) 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Common shares $0.000 $0.300 $0.000 $1.470
Series B Preferred Stock 0.680 0.680 2.720 3.355
Series F Preferred Stock 0.190 -- 0.190 --
</TABLE>
-----------------------------
(1) Due to the Chapter 11 filing on October 5, 1998, cash dividends were not
paid for the year ended 1999 on common or preferred shares. The Company
paid a dividend on November 5, 1999 in the form of junior preferred stock
to its common shareholders for the purpose of distributing approximately
$15.7 million in undistributed 1998 taxable income. See "BUSINESS-Effect of
Chapter 11 Filing on REIT Status and Other Tax Matters" regarding this
dividend and the anticipated distribution of all or a substantial portion
of its 1999 taxable income in the form of non-cash taxable dividends.
However, since dividends on the Company's preferred shares are cumulative,
the dividends payable at December 31, 1998 and for the year ended December
31, 1999 were accrued in the financial statements.
In addition to the per share amounts described above, dividends were
paid or accrued on the Company's Series C Preferred Stock and Series D
Preferred Stock. Amounts payable to Series C Preferred Stock for both the
three and twelve months ended December 31, 1999 were $193,068 and $697,172,
respectively. This compares to amounts paid or payable to Series C Preferred
Stock for both the three and twelve months ended December 31, 1998 of
$259,139 and $1,305,082, respectively. Amounts payable to Series D Preferred
Stock for the three and twelve months ended December 31, 1999 were $185,254
and $645,822, respectively. This compares to amounts paid or payable to
Series D Preferred Stock for the three and twelve months ended December 31,
1998 of $154,931 and $264,011, respectively. Amounts payable to the Series F
Preferred Stock for the three and twelve months ended December 31, 1999 were
$161,527.
On February 22, 2000, CRIIMI MAE and the holder of its Series C
Preferred Stock entered into a Preferred Stock Exchange Agreement pursuant to
which 103,000 shares of Series C Preferred Stock were exchanged for 103,000
shares of a new series of preferred stock designated as Series E Preferred
Stock. See "MARKET AND TRADING INFORMATION - Exchange of Series C Preferred
Stock for Series E Preferred Stock" for a further discussion of the exchange
of Series C Preferred Stock for Series E Preferred Stock.
REIT STATUS AND OTHER TAX MATTERS
CRIIMI MAE has elected to qualify as a REIT for tax purposes under
Sections 856-860 of the Internal Revenue Code and has maintained REIT status
for the 1999 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 "BUSINESS - Effect of
Chapter 11 Filing on REIT Status and Other Tax Matters."
The recently issued Internal Revenue Service Revenue Procedure 99-17
provides securities and commodities traders with the ability to elect
mark-to-market treatment for 2000 by including an election with their timely
filed 1999 federal tax extension. The election applies to all future years as
well, unless revoked with the consent of the Internal Revenue Service. On March
15, 2000, the Company determined to elect mark-to-market
61
<PAGE>
treatment as a securities trader for 2000 and, accordingly, will recognize
gains and losses prior to the actual disposition of its securities. Moreover,
some if not all of those gains and losses, as well as some if not all gains
or losses from actual dispositions of securities, will be treated as ordinary
in nature and not capital, as they would be in the absence of the election.
Therefore, any net operating losses generated by the Company's trading
activity will offset the Company's taxable income, and reduce any required
distributions to shareholders by a like amount. See "CERTAIN RISK
FACTORS-Risks Associated with Trader Election" for further discussion. If the
Company does have a REIT distribution requirement (and such distributions
would be permitted under the Plan), a substantial portion of the Company's
distributions would be in the form of non-cash taxable dividends.
INVESTMENT COMPANY ACT
For a discussion of the Investment Company Act and the risk to the
Company if it were required to register as an Investment Company, see
"CERTAIN RISK FACTORS-Investment Company Act Risk."
YEAR 2000
During the transition from 1999 to 2000, the Company did not
experience any significant problems or errors in its information technology
("IT") systems or date-sensitive embedded technology that controls certain
systems. Based on operations since January 1, 2000, the Company does not
expect any significant impact to its business, operations, or financial
condition as a result of the Year 2000 issue. However, it is possible that
the full impact of the date change has not been fully recognized. The Company
is not aware of any significant Year 2000 problems affecting third parties
with which the Company interfaces directly or indirectly.
G. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in this Section G of Part III, without
limitation, is updated, modified, and supplemented by the information
contained in the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, a copy of which is attached hereto as Exhibit H.
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 have an increase in the amount of interest expense paid on
its variable rate obligations primarily due to increases in One-Month LIBOR.
The Company will also 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.
CRIIMI MAE has entered into interest rate protection agreements to
mitigate the adverse effects of rising interest rates on the amount of
interest expense payable under 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 all cases is currently
above the current rate of the index, will limit 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 that portion of the CMBS. These
transactions also increased the borrowing capacity of the Company which was
used to acquire Subordinated CMBS.
The table below provides information about the Company's
Subordinated CMBS, Insured Mortgage Securities, and Investment in Originated
Loans. The Company holds these assets in its portfolio for other than trading
purposes. For Subordinated CMBS, insured mortgage securities, and investment
in originated loans, the
62
<PAGE>
table presents anticipated principal and interest cash flows based upon the
assumptions used in determining the fair value of these securities and the
related weighted average interest rates by expected maturity. The assumptions
used to price these securities include an estimate for prepayments which was
0% for the Subordinated CMBS, and ranged from 0% to 14% for the investment in
originated loans.
ESTIMATED PRINCIPAL AND INTEREST CASHFLOWS
<TABLE>
<CAPTION>
Assets (in millions) 2000 2001 2002 2003 2004 Thereafter Total Fair Value
------------------------------ -------- ---------- ---------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subordinated CMBS (1) $155.0 $155.5 $155.7 $156.0 $159.3 $3,925.4 $4,706.9 $1,179.3
Average Stated Interest Rate 6.8% 6.8% 6.8% 6.8% 6.8% 6.8%
Insured Mortgage Securities $ 36.3 $ 34.4 $ 34.5 $ 34.5 $ 34.5 $ 803.9 $ 978.1 $394.9
Average Stated Interest Rate 7.6% 7.6% 7.6% 7.6% 7.6% 7.7%
Investment in Originated Loans $ 70.1 $ 73.7 $ 67.0 $ 60.9 $ 57.9 $ 337.2 $ 666.8 $422.6
Average Stated Interest Rate 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
</TABLE>
----------------------
(1) The estimated principal and interest cash flows are based on the
Subordinated CMBS portfolio as of December 31, 1999. However, these cash flows
will decrease as the CMBS anticipated to be sold as part of the Company's Plan
are actually sold.
The next table provides information about the Company's debt
obligations and derivative instruments. This table is based on the Company's
current debt obligations as of December 31, 1999 and does not account for the
contemplated New Debt from the Company's Plan. For debt obligations, the
table presents the contractual principal and interest payments and the
related weighted average interest rates by contractual maturity date. For the
caps, the table presents the notional amount of the agreement by fiscal year
of maturity and weighted average strike price.
ESTIMATED PRINCIPAL AND INTEREST ON DEBT OBLIGATIONS
<TABLE>
<CAPTION>
Debt Obligations
(in millions) 2000 2001 2002 2003 2004 Thereafter Total Fair Value
------------------------------- --------- ---------- ---------- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securitized Mortgage
Obligations - Fixed Rate $ 90.5 $ 88.8 $ 90.3 $89.2 $92.6 $1,632.3 $2,083.7 $1,007.8
Average Stated Interest Rate 6.7% 6.7% 6.7% 6.8% 6.8% 7.0%
Senior Unsecured Notes (2) $ 9.1 $ 9.1 $109.1 $ - $ - $ - $ 127.3 $ 86.0
Average Stated Interest Rate 9.1% 9.1% 9.1%
Variable Rate Secured Borrowings (1) $ - $ - $ - $ - $ - $ - $ - N/A
Average Stated Interest Rate
Other Variable Rate (1) $ - $ - $ - $ - $ - $ - $ - N/A
Average Stated Interest Rate
Derivative Contracts
(in millions)
-------------------------------
Cap Contracts $350.0 $425.0 $ - $ - $ - $ - $ 775.0 $ 1.5
Average Strike Rate 6.7% 6.7%
</TABLE>
63
<PAGE>
---------------------------
(1) These facilities are in default due to the Chapter 11 proceedings. As a
result, the maturity dates of these facilities have passed. See Note 9 of
the Notes to Consolidated Financial Statements for additional information.
(2) This facility is in default due to the Chapter 11 proceedings, however, the
maturity date has not passed as of December 31, 1999.
H. MARKET AND TRADING INFORMATION
MARKET DATA
CRIIMI MAE's common stock is listed on the New York Stock Exchange
(symbol CMM). As of March 15, 2000, there were approximately 31,200 holders of
record of the Company's common stock. The following table sets forth the high
and low closing sales prices and the dividends per share for CRIIMI MAE's common
stock during the periods indicated:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------
Sales Price
Dividends per
Quarter Ended High Low Common Share
----------------- ----------- ----------- --------------
<S> <C> <C> <C>
March 31 $3 7/8 $2 9/16 $ - (1)
June 30 2 3/4 1 15/16 - (1)
September 30 3 3/16 1 15/16 - (1)
December 31 2 1 1/16 - (1)
-----------
$ -
===========
<CAPTION>
1998
--------------------------------------------------------------------
Sales Price
Dividends per
Quarter Ended High Low Common Share
----------------- ----------- ----------- --------------
<S> <C> <C> <C>
March 31 $16 1/16 $14 7/8 $ 0.37
June 30 15 3/4 13 7/8 0.40
September 30 14 15/16 8 5/8 0.40
December 31 7 1/8 1 1/4 0.30 (2)
-----------
$ 1.47
===========
</TABLE>
(1) During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy
Court approval.
(2) The Company paid a dividend in junior preferred stock on November 5, 1999
for the 1998 taxable year. See "BUSINESS-Effect of Chapter 11 Filing on
REIT Status and Other Tax Matters" and Notes 11 and 12 of the Notes to
Consolidated Financial Statements for a further discussion of this
dividend.
ADJUSTMENT TO CONVERSION PRICE FOR SERIES B PREFERRED STOCK
Due to the distribution of the junior preferred stock to the common
shareholders on November 5, 1999, Section 10(f)(iii) of the Company's
Articles Supplementary to the Articles of Incorporation for Series B
Preferred Stock was triggered, resulting in an adjustment to the conversion
price such that each share of Series B Preferred
64
<PAGE>
Stock is now convertible into 2.6379 shares of common stock. Such junior
preferred stock dividend also triggered adjustments relating to the Company's
two stock option plans and two unrelated option agreements.
SERIES B AND D PREFERRED STOCK DIRECTORSHIPS
On April 1, 2000, the Company's Board of Directors was automatically
increased from six to ten directors pursuant to the terms of the respective
Articles Supplementary to the Articles of Incorporation for CRIIMI MAE's
Series B Preferred Stock and Series D Preferred Stock. The Articles
Supplementary for each of Series B and D Preferred Stock provide that during
any period in which dividends are cumulatively in arrears for six or more
quarterly dividend payments, then the number of directors constituting the
Board shall automatically be increased by two. As discussed above, during the
pendency of the Chapter 11 proceedings, the Company is prohibited from paying
cash dividends without prior Bankruptcy Court approval. The Company has not
paid any cash dividends on either the Series B or D Preferred Stock since
September 30, 1998. Thus, the holders of each of the Series B and D Preferred
Stock have the right to elect two directors to the Company's Board (the
"Election Right") at the next annual meeting of stockholders or at a special
meeting of stockholders held for such purpose (and called in accordance with
the applicable Articles Supplementary).
Pursuant to the terms of the Plan, the holder of the Series D
Preferred Stock, if not previously exchanged, will receive on the Effective
Date in exchange for its shares of Series D Preferred Stock an identical
number of shares of Series E Preferred Stock, issued effective as of the
Effective Date. On the date of the exchange, the Election Right shall be
extinguished since the former holder of the Series D Preferred Stock will not
own any shares of Series D Preferred Stock. Furthermore, the Plan provides
that all accrued and past due dividends on Series D Preferred Stock will be
paid on the Effective Date, at the election of the Company, in common stock
or cash, thereby curing the default and eliminating the Election Right.
The Plan further provides that if the requisite number of holders of
the Series B Preferred Stock accept the Plan, the Articles Supplementary
relating to the Series B Preferred Stock will be amended to permit the
payment of dividends on Series B Preferred Stock, including accrued and
unpaid dividends, in common stock or cash, at the election of the Company.
The payment of the accrued and unpaid dividends by the Company on or after
the Effective Date would cure the default and eliminate the Election Right.
EXCHANGE OF SERIES C PREFERRED STOCK FOR SERIES E PREFERRED STOCK
On February 22, 2000, CRIIMI MAE and the holder of its Series C
Preferred Stock entered into a Preferred Stock Exchange Agreement pursuant to
which 103,000 shares of Series C Preferred Stock were exchanged for 103,000
shares of a new series of preferred stock designated as Series E Preferred
Stock. The principal purpose of such exchange was to effect an extension of
the mandatory conversion date, upon which the Series C Preferred Stock would
have converted into common stock. Pursuant to the Preferred Stock Exchange
Agreement, the Company has amended its Plan to provide for a new mandatory
conversion date and certain additional terms and conditions with respect to
the Series E Preferred Stock. The additional terms principally address
dividend and additional conversion matters. See "GENERAL INFORMATION -- The
Debtors and Chapter 11 Filing and Other Chapter 11 Events -- Exchange of
Series D Preferred Stock for Series E Preferred Stock" for a discussion of
the exchange of Series D Preferred Stock for Series E Preferred Stock
effected in July 2000.
I. MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF CRIIMI MAE
The following table sets forth information concerning the executive
officers and directors of the Company as of March 15, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William B. Dockser (1).................. 63 Chairman of the Board and Director
H. William Willoughby (1)............... 53 President, Secretary and Director
65
<PAGE>
Cynthia O. Azzara....................... 40 Senior Vice President, Chief Financial
Officer and Treasurer
David B. Iannarone...................... 39 Senior Vice President and General Counsel
Brian L. Hanson......................... 38 Senior Vice President/Servicing
Garrett G. Carlson, Sr. (2)(3)(4)....... 62 Director
G. Richard Dunnells (2)(3)(4)........... 62 Director
Robert J. Merrick (2)(3)(4)............. 55 Director
Robert E. Woods (2)(3)(4)............... 52 Director
</TABLE>
------------------
(1) Member of the Transactional Committee
(2) Member of the Audit Committee
(3) Member of the Compensation and Stock Option Committee
(4) Member of the Special Reorganization Committee
Mr. William B. Dockser has been Chairman of the Board of CRIIMI MAE
since 1989. Mr. Dockser also serves as Chairman of the Board of C.R.I., Inc.
("CRI"), the former advisor to CRIIMI MAE, which currently oversees a $3
billion real estate portfolio. Prior to forming CRI in 1974, he served as
President of Kaufman Broad Asset Management, Inc., an affiliate of Kaufman
and Broad, Inc., which managed a number of publicly held limited partnerships
created to invest in low and moderate income multifamily apartment complexes.
For a period of 2 1/2 years prior to joining Kaufman and Broad, he served in
various positions at HUD, culminating in the post of Deputy FHA Commissioner
and Deputy Assistant Secretary for Housing Production and Mortgage Credit,
where he was responsible for a federally insured housing production program.
Before coming to Washington, Mr. Dockser was a practicing attorney in Boston
and also was a special Assistant Attorney General for the Commonwealth of
Massachusetts. He holds a Bachelor of Laws degree from Yale University Law
School and a Bachelor of Arts degree from Harvard University.
Mr. H. William Willoughby has been President of CRIIMI MAE since
1990. Mr. Willoughby was a co-founder of CRI and has served as its President
since its inception in 1974. Mr. Willoughby is principally responsible for
the structuring and oversight of investment vehicles and acquisition
programs. Prior to joining CRI in 1974, he was Vice President of Shelter
Company of America and a number of its subsidiaries, dealing principally with
real estate development and equity financing. Before joining Shelter Company,
he was a senior tax accountant with Arthur Andersen & Company. He holds a
Juris Doctorate degree, a Master of Business Administration degree and a
Bachelor of Science degree in Business Administration from the University of
South Dakota.
Ms. Cynthia O. Azzara has been Chief Financial Officer since 1994, a
Senior Vice President since 1995 and Treasurer since 1997. Ms. Azzara is
responsible for accounting, financial and treasury matters of CRIIMI MAE.
From 1989 to 1994, she served as Vice President/Controller of CRI public
funds. From 1985 to 1989, she held positions at CRI as manager of financial
reporting and assistant controller. Before joining CRI in 1985, Ms. Azzara
was controller for a consulting company and was a staff accountant for a
regional CPA firm in Virginia. Ms. Azzara is a certified public accountant
and holds a B.B.A. in accounting from James Madison University, magna cum
laude.
Mr. David B. Iannarone is Senior Vice President and General Counsel
of CRIIMI MAE. Mr. Iannarone joined CRIIMI MAE Inc. during 1996, and is
responsible for all corporate legal affairs. From 1991 to 1996, he served
with the Federal Deposit Insurance Company/Resolution Trust Company as
Counsel-Securities and Finance. From 1989 to 1991, Mr. Iannarone served with
Citibank, N.A. as assistant vice president and counsel, serving the World
Corporate Group and the Corporate Banking Department. He was with Kaye,
Scholer, Fierman, Hays & Handler as an associate in the Corporate and Banking
Department from 1986 to 1989. Mr. Iannarone received an LLM from the
Georgetown University Law Center, a JD from the University of Villanova
School of Law, and a BA from Trinity College.
Mr. Brian L. Hanson has been a Senior Vice President of the Company
since March 1998. From March 1996 to March 1998, he served as Group Vice
President of the Company. Prior to joining the Company, from May 1991 to
February 1996, Mr. Hanson was with the Lanham, Maryland based company of JCF
Partners, where he served as Chief Operating Officer and Director of Asset
Operations and Portfolio Director.
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<PAGE>
Mr. Garrett G. Carlson, Sr. has served as a Director of the Company
since 1989. Mr. Carlson has served as President of Can-American Realty Corp.
and the Canadian Financial Corp. since 1979 and 1974, respectively, and
President of Garrett Real Estate Development since 1982. Since 1996, Mr.
Carlson has served as a director of Satellite Broadcasting Company. From 1985
to 1995, he served as Chairman of the Board of SCA Realty Holdings Inc; from
1983 to 1995, he served as Vice Chairman of the Shelter Development Company
Ltd. and from 1992 to 1994, he served as a director of Bank Windsor.
Mr. G. Richard Dunnells has served as a Director of the Company
since 1991. Since 1995, Mr. Dunnells has served as the Hiring Partner of the
law firm Holland & Knight. He was Chairman of the Washington, D.C. law firm
of Dunnells & Duvall from 1989 to 1993 and was the firm's Senior Partner from
1973 to 1993. Mr. Dunnells served on the President's Commission on Housing
from 1981 to 1982 and thereafter served in various roles at the U.S.
Department of Housing and Urban Development from 1969 to 1973, including
Special Assistant to the Under-Secretary, Deputy Assistant Secretary for
Housing and Urban Renewal and Deputy Assistant Secretary for Housing
Management.
Mr. Robert J. Merrick has served as a Director of the Company since
1997. Since February 1998, Mr. Merrick has served as the Chief Credit Officer
and Director of MCG Credit Company. From 1985 to 1997, he served as Executive
Vice President and Chief Credit Officer of Signet Banking Company. In
addition, while at Signet, Mr. Merrick also served as Chairman of the Credit
Policy Committee and was a member of the Asset and Liability Committee, as
well as the Management Committee. Prior to joining Signet, Mr. Merrick was a
Credit Officer of the Virginia Banking Company from 1980 to 1984. He also
served as Senior Vice President of the Bank of Virginia from 1976 to 1980.
Mr. Robert Woods has served as a Director of the Company since 1998.
He is currently the Managing Director and head of loan syndications for the
Americas at Societe Generale in New York where he has served in that position
since 1997. Prior to that, Mr. Woods had been Managing Director and Head of
the Real Estate Capital Markets and Mortgage-Backed Securities division at
Citicorp since 1991. Mr. Woods also served as Head of Citicorp's
syndications, private placements, money markets and asset-backed businesses
from 1985 to 1990.
Mr. Douglas L. Cooper, who had served as a Senior Vice President of
the Company since March 1998, resigned in October 1999.
Mr. Donald R. Drew, who had served as a Senior Vice President of the
Company since April 1997, resigned in January 2000.
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company receive no
additional compensation for their services as directors. Each director who is
not an officer or employee of the Company and does not perform any services
for the Company other than as a director (an "Unaffiliated Director"),
receives (i) an aggregate annual fee of $12,000, (ii) 500 common shares
annually, (iii) options to purchase 500 common shares annually and (iv) a fee
of $750 (for telephonic meetings) or $1,500 (for in-person meetings) per day
for each meeting in which such director participates, including committee
meetings held on days when the Board of Directors is not meeting. In
addition, the Company reimburses directors (including those employed by the
Company as executive officers) for travel and other expenses incurred in
connection with their duties as directors of the Company. The Unaffiliated
Directors, in addition to the foregoing compensation have received additional
compensation for their service on the Special Reorganization Committee.
Messrs. Carlson, Dunnells and Merrick each received $25,000 and Mr. Woods, as
lead director, received $35,000. See "The Debtors and Chapter 11 Filing and
other Chapter 11 Events" for a further description of the Special
Reorganization Committee.
67
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee, a Compensation and
Stock Option Committee, a Transactional Committee and a Special
Reorganization Committee. The Company has no nominating or similar committee.
AUDIT COMMITTEE. The Board of Directors has an Audit Committee
currently comprised of Messrs. Carlson, Dunnells, Merrick and Woods, each of
whom is an Unaffiliated Director. The functions performed by the Audit
Committee are to: (1) recommend independent auditors to the Company; (2)
review the scope of the audit, audit fees, the audit report and the
management letter with the Company's independent auditors; (3) review the
financial statements of the Company; (4) review and approve non-audit
services provided by the independent auditors; and (5) consult with the
independent auditors and management with regard to the adequacy of internal
controls.
COMPENSATION AND STOCK OPTION COMMITTEE. The Board of Directors has
a Compensation and Stock Option Committee currently comprised of Messrs.
Carlson, Dunnells, Merrick and Woods, each of whom is an Unaffiliated
Director. The Compensation and Stock Option Committee was formed to
establish, review and modify the compensation (including salaries and
bonuses) of the Company's executive officers, to administer the Employee
Stock Option Plan and to perform such other duties as may be delegated to it
by the Board of Directors.
TRANSACTIONAL COMMITTEE. The Board of Directors has a Transactional
Committee currently comprised of Messrs. Dockser and Willoughby. The
Transactional Committee was formed to review and approve certain debt and
equity financings, and securitizations and resecuritizations of assets, with
certain of the foregoing subject to specific limitations.
SPECIAL REORGANIZATION COMMITTEE. The Board of Directors has a
Special Reorganization Committee comprised of Messrs. Carlson, Dunnells,
Merrick and Woods established in connection with the Company's Chapter 11
proceeding. See "GENERAL INFORMATION -- The Debtors and Chapter 11 Filing and
other Chapter 11 Events" for a further description of the Special
Reorganization Committee.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation earned during the last three years by the Chairman of the Board
of Directors and each of the other four most highly compensated executive
officers of the Company whose income exceeded $100,000 during the year ended
December 31, 1999 (collectively, the "Named Executive Officers").
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------ --------------------------
Restricted Securities
Stock Underlying All Other
Year Salary ($) Bonus ($) Awards Options (#) Compensation ($)
------ ----------- ----------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
William B. Dockser 1999 $318,354 $ - $ - 125,000 $ -
Chairman of the Board 1998 285,600 59,000 - 225,000 334,916 (1)
1997 230,000 215,000 - 150,000 467,424 (1)
H. William Willoughby 1999 $318,354 $ - $ - 125,000 $ -
President and Secretary 1998 285,600 59,000 - 225,000 334,916 (1)
1997 230,000 215,000 - 150,000 467,424 (1)
Cynthia O. Azzara 1999 $242,812 $ 49,500 $ - 40,000 $247,500 (2)
Senior Vice President, 1998 185,150 45,000 - 20,000 -
Chief Financial Officer 1997 147,500 77,500 - 25,000 -
and Treasurer
David B. Iannarone 1999 $242,812 $ 49,500 $ - 50,000 $247,500 (2)
Senior Vice President 1998 163,882 45,000 - 15,000 -
and General Counsel 1997 114,167 50,000 - 15,000 -
Brian L. Hanson (3) 1999 $188,854 $ 38,500 $ - 25,000 $192,500
Senior Vice President 1998 147,235 40,000 - 15,000 -
1997 106,433 50,000 - 15,000 -
</TABLE>
(1) These amounts represent deferred compensation, which the Company has agreed
to pay for services performed in connection with the Merger. These amounts
were paid solely from principal and interest received by the Company from
CRI in connection with a note receivable acquired by the Company in the
Merger. As a result of the Company's Chapter 11 filing, these payments have
been temporarily suspended.
(2) These amounts represent retention payments made on April 15, 1999 and
October 15, 1999 pursuant to the Employee Retention Plan.
(3) These amounts represent compensation paid by CMSLP throughout 1999 and
long-term incentive payments made on April 15, 1999 and October 15, 1999
pursuant to the CMSLP Long-Term Incentive Plan.
EMPLOYMENT AGREEMENTS
On June 30, 1995, in connection with the Merger, the Company,
through its wholly-owned operating subsidiary CMM, entered into employment
agreements with each of Messrs. Dockser and Willoughby. In connection with
the adoption of the Employee Retention Plan, such employment agreements were
assumed by CMM and were amended as of October 5, 1998 (together and as
amended, the "Employment Agreements.") The Employment Agreements each expire
June 30, 2000 and provide that Messrs. Dockser and Willoughby salaries will
be adjusted at least annually by the Compensation and Stock Option Committee
of the Board of Directors. Each of Mr. Dockser and Mr. Willoughby currently
receive a base salary of $324,500. The Employment Agreements require each of
Messrs. Dockser and Willoughby to devote a substantial portion of his time to
the affairs of the Company and its affiliated entities, except that each of
them may devote time to other existing business activities; provided that the
time devoted to such other existing business activities does not interfere
with the performance of his duties to the Company and its affiliated
entities. The agreements define the phrase "substantial portion" to mean all
of the time required to perform the services necessary and appropriate for
the conduct of the businesses of the Company and its affiliated entities.
In the event of a change of control, as defined in the Employment
Agreements, Messrs. Dockser and Willoughby reserve the right to voluntarily
terminate their employment with the Company. Messrs. Dockser and
69
<PAGE>
Willoughby are entitled to severance payments in an amount equal to 18
months' base salary upon termination without cause and upon an involuntary
resignation for any of the reasons set forth in the Employment Agreements,
including a change of control. Messrs. Dockser and Willoughby are not
currently entitled to receive any retention payments under the Employment
Retention Plan. The Bankruptcy Court may, at its discretion, upon request,
authorize the payment of certain retention payments to Messrs. Dockser and
Willoughby in connection with services rendered during the Chapter 11 cases.
The Employment Agreements provide for indemnification of Messrs.
Dockser and Willoughby to the extent provided for in the bylaws of the
Company and/or CMM up to and including amounts totaling a maximum of $250,000
for all covered persons, constituting the aggregate deductible under
applicable Director and Officer insurance policies, the application of any
available portion of proceeds of applicable Director and Officer insurance
policies, up to $20 million in the aggregate for all covered persons, and the
payment of all uninsured indemnification arising under the post-petition
actions of the executives for which they are otherwise entitled to
indemnification under the Bylaws of the Company and/or CMM.
In July 1998, the Company entered into a new employment agreement
with Ms. Cynthia O. Azzara that, in connection with the adoption of the
Employee Retention Plan, was assumed by CMM and was amended as of October 5,
1998 (as amended, the "Azzara Employment Agreement"). The Azzara Employment
Agreement has a three-year term and provides for minimum base annual
compensation of $225,000. The Azzara Employment Agreement contains provisions
that prohibit Ms. Azzara from competing with the Company and certain of its
affiliates for a period not to extend beyond October 5, 2000, subject to
certain limited exceptions. In addition, Ms. Azzara is entitled to receive a
retention payment, under the Employee Retention Plan, equal to two times her
base salary paid semiannually in four equal installments over a two-year
period, subject to certain conditions. The first retention plan payment to
Ms. Azzara vested on April 5, 1999 and was paid on April 15, 1999. The second
retention payment vested on October 5, 1999 and was paid on October 15, 1999.
The third retention payment vested on April 5, 2000 and was paid on April 14,
2000. The fourth retention plan payment to Ms. Azzara is subject to
Bankruptcy Court approval. Any unpaid portion of the retention payments owed
to Ms. Azzara will become immediately due and payable upon the effective date
of a plan of reorganization of the Company, only upon receipt of Bankruptcy
Court approval, or upon the termination of Ms. Azzara other than for cause.
Ms. Azzara is entitled to severance payments in an amount equal to
24 months' base salary upon termination without cause. In addition, upon
termination following a change of control, all options to acquire shares of
the Company's common stock held by Ms. Azzara, to the extent not then
exercisable, will become immediately exercisable. The Azzara Employment
Agreement provides for indemnification of Ms. Azzara to the extent provided
for in the bylaws of the Company and/or CMM up to and including amounts
totaling a maximum of $250,000 for all covered persons, constituting the
aggregate deductible under applicable Officer and Director insurance
policies, the application of any available portion of proceeds of applicable
Officer and Director insurance policies, up to $20 million in the aggregate
for all covered persons, and the payment of all uninsured indemnification
arising under the post-petition actions of the executive for which she is
otherwise entitled to indemnification under the bylaws of the Company and/or
CMM.
On October 7, 1998, the Company entered into an employment agreement
with David B. Iannarone that, in connection with the Employee Retention Plan,
was assumed by CMM and was amended as of October 7, 1998 (as amended, the
"Iannarone Employment Agreement"). The Iannarone Employment Agreement has a
three-year term and provides for minimum base annual compensation of
$225,000. In addition, Mr. Iannarone is entitled to receive a retention
payment, under the Employee Retention Plan, equal to two times his base
salary paid semiannually in four equal installments over a two-year period,
subject to certain conditions. The first retention plan payment to Mr.
Iannarone vested on April 5, 1999 and was paid on April 15, 1999. The second
retention payment vested on October 5, 1999 and was paid on October 15, 1999.
The third retention payment vested on April 5, 2000 and will be paid on April
14, 2000. The fourth retention plan payment to Mr. Iannarone is subject to
Bankruptcy Court approval. Any unpaid portion of the retention payments owed
to Mr. Iannarone will become immediately due and payable upon the effective
date of a plan of reorganization of the Company, only upon receipt of
Bankruptcy Court approval, or upon the termination of Mr. Iannarone other
than for cause.
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<PAGE>
Mr. Iannarone is entitled to severance payments in an amount equal
to 24 months' base salary upon termination without cause. In addition, upon
termination following a change of control, all options to acquire shares of
the Company's common stock held by Mr. Iannarone, to the extent not then
exercisable, will become immediately exercisable. The Iannarone Employment
Agreement provides for indemnification of Mr. Iannarone to the extent
provided for in the bylaws of the Company and/or CMM up to and including
amounts totaling a maximum of $250,000 for all covered persons, constituting
the aggregate deductible under applicable Officer and Director insurance
policies, the application of any available portion of proceeds of applicable
Officer and Director insurance policies, up to $20 million in the aggregate
for all covered persons, and the payment of all uninsured indemnification
arising under the post-petition actions of the executive for which he is
otherwise entitled to indemnification under the bylaws of the Company and/or
CMM.
Pursuant to the Employee Retention Plan, options granted to each of
the Named Executive Officers after October 5, 1998 will immediately become
exercisable upon a change of control.
EMPLOYEE STOCK OPTION PLAN
The purpose of the Employee Stock Option Plan is to enhance the
long-term profitability of the Company and shareholder value by offering
incentives and rewards to those officers and other employees of the Company
and its subsidiaries who are important to the Company's growth and success,
and to encourage such officers and employees to remain in the service of the
Company and its subsidiaries and to acquire and maintain stock ownership in
the Company. See "PLAN OF REORGANIZATION - The Reorganized Debtors" regarding
amendments to the Employee Stock Option Plan proposed in connection with the
Plan.
The Employee Stock Option Plan currently provides for
grants of stock options to purchase up to 2,092,903 shares of Company common
stock (as adjusted from 2,000,000 shares as a result of the junior preferred
stock dividend paid to common shareholders in November 1999 and consistent
with a Bankruptcy Court order which limits the full adjustment to 2,198,831
shares of Company common stock, contemplated by the terms and provisions of
the Employee Stock Option Plan, until such time as the Company emerges from
Chapter 11). As of March 17, 2000, options to purchase a total of 2,083,123
shares of Company common stock were outstanding under the Employee Stock
Option Plan. Options granted under the Employee Stock Option Plan may be
designated as either "nonqualified stock options" or "incentive stock
options." The exercise price for options granted under the Employee Stock
Option Plan may not be less than the fair market value of a share of common
stock on the date of grant.
Any executive officer or other key employee of the Company or any
subsidiary of the Company is eligible to be granted options, subject to
certain limitations. The Compensation and Stock Option Committee is
authorized to select from among eligible employees the individuals to whom
options are to be granted and to determine the number of common shares
subject to each option, whether such options are to be incentive stock
options or nonqualified stock options, and the terms and conditions of the
options consistent with terms and provisions of the Employee Stock Option
Plan.
The Employee Stock Option Plan is administered by the Compensation
and Stock Option Committee. Currently, the Compensation and Stock Option
Committee consists of Messrs. Carlson, Dunnells, Merrick and Woods, each of
whom is an Unaffiliated Director. Except as permitted by Rule 16b-3(c)(2)
under the Exchange Act, options may not be granted under the Employee Stock
Option Plan to any member of the Compensation and Stock Option Committee
during the term of his or her membership on the Compensation and Stock Option
Committee.
Pursuant to the Employee Retention Plan, options granted after
October 5, 1998 will immediately become exercisable upon a change of control.
The following table sets forth certain information concerning
options granted to the Named Executive Officers during the year ended
December 31, 1999:
71
<PAGE>
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total Options
Common Shares Granted to
Underlying Employees in Exercise Expiration Grant Date
Options Ganted Fiscal Year Price Date Present Value
----------------- ----------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
William B. Dockser 100,000 (1) 13.41% $3.125 3/16/07 $250,580 (3)
25,000 (2) 3.35% $1.125 12/15/07 $ 22,615 (4)
H. William Willoughby 100,000 (1) 13.41% $3.125 3/16/07 $250,580 (3)
25,000 (2) 3.35% $1.125 12/15/07 $ 22,615 (4)
Cynthia O. Azzara 20,000 (1) 2.68% $3.125 3/16/07 $ 50,116 (3)
20,000 (2) 2.68% $1.125 12/15/07 $ 18,092 (4)
David B. Iannarone 25,000 (1) 3.35% $3.125 3/16/07 $ 62,645 (3)
25,000 (2) 3.35% $1.125 12/15/07 $ 22,615 (4)
Brian L. Hanson 15,000 (1) 2.01% $3.125 3/16/07 $ 37,587 (3)
10,000 (2) 1.34% $1.125 12/15/07 $ 9,046 (4)
</TABLE>
(1) These options were granted on March 16, 1999 and will vest in three equal
annual installments over three years commencing on the first anniversary of
the date of grant.
(2) These options were granted on December 15, 1999 and will vest in three
equal annual installments over three years commencing on the first
anniversary of the date of grant.
(3) These values are estimated on the date of grant using the Black-Scholes
option pricing model, which produces a per option share value as of March
16, 1999, the grant date, of $2.5058 using the following principal
assumptions: expected stock price volatility 95.5656%, risk free rate of
return of 5.0386%, dividend yield of 0% and expected life of 6.23 years. No
adjustments have been made for forfeitures or nontransferability. The
actual value, if any, that the executive officer will realize from these
options will depend solely on the increase in the stock price over the
option price when the options are exercised.
(4) These values are estimated on the date of grant using the Black-Scholes
option pricing model, which produces a per option share value as of
December 15, 1999, the grant date, of $0.9046 using the following principal
assumptions: expected stock price volatility 94.332%, risk free rate of
return of 6.1513%, dividend yield of 0% and expected life of 6.23 years. No
adjustments have been made for forfeitures or nontransferability. The
actual value, if any, that the executive officer will realize from these
options will depend solely on the increase in the stock price over the
option price when the options are exercised.
The following table provides information concerning the exercise of
options during the year ended December 31, 1999 for each of the Named Executive
Officers.
72
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND YEAR END 1999 OPTION VALUES
<TABLE>
<CAPTION>
Common Shares Number of Common Shares Value of Unexercised
Acquired on Underlying Unexercised In-the-Money
Exercise During Value Options at FY-end Options at FY-end
1999 Realized Exercisable/Unexercisable Exercisable/Unexercisable(1)
--------------- ----------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
William B. Dockser - $ - 1,102,302 675,000 $- $7,813
H. William Willoughby - $ - 1,266,905 675,000 $- $7,813
Cynthia O. Azzara - $ - 51,734 61,666 $- $6,250
David B. Iannarone - $ - 15,000 65,000 $- $7,813
Brian L. Hanson - $ - 20,625 41,875 $- $3,125
</TABLE>
-------------------
(1) The value of the in-the-money options was calculated using the difference
between $1.4375, the closing share price of the Company's common stock on
December 31, 1999, and the exercise price of the options.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of March 17, 2000 by
(i) each person known by the Company to be the beneficial owner of more than
5% of its common stock, (ii) each director of the Company, (iii) each Named
Executive Officer, and (iv) all directors and executive officers of the
Company as a group. Unless otherwise indicated, each stockholder has sole
voting and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
Amount and Nature of Common Percentage of Common
Name Shares Beneficially Owned Shares Outstanding
---- ------------------------- ------------------
<S> <C> <C>
William B. Dockser 3,679,949 (1)(2) 5.6%
H. William Willoughby 3,459,827 (1)(3) 5.3%
Garrett G. Carlson, Sr. 18,910 (4) *
G. Richard Dunnells 17,130 (5) *
Robert J. Merrick 5,246 (6) *
Robert E. Woods 2,164 (7) *
Cynthia O. Azzara 101,079 (8) *
Brian L. Hanson 37,595 (9) *
David B. Iannarone 34,929(10) *
Gotham Partners L.P.
Gotham Partners III
Gotham International Advisors LLC 6,009,000(11) 9.2%
110 East 42nd Street 18th Floor
New York, NY 10017
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<PAGE>
All Directors and Executive
Officers as a Group (9 persons) 7,353,358 (12) 11.2%
</TABLE>
*Less than 1%.
(1) Includes 3,471 common shares owned by C.R.I, Inc. of which Messrs. Dockser
and Willoughby are the sole shareholders.
(2) Includes 1,409,525 shares exercisable upon exercise of presently
exercisable options or those exercisable within 60 days. Includes 131,592
common shares held by Mr. Dockser's wife, 156,817 common shares held by the
William B. Dockser '59 Charitable Lead Annuity Trust (for which Mr. Dockser
has sole voting power) and 250,907 common shares held by the Dockser Family
Foundation (for which Mr. Dockser has sole voting power).
(3) Includes 1,601,170 shares exercisable upon exercise of presently
exercisable options or those exercisable within 60 days. Includes 43,100
common shares held by Mr. Willoughby's wife, 34,384 common shares held by
Mr. Willoughby's parents, 10,000 common shares held by Mr. Willoughby's son
and 4,095 common shares held by Mr. Willoughby's daughter.
(4) Includes 2,910 shares exercisable upon exercise of presently exercisable
options or those exercisable within 60 days. Includes 1,000 common shares
held by Mr. Carlson's wife and 14,500 common shares held by a partnership
for which Mr. Carlson is the sole general partner.
(5) Includes 2,910 shares exercisable upon exercise of presently exercisable
options or those exercisable within 60 days.
(6) Includes 1,746 shares exercisable upon exercise of presently exercisable
options or those exercisable within 60 days.
(7) Includes 1,164 shares exercisable upon exercise of presently exercisable
options or those exercisable within 60 days.
(8) Includes 79,635 shares exercisable upon exercise of presently exercisable
options or those exercisable within 60 days.
(9) Includes 37,595 shares exercisable upon exercise of presently exercisable
options or those exercisable within 60 days.
(10) Includes 34,929 shares exercisable upon exercise of presently exercisable
options or those exercisable within 60 days.
(11) Based on a Schedule 13G filed by Gotham Partners, L.P., Gotham Partners
III, L.P. and Gotham International Advisors L.L.C., such entities
collectively hold 6,009,000 common shares, for which they hold sole voting
and investment power.
(12) Includes 3,171,584 shares exercisable upon exercise of presently
exercisable options or those exercisable within 60 days.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company maintains its headquarters office in Rockville,
Maryland. Pursuant to an administrative services agreement with CRI which was
entered into in connection with the Merger (the "CRI Administrative Services
Agreement"), CRI is obligated to provide the Company and its subsidiaries
with certain administrative office, facility and other services, at cost,
with respect to certain aspects of the Company's business. The Company
intends to use the services provided under the CRI Administrative Services
Agreement to the extent such services are not performed by the Company or
provided by another service provider. The CRI Administrative Services
Agreement is terminable on 30 days' notice at any time by the Company. The
Company and its subsidiaries paid charges under the CRI Administrative
Services Agreement of $182,691 and $352,471 for the year ended December 31,
1999 and 1998, respectively.
In June 1997, a subsidiary of the Company acquired a Holiday Inn
Express hotel in Nashville, Tennessee in a foreclosure sale from a commercial
mortgage-backed security trust. In connection with such purchase, the
subsidiary-owner of the hotel entered into a hotel management agreement (the
"Hotel Management Agreement") with Capitol Hotel Group International, Inc.
("CHGI"), a Maryland company partially owned by Messrs. Dockser and
Willoughby. The Hotel Management Agreement provides that in exchange for the
hotel management and operating duties set forth in the agreement, CHGI will
receive an annual management fee in an amount equal to four percent of the
total annual revenues of the hotel plus twenty percent of the annual net
profit of the hotel. For the years ended December 31, 1999 and 1998, the
Company paid a total of $61,077 and $ 4,691, respectively, to CHGI pursuant
to the Hotel Management Agreement. Prior to entering into the Hotel
Management Agreement, the Company received a written opinion from an
independent hotel consulting and appraisal company that the terms of the
Hotel Management Agreement were reasonable and within industry standards.
IV. BUSINESS PLAN
THE INFORMATION CONTAINED UNDER THIS PART IV. "BUSINESS PLAN" IS
SUPPLEMENTED BY THE INFORMATION CONTAINED IN THE COMPANY'S QUARTERLY REPORT
ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000, A COPY OF WHICH IS ATTACHED
HERETO AS EXHIBIT H.
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The Company's post-bankruptcy business strategy is designed to
capitalize on its core strengths in real estate and mortgage finance. The key
components of the Company's business strategy are initially, upon emergence
from Chapter 11, the continued ownership and management of the Company's
remaining portfolio of mortgage-related assets, the continuation and, as
appropriate, expansion of its servicing business, the reduction of
outstanding indebtedness consistent with the terms agreed to with Merrill and
GACC and the Unsecured Creditors' Committee as set forth in the Plan, and to
invest and trade in CMBS and other mortgage-related assets. See "CERTAIN RISK
FACTORS -- Risks Associated With Trader Election." At such time as market
conditions permit and provided that the Company is able to access external
capital (if and as necessary) through the capital markets on terms acceptable
to the Company (with the use of such capital to be subject to and consistent
with the terms agreed to with Merrill and GACC and the Unsecured Creditors'
Committee, as set forth in the Plan), the Company intends to resume the
acquisition of Subordinated CMBS and the origination and securitization of
commercial mortgage loans. See "PLAN OF REORGANIZATION -- The Reorganized
Debtors -- Business of Reorganized Debtors" and "CERTAIN RISK FACTORS."
MANAGEMENT OF EXISTING PORTFOLIO AND CONTINUATION OF SERVICING
BUSINESS. The Company will continue to own and manage, through its servicing
affiliate CMSLP, a large portfolio of mortgage-related assets. On a proforma
basis, giving effect to the reorganization, including the assumed sale of
$702 million (face amount) of CMBS, the Company's September 30, 2000 GAAP
balance sheet would include approximately $2.0 billion (face amount) of CMBS
and insured mortgage securities that were securitized by the Company. The
Company will continue to actively monitor and manage the credit risks and
performance of its portfolio in an effort to maximize returns.
Following the reorganization and rating agency approval, the Company
expects to exercise its right, as owner of the controlling bond class, to
re-name CMSLP as special servicer for transactions in its portfolio currently
being specially-serviced by ORIX with CMSLP serving as their special
sub-servicer. In addition, the Company intends for CMSLP to pursue direct,
master and special servicing assignments, as well as expand its fee-based
services for a variety of participants in the mortgage and asset finance
arenas.
ACCESS TO CAPITAL. The Company intends to internally generate
capital from operating and investing activities and expected reductions in
REIT distribution requirements to shareholders due to expected net operating
losses for tax purposes. Such capital will be used (subject to and consistent
with the terms agreed to with Merrill and GACC and the Unsecured Creditors'
Committee) in order to fund the initial key components of its business plan
referenced above.
In order to fund the resumption of CMBS acquisitions and loan
originations and securitizations, discussed in more detail below, the
business plan contemplates that the Company will be required to access the
capital markets (with the use of such capital to be subject to and consistent
with the terms agreed to with Merrill and GACC and the Unsecured Creditors'
Committee, as set forth in the Plan) through public or private issuances of
equity and/or debt securities and/or through secured or unsecured credit
facilities. In addition, it is contemplated that the Company would continue
to use long-term, fixed rate debt refinancings, short-term borrowing
agreements (but to a lesser extent than utilized prior to the Chapter 11
filing and in accordance with the terms agreed to with Merrill and GACC and
the Unsecured Creditors' Committee) and other borrowings to fund a portion of
any mortgage asset acquisitions.
RESUMPTION OF SUBORDINATED CMBS ACQUISITIONS. Prior to the Chapter
11 filing, the Company had historically been a leading purchaser of
Subordinated CMBS. The Company believes that its servicing and underwriting
capabilities are competitive advantages that allow the Company to compete
against other investors who may have greater access to capital (or the
ability to obtain capital at a lower cost) for the acquisition of
Subordinated CMBS. The Company's ability to resume the acquisition of
Subordinated CMBS will depend upon, among other matters, market conditions
and the Company's ability to access capital to fund such acquisitions. The
Company has not at this time arranged for any post-reorganization financing
for the acquisition of Subordinated CMBS and there can be no assurance that
the Company will be able to obtain any such acquisition financing or that if
acquisition financing is available it will be on favorable terms.
RESUMPTION OF LOAN ORIGINATIONS AND SECURITIZATIONS. The Company's
ability to resume mortgage loan originations, principally through mortgage
loan conduit programs with major financial institutions for the primary
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purpose of pooling such loans for securitization, will depend upon, among
other matters, market conditions, the Company's ability to retain personnel
with the requisite expertise, and the Company's ability to enter into
suitable agreements with financial institutions and to obtain any financing
required by such agreements. To the extent the Company is able to resume its
origination program, it intends to securitize originated mortgage loans,
retaining the subordinated bonds for its portfolio, and providing loan
management and servicing functions for the underlying mortgage pool. The
Company has not at this time arranged for any post-reorganization mortgage
loan origination financing and there can be no assurance that the Company
will be able to enter into suitable agreements with major financial
institutions or obtain any financing required by such agreements.
NEW OPPORTUNITIES. The Company intends to explore the possibility of
additional business activities including, but not limited to, expanding the
scope of servicing efforts to include asset-backed and franchise loan
servicing; the further development of fee-based servicing businesses; joint
ventures for the acquisition of Subordinated CMBS or other real estate
assets; expanding its originations into other higher yielding financings such
as mezzanine loans and equity investments; and consulting or other fee-based
opportunities in countries where CMBS markets are currently developing. The
ability to pursue any new opportunity will depend upon, among other matters,
market conditions and the availability of capital and other resources.
V. PLAN OF REORGANIZATION
A. OVERVIEW OF THE PLAN
BRIEF EXPLANATION OF CHAPTER 11
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a debtor is
authorized to reorganize its business for the benefit of itself and its
creditors and stockholders. In addition to permitting rehabilitation of the
debtor, another goal of Chapter 11 is to promote equality of treatment of
creditors and equity security holders, respectively, who hold substantially
similar claims or interests with respect to the distribution of the value of
a debtor's assets. In furtherance of these two goals, upon the filing of a
petition for relief under Chapter 11, Section 362 of the Bankruptcy Code
generally provides for an automatic stay of substantially all acts and
proceedings against the debtor and its property, including all attempts to
collect claims or enforce liens that arose prior to the commencement of the
debtor's Chapter 11 case.
The consummation of a plan of reorganization is the principal
objective of a Chapter 11 case. A plan of reorganization sets forth the means
for satisfying claims against and interests in a debtor. Confirmation of a
plan of reorganization by the Bankruptcy Court makes the plan binding upon
the debtor, any issuer of securities under the plan, any person or entity
acquiring property under the plan and any creditor of or equity security
holder in the debtor, whether or not such creditor or equity security holder
(i) is impaired under or has accepted the plan or (ii) receives or retains
any property under the plan. Subject to certain limited exceptions and other
than as provided in the plan itself or the confirmation order, the
confirmation order discharges the debtor from any debt that arose prior to
the date of confirmation of the plan and substitutes therefor the obligations
specified under the confirmed plan.
The following is an overview of certain material provisions of the
Plan of the Debtors, which is attached hereto as Exhibit A. The following
summaries of the material provisions of the Plan do not purport to be
complete and are qualified in their entirety by reference to all the
provisions of the Plan, including all exhibits thereto, all documents
described therein and the definitions therein of certain terms used below.
Wherever defined terms of the Plan not otherwise defined in this Disclosure
Statement are used, such defined terms shall have the meanings ascribed to
them in the Plan.
SOLICITATION OF ACCEPTANCES OF THE PLAN
Under the Plan, all Claims and Interests have been separated into
classes according to the applicable Debtor, and each Class has been
determined to be either Impaired or Unimpaired by the Plan's terms. Except as
discussed below under "CONFIRMATION AND CONSUMMATION PROCEDURES --
Confirmation," as a condition to confirmation, Section 1129(a) of the
Bankruptcy Code requires that (i) each impaired class of claims
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and interests that receives or retains property under a plan of
reorganization vote to accept the plan and (ii) the plan meets the other
requirements of Section 1129(a). Classes of claims and interests that do not
receive or retain any property under a plan on account of such claims and
interests are deemed to have rejected the plan and are not entitled to vote,
and classes of claims and interests that are not impaired under a plan are
deemed to have accepted the plan and are not entitled to vote. Therefore,
acceptances of the Plan are being solicited only from those who hold Claims
and Interests in an Impaired Class. An Impaired Class of Claims will be
deemed to have accepted the Plan if it is accepted by Holders of at least
two-thirds in dollar amount and a majority in number of Claims of such Class
held by Holders who cast timely votes with respect to the Plan. An Impaired
Class of Interests will be deemed to have accepted the Plan if it is accepted
by Holders of at least two-thirds in the amount of the allowed Interests of
such Class held by Holders of such Interests that have voted to accept or
reject the Plan. Holders of Claims or Interests who fail to vote or who
abstain from voting on the Plan are not counted for purposes of determining
either acceptance or rejection of the Plan by any Impaired Class of Claims or
Interests.
If at least one Impaired Class of Claims votes to accept a plan of
reorganization (not counting the votes of insiders), the Plan may be
confirmed despite rejection by the other impaired Classes if the "cramdown"
provisions of Section 1129(b) of the Bankruptcy Code are satisfied. The
"cramdown" provisions of Section 1129(b) essentially provide that a plan may
be confirmed over the rejection of an impaired class of claims or interests
if the plan "does not discriminate unfairly" and is "fair and equitable" with
respect to such rejecting impaired class.
GENERAL INFORMATION CONCERNING TREATMENT OF CLAIMS AND INTERESTS
In general, the Plan provides that Holders of Allowed Claims or
Interests in Classes: A8, A12, A15, A17, A19, A22, A23, B3, B4, B7, C3, C4
and C7 are Unimpaired.
Holders of Allowed Claims or Interests in Classes: A1, A2, A3, A4,
A5, A6, A7, A9, A10, A11, A13, A14, A16, A18, A20, A21, B1, B2, B5, B6, C1,
C2, C5 and C6 are Impaired.
SUMMARY OF CLASSES AND TREATMENT OF CLAIMS AND INTERESTS
Section 1123 of the Bankruptcy Code provides that a plan of
reorganization shall classify the claims and interests of a debtor's
creditors and equity interest holders. In compliance therewith, the Plan
divides Claims and Interests into Classes and sets forth the treatment for
each Class. In accordance with Section 1123(a)(1), Administrative Claims and
Priority Tax Claims have not been classified. The Debtors also are required,
under Section 1122 of the Bankruptcy Code, to classify Claims against and
Interests in CMI, CMM and Holdings into Classes that contain Claims and
Interests that are substantially similar to the other Claims and Interests in
such Classes.
The classification of Claims and Interests and the nature of
distributions to Holders of Impaired Claims or Impaired Interests in each
Class are summarized below.
CMI CLASSES
<TABLE>
<S> <C>
Class A1 - Citicorp Secured Claims Class A1 consists of all Allowed
Secured Claims against CMI of Citicorp
Securities, Inc., Salomon Smith Barney
Inc., Citicorp Real Estate, Inc.
and/or CitiBank N.A. or any other
Holder of a Secured Claim against CMI
under, arising from or related to that
certain Master Repurchase Agreement
between CMI and Citicorp Securities,
Inc. dated as of August 1, 1997 or any
documents executed in connection
therewith or related thereto.
Class A2 - First Union Secured Claim Class A2 consists of all Allowed
Secured Claims against CMI of First
Union National Bank or any other
Holder of a Secured Claim against CMI
under, arising from or related to
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(i) that certain Master Assignment
Agreement between First Union National
Bank and CMI dated as of June 30, 1998
or any documents executed in
connection therewith or related
thereto or (ii) that certain Guaranty
by CMI in favor of and for the benefit
of Signet Bank/Virginia entered into
as of June 30, 1995 or that certain
Collateral Assignment of Partnership
Interests from CMI in favor of Signet
Bank/Virginia dated as of June 30,
1995 or that certain Stock Pledge
Agreement by CMI in favor of Signet
Bank/Virginia dated as of June 30,
1995 or that certain Credit Agreement
between CMM and Signet Bank/Virginia
dated as of June 30, 1995 or any
documents executed in connection with
or related to any of the foregoing.
Class A3 - GACC Secured Claim Class A3 consists of all Allowed
Secured Claims against CMI of German
American Capital Corp. or any other
Holder of a Secured Claim against CMI
under, arising from or related to that
certain Master Loan and Security
Agreement between CMI and German
American Capital Corp. dated as of
March 31, 1998 or any documents
executed in connection therewith or
related thereto.
Class A4 - Lehman Secured Claim Class A4 consists of all Allowed
Secured Claims against CMI of Lehman
Ali Inc. or any other Holder of a
Secured Claim against CMI under,
arising from or related to that
certain Master Assignment Agreement
between CMI and Lehman Ali Inc. dated
as of May 29, 1998 or any documents
executed in connection therewith or
related thereto.
Class A5 - Merrill Secured Claim Class A5 consists of all Allowed
Secured Claims against CMI of Merrill
Mortgage Capital Inc. or any other
Holder of a Secured Claim against CMI
under, arising from or related to that
certain Master Assignment Agreement
between CMI and Merrill Mortgage
Capital Inc. dated as of September 25,
1997 or any documents executed in
connection therewith or related
thereto.
Class A6 - Morgan Stanley Secured Claim Class A6 consists of any Allowed
Secured Claims against CMI of Morgan
Stanley & Co. International Ltd. or
any other Holder of a Secured Claim
against CMI under, arising from or
related to that certain Master
Repurchase Agreement between Morgan
Stanley & Co. International Limited
and CMI dated as of May 8, 1998 or any
documents executed in connection
therewith or related thereto.
Class A7 - Other Secured Claims Class A7 consists of any Allowed
Secured Claims against CMI other than
the Secured Claims specified in
Classes A1 through A6.
Class A8 - Priority Claims Class A8 consists of all Allowed
Priority Claims against CMI.
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Class A9 - Old Senior Note Claims Class A9 consists of all Allowed
Claims against CMI of Holders of Old
Senior Notes under, arising from or
related to the Old Senior Notes.
Class A10 - CMI General Unsecured Claims Class A10 consists of all Allowed
Unsecured Claims against CMI other
than the Unsecured Claims (if any) in
Classes A8, A9, A11, A12, A13, A15,
A17, A19, and A23 and other than
Administrative Claims and Priority Tax
Claims.
Class A11 - Guarantee Claims Class A11 consists of all Allowed
Claims against CMI of Holders of
Guarantee Claims based upon CMI's
guarantee of obligations of CMM or
Holdings, as the case may be.
Class A12 - Freddie Mac Claims Class A12 consists of Claims against
CMI of Freddie Mac numbered 335 and
497, on the July 20, 1999 claims
register, in the amount of
$230,448,487.24 each.
Class A13 - Intercompany Claims Class A13 consists of all Allowed
Claims against CMI of CMM or Holdings.
Class A14 - Series B Preferred Stock Class A14 consists of all Allowed
Series B Preferred Stock Interests in
CMI.
Class A15 - Series B Preferred Stock Securities Claims
Class A15 consists of all Allowed
Securities Claims on account of Series
B Preferred Stock against CMI.
Class A16 - Former Series C Preferred Class A16 consists of all Allowed
Stock Former Series C Preferred Stock
Interests in CMI.
Class A17 - Former Series C Preferred Stock Securities
Claims Class A17 consists of all
Allowed Securities Claims on account
of Former Series C Preferred Stock
against CMI.
Class A18 - Old Series D Preferred Stock Class A18 consists of all Allowed Old
Series D Preferred Stock Interests in
CMI.
Class A19 - Old Series D Preferred Stock Securities Claim
Class A19 consists of all Allowed
Securities Claims on account of Old
Series D Preferred Stock against CMI.
Class A20 - Series F Dividend Preferred Class A20 consists of all Allowed
Stock Series F Dividend Preferred Stock
Interests in CMI.
Class A21 - CMI Common Stock Class A21 consists of all Allowed CMI
Common Stock Interests in CMI.
Class A22 - Stock Options Class A22 consists of all Allowed
Stock Option Interests in CMI.
Class A23 - CMI Common Stock Securities Class A23 consists of all Allowed
Claims Securities Claims on account of CMI
Common Stock against CMI including
indemnification claims with respect
thereto.
CMM CLASSES
Class B1 - First Union Secured Claims Class B1 consists of all Allowed
Secured Claims against CMM of First
Union National Bank or any other
Holder of
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a Secured Claim against CMM under,
arising from or related to that
certain Credit Agreement between CMM
and Signet Bank/Virginia dated as of
June 30, 1995 or any documents
executed in connection therewith or
related thereto.
Class B2 - Other Secured Claims Class B2 consists of any Allowed
Secured Claims against CMM other than
the Secured Claims specified in Class
B1.
Class B3 - Priority Claims Class B3 consists of all Allowed
Priority Claims against CMM.
Class B4 - Guarantee Claims Class B4 consists of all Allowed
Claims against CMM of Holders of
Guarantee Claims based upon CMM's
guarantee of obligations of CMI or
Holdings, as the case may be.
Class B5 - CMM General Unsecured Claims Class B5 consists of all Allowed
Unsecured Claims against CMM other
than the Unsecured Claims (if any) in
Classes B3, B4 and B6 and other than
Administrative Claims and Priority Tax
Claims.
Class B6 - Intercompany Claims Class B6 consists of all Allowed
Claims against CMM of CMI or Holdings.
Class B7 - CMI's Interests in CMM Class B7 consists of all Allowed
Interests in CMM of CMI.
HOLDINGS CLASSES
Class C1 - Citicorp Secured Claims Class C1 consists of all remaining
Allowed Secured Claims (if any)
against Holdings of Citicorp
Securities, Inc. and/or Salomon Smith
Barney Inc.
Class C2 - Other Secured Claims Class C2 consists of any Allowed
Secured Claims against Holdings other
than the Secured Claims specified in
Class C1.
Class C3 - Priority Claims Class C3 consists of all Allowed
Priority Claims against Holdings.
Class C4 - Guarantee Claims Class C4 consists of all Allowed
Claims against Holdings of Holders of
Guarantee Claims based upon Holdings'
guarantee of obligations of CMI or
CMM, as the case may be.
Class C5 - Holdings General Unsecured Class C5 consists of all Allowed
Claims Unsecured Claims against Holdings
other than the Unsecured Claims (if
any) in Classes C3, C4 and C6 and
other than Administrative Claims and
Priority Tax Claims.
Class C6 - Intercompany Claims Class C6 consists of all
Allowed Claims against Holdings of CMI
or CMM.
Class C7 - Interests in Holdings Class C7 consists of all Allowed
Interests in Holdings of CMI and
CMSLP.
</TABLE>
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Except for Disputed Claims, distributions will be made on the
Effective Date or as soon as practicable thereafter. See "PLAN OF
REORGANIZATION --Distributions Under the Plan" for a discussion of Plan
provisions that may affect the timing of distributions under the Plan.
Distributions on account of Claims that become Allowed Claims after the
Effective Date will be made pursuant to Section VI.B of the Plan (relating to
timing and calculation of amounts to be distributed under the Plan) and
Section VI.H of the Plan (relating to distributions on account of Disputed
Claims once they are allowed). See "PLAN OF REORGANIZATION -- Distributions
Under the Plan --Timing and Methods of Distribution."
The treatment of Claims and Interests described below is subject to
the Plan provisions described in Section IV of the Plan.
B. TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN
DESCRIPTION OF CLAIMS AND INTERESTS
ADMINISTRATIVE CLAIMS. Subject to certain additional requirements
for professionals and certain other entities, each Holder of an Allowed
Administrative Claim will receive on account of its Administrative Claim and
in full satisfaction thereof, Cash equal to the amount of such Allowed
Administrative Claim on, as soon as practicable after, the later of the
Effective Date and the day on which such Claim becomes an Allowed Claim,
unless the Holder and the Debtors or the Reorganized Debtors agree or will
have agreed to other treatment of such Claim, or an order of the Bankruptcy
Court provides for other terms; provided, that if incurred in the ordinary
course of business or otherwise assumed by the Debtors pursuant to the Plan
(including Administrative Claims of governmental units for taxes), an Allowed
Administrative Claim will be assumed on the Effective Date and paid,
performed or settled by the Reorganized Company when due in accordance with
the terms and conditions of the particular agreement(s) governing the
obligation in the absence of the Reorganization Cases. In addition, on or
before the Effective Date, all fees payable pursuant to 28 U.S.C.
Section1930, as determined by the Bankruptcy Court at the Confirmation
Hearing, will be paid in Cash equal to the amount of such Administrative
Claim.
PRIORITY TAX CLAIMS. Unless otherwise agreed to by the Debtors or
the Reorganized Debtors and the Holder of a Priority Tax Claim, each Holder
of an Allowed Priority Tax Claim will receive, at the sole option of the
Reorganized Debtors (i) Cash equal to the unpaid portion of such Allowed
Priority Tax Claim on the later of the Effective Date and the date on which
such Claim becomes an Allowed Priority Tax Claim, or as soon thereafter as is
practicable, or (ii) equal quarterly Cash payments in an aggregate amount
equal to such Allowed Priority Tax Claim, together with interest at a fixed
annual rate to be determined by the Bankruptcy Court or otherwise agreed to
by the Reorganized Debtors and such Holder, over a period through the sixth
anniversary of the date of assessment of such Allowed Priority Tax Claim, or
upon such other terms determined by the Bankruptcy Court to provide the
Holder of such Allowed Priority Tax Claim deferred cash payments having a
value, as of the Effective Date, equal to such Allowed Priority Tax Claim.
The Debtors are not currently in a position to determine the amount
of Administrative Claims, Priority Tax Claims and other Priority Claims for
which they will be liable as of the Effective Date. However, solely for
purposes of preparing the projections set forth in Exhibit B hereto and
estimating recoveries for creditors under the Plan, they have estimated that
the aggregate amount of such Claims may approximate up to $15 million.
TREATMENT OF CLAIMS AGAINST AND INTERESTS IN CMI
1. Class A1 (Citicorp Secured Claims).
The Holder of the Allowed Class A1 Claim will receive on the
Effective Date the treatment of its Allowed Secured Claim set forth on
Exhibit 4 to the Plan, or such other treatment as may be agreed to by CMI and
the Holder of the Allowed Class A1 Claim. As set forth in Exhibit 4, the
treatment set forth therein resolves all Claims of Salomon Smith Barney Inc.,
Citicorp Real Estate, Inc., Citicorp Securities, Inc. and Citicorp North
America, Inc. against each of the Debtors, the Reorganized Debtors and CRIIMI
MAE Brick Church, Inc.
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The Debtors expect that there will be $0 of Allowed Class A1 Claims
against the Debtors as of the Effective Date after giving effect to the
reorganization provisions of the Plan including payments to be made on the
Effective Date.
2. Class A2 (First Union Secured Claim).
The Holder of the Allowed Class A2 Claim will receive on the
Effective Date payment in full in Cash of any remaining balance of the
Allowed Class A2 Claim with interest on the principal balance of such Allowed
Claim calculated at the Plan Rate.
The Debtors expect that there will be less than $240,000 of Allowed
Class A2 Claims against the Debtors as of the Effective Date after giving
effect to the reorganization provisions of the Plan including payments to be
made on the Effective Date.
3. Class A3 (GACC Secured Claim).
The Holder of the Allowed Class A3 Claim will receive on the
Effective Date the treatment of its Allowed Secured Claim set forth on
Exhibit 1 to the Plan, or such other treatment as may be agreed to by CMI and
the Holder.
The Debtors expect that there will be approximately $87 million of
Allowed Class A3 Claims against the Debtors as of the Effective Date after
giving effect to the reorganization provisions of the Plan including payments
to be made on the Effective Date.
4. Class A4 (Lehman Secured Claim).
The Holder of the Allowed Class A4 Claim will receive on the
Effective Date payment in full in Cash of any remaining balance of the
Allowed Class A4 Claim with interest on the principal balance of such Allowed
Claim calculated at the Plan Rate.
The Debtors expect that there will be Allowed Class A4 Claims not to
exceed $200,000 against the Debtors as of the Effective Date after giving
effect to the reorganization provisions of the Plan including payments to be
made on the Effective Date.
5. Class A5 (Merrill Secured Claim).
The Holder of the Allowed Class A5 Claim will receive on the
Effective Date the treatment of its Allowed Secured Claim set forth on
Exhibit 1 to the Plan, or such other treatment as may be agreed to by CMI and
the Holder.
The Debtors expect that there will be approximately $189 million of
Allowed Class A5 Claims against the Debtors as of the Effective Date after
giving effect to the reorganization provisions of the Plan including payments
to be made on the Effective Date.
6. Class A6 (Morgan Stanley Secured Claim).
The Holder of the Allowed Class A6 Claim will receive on the
Effective Date payment in full in Cash of any remaining balance of the
Allowed Class A6 Claim with interest on the principal balance of such Allowed
Claim calculated at the Plan Rate.
The Debtors expect that there will be $ 0 of Allowed Class A6 Claims
against the Debtors as of the Effective Date after giving effect to the
reorganization provisions of the Plan including payments to be made on the
Effective Date.
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7. Class A7 (Other Secured Claims).
Each Holder (if any) of an Allowed Class A7 Claim will receive on
the Effective Date either (i) payment in full in Cash of the Allowed Class A7
Claim with interest on the principal balance of any such Allowed Claim
calculated at the Plan Rate; (ii) if CMI so elects, the collateral securing
the Allowed Class A7 Claim (if any) in full satisfaction of such Claim; or
(iii) such other treatment as may be agreed to by CMI and the Holder (if any).
The Debtors expect that there will be $ 0 of Allowed Class A7 Claims
against the Debtors as of the Effective Date.
8. Class A8 (Priority Claims).
Each Holder of the Allowed Class A8 Claim will receive on the
Effective Date payment in full in Cash of the Allowed Class A8 Claim
including Plan Interest thereon.
The Debtors expect that there will be $ 0 of Allowed Class A8 Claims
against the Debtors as of the Effective Date after giving effect to the
reorganization provisions of the Plan including payments to be made on the
Effective Date.
9. Class A9 (Old Senior Note Claims).
Each Holder of an Allowed Class A9 Claim will receive on the
Effective Date the treatment of its Allowed Claim as set forth on Exhibit 2
to the Plan.
The Debtors expect that there will be approximately $81 million of
Allowed Class A9 Claims against the Debtors as of the Effective Date after
giving effect to the reorganization provisions of the Plan including payments
to be made on the Effective Date.
10. Class A10 (CMI General Unsecured Claims).
Each Holder of an Allowed Class A10 Claim, other than those electing
the convenience class option described hereinafter, will be paid in full
through a combination of an initial cash payment and two notes as further set
forth in Exhibit 2 to the Plan. In addition, as referred to in Exhibit 2 to
the Plan, there will be a convenience class option with respect to Class A10,
as follows: any Holder of an Allowed Class A10 Claim whose Allowed Claim is
for $150,000 or less and elects the convenience class treatment on its
ballot, or whose Allowed Claim is for an amount in excess of $150,000 and
elects in writing on its ballot to reduce its Claim to $150,000 and accept
convenience class treatment thereof, shall be entitled to receive payment in
Cash on the Effective Date of the allowed amount of such Holders' Allowed
Class A10 Claim in full satisfaction of said claim, with accrued and unpaid
pre-petition and post-petition interest thereon calculated at the non-default
contract rate of interest in such Holder's documents for those Holders of
Allowed Class A10 Claims electing convenience class treatment who have a
contract, the invoice rate (capped at 9-1/8%) for those Holders of Allowed
Class A10 Claims electing convenience class treatment who have an invoice
rate, and 6% for all others. For purposes of calculating the $150,000 amount
in the preceding sentence, the amount of allowed post-petition interest on
any such Claim (which interest shall be paid as part of such Claim) will be
excluded from such calculation.
The Debtors expect that there will be approximately $73 million of
Allowed Class A10 Claims against the Debtors as of the Effective Date after
giving effect to the reorganization provisions of the Plan including payments
to be made on the Effective Date.
11. Class A11 (Guarantee Claims).
If, and only to the extent that, an Allowed Class A11 Claim is not
fully treated with respect to such Holder's underlying Allowed Claim under
the Plan treatment for Claims against CMM or Holdings, as the case may be,
any remaining Allowed Class A11 Claim (if any) will be included as part of
the CMI General Unsecured Claims and treated for all purposes as part of
Class A10.
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The Debtors expect that there will be $ 0 of Allowed Class A11
Claims against the Debtors as of the Effective Date.
12. Class A12 (Freddie Mac Claims).
CMI's obligation under the Freddie Mac Agreement shall be deemed
reaffirmed on the Effective Date, and the Claims of Freddie Mac numbered 335
and 497 on the July 2, 1999 claims register, each in the amount of
$230,448,487.24, shall be deemed withdrawn and thereby disallowed as of the
Effective Date.
The Debtors expect that there will be $ 0 of Allowed Class A12
Claims against the Debtors as of the Effective Date.
13. Class A13 (Intercompany Claims).
Holders of Allowed Class A13 Claims will not receive any payment
under the Plan on account of such Claims.
14. Class A14 (Series B Preferred Stock).
Each Holder of Series B Preferred Stock as of the Effective Date
will retain its Series B Preferred Stock; provided that if the Holders of
Series B Preferred Stock as of the Voting Record Date vote as a Class by the
requisite amount to accept the Plan, the Articles Supplementary relating to
the Series B Preferred Stock will be deemed amended (and, as amended, to be
part of the Reorganized CMI Amended and Restated Articles of Incorporation)
to permit the payment of dividends on Series B Preferred Stock, including
accrued and unpaid dividends, in CMI Common Stock or Cash (or a combination
thereof), at the election of Reorganized CMI, with such payment of dividends
to be consistent with Exhibits 1 and 2 to the Plan. It is contemplated that
such dividends will be paid in CMI Common Stock. See Exhibit 2 to the Plan
regarding limitations on cash dividends. Holders of Series B Preferred Stock
who are not affiliates or "underwriters" may publicly trade the CMI Common
Stock issued to them on the Effective Date as payment for dividends accrued
and payable.
The Debtors expect that there will be approximately $39.9 million of
Allowed Class A14 Interests in the Debtors as of the Effective Date after
giving effect to the reorganization provisions of the Plan (assuming that the
accrued and unpaid dividends are paid in CMI Common Stock).
15. Class A15 (Series B Preferred Stock Securities Claims).
Each Holder (if any) of an Allowed Class A15 Claim will, if, as and
when any such Claim is Allowed by Final Order, receive in full satisfaction
of any such Allowed Class A15 Claim its share of any Insurance Proceeds
applicable thereto plus, if such Allowed Class A15 Claim (if any) is not paid
in full from such Insurance Proceeds, CMI Common Stock in an amount equal in
value, as of the date of issuance thereof, to the balance (if any) of such
Allowed Class A15 Claim, provided that any such Claim not timely filed (and
in any event not filed before the Confirmation Date) shall be released and
discharged under the Plan and Confirmation Order.
The Debtors expect that there will be $ 0 of Allowed Class A15
Claims against the Debtors as of the Effective Date.
16. Class A16 (Former Series C Preferred Stock).
Former Series C Preferred Stock has been exchanged for Series E
Preferred Stock. Each Holder of Series E Preferred Stock as of the
Distribution Record Date shall retain its Series E Preferred Stock and such
Series E Preferred Stock shall have the terms, rights and preferences
summarized in Exhibit 3 to the Plan and as set forth in the Articles
Supplementary relating to the Series E Preferred Stock, as such Articles
Supplementary shall be amended as of the Effective Date, expected to be
substantially in the form of Exhibit B (Series E Preferred Stock Articles) to
Exhibit E (Reorganized CMI Amended and Restated Articles of Incorporation) to
the Disclosure Statement. All accrued and past due dividends from February
23, 2000 through the Effective Date on Series E Preferred Stock will be paid
on the Effective Date in CMI Common Stock. All other accrued and past due
dividends
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on Former Series C Preferred Stock (prior to February 23, 2000) shall be paid
on the Effective Date in CMI Common Stock or Cash, at the election of
Reorganized CMI, with such payment of dividends to be consistent with
Exhibits 1 and 2 to the Plan. It is contemplated that such dividends will be
paid in CMI Common Stock. See Exhibit 2 to the Plan regarding limitations on
cash dividends.
The Debtors expect that there will be approximately $10.3 million of
Allowed Class A16 Interests in the Debtors (as part of the Series E Preferred
Stock) as of the Effective Date after giving effect to the reorganization
provisions of the Plan (assuming that the accrued and unpaid dividends are
paid in CMI Common Stock).
17. Class A17 (Former Series C Preferred Stock Securities Claims).
Each Holder (if any) of an Allowed Class A17 Claim will, if, as and
when any such Claim is allowed by Final Order, receive in full satisfaction
of any such Allowed Class A17 Claim its share of any Insurance Proceeds
applicable thereto plus, if such Allowed Class A17 Claim (if any) is not paid
in full from such Insurance Proceeds, CMI Common Stock in an amount equal in
value, as of the date of issuance thereof, to the balance (if any) of such
Allowed Class A17 Claim, provided that any such Claim not timely filed (and
in any event not filed before the Confirmation Date) shall be released and
discharged under the Plan and Confirmation Order.
The Debtors expect that there will be $ 0 of Allowed Class A17
Claims against the Debtors as of the Effective Date.
18. Class A18 (Old Series D Preferred Stock).
Each Holder of Old Series D Preferred Stock as of the Distribution
Record Date, if not previously exchanged, shall receive on the Effective Date
in exchange for its Old Series D Preferred Stock an identical number of
shares of Series E Preferred Stock issued effective as of the Effective Date,
and such Series E Preferred Stock shall have the terms, rights and
preferences summarized in Exhibit 3 to the Plan and as set forth in the
Articles Supplementary relating to the Series E Preferred Stock, as such
Articles Supplementary shall be amended as of the Effective Date, expected to
be substantially in the form of Exhibit B (Series E Preferred Stock Articles)
to Exhibit E (Reorganized CMI Amended and Restated Articles of Incorporation)
to the Disclosure Statement.. All shares of Old Series D Preferred Stock, if
not previously exchanged and cancelled, shall be deemed cancelled as of the
Effective Date. All accrued and past due dividends on Old Series D Preferred
Stock shall be paid on the Effective Date, in CMI Common Stock or Cash, at
the election of Reorganized CMI, with such payment of dividends to be
consistent with Exhibits 1 and 2 to the Plan. It is contemplated that such
dividends will be paid in CMI Common Stock. See Exhibit 2 to the Plan
regarding limitations on cash dividends.
The Debtors expect that there will be approximately $10 million of
Allowed Class A18 Interests in the Debtors (as part of the Series E Preferred
Stock) as of the Effective Date after giving effect to the reorganization
provisions of the Plan (assuming that the accrued and unpaid dividends are
paid in CMI Common Stock).
19. Class A19 (Old Series D Preferred Stock Securities Claims).
Each Holder (if any) of an Allowed Class A19 Claim will, if, as and
when any such Claim is Allowed by Final Order, receive in full satisfaction
of any such Allowed Class A19 Claim its share of any Insurance Proceeds
applicable thereto plus, if such Allowed Class A19 Claim (if any) is not paid
in full from such Insurance Proceeds, CMI Common Stock in an amount equal in
value, as of the date of issuance thereof, to the balance (if any) of such
Allowed Class A19 Claim, provided that any such Claim not timely filed (and
in any event not filed before the Confirmation Date) shall be released and
discharged under the Plan and Confirmation Order.
The Debtors expect that there will be $ 0 of Allowed Class A19
Claims against the Debtors as of the Effective Date.
20. Class A20 (Series F Dividend Preferred Stock).
Each Holder of Series F Dividend Preferred Stock as of the Effective
Date shall retain its Series F Dividend Preferred Stock; provided that if the
Holders of Series F Dividend Preferred Stock as of the Voting Record Date
vote
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as a Class by the requisite amount to accept the Plan, the Articles
Supplementary relating to the Series F Dividend Preferred Stock will be
deemed amended (and, as amended, to be part of the Reorganized CMI Amended
and Restated Articles of Incorporation) to permit the payment of dividends on
Series F Dividend Preferred Stock, including any accrued and unpaid
dividends, in CMI Common Stock or Cash (or a combination thereof), at the
election of Reorganized CMI, with such payment of dividends to be consistent
with Exhibits 1 and 2 to the Plan. It is possible that such dividends may be
paid in CMI Common Stock. See Exhibit 2 to the Plan regarding limitations on
cash dividends. Holders of Series F Dividend Preferred Stock who are not
affiliates or "underwriters" may publicly trade the CMI Common Stock issued
to them on the Effective Date as payment for dividends accrued and payable.
The Debtors expect that there will be approximately $6.5
million of Allowed Class A20 Interests in the Debtors as of the Effective
Date after giving effect to the reorganization provisions of the Plan
(assuming that the accrued and unpaid dividends are paid in CMI Common Stock).
21. Class A21 (CMI Common Stock).
Each Holder of an Allowed Class A21 Interest as of the Effective
Date will retain its CMI Common Stock.
22. Class A22 (Stock Options).
Each Holder of a Stock Option as of the Effective Date will retain
its Stock Option.
23. Class A23 (CMI Common Stock Securities Claims).
All Holders (if any) of Allowed Class A23 Claims will receive in
full satisfaction of any such Allowed Class A23 Claims their share of any
Insurance Proceeds applicable thereto plus, if such Allowed Class A23 Claims
(if any) are not paid in full from such Insurance Proceeds, CMI Common Stock
in an amount equal in value, as of the date of issuance thereof, to the
balance (if any) of such Allowed Class A23 Claims.
The Debtors expect that there will be $ 0 of Allowed Class A23
Claims against the Debtors as of the Effective Date.
TREATMENT OF CLAIMS AGAINST AND INTERESTS IN CMM
1. Class B1 (First Union Secured Claims).
The Holder of the Allowed Class B1 Claim will receive on the
Effective Date payment in full in Cash of any remaining balance of the
Allowed Class B1 Claims with interest on the principal balance of such
Allowed Claim calculated at the Plan Rate.
The Debtors expect that there will be $ 0 of Allowed Class B1 Claims
against the Debtors as of the Effective Date after giving effect to the
reorganization provisions of the Plan including payments to be made on the
Effective Date.
2. Class B2 (Other Secured Claims).
Each Holder (if any) of an Allowed Class B2 Claim will receive on
the Effective Date either (i) payment in full in Cash of the Allowed Class B2
Claims with interest on the principal balance of any such Allowed Claim
calculated at the Plan Rate; (ii) if CMM so elects, the collateral securing
the Allowed Class B2 Claims (if any) in full satisfaction of such Claims; or
(iii) such other treatment as may be agreed to by CMM and the Holder(s) (if
any) of Allowed Class B2 Claims.
The Debtors expect that there will be $ 0 of Allowed Class B2 Claims
against the Debtors as of the Effective Date.
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3. Class B3 (Priority Claims).
Each Holder of an Allowed Class B3 Claim will receive on the
Effective Date payment in full in Cash of the Allowed Class B3 Claims
including Plan Interest thereon.
The Debtors expect that there will be $ 0 of Allowed Class B3 Claims
against the Debtors as of the Effective Date after giving effect to the
reorganization provisions of the Plan including payments to be made on the
Effective Date.
4. Class B4 (Guarantee Claims).
Each Holder (if any) of an Allowed Class B4 Claim shall be paid, if,
as and when any such Claim is allowed by Final Order, in Cash in full by CMM
or Reorganized CMM including Plan Interest thereon if, and only to the extent
not fully treated with respect to such Holder's underlying Allowed Claim
under the Plan treatment for Claims against CMI or Holdings, as the case may
be.
The Debtors expect that there will be $ 0 of Allowed Class B4 Claims
against the Debtors as of the Effective Date.
5. Class B5 (CMM General Unsecured Claims).
Each Holder of an Allowed Class B5 Claim will receive on the
Effective Date payment in full in Cash of Allowed Class B5 Claims, with
accrued and unpaid pre-petition and post-petition interest thereon calculated
at the non-default contract rate of interest in such Holder's documents for
those Holders of Allowed Class B5 Claims who have a contract, the invoice
rate (capped at 9-1/8%) for those Holders of Allowed Class B5 Claims who have
an invoice rate, and 6% for all other Holders of Allowed Class B5 Claims.
The Debtors expect that there will be $ 0 of Allowed Class B5 Claims
against the Debtors as of the Effective Date after giving effect to the
reorganization provisions of the Plan including payments to be made on the
Effective Date.
6. Class B6 (Intercompany Claims).
Holders of Class B6 Claims will not receive any payment under the
Plan on account of such Claims.
7. Class B7 (CMI's Interests in CMM).
The Holder will retain its Interest under the Plan.
TREATMENT OF CLAIMS AGAINST AND INTERESTS IN HOLDINGS
1. Class C1 (Citicorp Secured Claims).
Each Holder (if any) of any remaining Allowed Class C1 Claim (if
any) shall be included in and satisfied as part of the treatment of the
Holder of the Allowed Class A1 Claim as set forth on Exhibit 4 to the Plan.
The Debtors expect that there will be $ 0 of Allowed Class C1 Claims
against the Debtors as of the Effective Date.
2. Class C2 (Other Secured Claims).
Each Holder (if any) of an Allowed Class C2 Claim will receive on
the Effective Date either (i) payment in full in Cash of the Allowed Class C2
Claim with interest on the principal balance of any such Allowed Claim
calculated at the Plan Rate; (ii) if Holdings so elects, the collateral
securing the Allowed Class C2 Claim (if any) in full satisfaction of such
Claim; or (iii) such other treatment as may be agreed to by Holdings and the
Holder(s) (if any) of Allowed Class C2 Claim(s).
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The Debtors expect that there will be $ 0 of Allowed Class C2 Claims
against the Debtors as of the Effective Date.
3. Class C3 (Priority Claims).
Each Holder of an Allowed Class C3 Claim will receive on the
Effective Date payment in full in Cash of the Allowed Class C3 Claim
including Plan Interest thereon.
The Debtors expect that there will be $ 0 of Allowed Class C3 Claims
against the Debtors as of the Effective Date.
4. Class C4 (Guarantee Claims).
Each Holder (if any) of an Allowed Class C4 Claim will receive if,
as and when any such Claim is allowed by Final Order payment in Cash in full
including Plan Interest thereon if, and only to the extent not fully treated
with respect to such Holder's underlying Allowed Claim under the Plan
treatment for Claims against CMI or CMM, as the case may be.
The Debtors expect that there will be $ 0 of Allowed Class C4 Claims
against the Debtors as of the Effective Date.
5. Class C5 (Holdings General Unsecured Claims)
Each Holder (if any) of an Allowed Class C5 Claim will if, as and
when any such Claim is allowed by Final Order, receive payment in full in
Cash of any such Allowed Class C5 Claim with any accrued and unpaid
pre-petition and post-petition interest thereon calculated at the non-default
contract rate of interest in such Holder's documents for any Holders of
Allowed Class C5 Claims who have a contract, the invoice rate (capped at
9-1/8%) for any such Holders who have an invoice rate, and 6% for any other
Holders of Allowed C5 Claims.
The Debtors expect that there will be $ 0 of Allowed Class C5 Claims
against the Debtors as of the Effective Date.
6. Class C6 (Intercompany Claims).
Holders of Class C6 Claims will not receive any payment under the
Plan on account of such Claims.
7. Class C7 (Interests in Holdings).
The Holder will retain its Interest under the Plan.
TREATMENT OF UNCLASSIFIED CLAIMS
The Bankruptcy Code does not require classification of certain
priority claims against a debtor. In this case, these unclassified claims
include Administrative Claims and Priority Tax Claims. All distributions
referred to below that are scheduled for the Effective Date will be made on
the Effective Date or as soon as practicable thereafter.
ADMINISTRATIVE CLAIMS. An "Administrative Claim" is a claim for
payment of an administrative expense of a kind specified in Section 503(b) of
the Bankruptcy Code and referred to in Section 507(a)(1) of the Bankruptcy
Code, including, without limitation, the actual and necessary costs and
expenses incurred after the commencement of a Chapter 11 Case of preserving
the estate or operating the business of the company (including wages,
salaries and commissions for services), loans and advances to the company
made after the petition date, compensation for legal and other services and
reimbursement of expenses awarded or allowed under Section 330(a) or 331 of
the Bankruptcy Code, certain retiree benefits, certain reclamation claims,
and all fees and charges against the estate under Section 1930 of title 28,
United States Code.
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Subject to certain additional requirements for professionals and
certain other entities set forth below, Reorganized CMI, Reorganized CMM or
Reorganized Holdings, as the case may be, shall pay to each Holder of an
Allowed Administrative Claim, on account of its Administrative Claim and in
full satisfaction thereof, Cash equal to the amount of such Allowed
Administrative Claim on the later of the Effective Date or the day on which
such Claim becomes an Allowed Claim, unless the Holder and Reorganized CMI,
Reorganized CMM or Reorganized Holdings, as the case may be, shall have
agreed to other treatment of such Claim, or an order of the Bankruptcy Court
provides for other terms, in which case such Allowed Administrative Claim
shall be paid in accordance with such agreement or Bankruptcy Court order, as
applicable; provided, that if incurred in the ordinary course of business or
otherwise assumed by the Debtors pursuant to the Plan (including
Administrative Claims of governmental units for taxes), an Allowed
Administrative Claim will be assumed on the Effective Date and paid,
performed or settled by Reorganized CMI, Reorganized CMM or Reorganized
Holdings, as the case may be, when due in accordance with the terms and
conditions of the particular agreement(s) governing the obligation in the
absence of the Reorganization Cases.
PAYMENT OF STATUTORY FEES
All fees payable pursuant to 28 U.S.C. Section 1930(a)(6) (U.S.
Trustee Fees) shall be paid by the Debtors or the Reorganized Debtors, as
applicable, when such fees are due and owing.
PRIORITY TAX CLAIMS
Unless otherwise agreed to by the Debtors or Reorganized CMI,
Reorganized CMM or Reorganized Holdings, as the case may be, and a Holder of
a Priority Tax Claim, each Holder of an Allowed Priority Tax Claim shall
receive, at the sole option of Reorganized CMI, Reorganized CMM or
Reorganized Holdings, as the case may be, (i) Cash equal to the unpaid
portion of such Allowed Priority Tax Claim on the later of the Effective Date
and the date on which such Claim becomes an Allowed Priority Tax Claim, or as
soon thereafter as is practicable, or (ii) equal quarterly Cash payments in
an aggregate amount equal to such Allowed Priority Tax Claim, together with
interest at a fixed annual rate to be determined by the Bankruptcy Court or
otherwise agreed to by Reorganized CMI, Reorganized CMM or Reorganized
Holdings, as the case may be, and such Holder, over a period through the
sixth anniversary of the date of assessment of such Allowed Priority Tax
Claim, or upon such other terms determined by the Bankruptcy Court to provide
the Holder of such Allowed Priority Tax Claim deferred Cash payments having a
value, as of the Effective Date, equal to such Allowed Priority Tax Claim.
The Holders of Allowed Priority Tax Claims are not entitled to vote on the
Plan. Pursuant to Section 1123(a)(1) of the Bankruptcy Code, Priority Tax
Claims are not designated a Class of Claims for purposes of voting on the
Plan.
BAR DATE FOR ADMINISTRATIVE CLAIMS.
GENERAL PROVISIONS. Except as provided below for (i) non-tax
liabilities incurred in the ordinary course of business by the Debtors in
Possession and (ii) Post-Petition Tax Claims, requests for payment of
Administrative Claims must be Filed and served on counsel for the Debtors and
Reorganized CMI, Reorganized CMM or Reorganized Holdings, as the case may be,
no later than (x) sixty (60) days after the Effective Date, or (y) such later
date, if any, as the Bankruptcy Court shall order upon application made prior
to the end of such 60-day period. Holders of Administrative Claims
(including, without limitation, professionals requesting compensation or
reimbursement of expenses and the Holders of any Claims for federal, state or
local taxes) that are required to File a request for payment of such Claims
and that do not File such requests by the applicable bar date shall be
forever barred from asserting such Claims against the Debtors, Reorganized
CMI, Reorganized CMM or Reorganized Holdings, or any of their respective
properties.
PROFESSIONALS. All professionals or other Persons requesting
compensation or reimbursement of expenses pursuant to Sections 327, 328, 330,
331, 503(b), 506(b) or 1103 of the Bankruptcy Code for services rendered on
or before the Effective Date (including, without limitation, any compensation
requested by any professional or any other Person for making a substantial
contribution in the Reorganization Cases) shall File and serve on Reorganized
CMI, Reorganized CMM or Reorganized Holdings, as the case may be, and counsel
for Reorganized CMI, Reorganized CMM or Reorganized Holdings, as the case may
be, an application for final allowance of compensation and reimbursement of
expenses no later than sixty (60) days after the Effective Date. Objections
to applications of
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professionals or other Persons for compensation or reimbursement of expenses
must be Filed and served on the Reorganized Debtors, counsel for the
Reorganized Debtors and the requesting professional or other Person not later
than ninety (90) days after the Effective Date.
On or as soon as reasonably practicable after the Effective Date,
Reorganized CMI shall pay the contractual claims of the Indenture Trustee for
its fees and expenses including its reasonable attorneys' fees and expenses.
To the extent, after being furnished with normal supporting documents for
such fees and expenses, Reorganized CMI disputes the reasonableness of any
such fees and expenses, Reorganized CMI shall pay such fees and expenses as
are not disputed, and shall submit to the Indenture Trustee a written list of
specific fees and expenses viewed by Reorganized CMI as not being reasonable.
To the extent that Reorganized CMI and the Indenture Trustee are unable to
resolve any dispute, the dispute shall be resolved by the Bankruptcy Court.
The Indenture Trustee shall not attach or set off any of its fees and
expenses against distributions to Holders of Old Senior Notes and shall not
otherwise withhold or delay any such distributions.
ORDINARY COURSE LIABILITIES. Except as provided herein, holders of
Administrative Claims based on liabilities incurred in the ordinary course of
the Debtors' businesses (other than Claims of governmental units for taxes or
Claims and/or penalties related to such taxes) shall not be required to File
any request for payment of such Claims. Such Administrative Claims shall be
assumed and paid by Reorganized CMI, Reorganized CMM or Reorganized Holdings,
as the case may be, pursuant to the terms and conditions of the particular
transactions giving rise to such Administrative Claims, without any further
action by the Holders of such Claims. Any dispute with respect to ordinary
course liabilities shall be submitted to the Bankruptcy Court for resolution
unless resolved by agreement of the parties.
TAX CLAIMS. All requests for payment of Post-Petition Tax Claims,
for which no bar date has otherwise been previously established, must be
Filed on or before the later of (i) sixty (60) days following the Effective
Date, and (ii) 120 days following the filing of the tax return for such taxes
for such tax year or period with the applicable governmental unit. Any Holder
of any Post-Petition Tax Claim that is required to File a request for payment
of such taxes and that does not File such a Claim by the applicable bar date
shall be forever barred from asserting any such Post-Petition Tax Claim
against the Debtors, Reorganized CMI, Reorganized CMM or Reorganized
Holdings, or any of their respective properties, whether any such
Post-Petition Tax Claim is deemed to arise prior to, on or subsequent to the
Effective Date.
CRAMDOWN. The so-called "cramdown" provisions of Section 1129(b) of
the Bankruptcy Code permit confirmation of a Chapter 11 plan of
reorganization in certain circumstances even if the plan is not accepted by
all impaired classes of claims and interests. In the event that at least one
impaired Class of Claims votes to accept the Plan (and at least one impaired
Class either votes to reject the Plan or is deemed to have rejected the
Plan), the Debtors and the CMI Equity Committee reserve the right to request
that the Bankruptcy Court confirm the Plan under the cramdown provisions of
the Bankruptcy Code. In that event, the Debtors and the CMI Equity Committee
have reserved the right to modify the Plan to the extent, if any, that
Confirmation pursuant to Section 1129(b) of the Bankruptcy Code requires or
permits modification of the Plan.
As set forth in the Plan, to the extent that any Impaired Class
votes to reject the Plan or is deemed to have rejected the Plan, the Debtors
and the CMI Equity Committee will request that the Bankruptcy Court confirm
the Plan under the "cramdown" provisions of Section 1129(b) of the Bankruptcy
Code.
SOURCES OF CASH TO MAKE PLAN DISTRIBUTIONS
Except as otherwise provided in the Plan or the Confirmation Order,
all cash necessary for the Reorganized Debtors to make the payments pursuant
to the Plan will be obtained from the Recapitalization Financing, Reorganized
Debtors' cash balances or the operations of the Debtors or the Reorganized
Debtors.
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C. CONFIRMATION AND EFFECTIVE DATE CONDITIONS
CONDITIONS TO CONFIRMATION
Confirmation of the Plan is conditioned upon satisfaction of the
applicable provisions of Section 1129 of the Bankruptcy Code and entry of a
Confirmation Order by the Bankruptcy Court in form and substance satisfactory
to the Debtors and the CMI Equity Committee. Among other things, the
Confirmation Order shall authorize and direct that the Debtors, Reorganized
CMI, Reorganized CMM and Reorganized Holdings take all actions necessary or
appropriate to enter into, implement and consummate the contracts,
instruments, releases, leases, indentures and other agreements or documents
created in connection with or contemplated by the Plan, including, but not
limited to, those actions contemplated by the provisions of the Plan, and
shall provide that all New Securities to be issued to Holders of Claims and
Interests pursuant to the Plan, and all securities issuable upon the
conversion of the New Securities are exempt from registration under federal
and state securities laws pursuant to Section 1145 of the Bankruptcy Code and
that the solicitation of Holders of CMI Common Stock, Series B Preferred
Stock and Old Senior Notes is exempt under Rule 14a-2(a)(4) of the proxy
regulations under the Securities Exchange Act of 1934.
CONDITIONS TO EFFECTIVE DATE
The Effective Date will not occur and the Plan will not be
consummated unless and until each of the following conditions has been
satisfied or waived by the Debtors and the CMI Equity Committee:
The Confirmation Order in form and substance satisfactory to the
Debtors and the CMI Equity Committee and entered by the Bankruptcy Court
shall not have been modified in any respect.
The Recapitalization Financing shall be funded in accordance with
the terms of the Plan and the respective governing documents for each
component of the Recapitalization Financing.
All other actions and documents necessary to implement the
transactions contemplated to be effected under this Plan on or before the
Effective Date shall have been effected or executed or, if waivable, waived
by the Person or Persons entitled to the benefit thereof.
WAIVER OF CONDITIONS TO EFFECTIVE DATE
Each of the conditions to the Effective Date may be waived in whole
or in part by the Debtors and the CMI Equity Committee at any time, without
notice or an Order of the Bankruptcy Court.
MODIFICATION OR REVOCATION OF THE PLAN; SEVERABILITY
The Debtors and the CMI Equity Committee reserve the right to modify
the Plan at any time prior to the Confirmation Date as provided for by
Section 1127 of the Bankruptcy Code or as otherwise permitted by law without
additional disclosure pursuant to Section 1125 of the Bankruptcy Code, except
as the Bankruptcy Court may otherwise order. The potential impact of any such
amendment or modification on the Holders of Interests cannot presently be
foreseen, but may include a change in the economic impact of the Plan on some
or all of the Classes or a change in the relative rights of such Classes.
If after receiving sufficient acceptances but prior to Confirmation
of the Plan, the Debtors and the CMI Equity Committee seek to modify the
Plan, the Debtors and the CMI Equity Committee can use such previously
solicited acceptances only to the extent permitted by applicable law.
The Debtors and the CMI Equity Committee reserve the right after
the Confirmation Date and before the Effective Date to modify the terms of
the Plan or waive any conditions to the effectiveness thereof if and to the
extent the Debtors and the CMI Equity Committee determine that such
modifications or waivers are necessary or desirable in order to consummate
the Plan. The Debtors will give such Holders of Claims and Interests notice
of such
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modifications or waivers as may be required by applicable law and the
Bankruptcy Court, and any such modifications will be subject to the approval
of the Bankruptcy Court to the extent required by, and in accordance with,
Section 1127 of the Bankruptcy Code.
The CMI Equity Committee will join in modifications proposed by the
Debtors in accordance with the foregoing in the exercise of such Committee's
reasonable discretion.
Notwithstanding the foregoing, any modifications of or amendments
to, or waivers of any conditions to the effectiveness of the Plan prior to
the Effective Date that materially affect the treatment or recovery of the
Holders of Class A9 or A10 Allowed Claims require the consent of the
Unsecured Creditors' Committee, provided, however, that it is hereby agreed
that any change in the amount of payments, timing of payments, term of the
New Debt as defined in Exhibit 2 to the Plan, Collateral as defined in
Exhibit 2 to the Plan, liens, rights or default remedies available to the
Holders of Class A9/A10 Note A's or Class A9/A10 Note B's or of any other
specific provisions of Exhibit 2 to the Plan shall be deemed material for
purposes of this paragraph.
The Debtors reserve the right to revoke or withdraw the Plan prior
to the Confirmation Date. If the Debtors revoke or withdraw the Plan, or if
Confirmation does not occur, then the Plan will be null and void, and all of
the Debtors' respective obligations with respect to the Claims and Interests
will remain unchanged and nothing contained in the Plan or in this Disclosure
Statement will be deemed an admission or statement against interest or
constitute a waiver or release of any claims by or against any Debtor or any
other Person or to prejudice in any manner the rights of any Debtor or any
Person in any further proceedings involving any Debtor or any Person.
If, prior to Confirmation, any term or provision of the Plan is held
by the Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy
Court will have the power, upon the request of the Debtors, to alter and
interpret such term or provision to make it valid or enforceable to the
maximum extent practicable, consistent with the original purpose of the term
or provision held to be invalid, void or unenforceable, and such term or
provision will then be applicable as altered or interpreted. Notwithstanding
any such holding, alteration or interpretation, the remainder of the terms
and provisions of the Plan will remain in full force and effect and will in
no way be affected, impaired or invalidated by such holding, alteration or
interpretation. The Confirmation Order will constitute a judicial
determination and will provide that each term and provision of the Plan, as
it may have been altered or interpreted in accordance with the foregoing, is
valid and enforceable pursuant to its terms.
If so ordered by the Bankruptcy Court at the Confirmation Hearing,
the Plan provisions for CMM may be confirmed independently of confirmation of
the Plan provisions for CMI and Holdings.
D. THE REORGANIZED DEBTORS
A description of various matters relating to the Reorganized Debtors
including (i) information relating to the business to be conducted by
Reorganized CMI, CMM and Holdings following the Effective Date, (ii) the
proposed management of Reorganized CMI, CMM and Holdings and proposed
compensation and other arrangements relating thereto, and (iii) certain
corporate governance matters, is set forth or referenced below.
CORPORATE STRUCTURE
On the Effective Date, CMI will become Reorganized CMI, CMM will
become Reorganized CMM, and Holdings will become Reorganized Holdings with no
change in their respective structural relationships.
BUSINESS OF THE REORGANIZED DEBTORS
In connection with the Plan, substantially all cash flows are
expected to be used to satisfy principal, interest and fee obligations under
the New Debt. The New Debt will be secured by substantially all assets of the
Company. It is contemplated that there will be restrictive covenants,
including financial covenants, in connection with the New Debt. The foregoing
will effect the Company's post-bankruptcy business strategy. See "BUSINESS
PLAN."
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DIRECTORS AND MANAGEMENT OF REORGANIZED CMI AND REORGANIZED CMM
BOARD OF DIRECTORS. The names, affiliations and backgrounds of the
persons to serve as the initial members of the Board of Directors of
Reorganized CMI and Reorganized CMM will be identified at or before the
Confirmation Hearing in a schedule to be filed by CMI and CMM with the
Bankruptcy Court. Such appointments to the respective Boards of Directors
will otherwise be consistent with the Plan, including the terms of the
Merrill/GACC Term Sheet. Two of the individuals to be nominated to serve as
directors of Reorganized CMI will be jointly identified by CMI and the CMI
Equity Committee and presented for approval in accordance with the provisions
of the Merrill/GACC Term Sheet.
See "GENERAL INFORMATION - Business - Management" for information
concerning CMI's existing directors.
EXECUTIVE OFFICERS. The initial officers of Reorganized CMI will be
selected by the Board of Directors of Reorganized CMI. To the extent that
initial officers have been selected, their names, affiliations and
backgrounds will be disclosed in a schedule to be Filed with the Bankruptcy
Court on or prior to the Confirmation Date. Reorganized CMI will negotiate
compensation packages with its officers that are consistent with compensation
packages in the industry and, to the extent applicable, subject to the terms
and conditions of assumed employment agreements.
The initial officers of Reorganized CMM will be selected by the
Board of Directors of Reorganized CMM. To the extent that initial officers
have been selected, their names, affiliations and backgrounds will be
disclosed in a schedule to be to be Filed with the Bankruptcy Court on or
prior to the Confirmation Date. Reorganized CMM will negotiate compensation
packages with its officers that are consistent with compensation packages in
the industry, and, to the extent applicable, subject to the terms and
conditions of assumed employment agreements.
See "GENERAL INFORMATION - Business - Management" for information
concerning CMI's existing executive officers and assumed employment
agreements.
CERTAIN CORPORATE GOVERNANCE MATTERS
REORGANIZED CMI AMENDED AND RESTATED ARTICLES OF INCORPORATION AND
REORGANIZED CMI AMENDED AND RESTATED BYLAWS. The Reorganized CMI Amended and
Restated Articles of Incorporation and the Reorganized CMI Amended and
Restated Bylaws, substantially in the forms of Exhibits E and F hereto and
incorporated herein by reference, shall by virtue of the Confirmation Order
be deemed exhibits to and part of the Plan and shall become effective without
further action by stockholders, on the Effective Date. The CMI Amended and
Restated Articles of Incorporation contain amendments providing for, among
other matters, an increase in authorized shares from 120 million to 375
million (consisting of 300 million shares of common stock and 75 million
shares of preferred stock); authority for the Board of Directors to increase
authorized shares without action by stockholders; new excess share provisions
relating to the transfer, acquisition and redemption of capital stock
addressing ownership limitations for CMI and the treatment of excess stock,
intended to ensure compliance with the Internal Revenue Code of 1986 (such
excess share provisions are also intended to serve as an antitakeover device
in connection with any hostile acquisition even though Reorganized CMI's REIT
status would not be threatened by such acquisition); deletion of certain
antitakeover provisions (however CMI will remain subject to the Maryland
business combination statute); a change in the vote required for (a) removal
of directors, (b) amendments to Article XI (excess share provisions), and (c)
amendments to Article XIII (conflict with terms of class or series of
preferred stock), from a majority to 66 2/3; changes in how vacancies on the
Board of Directors and newly created directorships are filled; and
prohibition of the issuance of nonvoting equity securities to the extent
required by Section 1123(a)(6) of the Bankruptcy Code. The Reorganized CMI
Amended and Restated Bylaws contain amendments providing for, among other
matters, advance notice of matters to be presented at annual meetings of
stockholders and advance notice of nominees for director.
REORGANIZED CMM ARTICLES OF INCORPORATION AND REORGANIZED CMM
BYLAWS. The Reorganized CMM Articles of Incorporation and the Reorganized CMM
Bylaws will be the Articles of Incorporation and Bylaws of CMM, unless
Reorganized CMM is required to amend such Articles of Incorporation and
Bylaws to prohibit the
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issuance of non-voting equity securities and then such Articles of
Incorporation and Bylaws shall be amended and filed with the Maryland
Department of Assessments and Taxation on the Effective Date.
SECOND AMENDED AND RESTATED OPTION PLAN FOR KEY EMPLOYEES. On or
prior to the Effective Date, the Second Amended and Restated Stock Option
Plan for Key Employees (the "Second Amended Employee Stock Option Plan"),
substantially in the form of Exhibit G hereto and incorporated herein by
reference, will be adopted by the Board of Directors to be effective on the
Effective Date and, by voting to accept the Plan, all Holders of Class A21
Interests shall be deemed to have ratified and approved the Second Amended
Employee Stock Option Plan. Additionally, upon entry of the Confirmation
Order, the Second Amended Employee Stock Option Plan shall be deemed an
exhibit to and part of the Plan and the Bankruptcy Court shall, consistent
with Maryland and federal law, be deemed to have approved the Second Amended
Employee Stock Option Plan (including the increase in the number of shares of
common stock with respect to which options may be granted and an extension of
time in which options may be granted, as provided for therein) on behalf of
CMI's stockholders and in satisfaction of Section 422 of the Internal Revenue
Code. Following the Effective Date, the Board of Directors of Reorganized CMI
may further amend or modify the Second Amended Employee Stock Option Plan in
accordance with the terms thereof and any such further amendment or
modification shall not require amendment of the Plan. The Second Amended
Employee Stock Option Plan amends CMI's Amended and Restated Stock Option
Plan for Key Employees to, among other matters, provide for an increase in
the number of shares of CMI Common Stock with respect to which options may be
granted from 2,068,031 (as adjusted from 2 million shares as a result of the
junior preferred stock dividend paid to common stockholders in November 1999
and consistent with a Bankruptcy Court Order which limits the full adjustment
to 2,198,831 shares, contemplated by the terms and provisions of the Second
Amended Employee Stock Option Plan, until CMI emerges from Chapter 11) to
4,500,000; to extend the time in which options may be granted under the Plan
from June 30, 2000 until June 30, 2002; and to effect changes consistent with
current securities and tax laws. After the Effective Date it is expected that
common stockholder approval of the material terms of the Second Amended
Employee Stock Option Plan will be sought for purposes of becoming exempt
from the deduction limits set forth in Section 162(m) of the Internal Revenue
Code. See "GENERAL INFORMATION - Management" for a description of the Amended
and Restated Stock Option Plan for Key Employees to be amended by the Second
Amended Employee Stock Option Plan.
CMI's Non-Employee Director Stock Option Plan in place prior to the
Effective Date shall remain in place after the Effective Date and Reorganized
CMI shall continue to honor such option plan.
E. RECAPITALIZATION FINANCING INCLUDING ISSUANCE OF NEW SECURITIES
On the Effective Date, the Recapitalization Financing shall be
funded and become effective and the CMBS Sale Portfolio, if not already sold,
shall be sold as parts of effectuating consummation of the Plan. On the
Effective Date, Reorganized CMI will issue the New Securities in accordance
with the Plan. The Plan provides that the issuance of the New Securities, and
all securities issuable upon conversion of the New Securities, is thereby
authorized pursuant to Section 1145 of the Bankruptcy Code, without further
action under applicable law. In addition, on the Effective Date, the
Reorganized Debtors will implement and, to the extent applicable, receive the
proceeds of the New Debt in accordance with the terms of the applicable
documents with respect thereto. On the Effective Date all securities,
instruments, corporate documents, and agreements entered into pursuant to or
contemplated by the Plan, including, without limitation, the New Securities,
any other security and any instrument, corporate document, or agreement
entered into in connection with any of the transactions referenced in Section
V or Section X.H of the Plan, shall become effective, binding and enforceable
in accordance with their respective terms and conditions upon the parties
thereon without further act or action under applicable law, regulation, order
or rule, and shall be deemed to become effective simultaneously.
F. SALE OF THE CMBS SALE PORTFOLIO
On or before the Effective Date, the commercial
mortgage-backed securities and any other assets in the CMBS Sale Portfolio
(including the CMO-IV Sale) shall be sold in accordance with the terms of the
Plan and any Orders with respect thereto entered by the Bankruptcy Court. The
proceeds thereof shall be used to pay Allowed Secured Claims in accordance
with any Orders entered by the Bankruptcy Court with respect thereto and
otherwise used as part of the funding of the Plan.
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G. AFFILIATE REORGANIZATION
In order to secure certain financing contemplated under the Plan
with the commercial mortgage backed securities representing the equity
interests in CBO-1 and CBO-2 (the "Equity Interests"), CMI anticipates that,
as a part of the Plan, either (i) a reorganization of certain CMI affiliated
entities will be effected resulting in REIT subsidiaries holding the Equity
Interests or owning the stock in the qualified REIT subsidiaries holding the
Equity Interests, or (ii) the qualified REIT subsidiaries holding the Equity
Interests or the trusts holding the underlying assets will elect REIT status
(and other actions will be taken as necessary to effect such election), with
the intent to secure such financing with a pledge of stock in the REITs, in
lieu of a direct pledge of the Equity Interests, which is restricted under
certain operative and constituent documents and could result in adverse tax
consequences and a negative impact on collateral values. This affiliate
reorganization is designed to address concerns of creditors who will provide
financing under the Plan contemplated to be secured by the Equity Interests.
In addition, certain other action may be taken as necessary to implement the
foregoing. All of the actions taken in effecting this affiliate
reorganization shall be consistent with the provisions of Exhibit 2 to the
Plan governing the treatment of Class A9 and Class A10.
H. POTENTIAL NEW EQUITY INVESTMENT AND RIGHTS OFFERING
Although not required to fund the Plan, the Debtors, in consultation
with the CMI Equity Committee, may seek new equity capital from one or more
investors to partially fund the Reorganized Debtors and the Plan as
Recapitalization Financing. In such event, the Plan will be amended to
appropriately reflect such new equity capital transaction, in a manner
consistent with Exhibits 1 and 2 to the Plan. If new equity capital is
sought, it is likely to take the form of a private issuance of preferred
stock with such relative rights and preferences as may be agreed to
consistent with the terms of the Plan.
In the event new equity capital is sought from an investor, it is
also anticipated that an offering of rights to purchase common stock or a new
series of preferred stock, with rights and preferences similar to the
preferred stock likely to be issued to the new equity capital investor but
with limited voting rights, would be made to Holders of CMI Common Stock.
Such rights offering would be developed in consultation with the CMI Equity
Committee. Such rights offering would commence on the Effective Date and
would be for a percentage of the aggregate face value of the securities
issued to the new equity capital investor. All or a portion of the proceeds
of the rights offering may be used to redeem at face value the securities
issued to the new equity investor.
Even if CMI does not seek new equity from an investor, an offering
of rights to purchase CMI Common Stock may be made to Holders of CMI Common
Stock in connection with the Plan. Such rights offering would be developed in
consultation with the CMI Equity Committee.
In the event new equity capital is sought from an investor and a
rights offering is made to Holders of CMI Common Stock or a rights offering
is made to Holders of CMI Common Stock independent of any new equity
investment by an investor, the CMI Common Stock will be exchanged for new CMI
Common Stock (on a one share per one share basis) and rights (one right per
share) structured to ensure that the value of the CMI Common Stock exchanged
exceeds the value of the fresh capital raised in the rights offering, thereby
making the exchange principally in exchange for an interest and only partly
for cash and rendering applicable the limited transactional exemption from
securities law registration afforded by Section 1145 of the Bankruptcy Code.
If CMI determines to proceed with a rights offering, it has committed to
discuss the applicability of the exemption afforded by Section 1145 of the
Bankruptcy Code with the SEC. If a rights offering is made and an exchange of
CMI Common Stock, consistent with the foregoing, is effected, then CMI's
existing Series B Preferred Stock, Old Series D Preferred Stock, Series E
Preferred Stock and Stock Options would be exchanged for new Series B
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Stock
Options, as applicable.
APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS
In reliance upon the exemption provided by Section 1145(a)(1) of the
Bankruptcy Code, the Debtors have not filed a registration statement under
the Securities Act or any state securities laws with respect to the New
Securities that will be offered pursuant to the Plan or any other securities
issuable upon conversion of the New Securities. Pursuant to the requirements
of the Trust Indenture Act of 1939 (the "TIA"), applications for
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qualification under the TIA will be filed with the SEC with regard to the
indentures that will govern the New Securities that will be issued to Holders
of Allowed Class A9 and A10 Claims (the "New Debt Securities"). Such
applications will be filed prior to the commencement of solicitation for
acceptances of the Plan.
SECTION 1145(a)(1). Section 1145(a)(1) exempts the offer or sale of
securities pursuant to a plan of reorganization from the registration
requirements of Section 5 of the Securities Act and from registration under
state and local securities laws if the following conditions are satisfied:
(i) the securities are issued by a debtor (or its affiliate or successor)
under a plan of reorganization; (ii) the recipients of the securities hold
claims against, interests in, or claims for administrative expenses against
the debtor; and (iii) the securities are issued in exchange for the
recipients' claims against or interests in the debtor, or principally in such
exchange and partly for cash or property.
The New Securities, and all other securities issuable upon
conversion of the New Securities issued pursuant to the Plan will not be
"restricted securities" within the meaning of Rule 144 under the Securities
Act and may, subject to the limitations discussed below, be freely
transferred by Holders of Allowed Class A9, A10, A14, A16, A18 and A20 Claims
and Interests under the Securities Act and their successors and assigns.
Accordingly, all resales and subsequent transactions in the New Securities,
and any other securities issuable upon conversion of the New Securities are
exempt from registration under the Securities Act pursuant to Section 4(1) of
the Securities Act, unless the Holder is deemed to be an "underwriter" with
respect to such securities or an "affiliate" of an issuer. Section 1145(b) of
the Bankruptcy Code defines four types of "underwriters":
(i) persons who purchase a claim against, an interest in, or a
claim for administrative expense against the debtor with a view to
distributing any security received in exchange for such a claim or
interest;
(ii) persons who offer to sell securities offered under a plan
for the holders of such securities;
(iii) persons who offer to buy securities from the holders of
such securities, if the offer to buy is (a) with a view to distributing
such securities and (b) made under a distribution agreement; and
(iv) a person who is an "issuer" with respect to the
securities, as the term "issuer" is defined in Section 2(11) of the
Securities Act.
Under Section 2(11) of the Securities Act, an "issuer" includes any
"affiliate" of the issuer, which means any person directly or indirectly
through one or more intermediaries, controlling, controlled by or under
common control with the issuer. Any Holder of an Allowed Claim or Interest
(or group of Holders of such Claims and/or Interests who act in concert) who
receives a substantial amount of any of the New Securities pursuant to the
Plan, or who holds a substantial amount of equity in CMI and receives any of
the New Securities pursuant to the Plan, may be deemed to be an "affiliate"
of an issuer and therefore an "issuer" and therefore an "underwriter" under
the foregoing definitions.
Whether or not any particular person would be deemed to be an
"underwriter" or an "affiliate" with respect to any security to be issued
pursuant to the Plan would depend upon various facts and circumstances
applicable to that person. Accordingly, the Debtors express no view as to
whether any person would be an "underwriter" or an "affiliate" with respect
to any security to be issued pursuant to the Plan.
GIVEN THE COMPLEX NATURE OF THE QUESTION OF WHETHER A PARTICULAR
PERSON MAY BE AN UNDERWRITER OR AN AFFILIATE, THE DEBTORS MAKE NO
REPRESENTATIONS CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN THE SECURITIES
TO BE TRANSFERRED PURSUANT TO THE PLAN. THE DEBTORS RECOMMEND THAT HOLDERS OF
ALLOWED CLAIMS CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY
TRADE SUCH SECURITIES.
Rule 144A, promulgated under the Securities Act, provides a
non-exclusive safe harbor exemption from the registration requirements of the
Securities Act for resales to certain "qualified institutional buyers" of
securities which are "restricted securities" within the meaning of the
Securities Act, irrespective of whether the seller of such securities
purchased its securities with a view towards reselling such securities under
the provisions of Rule 144A.
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Under Rule 144A, a "qualified institutional buyer" is defined to include,
among other persons (E.G., "dealers" registered as such pursuant to Section
15 of the Exchange Act and "banks" as defined in Section 3(a)(2) of the
Securities Act), any entity which purchases securities for its own account or
for the account of another qualified institutional buyer and which (in the
aggregate) owns and invests on a discretionary basis at least $100 million in
the securities of unaffiliated issuers. Subject to certain qualifications,
Rule 144A does not exempt the offer or sale of securities which, at the time
of their issuance, were securities of the same class of securities then
listed on a national securities exchange (registered as such under Section 6
of the Exchange Act) or quoted in a U.S. automated interdealer quotation
system (E.G., Nasdaq). Holders of such securities who are deemed to be
"underwriters" within the meaning of Section 1145(b)(1) of the Bankruptcy
Code or who may otherwise be deemed to be "underwriters" of, or to exercise
"control" over, the Company within the meaning of Rule 405 of Regulation C
under the Securities Act should, assuming that all other conditions of Rule
144A are met, be entitled to avail themselves of the safe harbor resale
provisions thereof.
To the extent that Rule 144A is unavailable, holders may, under
certain circumstances, be able to sell their securities pursuant to the more
limited safe harbor resale provisions of Rule 144 under the Securities Act.
Generally, Rule 144 provides that if certain conditions are met (E.G., volume
limitations, manner of sale, availability of current information about the
issuer, etc.), any "affiliate" of the issuer of the securities sought to be
resold will not be deemed to be an "underwriter" as defined in Section 2(11)
of the Securities Act. Under paragraph (k) of Rule 144, the aforementioned
conditions to resale will no longer apply to restricted securities sold for
the account of a holder who is not an affiliate of the Company at the time of
such resale and who has not been such during the three-month period next
preceding such resale, so long as a period of at least two years has elapsed
since the later of (i) the Effective Date and (ii) the date on which such
holder acquired his or its securities from an affiliate of the Company.
As noted above, Section 1145(a)(1) exempts the offer and sale of the
New Securities from the registration requirements of Section 5 of the
Securities Act. Section 1145(a)(1) does not, however, contain a corresponding
exemption from the indenture qualification requirements of the TIA. The
exemptive provision of the TIA, Section 304, exempts certain specified types
of securities from the provisions of the TIA, including many of the types of
securities exempt from the registration requirements of Section 5 of the
Securities Act, but it does not exempt securities issued under Section
1145(a)(1) of the Bankruptcy Code. Section 305 and 307 of the TIA
specifically provide for the filing of an application for qualification of
indentures governing any debt securities that are exempt from the Securities
Act registration requirements but are not exempt from the TIA. Pursuant to
such sections and TIA Rule 7a-1, CMI will file (prior to commencement of
solicitation for acceptances of the Plan) with the SEC applications on Form
T-3 for qualification of the indentures that will govern the New Debt
Securities.
THE NEW SECURITIES ISSUED ON THE EFFECTIVE DATE AND THE SECURITIES
ISSUABLE UPON CONVERSION OF THE NEW SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SEC OR BY ANY STATE SECURITIES COMMISSION OR SIMILAR
PUBLIC, GOVERNMENTAL OR REGULATORY AUTHORITY AND NEITHER THE SEC NOR SUCH
AUTHORITY HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DISCLOSURE STATEMENT OR UPON THE MERITS OF THE PLAN. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
I. DISTRIBUTIONS UNDER THE PLAN
GENERAL
Reorganized Debtors, or such Person(s) as the Debtors may employ in
their sole discretion, will act as Disbursing Agent under the Plan. The
Disbursing Agent shall make all distributions of Cash required to be
distributed under the applicable provisions of the Plan and the documents
evidencing the Recapitalization Financing. Any Disbursing Agent may employ or
contract with other entities to assist in or make the distributions required
by the Plan and the documents evidencing the Recapitalization Financing. Each
Disbursing Agent will serve without bond, and each Disbursing Agent, without
further Bankruptcy Court approval, reasonable compensation for distribution
services rendered pursuant to the Plan and reimbursement of reasonable
out-of-pocket expenses incurred in connection with such services from the
Reorganized Debtors on terms acceptable to the Reorganized Debtors.
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TIMING OF DISTRIBUTIONS
Except as otherwise provided in the Plan with respect to any
particular Class or Claim, property to be distributed hereunder on account of
Allowed Claims and Allowed Interests in an Impaired Class (a) shall be
distributed on the Effective Date or as soon as practicable thereafter to
each Holder of an Allowed Claim or an Allowed Interest in that Class that is
an Allowed Claim or an Allowed Interest as of the Effective Date, and (b)
shall be distributed to each Holder of an Allowed Claim or an Allowed
Interest of that Class that becomes an Allowed Claim or Allowed Interest
after the Effective Date, as soon as practicable after the Order of the
Bankruptcy Court allowing such Claim or Interest becomes a Final Order.
Except as otherwise provided in the Plan, property to be distributed under
the Plan on account of an Administrative Claim shall be distributed on the
later of (i) the Effective Date or as soon as practicable thereafter, or if
any Claim is not an Allowed Claim as of the Effective Date, on the date the
Order allowing such Claim becomes a Final Order or as soon as practicable
thereafter, and (ii) the date on which the distribution to the Holder of the
Claim would have been due and payable in the ordinary course of business or
under the terms of the Claim.
METHODS OF DISTRIBUTIONS
CASH PAYMENTS. Cash payments made pursuant to the Plan will be
in United States dollars. Cash payments to foreign creditors may be made, at
the option of the Debtors or the Reorganized Debtors, in such funds and by
such means as are necessary or customary in a particular foreign
jurisdiction. Cash payments made pursuant to the Plan in the form of checks
issued by the Reorganized Debtors shall be null and void if not cashed within
90 days of the date of the issuance thereof. Requests for reissuance of any
check shall be made directly to the Disbursing Agent as set forth in Section
V.G of the Plan. Cash payments to bank creditors of the Debtors may be by
wire transfer.
COMPLIANCE WITH TAX REQUIREMENTS. In connection with the
distributions set forth herein, to the extent applicable, the Disbursing
Agent shall comply with all tax withholding and reporting requirements
imposed on it by any governmental unit, and all distributions pursuant to
this Plan shall be subject to such withholding and reporting requirements.
The Disbursing Agent shall be authorized to take any and all actions that may
be necessary or appropriate to comply with such withholding and reporting
requirements.
Notwithstanding any other provision contained herein: (i) each
Holder of an Allowed Claim or Interest that is to receive a distribution of
Cash pursuant to the Plan shall have sole and exclusive responsibility for
the satisfaction and payment of any tax obligations imposed by any
governmental unit, including income, withholding and other tax obligations,
on account of such distribution; and (ii) no distribution shall be made to or
on behalf of such Holder pursuant to the Plan unless and until such Holder
has made arrangements reasonably satisfactory to the Disbursing Agent for the
payment and satisfaction of such tax obligations. Any distributions pursuant
to the Plan will, pending the implementation of such arrangements, be treated
as an undeliverable distribution pursuant to Section V.G of the Plan.
DISTRIBUTION RECORD DATE. As of the close of business on the
Distribution Record Date, the transfer registers for the Old Securities,
maintained by the Debtors, or their respective agents, will be closed. The
Disbursing Agent and its respective agents and the Indenture Trustee will
have no obligation to recognize the transfer of any Old Securities occurring
after the Distribution Record Date, and will be entitled for all purposes
relating to this Plan to recognize and deal only with those Holders of Record
as of the close of business on the Distribution Record Date.
SURRENDER OF CANCELLED OLD SECURITIES AND EXCHANGE OF OLD SECURITIES FOR NEW
SECURITIES
TENDER OF OLD SECURITIES. The mechanism by which Holders of Allowed
Claims and Allowed Interests surrender their Old Securities in order to
receive Cash, if and as applicable under the Plan, and to exchange such Old
Securities for New Securities (as applicable), shall be determined based upon
the manner in which the Old Securities were issued and the mode in which they
are held, as set forth below.
OLD SECURITIES HELD IN BOOK-ENTRY FORM. Old Securities held in
book-entry form through bank and broker nominee accounts shall be mandatorily
cancelled and (i) Cash distributed, if and as applicable under the Plan, and
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(ii) mandatorily exchanged for New Securities (as applicable) through the
facilities of such nominees and the systems of the applicable securities
depository or Clearing System holding such Old Securities on behalf of the
brokers or banks.
OLD SECURITIES IN PHYSICAL, REGISTERED, CERTIFICATED FORM. Each
Holder of Old Securities in physical, registered, certificated form will be
required, on or before the Effective Date, to deliver its physical notes or
certificates (the "Tendered Certificates") to the Disbursing Agent,
accompanied by a properly executed letter of transmittal, to be distributed
by the Disbursing Agent after the Confirmation Date and containing such
representations and warranties as are described in this Disclosure Statement
(a "Letter of Transmittal").
Any Cash or New Securities to be distributed pursuant to the Plan on
account of any Allowed Claim or Allowed Interest represented by an Old
Security held in physical, registered, certificated form shall, pending such
surrender, be treated as an undeliverable distribution pursuant to Section
V.G of the Plan.
Signatures on a Letter of Transmittal must be guaranteed by an
Eligible Institution (as defined below), unless the Old Securities tendered
pursuant thereto are registered in the name of the Person signing the Letter
of Transmittal or are tendered for the account of an Eligible Institution. If
signatures on a Letter of Transmittal are required to be guaranteed, such
guarantees must be by a member firm of a registered national securities
exchange in the United States, a member of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company having an
office or a correspondent in the United States (each of which is an "Eligible
Institution"). If Old Securities are registered in the name of a Person other
than the Person signing the Letter of Transmittal, the Old Securities, in
order to be tendered validly, must be endorsed or accompanied by a properly
completed power of authority, with signature guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time
of receipt) and acceptance of Letters of Transmittal and Tendered
Certificates will be resolved by the applicable Disbursing Agent, whose
determination shall be final and binding, subject only to review by the
Bankruptcy Court upon application with due notice to any affected parties in
interest. CMI reserves the right, on behalf of itself and the Disbursing
Agent, to reject any and all Letters of Transmittal and Tendered Certificates
not in proper form, or Letters of Transmittal and Tendered Certificates, the
Disbursing Agent's acceptance of which would, in the opinion of the
Disbursing Agent or its counsel, be unlawful or would subject the Disbursing
Agent to liability.
DELIVERY OF NEW SECURITIES IN EXCHANGE FOR OLD SECURITIES. On the
Effective Date, Reorganized CMI or the Disbursing Agent shall issue and
authenticate the New Securities, and shall apply to DTC to make such New
Securities eligible for deposit at DTC. With respect to Holders of Old
Securities who hold such Old Securities through nominee accounts at bank and
broker participants in DTC or any similar clearing system, the Disbursing
Agent shall deliver such New Securities to DTC or to the registered address
specified by the Clearing System. The Clearing System (or its depositary)
shall return the applicable Old Securities to the Disbursing Agent for
cancellation.
The Disbursing Agent will request that DTC effect a mandatory
exchange of the applicable Old Securities for the applicable New Securities
by crediting the accounts of its participants with the applicable New
Securities in exchange for the Old Securities. On the effective date of such
exchange, each DTC participant will effect a similar exchange for accounts of
the beneficial owners holding Old Securities through such firms. Neither the
Debtors, Reorganized Debtors nor the Disbursing Agent shall have any
responsibility or liability in connection with the Clearing Systems' or such
participants' effecting, or failure to effect, such exchanges.
Holders of Old Securities holding such Old Securities outside a
Clearing System will be required to surrender their Old Securities by
delivering them to the Disbursing Agent, along with properly executed Letters
of Transmittal (as described above). The Disbursing Agent shall forward the
New Securities on account of such Old Securities in accordance with the
instructions contained in the Letters of Transmittal.
OTHER MATTERS WITH RESPECT TO THE SURRENDER OF OLD SECURITIES. By
participating in any of the above procedures, each Holder of the Old
Securities will be representing and warranting (and the Letters of
Transmittal will so provide) that among other things, the Holder has full
power and authority to tender, exchange, sell, assign and
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transfer the Old Securities and that when such Old Securities are accepted
for exchange by the Debtors or the Reorganized Debtors, the Debtors or the
Reorganized Debtors will acquire valid title thereto, free and clear of all
liens, restrictions, charges and encumbrances and that the Old Securities are
not subject to any adverse claims or proxies. The Holder also agrees that it
will, upon request, execute and deliver any additional documents deemed by
the Disbursing Agent, the Debtors or the Reorganized Debtors to be necessary
or desirable to complete the exchange, sale, assignment and transfer of the
Old Securities Old. All authority conferred by participating in the above
procedures will survive the death or incapacity of the Holder, and all
obligations of the Holder will be binding upon the heirs, personal
representatives, successors and assigns of the Holder.
The surrender of the Old Securities pursuant to any one of the
procedures described in this Disclosure Statement, upon the Debtors' or the
Reorganized Debtors' acceptance for exchange of such Old Securities,
constitutes a binding agreement between the Holder and the Debtors or the
Reorganized Debtors upon the terms, and subject to the conditions, of the
Plan.
SPECIAL PROCEDURES FOR LOST, STOLEN, MUTILATED OR DESTROYED
INSTRUMENTS. Any Holder of a Claim or an Interest evidenced by an Instrument
that has been lost, stolen, mutilated or destroyed will, in lieu of
surrendering such Instrument, deliver to the Disbursing Agent: (a) an
affidavit of loss or other evidence reasonably satisfactory to the Disbursing
Agent of the loss, theft, mutilation or destruction; and (b) such security or
indemnity as may reasonably be required by the Disbursing Agent or the
applicable Reorganized Debtor to hold the Disbursing Agent and such
Reorganized Debtor harmless from any damages, liabilities or costs incurred
in treating such individual as a Holder of an Instrument. Upon compliance
with the Plan, the Holder of a Claim or Interest evidenced by any such lost,
stolen, mutilated or destroyed Instrument shall, for all purposes under the
Plan and notwithstanding anything to the contrary contained herein, be deemed
to have surrendered such Instrument.
FAILURE TO SURRENDER CANCELLED INSTRUMENT. Any Holder of Old
Securities holding such Old Securities in physical, registered or
certificated form who has not properly completed and returned to the
Disbursing Agent a Letter of Transmittal, together with the applicable
Tendered Certificates, within two years after the Effective Date shall have
its claim for a distribution pursuant to the Plan on account of such
Instrument discharged and shall be forever barred from asserting any such
claim against Reorganized CMI, Reorganized CMM or Reorganized Holdings or
their properties. In such cases, any Cash or New Securities held for
distribution on account of such claim shall be disposed of pursuant to the
provisions of Section V.G of the Plan.
RELEASE OF SECURITY INTERESTS IN OR OTHER CLAIMS TO OR AGAINST ASSETS OR
PROPERTY OF THE REORGANIZED DEBTORS BY CREDITORS PAID PURSUANT TO THE PLAN
Any Holder of a Secured Claim whose Secured Claim is being paid in
full in accordance with Section IV.C, IV.D or IV.E of the Plan shall
cooperate in all respects with the Reorganized Debtors and shall execute such
documents and release and return to the Reorganized Debtors such assets or
property of the Debtors or Reorganized Debtors, as applicable, that such
creditor is holding, directly or indirectly, as collateral and, if
applicable, unwind any alleged repurchase agreements or claims to assets or
property subject to such alleged repurchase agreements. Furthermore, any and
all Holders of such Secured Claims shall execute such documents and take such
actions as may be reasonably required by the Reorganized Debtors to
effectuate the transfer or retransfer back to the Reorganized Debtors of all
collateral security, or assets or property held subject to alleged repurchase
agreements, free and clear of all liens, security interests, claims or
interests in or to such collateral, assets or property by such Holder, and
shall confirm the foregoing in writing if requested by the Reorganized
Debtors.
DELIVERY OF DISTRIBUTIONS; UNDELIVERABLE OR UNCLAIMED DISTRIBUTIONS
Any Person that is entitled to receive a Cash distribution under the
Plan but that fails to cash a check within 90 days of its issuance shall be
entitled to receive a reissued check from Reorganized CMI, Reorganized CMM or
Reorganized Holdings, as the case may be, for the amount of the original
check, without any interest, if such Person requests the Disbursing Agent to
reissue such check and provides the Disbursing Agent with such documentation
as the Disbursing Agent reasonably requests to verify that such Person is
entitled to such check, prior to the second anniversary of the Effective
Date. If a Person fails to cash a check within 90 days of its issuance and
fails to request
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reissuance of such check prior to the second anniversary of the Effective
Date, such Person shall not be entitled to receive any distribution under the
Plan.
Subject to Bankruptcy Rule 9010, all distributions to any Holder of
an Allowed Claim or an Allowed Interest shall be made to the address of such
Holder on the books and records of the Debtors or their agents, unless
Reorganized CMI, Reorganized CMM or Reorganized Holdings, as applicable, has
been notified in writing of a change of address. If the distribution to any
Holder of an Allowed Claim or Allowed Interest is returned to a Disbursing
Agent as undeliverable, such Disbursing Agent shall use reasonable efforts to
determine the current address of such Holder, but no distribution shall be
made to such Holder unless and until the applicable Disbursing Agent has
determined or is notified in writing of such Holder's then-current address,
at which time such distribution shall be made to such Holder without any
additional interest on such distribution after the Effective Date.
Undeliverable distributions shall remain in the possession of the applicable
Disbursing Agent pursuant to Section VI.A of the Plan until such time as a
distribution becomes deliverable. Undeliverable Cash or New Securities shall
be held in trust by the applicable Disbursing Agent for the benefit of the
potential claimants of such funds or securities, and will be accounted for
separately. Any Disbursing Agent holding undeliverable Cash shall invest such
Cash in a manner consistent with the Debtors' investment and deposit
guidelines. Any interest paid, and any other amounts earned, with respect to
such undeliverable Cash pending its distribution in accordance with this Plan
shall be property of Reorganized CMI, Reorganized CMM or Reorganized
Holdings, as the case may be. Undeliverable New Securities will be held in
trust for the benefit of the potential claimants of such securities by the
Disbursing Agent in principal amounts or numbers of shares sufficient to fund
the unclaimed amounts of such New Securities and will be accounted for
separately. Any unclaimed or undeliverable distributions (including Cash and
New Securities) shall be deemed unclaimed property under Section 347(b) of
the Bankruptcy Code at the expiration of two years after the Effective Date
and, after such date, all such unclaimed property shall revert to Reorganized
CMI, Reorganized CMM, or Reorganized Holdings, as the case may be, and the
Claim or Interest of any Holder with respect to such property shall be
discharged and forever barred.
The Plan provides that the Disbursing Agent will make all
distributions required under the applicable provisions of the Plan, subject
to the terms of the Plan.
J. GENERAL INFORMATION CONCERNING THE PLAN
PROCEDURES FOR TREATING DISPUTED CLAIMS UNDER PLAN OF REORGANIZATION
PROCESS. If any of the Debtors disputes any Claim, such dispute
shall be determined, resolved or adjudicated, as the case may be, under
applicable law, and such Claim shall survive the Effective Date to the extent
that such Claim has not been allowed and has not received the treatment
afforded the Class of Claims in which such Claim is classified under this
Plan on or before the Effective Date. Among other things, any Debtor may
elect, at its sole option, to object or seek estimation under Section 502 of
the Bankruptcy Code with respect to any proof of claim filed by or on behalf
of a Holder of a Claim or any proof of interest filed by or on behalf of a
Holder of an Interest.
TORT CLAIMS. All Tort Claims are Disputed Claims. Any unliquidated
Tort Claim that is not otherwise settled or resolved pursuant to Section
V.H.l.a of the Plan shall be determined and liquidated under applicable law
in the Bankruptcy Court or the administrative or judicial tribunal in which
it is pending on the Confirmation Date or, if no such action was pending on
the Confirmation Date, in the Bankruptcy Court or any administrative or
judicial tribunal of appropriate jurisdiction. Pursuant to Section IX.E of
the Plan, the automatic stay arising pursuant to Section 362 of the
Bankruptcy Code shall be vacated as of the Effective Date as to all Tort
Claims. Any Tort Claim determined and liquidated pursuant to a judgment
obtained in accordance with Section V.H. l.b of the Plan and applicable
non-bankruptcy law that is no longer subject to appeal or other review shall
be deemed to be an Allowed Claim in Class A10, B5 or C5, as applicable, in
such liquidated amount and satisfied in accordance with the Plan. Nothing
contained in Section V.H.l.b of the Plan shall constitute or be deemed a
waiver of any claim, right or cause of action that the Debtors or the
Reorganized Debtors may have against any Person in connection with or arising
out of any Tort Claim, including, without limitation, any rights under
Section 157(b) of title 28, United States Code.
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OBJECTIONS TO CLAIMS AND INTERESTS. Except insofar as a Claim or
Interest is allowed hereunder, Reorganized CMI, Reorganized CMM and
Reorganized Holdings shall be entitled and reserve the right to object to
Claims and Interests. Except as otherwise provided in Section V.H.3 of the
Plan and except as otherwise ordered by the Bankruptcy Court, objections to
any Claim or Interest, including, without limitation, Administrative Claims,
shall be Filed and served upon the Holder of such Claim or Interest no later
than 90 days after the Effective Date, unless such period is extended by the
Bankruptcy Court, which extension may be granted on an ex parte basis without
notice or hearing. After the Confirmation Date, only the Debtors, Reorganized
CMI, Reorganized CMM or Reorganized Holdings shall have the authority to
File, settle, compromise, withdraw, or litigate to judgment objections to
Claims and Interests. From and after the Confirmation Date, the Debtors,
Reorganized CMI, Reorganized CMM or Reorganized Holdings may settle or
compromise any Disputed Claim or Disputed Interest in an amount or of a value
of $75,000 or less, other than Claims or Interests of Insiders (as defined in
the Bankruptcy Code), without approval of the Bankruptcy Court. Except as (i)
specified otherwise herein, or (ii) ordered by the Bankruptcy Court, all
Disputed Claims or Disputed Interests shall be resolved by the Bankruptcy
Court. The failure of the Debtors to object to any Claim or Interest for
voting purposes shall not be deemed to be a waiver of the Debtors' or
Reorganized Debtors' right to object to any Claim or Interest in whole or in
part thereafter.
PROFESSIONALS, CLAIMS. Except as otherwise ordered by the Bankruptcy
Court, objections to Claims of professionals shall be governed by the
provisions of Section IV.A.3.b of the Plan.
NO DISTRIBUTIONS PENDING ALLOWANCE. Notwithstanding any other
provisions of the Plan, no payments or distributions will be made on account
of a Disputed Claim or a Disputed Interest until such Claim or Interest
becomes an Allowed Claim or Allowed Interest.
DISTRIBUTIONS ON ACCOUNT OF DISPUTED CLAIMS AND INTERESTS ONCE THEY
ARE ALLOWED. Within 30 days after the end of each calendar quarter following
the Effective Date, the applicable Disbursing Agent will make all
distributions on account of any Disputed Claim or Disputed Interest that has
become an Allowed Claim or Allowed Interest during the preceding calendar
quarter. Such distributions will be made pursuant to the provisions of the
Plan governing the applicable Class. Holders of Disputed Claims or Disputed
Interests that are ultimately allowed will also be entitled to receive, on
the basis of the amount ultimately allowed: (i) matured and payable interest,
if any, at the rate provided for the Class to which such Claim belongs; and
(ii) any interest payments, dividends or other payments made to the Class to
which such Claim or Interest belongs, but held pending distribution.
SETOFFS
Except with respect to any contract, instrument, release, indenture
or other agreement or document created in connection with the Plan, the
Debtors, Reorganized CMI, Reorganized CMM or Reorganized Holdings, as the
case may be, may, pursuant to Section 553 or section 502(d) of the Bankruptcy
Code or applicable nonbankruptcy law, set off against any Allowed Claim and
the distributions to be made pursuant to the Plan on account of such Claim
(before any distribution is made on account of such Claim), the claims,
rights and causes of action of any nature that the Debtors, Reorganized CMI,
Reorganized CMM or Reorganized Holdings may hold against the Holder of such
Allowed Claim; provided, however, that neither the failure to effect such a
setoff nor the allowance of any Claim hereunder shall constitute a waiver or
release by the Debtors, Reorganized CMI, Reorganized CMM or Reorganized
Holdings of any such claims, rights and causes of action that the Debtors,
Reorganized CMI, Reorganized CMM or Reorganized Holdings may possess against
such Holder.
TERMINATION OF SUBORDINATION
The classification and manner of satisfying all Claims and Interests
under the Plan and the distributions thereunder take into consideration all
contractual, legal and equitable subordination rights, whether arising under
any agreement, general principles of equitable subordination, Section 510 of
the Bankruptcy Code or otherwise, that a Holder of a Claim or Interest may
have against other Claim or Interest Holders with respect to any distribution
made pursuant to the Plan. On the Effective Date, all contractual, legal or
equitable subordination rights that such Holder may have with respect to any
distribution to be made pursuant to the Plan shall be deemed to be waived,
discharged and terminated, and all actions related to the enforcement of such
subordination rights will be permanently enjoined. Accordingly, distributions
pursuant to the Plan to Holders of Allowed Claims and Allowed Interests shall
not be
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subject to payment to a beneficiary of such terminated subordination rights,
or to levy, garnishment, attachment or other legal process by any beneficiary
of such terminated subordination rights.
INDIVIDUAL HOLDER PROOFS OF INTEREST
Individual Holders of Interests in Classes A14, A16, A18, A20, A21,
A22, B7 and C7 are not required to File proofs of Interests unless they
disagree with the number of shares set forth on the applicable stock register.
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
ASSUMPTIONS. Except as otherwise provided herein, on the Effective
Date, pursuant to Section 365 of the Bankruptcy Code, the Debtors will assume
each executory contract and unexpired lease entered into by the Debtors prior
to the Petition Date that has not previously (a) expired or terminated
pursuant to its own terms or (b) been assumed or rejected pursuant to Section
365 of the Bankruptcy Code. The Confirmation Order will constitute an Order
of the Bankruptcy Court approving the assumptions described in Section VII.A
of the Plan, pursuant to Section 365 of the Bankruptcy Code, as of the
Effective Date.
CURE OF DEFAULTS IN CONNECTION WITH ASSUMPTION. Any monetary amounts
by which each executory contract and unexpired lease to be assumed pursuant
to the Plan is in default will be satisfied, pursuant to Section 365(b)(1) of
the Bankruptcy Code, at the option of the Debtors, Reorganized CMI,
Reorganized CMM or Reorganized Holdings, as the case may be: (a) by payment
of the default amount in Cash on the Effective Date or as soon as practicable
thereafter; or (b) on such other terms as are agreed to by the parties to
such executory contract or unexpired lease.
If there is a dispute regarding: (i) the amount of any cure
payments; (ii) the ability of Reorganized CMI, Reorganized CMM or Reorganized
Holdings to provide "adequate assurance of future performance" (within the
meaning of Section 365 of the Bankruptcy Code) under the contract or lease to
be assumed; or (iii) any other matter pertaining to assumption, the cure
payments required by Section 365(b)(1) of the Bankruptcy Code will be made
following the entry of a Final Order resolving the dispute and approving the
assumption.
REJECTIONS. Except as otherwise provided in the Plan on the
Effective Date, pursuant to Section 365 of the Bankruptcy Code, the Debtors
will reject each of the executory contracts and unexpired leases listed on a
schedule to be filed prior to the Confirmation Hearing (the "Contract
Rejection Schedule") provided, however, that the Debtors reserve the right,
at any time prior to the Effective Date, to amend such schedule to delete any
executory contract or unexpired lease listed therein, thus providing for its
assumption pursuant to Sections VII.A and B of the Plan. Each contract and
lease listed on the Contract Rejection Schedule will be rejected only to the
extent that any such contract or lease constitutes an executory contract or
unexpired lease. Listing a contract or lease on the Contract Rejection
Schedule does not constitute an admission by the Debtors, Reorganized CMI,
Reorganized CMM or Reorganized Holdings that such contract or lease is an
executory contract or unexpired lease or that the Debtors, Reorganized CMI,
Reorganized CMM or Reorganized Holdings has any liability thereunder. The
Confirmation Order shall constitute an Order of the Bankruptcy Court
approving such rejections, pursuant to Section 365 of the Bankruptcy Code, as
of the Effective Date.
BAR DATE FOR REJECTION DAMAGES. If the rejection of an executory
contract or unexpired lease pursuant to Section VII.C of the Plan gives rise
to a Claim by the other party or parties to such contract or lease, such
Claim shall be forever barred and shall not be enforceable against the
Debtors, Reorganized CMI, Reorganized CMM or Reorganized Holdings, their
successors or properties unless (a) a stipulation with respect to the amount
and nature of such Claim has been entered into by either of the Debtors,
Reorganized CMI, Reorganized CMM or Reorganized Holdings, as applicable, and
the Holder of such Claim in connection with the rejection of such executory
contract or unexpired lease, or (b) a Proof of Claim is Filed and served on
Reorganized CMI, Reorganized CMM or Reorganized Holdings, as the case may be,
and counsel for Reorganized CMI, Reorganized CMM or Reorganized Holdings, as
the case may be, within 30 days after the Effective Date or such earlier date
as established by the Bankruptcy Court. Unless otherwise ordered by the
Bankruptcy Court, all Allowed Claims arising from the rejection of executory
contracts and unexpired leases shall be treated as Claims in Class A10, B5 or
C5 as applicable.
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CONTINUATION OF CERTAIN RETIREMENT AND OTHER BENEFITS. All
employment, retirement and other related agreements and incentive
compensation plans and programs to which CMI, CMM or Holdings is a party are
treated as executory contracts under the Plan and will be assumed or rejected
pursuant to Section VII of the Plan and Sections 365 and 1123 of the
Bankruptcy Code.
EXECUTORY CONTRACTS AND UNEXPIRED LEASES ENTERED INTO AND OTHER
OBLIGATIONS INCURRED AFTER THE PETITION DATE. Executory contracts and
unexpired leases entered into and other obligations incurred after the
Petition Date by the Debtors will be performed by the Debtors or the
Reorganized Debtors, in the ordinary course of their businesses. Accordingly,
such executory contracts, unexpired leases and other obligations will, except
as provided in such contracts, leases or other obligations, survive and
remain unaffected by entry of the Confirmation Order.
LEGAL EFFECTS OF THE PLAN
CONTINUED CORPORATE EXISTENCE; VESTING OF ASSETS IN REORGANIZED CMI,
CMM AND HOLDINGS. Reorganized CMI will exist after the Effective Date as a
separate corporate entity, with all the powers of a corporation under the
general corporate law of Maryland. Reorganized CMM will exist after the
Effective Date as a separate corporate entity, with all the powers of a
corporation under the general corporate law of Maryland. Reorganized Holdings
will exist after the Effective Date as a separate limited partnership entity
with all the powers of a limited partnership under the applicable partnership
law of Delaware. Except as otherwise provided in the Plan or the Confirmation
Order, on the Effective Date, all property of CMI's Estate will vest in
Reorganized CMI, all property of CMM's Estate will vest in Reorganized CMM,
and all property of Holdings Estate will vest in Reorganized Holdings, all
free and clear of all Claims, liens, encumbrances and Interests of Holders of
Claims and Holders of Old Securities. From and after the Effective Date,
Reorganized CMI, CMM and Holdings may operate their business and use,
acquire, and dispose of property and settle and compromise claims or
interests arising on or after the Effective Date without supervision by the
Bankruptcy Court and free of any restrictions of the Bankruptcy Code, the
Bankruptcy Rules or the Local Bankruptcy Rules, other than those restrictions
expressly imposed by the Plan or the Confirmation Order.
CANCELLATION OF OLD SECURITIES AND RELATED AGREEMENTS. On the
Effective Date, except as otherwise provided by the Plan, the Old Securities
and all instruments, indentures and agreements evidencing or governing such
Old Securities will be deemed terminated, cancelled, extinguished and of no
further force or effect without any further action on the part of the
Bankruptcy Court, or any person or any government entity or agency, and
except as otherwise provided in the Plan, CMI, CMM and Holdings, will be
released from any and all obligations under such securities, instruments,
indentures and agreements. Holders of cancelled Old Securities will have no
rights arising from or relating to such Old Securities or the cancellation
thereof, except the rights provided pursuant to the Plan.
NO FURTHER CORPORATE ACTION. Each of the matters provided for under
the Plan involving the corporate structure of any Debtor or Reorganized
Debtor or corporate action to be taken by or required of any Debtor or
Reorganized Debtor (including, without limitation, approval of the issuance
of the New Securities) shall, as of the Effective Date, be deemed to have
occurred and be effective as provided in the Plan, and shall be authorized
and approved in all respects without any requirement of further action by
stockholders or directors of any of the Debtors or Reorganized Debtors.
IMPLEMENTATION. The Debtors, Reorganized CMI, Reorganized CMM and
Reorganized Holdings are authorized and directed by the Plan to take all
necessary steps, and perform all necessary acts, to consummate the terms and
conditions of the Plan on and after the Effective Date. On or before the
Effective Date, the Debtors may file with the Bankruptcy Court such
agreements and other documents as may be necessary or appropriate to
effectuate or further evidence the terms and conditions of the Plan and the
other agreements referred to herein or contemplated by the Plan.
EFFECTUATING DOCUMENTS AND ACTIONS. The Debtors, Reorganized CMI,
Reorganized CMM and Reorganized Holdings, as the case may be, and each of
their respective appropriate officers shall be authorized to execute and
deliver such contracts, instruments, releases, and other agreements or
documents and take such other
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actions as may be necessary or appropriate to effectuate and further evidence
the terms and conditions of the Plan, the transactions provided for in the
Plan and all other actions in connection therewith.
DISCHARGE OF DEBTORS AND INJUNCTION. Except as otherwise provided in
the Plan or the Confirmation Order: (i) on the Effective Date, the Debtors
shall be deemed discharged and released to the fullest extent permitted by
Section 1141 of the Bankruptcy Code from all Claims and Interests, including,
but not limited to, demands, liabilities, Claims and Interests that arose
before the Effective Date and all debts of the kind specified in Sections
502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not (a) a proof
of Claim or proof of Interest based on such debt or Interest is Filed or
deemed Filed pursuant to Section 501 of the Bankruptcy Code, (b) a Claim or
Interest based on such debt or Interest is allowed pursuant to Section 502 of
the Bankruptcy Code, or (c) the Holder of a Claim or Interest based on such
debt or Interest has accepted the Plan; and (ii) all Persons shall be
precluded from asserting against Reorganized CMI, Reorganized CMM and
Reorganized Holdings, their respective successors, or their respective assets
or properties any other or further Claims or Interests based upon any act or
omission, transaction, or other activity of any kind or nature that occurred
prior to the Effective Date. Except as otherwise provided in the Plan or the
Confirmation Order, the Confirmation Order shall act as a discharge of any
and all Claims against and all debts and liabilities of the Debtors, as
provided in Sections 524 and 1141 of the Bankruptcy Code, and such discharge
shall void any judgment against the Debtors at any time obtained to the
extent that it relates to a Claim discharged.
Except as otherwise provided in the Plan or the Confirmation Order,
on and after the Effective Date, all Persons who have held, currently hold or
may hold a debt, Claim or Interest discharged pursuant to the terms of the
Plan are permanently enjoined from taking any of the following actions on
account of any such discharged debt, Claim or Interest: (i) commencing or
continuing in any manner any action or other proceeding against the Debtors,
Reorganized CMI, Reorganized CMM or Reorganized Holdings, or their respective
successors or their respective properties; (ii) enforcing, attaching,
collecting or recovering in any manner any judgment, award, decree or order
against the Debtors, Reorganized CMI, Reorganized CMM or Reorganized
Holdings, or their respective successors or their respective properties;
(iii) creating, perfecting or enforcing any lien or encumbrance against the
Debtors, Reorganized CMI, Reorganized CMM or Reorganized Holdings, or their
respective successors or their respective properties; and (iv) commencing or
continuing any action, in any manner, in any place that does not comply with
or is inconsistent with the provisions of the Plan or the Confirmation Order.
Any Person, including but not limited to the Debtors, Reorganized CMI,
Reorganized CMM or Reorganized Holdings, injured by any willful violation of
such injunction shall recover actual damages, including costs and attorneys'
fees, and, in appropriate circumstances, may recover punitive damages, from
the willful violator.
LIMITATION OF LIABILITY. None of the Debtors, Reorganized CMI,
Reorganized CMM or Reorganized Holdings, the members of the Committees, the
Indenture Trustee, or any of their respective employees, officers, directors,
agents, or representatives, or any professional persons employed by any of
them (including, without limitation, their respective Designated
Professionals), shall have any responsibility, or have or incur any
liability, to any Person whatsoever (i) for any matter expressly approved or
directed by the Confirmation Order or (ii) under any theory of liability
(except for any claim based upon willful misconduct or gross negligence) for
any act taken or omission made in good faith directly related to formulating,
implementing, confirming, or consummating the Plan, the Disclosure Statement,
or any contract, instrument, release or other agreement or document created
in connection with or contemplated by the Plan; provided, that nothing in
Section XI.B of the Plan shall limit the liability of any Person for breach
of any express obligation it has under the terms of this Plan or any
documents executed in connection therewith or pursuant thereto or under any
other agreement other document entered into by such Person in accordance with
or pursuant to the terms of this Plan (except to the extent expressly
provided in the Confirmation Order) or for any breach of a duty of care owed
to any other Person occurring after the Effective Date.
RELEASES. On the Effective Date, each of the Debtors shall release
unconditionally, and hereby is deemed to release unconditionally (i) each of
the Debtors' then-current and former officers, directors, shareholders,
employees, consultants, attorneys, accountants, financial advisors and other
representatives (solely in their capacities as such) (collectively, the
"Debtor Releasees") and (ii) the Committees and, solely in their capacity as
members or representatives of the Committees, each member, consultant,
attorney, accountant, financial advisor or other representative of the
Committees (collectively the "Committee Releasees") from any and all claims,
obligations, suits, judgments, damages, rights, causes of action and
liabilities whatsoever, whether known or unknown, foreseen
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or unforeseen, existing or hereafter arising, in law, equity or otherwise,
based in whole or in part upon any act or omission, transaction, event or
other occurrence taking place on or after the Petition Date and up to and
including the Effective Date in any way relating to the Reorganization Cases,
the Plan or this Disclosure Statement.
On the Effective Date, each Holder of a Claim or Interest shall be
deemed to have unconditionally released the Debtor Releasees, the Committee
Releasees and each of their then-current and former officers, directors,
shareholders, employees, consultants, attorneys, accountants, financial
advisors and other representatives (solely in their capacities as such) from
any and all claims, obligations, suits, judgments, damages, rights, causes of
action and liabilities whatsoever which any such holder may be entitled to
assert, whether known or unknown, foreseen or unforeseen, existing or
hereafter arising, in law, equity or otherwise, based in whole or in part
upon any act or omission, transaction, event or other occurrence taking place
on or after the Petition Date and up to and including the Effective Date in
any way relating to the Reorganization Cases, the Plan or the Disclosure
Statement, excepting, however, from such release any obligation owing to a
Holder of an Allowed Claim or Allowed Interest provided for in this Plan or
the Confirmation Order.
INDEMNIFICATION. The obligations of the Debtors as of the Petition
Date to indemnify their present and former directors or officers,
respectively, against any obligations pursuant to the Debtors' articles of
incorporation, by-laws, applicable state law or specific agreement or
resolution, or any combination of the foregoing, shall survive confirmation
of the Plan, remain unaffected thereby, be assumed by Reorganized CMI,
Reorganized CMM or Reorganized Holdings, as the case may be, and not be
discharged. The Debtors shall fully indemnify, and Reorganized CMI,
Reorganized CMM or Reorganized Holdings, as the case may be, shall assume the
Debtors' obligations to indemnify, any person by reason of the fact that he
or she is or was serving as a director, officer, employee, agent,
professional, member, or other authorized representative (in each case, as
applicable) of any of the Debtors (collectively, the "Indemnitees") against
any claims, liabilities, actions, suits, damages, fines, judgments or
expenses (including reasonable attorneys' fees and expenses), arising during
the course of, or otherwise in connection with or in any way related to, the
negotiation, preparation, formulation, solicitation, dissemination,
implementation, confirmation and consummation of the Plan and the
transactions contemplated thereby and the Disclosure Statement in support
thereof, provided, however, that the foregoing indemnification shall not
apply to any liabilities arising from the gross negligence or willful
misconduct of any Indemnitee. In addition, Reorganized CMI shall fully
indemnify the CMI Equity Committee and its professionals against any claims,
liabilities, actions, suits, damages, fines, judgments, expenses (including
reasonable attorneys' fees and expenses) as a result of or arising from the
CMI Equity Committee being a co-proponent of the Plan and Disclosure
Statement, provided, however, that the foregoing indemnification shall not
apply to any liabilities arising from gross negligence or willful misconduct
of any such indemnitee. For purposes of the following sentences in this
paragraph, reference to the term "Indemnitee" shall include the CMI Equity
Committee and its professionals. If any claim, action or proceeding is
brought or asserted against an Indemnitee in respect of which indemnity may
be sought from Reorganized CMI, Reorganized CMM or Reorganized Holdings, the
Indemnitee shall promptly notify Reorganized CMI, in writing and, in any such
event, Reorganized CMI shall assume the defense thereof including the
employment of counsel reasonably satisfactory to the Indemnitee, and the
payment of all expenses of such Indemnitee. The Indemnitee shall have the
right to employ separate counsel in any such claim, action or proceeding and
to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the Indemnitee unless (a) Reorganized CMI
has agreed to pay the fees and expenses of such counsel, or (b) Reorganized
CMI shall have failed to assume promptly the defense of such claim, action or
proceeding or to employ counsel reasonably satisfactory to the Indemnitee in
any such claim action or proceeding, or (c) the named parties in any such
claim, action or proceeding (including any impleaded parties) include both
the Indemnitee and Reorganized CMI, Reorganized CMM or Reorganized Holdings,
as the case may be, and the Indemnitee believes, in the exercise of its
business judgment and in the opinion of its legal counsel, reasonably
satisfactory to Reorganized CMI, that the joint representation of Reorganized
CMI, Reorganized CMM or Reorganized Holdings, as the case may be, and the
Indemnitee will likely result in a conflict of interest (in which case, if
the Indemnitee notifies Reorganized CMI in writing that it elects to employ
separate counsel at the expense of Reorganized CMI, Reorganized CMI shall not
have the right to assume the defense of such action or proceeding on behalf
of the Indemnitee). In addition, neither Reorganized CMI, nor Reorganized CMM
nor Reorganized Holdings shall effect any settlement or release from
liability in connection with any matter for which the Indemnitee would have
the right to indemnification from Reorganized CMI, Reorganized CMM or
Reorganized Holdings unless such settlement contains a full and unconditional
release of the Indemnitee, or a release of the
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Indemnitee reasonably satisfactory in form and substance to the Indemnitee.
Anything in the Plan notwithstanding, no Securities Claims shall be treated
as part of Classes A9 or A10 under the Plan.
It should be noted in connection with the foregoing paragraph that
certain courts have held, and it is the position of the SEC, that
indemnification for liabilities arising under the Securities Act is against
public policy and unenforceable.
VESTING OF ASSETS. Except as otherwise provided in the Plan or the
Confirmation Order, on the Effective Date, all property of CMI's Estate shall
vest in Reorganized CMI and all property of CMM's Estate shall vest in
Reorganized CMM and all property of Holdings' estate shall vest in
Reorganized Holdings, all free and clear of all Claims, liens, encumbrances
and Interests of Holders of Claims and Holders of Old Securities. From and
after the Effective Date, Reorganized CMI, Reorganized CMM and Reorganized
Holdings may operate their business and use, acquire and dispose of property
and settle and compromise claims or interests arising on or after the
Effective Date without supervision by the Bankruptcy Court and free of any
restrictions of the Bankruptcy Code, the Bankruptcy Rules or the Local
Bankruptcy Rules, other than those restrictions expressly imposed by the Plan
or the Confirmation Order.
PRESERVATION OF CAUSES OF ACTION. Except as otherwise provided
herein, or in any contract, instrument, release or other agreement entered
into in connection with or pursuant to the Plan, Reorganized CMI, Reorganized
CMM and Reorganized Holdings shall retain (and may enforce) any claims,
rights and causes of action that the Debtors or the Estates may hold against
any Person, including, but not limited to, any claims, rights or causes of
action under Sections 544 through 550 of the Bankruptcy Code or any similar
provisions of state law, or any other statute or legal theory. With respect
to avoidance power causes of action under Sections 544, 547 and 548 of the
Bankruptcy Code, except as any such causes of action are generally referenced
in the Plan, the Disclosure Statement or exhibits thereto, and except any
such actions as may be brought prior to the Confirmation Hearing, the Debtors
are presently unaware of any other such causes of action that any of them
intends to pursue prior to or subsequent to the Effective Date.
Notwithstanding the foregoing, creditors and interest holders should make
their decision on whether to vote to accept or reject the Plan without
relying on the preceding sentence.
RETENTION OF BANKRUPTCY COURT JURISDICTION. To the maximum extent
permitted by the Bankruptcy Code and other applicable law, the Bankruptcy
Court shall have jurisdiction of all matters arising out of, and related to,
the Reorganization Cases and the Plan pursuant to, and for the purpose of,
Sections 105(a) and 1142 of the Bankruptcy Code, including, without
limitation, jurisdiction to:
1. Allow, disallow, determine, liquidate, classify, estimate or establish the
priority or secured or unsecured status of any Claim or Interest, including
the resolution of any request for payment of any Administrative Claim, the
resolution of any objections to the allowance or priority of Claims or
Interests and the resolution of any dispute as to the treatment necessary to
Reinstate a Claim pursuant to the Plan;
2. Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Plan, for periods ending before the Effective Date;
3. Resolve any matters related to the assumption or rejection of any
executory contract or unexpired lease to which any of the Debtors is a party
or with respect to which any of the Debtors may be liable, and to hear,
determine and, if necessary, liquidate any Claims arising therefrom;
4. Ensure that distributions to Holders of Allowed Claims or Allowed
Interests are accomplished pursuant to the provisions of the Plan;
5. Decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any applications
involving the Debtors, Reorganized CMI, Reorganized CMM or Reorganized
Holdings that may be pending on the Effective Date;
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6. Enter such Orders as may be necessary or appropriate to implement or
consummate the provisions of the Plan and all contracts, instruments,
releases, indentures and other agreements or documents created in connection
with or pursuant to the Plan, the Disclosure Statement or the Confirmation
Order, except as otherwise provided herein;
7. Resolve any cases, controversies, suits or disputes that may arise in
connection with the consummation, interpretation or enforcement of the Plan
or the Confirmation Order, including the release and injunction provisions
set forth in and contemplated by the Plan and the Confirmation Order, or any
entity's rights arising under or obligations incurred in connection with the
Plan or the Confirmation Order;
8. Enter such Orders as may be necessary or appropriate to correct any
defect, cure any omission, or reconcile any inconsistency in this Plan or the
Confirmation Order as may be necessary to carry out the purposes and intent
of the Plan;
9. Enter such Orders as may be necessary or appropriate to enforce, implement
or interpret the terms and conditions of this Plan and resolve any objections
filed with respect to any actions proposed to be taken in connection with or
pursuant to the provisions of the Plan;
10. Enter such Orders as may be necessary or appropriate to approve
agreements, settlements or compromises in connection with matters pending on
the Effective Date or arising thereafter in connection with implementation of
provisions of the Plan;
11. Determine all adversary proceedings and contested matters to recover or
enforce rights with respect to property of any of the Debtors or their
Estates or to obtain other relief relating to causes of actions or claims
under the Bankruptcy Code or other applicable law including, but not limited
to, any actions brought under Sections 541 through 553 of the Bankruptcy Code;
12. Determine matters concerning state, local or federal taxes pursuant to
Sections 346, 505, 525, 1146 and any other tax-related provisions of the
Bankruptcy Code;
13. Enter such Orders as may be necessary or appropriate to enforce and
interpret the provisions of the Confirmation Order;
14. Subject to any restrictions on modifications provided herein or in any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan, modify this Plan before or after the
Effective Date pursuant to Section 1127 of the Bankruptcy Code or modify the
Disclosure Statement, the Confirmation Order or any contract, instrument,
release, indenture or other agreement or document created in connection with
or pursuant to the Plan, the Disclosure Statement or the Confirmation Order,
or remedy any defect or omission or reconcile any inconsistency in any
Bankruptcy Court Order, the Plan, the Disclosure Statement, the Confirmation
Order or any contract, instrument, release, indenture or other agreement or
document created in connection with or pursuant to the Plan, the Disclosure
Statement or the Confirmation Order, in such manner as may be necessary or
appropriate to consummate the Plan, to the extent authorized by the
Bankruptcy Code;
15. Issue injunctions, enter and implement other Orders or take such other
actions as may be necessary or appropriate to restrain interference by any
entity with consummation, implementation or enforcement of the Plan or the
Confirmation Order;
16. Enter and implement such Orders as are necessary or appropriate if the
Confirmation Order is for any reason modified, stayed, reversed, revoked or
vacated;
17. Except as otherwise provided in the Plan, or with respect to specific
matters, in the Confirmation Order or any other Order entered in connection
with the Reorganization Cases, determine any other matters that may arise in
connection with or relating to the Plan, this Disclosure Statement, the
Confirmation Order or any contract,
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instrument, release, indenture or other agreement or document created in
connection with or pursuant to the Plan, this Disclosure Statement or the
Confirmation Order; and
18. Enter an Order or Orders closing the Reorganization Cases.
FAILURE OF BANKRUPTCY COURT TO EXERCISE JURISDICTION. If the
Bankruptcy Court abstains from exercising or declines to exercise
jurisdiction, or is otherwise without jurisdiction over any matter arising
out of the Reorganization Cases, including the matters set forth in Section
XI.G of the Plan, Section XI.G of the Plan shall not prohibit or limit the
exercise of jurisdiction by any other court having competent jurisdiction
with respect to such matter.
COMMITTEES. On the Effective Date, all Committees, shall be
dissolved and the members of such Committees and their professionals shall be
released and discharged from all further rights and duties arising from or
related to the Reorganization Cases. The professionals retained by such
Committees and the members thereof shall not be entitled to compensation or
reimbursement of expenses incurred for services rendered after the Effective
Date other than for services rendered in connection with any application for
allowance of compensation and reimbursement of expenses pending as of, or
timely Filed after, the Effective Date.
VI. CONFIRMATION AND CONSUMMATION PROCEDURES
A. SOLICITATION OF ACCEPTANCES
As permitted by the Bankruptcy Code, the Debtors and the CMI Equity
Committee are soliciting, in good faith and in compliance with the applicable
provisions of the Bankruptcy Code, the acceptance of the Plan by all Classes
of Claims and Interests that are "Impaired" under the Plan and that are
entitled to vote on the Plan. The solicitation of acceptances from Holders of
Claims or Interests in unimpaired Classes is not required under the
Bankruptcy Code. The following Classes are Impaired and are entitled to vote
on the Plan:
Classes A1, A2, A3, A4, A5, A6, A7, A9, A10, A11, A13, A14, A16,
A18, A20, A21, B1, B2, B5, B6, C1, C2, C5 and C6.
A plan is accepted by an impaired class of claims if holders of at
least two-thirds in dollar amount and more than one-half in number of claims
of that class vote to accept the plan. A plan is accepted by an impaired
class of interests if holders of at least two-thirds in amount vote to accept
the plan. Only those holders of claims or interests who actually vote count
in these tabulations.
In addition to this voting requirement, Section 1129 of the
Bankruptcy Code requires that a plan be accepted by each holder of a claim or
interest in an impaired class or that the plan otherwise be found by the
bankruptcy court to be in the best interests of each holder of a claim or
interest in such class. In addition, each impaired class must accept the plan
for the plan to be confirmed without application of the "fair and equitable"
and "unfair discrimination" tests in Section 1129(b) of the Bankruptcy Code
discussed below.
Any Holder of an Impaired Claim or Interest is entitled to accept or
reject the Plan (unless such claim or Interest has been disallowed by the
Bankruptcy Court for purposes of accepting or rejecting the Plan). The Voting
Record Date for determining which Holders of Interests in Classes A9, A14,
A16 and A18, A20 and A21 are entitled to accept or reject the Plan is
September 5, 2000.
B. CONFIRMATION HEARING
The Bankruptcy Code requires the Bankruptcy Court, after notice, to
hold a hearing on the Confirmation of the Plan. The Confirmation Hearing has
been scheduled for 10:00 a.m., Eastern Time, on November 15, 2000. The
Confirmation Hearing may be adjourned from time to time by the Bankruptcy
Court without further notice other than an announcement of the adjourned date
made at the Confirmation Hearing. Any objection to Confirmation of the Plan
must be made in writing and filed with the Bankruptcy Court and served upon
the following so that they are received no later than November 3, 2000:
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<TABLE>
<S> <C>
VENABLE, BAETJER AND HOWARD, LLP AKIN, GUMP, STRAUSS, HAUER
Richard L. Wasserman & FELD, L.L.P.
1800 Mercantile Bank and Trust Building Stanley J. Samorajczyk
Two Hopkins Plaza Michael S. Stamer
Baltimore, Maryland 21201 1333 New Hampshire Avenue, N.W.
(410) 244-7400 Washington, D.C. 20036
(202) 887-4000
Co-Counsel to CRIIMI MAE Inc.
and CRIIMI MAE Holdings II, L.P.
SHULMAN, ROGERS, GANDAL, PORDY COVINGTON & BURLING
& ECKER, P.A. Michael St. Patrick Baxter
Morton A. Faller Dennis B. Auerbach
11921 Rockville Pike 1201 Pennsylvania Avenue, NW
Third Floor Washington, D.C. 20004-2401
Rockville, MD 20852-2753 (202) 662-6000
(301) 231-0928
Counsel to CRIIMI MAE Management, Inc. Counsel to the Official Committee of
Equity Security Holders
of CRIIMI MAE Inc.
ARNOLD & PORTER WHITEFORD, TAYLOR & PRESTON, LLP
Daniel M. Lewis Paul M. Nussbaum
555 Twelfth Street, N.W. Seven Saint Paul Street, Suite 1400
Washington, D.C. 20004 Baltimore, Maryland 21202-1626
(202) 942-5000 (410) 347-8700
Counsel to the Official Committee of Counsel to the Official Committee of
Unsecured Creditors of CRIIMI MAE Inc. Unsecured Creditors of CRIIMI MAE
Management, Inc.
</TABLE>
C. CONFIRMATION
At the Confirmation Hearing, the Bankruptcy Court will confirm the
Plan only if the Plan satisfies all of the requirements of Section 1129 of
the Bankruptcy Code. The requirements, in relevant part, are the following:
a) The Plan and the Debtors must comply with the applicable
provisions of the Bankruptcy Code.
b) The Plan must have been proposed in good faith and not by any
means forbidden by law.
c) Any payment made or to be made by the Debtors, or by an entity
issuing securities, or acquiring property under the Plan, for services or for
costs and expenses in, or in connection with, the Chapter 11 Cases or in
connection with the Plan and incident to the Chapter 11 Cases must have been
approved by or be subject to, the approval of the Bankruptcy Court as
reasonable.
d) The Debtors must have disclosed the identity and affiliations of
any individual proposed to serve, after the Confirmation of the Plan, as a
director or officer of the Debtors under the Plan, and the appointment to or
continuance in such office by such individual must be consistent with the
interests of creditors and equity security holders and with public policy.
The Debtors must have disclosed the identity of any "insider" (as defined in
Section 101 of the Bankruptcy Code) who will be employed or retained by
Reorganized CMI, CMM and Holdings and the nature of any compensation for such
insider.
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e) Any government regulatory commission with jurisdiction, after the
Confirmation Date, over the rates of the Debtors has approved any rate change
provided for in the Plan, or such rate change is expressly conditioned upon
such approval.
f) With respect to each Impaired Class of Claims or Interests, each
Holder of a Claim or Interest in such class must either accept the Plan or
receive or retain under the Plan on account of such Claim or Interest,
property of a value, as of the Effective Date that is not less than the
amount that such Holder would receive or retain if the Debtors were
liquidated on the Effective Date under Chapter 7 of the Bankruptcy Code.
g) Each Class of Claims or Interests must either accept the Plan or
not be Impaired under the Plan. If this requirement is not met, the Plan may
still be confirmed pursuant to Section 1129(b) of the Bankruptcy Code.
h) Except to the extent that the Holder of a particular Claim has
agreed to a different treatment of such Claim, the Plan must provide that (i)
Administrative Expenses will be paid in full in Cash on the Effective Date,
(ii) Priority Claims will be paid in full in Cash on the Effective Date, or
if the Class of Priority Claims accepts the Plan, the Plan may provide for
deferred Cash payments, of a value, as of the Effective Date, equal to the
Allowed amount of such Priority Claims, and (iii) the Holder of a Priority
Tax Claim will receive on account of such Claim deferred Cash payments over a
period not exceeding six (6) years after the date of assessment of such
Claim, of a value as of the Effective Date, equal to the Allowed amount of
such Claim.
i) If a class of Claims is Impaired under the Plan, at least one
Class of Claims that is Impaired by the Plan must accept the Plan, such
acceptance to be determined without giving effect to any acceptance of the
Plan by an "insider."
j) Confirmation of the Plan must not be likely to be followed by the
liquidation, or the need for further financial reorganization, of the Debtors
or any successor of the Debtors under the Plan.
k) All fees payable under Section 1930 of title 28, United States
Code, as determined by the Bankruptcy Court at the Confirmation Hearing, must
have been paid or the Plan must provide for the payment of all such fees on
the Effective Date.
l) The Plan provides for the continuation after the Effective Date
of payment of all retiree benefits, as that term is defined in Section 1114
of the Bankruptcy Code, and at the level established pursuant to Section
1114, at any time prior to the Confirmation Date, for the duration of the
period the Debtors have obligated themselves to provide such benefits.
The Debtors believe that the Plan satisfies all of the statutory
requirements of Chapter 11 of the Bankruptcy Code. Certain of these
requirements are discussed in greater detail below.
BEST INTERESTS TEST
In order to the meet the "best interests" test of Section 1129(a)(7)
of the Bankruptcy Code, the Debtors must establish that each holder of a
Claim or Interest in an Impaired class either (i) has accepted the Plan or
(ii) will receive or retain under the Plan in respect of its Claim or
Interest, property of a value, as of the Effective Date, that is not less
than the amount such holder would receive or retain if the Debtors were
liquidated under Chapter 7 of the Bankruptcy Code.
To determine the recovery that Creditors and Holders of Interests
would receive if the Debtors were to be liquidated, the Bankruptcy Court must
determine the amount of cash that would be generated from the liquidation of
the assets and properties of the Debtors in a Chapter 7 liquidation case. The
dollar amount that would be available for satisfaction of Claims and
Interests would consist of the proceeds resulting from the disposition of the
assets of the Debtors in a liquidation case plus the cash held by the Debtors
at the time of the commencement of the liquidation case and any interest
earned on the investment thereof minus the costs and expenses of the
liquidation and any additional administrative and priority claims that may
result from the termination of the Debtors' business and the completion of
its liquidation under Chapter 7.
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The Debtors' costs of liquidation under Chapter 7 of the Bankruptcy
Code would include the fees payable to a trustee (or trustees) in bankruptcy
and to any additional attorneys and other professionals engaged by such
trustee (or trustees), operating costs to effectuate the liquidation of the
Debtors' assets plus any unpaid expenses incurred by the Debtors during the
Chapter 11 Cases including compensation to and reimbursement of expenses of,
attorneys, financial advisors and accountants and costs and expenses of
members of the Committees that are allowed. The foregoing types of Claims and
such other Claims as may arise in the liquidation case or result from the
Chapter 11 Cases would be paid in full from the liquidation proceeds before
the balance of those proceeds would be available to pay Unsecured Claims. In
addition, additional Claims would arise by reason of the rejection of
unexpired leases and executory contracts.
Under the "best interest" test, all entities holding Unsecured
Claims in a particular class having the same rights upon liquidation would be
treated as a single class for purposes of determining the potential
distribution of the proceeds from the liquidation of the assets of the
Debtors under Chapter 7. The distributions payable to each of the creditors
in a Class from the liquidation proceeds would be calculated pro rata
according to the amount of the Claim in such Class held by each Creditor. The
Debtors believe that the most likely outcome of liquidation proceeding under
Chapter 7 would be the application of the rule of absolute priority of
distributions. Under this rule, (i) no holders of Unsecured Claims would
receive any distribution until all holders of Administrative Expenses,
Priority Claims and Priority Tax Claims were paid in full with interest and
(ii) no holder of an Interest would receive any distribution until all
Holders of General Unsecured Claims were paid in full with interest.
The Debtors have carefully considered the probable effects of
liquidation under Chapter 7 of the Bankruptcy Code on the ultimate proceeds
available for distribution to creditors and holders of Interests, including
the following:
a) the probable costs and expenses of such liquidation;
b) the possible adverse effect of liquidation under Chapter 7 on the
realizable values of the Debtors' assets and properties;
c) the possible adverse effect of liquidation under Chapter 7 on the
salability of the Debtors' business on a going-concern basis as a result of
the possible loss of key employees, the goodwill of customers, vendors and
suppliers and the negative effect on the Debtors' reputation; and
d) the possible substantial increase in Claims which would rank
prior to or on a parity with those of unsecured creditors. After considering
these factors, among others, the Debtors have prepared a liquidation analysis
(the "Liquidation Analysis") (set forth in Exhibit C attached hereto), of the
projected proceeds of a hypothetical Chapter 7 liquidation and the resulting
distributions of such proceeds to the various Classes of Claims and Holders
of Interests. The Liquidation Analysis demonstrates that the value of the
distributions to each Class of Claims and Interests pursuant to the Plan is
equal to or greater than the value of the distributions to such Class in a
Chapter 7 liquidation.
Although the Liquidation Analysis assumes that full distributions to
creditors of the liquidation proceeds would occur within six months of the
commencement of the hypothetical Chapter 7 case, the Debtors also believe
that distributions of the proceeds of the liquidation could be delayed for a
significantly greater period, because of the time necessary to complete the
liquidation, the possibility of litigation among the Holders of various
Classes of Claims of Interests and the additional time required thereafter to
litigate and resolve Disputed Claims and prepare for distributions. If such
further delay were to occur, the present value of future distributions to
creditors under Chapter 7 would be further reduced.
FEASIBILITY
In order to meet the "feasibility" test under Section 1129(a)(11) of
the Bankruptcy Code, the Debtors must establish that Confirmation of the Plan
is not likely to be followed by the liquidation, or the need for further
financial reorganization, of the Debtors. To determine whether the Plan meets
this requirement, the Debtor has prepared
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projected financial statements for Reorganized CMI, CMM and Holdings on a
consolidated basis for eight annual periods commencing on the Effective Date
or on the assumed Effective Date. See Exhibit B.
Although the Projections are based upon the Debtors' best estimates,
no representations are made with respect to the accuracy thereof or the
ability of Reorganized CMI, CMM and Holdings to achieve the Projections. The
Projections are based upon a number of assumptions, many of which are subject
to substantial uncertainty. Some assumptions inevitably will not materialize
and unanticipated events and circumstances occurring subsequent to the date
of preparation of the Projections may affect actual results. Therefore,
actual operating results may vary materially from the projected operating
results set forth in the Projections.
Based upon the Projections, the Debtors and the CMI Equity Committee
believe the Plan is feasible and will be prepared to so demonstrate at the
Confirmation Hearing.
Each party in interest is urged to carefully examine the Projections
and the related assumptions in evaluating the feasibility of the Plan.
CONFIRMATION OVER A DISSENTING CLASS
The Bankruptcy Code contains provisions authorizing the confirmation
of a plan even if it is not accepted by all impaired classes, as long as at
least one impaired class of claims (without including any acceptance of the
plan by an insider) has accepted it. These so-called "cramdown" provisions
are set forth in Section 1129(b) of the Bankruptcy Code. As indicated above,
a plan may be confirmed under the cramdown provisions if, in addition to
satisfying the other requirements of Section 1129 of the Bankruptcy Code, it
(i) is "fair and equitable" and (ii) "does not discriminate unfairly" with
respect to each class of claims or interests that is impaired under, and has
not accepted, the plan. The "fair and equitable" standard, also known as the
"absolute priority rule," requires, among other things, that unless a
dissenting class of claims or a class of interests receives full compensation
for its allowed claims or allowed interests, no holder of claims or interests
in any junior class may receive or retain any property on account of such
claims. The Bankruptcy Code establishes different "fair and equitable" tests
for secured creditors, unsecured creditors and equity holders, as follows:
Secured Creditors: either (i) each impaired secured creditor retains
its liens securing its secured claim and receives on account of its secured
claim deferred cash payments having a present value equal to the amount of
its allowed secured claim, (ii) each impaired secured creditor realizes the
"indubitable equivalent" of its allowed secured claim, or (iii) the property
securing the claim is sold free and clear of liens with such liens to attach
to the proceeds, and the liens against such proceeds are treated in
accordance with clause (i) or (ii) of this paragraph.
Unsecured Creditors: either (i) each impaired unsecured creditor
receives or retains under the plan of reorganization property of a value
equal to the amount of its allowed claim, or (ii) the holders of claims and
equity interests that are junior to the claims of the nonaccepting class do
not receive any property under the plan of reorganization on account of such
claims and equity interests.
Equity Holders: either (i) each equity holder will receive or retain
under the plan of reorganization property of a value equal to the greater of
(a) the fixed liquidation preference or redemption price, if any, of such
stock or (b) the value of the stock, or (ii) the holders of interests that
are junior to the nonaccepting class will not receive any property under the
plan of reorganization.
The "fair and equitable" standard has also been interpreted to
prohibit any class senior to a dissenting class from receiving under a plan
more than 100% of its allowed claims. The requirement that a plan not
"discriminate unfairly" means, among other things, that a dissenting class
must be treated substantially equally with respect to other classes of equal
rank.
The Debtors and the CMI Equity Committee believe that, if necessary,
the Plan may be crammed down over the dissent of Classes of certain Claims
and Interests, in view of the treatment proposed for such Classes. See "PLAN
OF REORGANIZATION -- Treatment of Claims and Interests Under the Plan" for
information concerning the treatment of various Classes depending on which
Classes vote to accept or reject the Plan. If necessary and
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appropriate, the Debtors and the CMI Equity Committee intend to amend the
Plan to permit cramdown of dissenting Classes of Claims or Interests. There
can be no assurance, however, that the requirements of Section 1129(b) of the
Bankruptcy Code would be satisfied even if the Plan treatment provisions were
amended or withdrawn as to one or more Classes.
In addition, the Debtors and the CMI Equity Committee do not believe
that the Plan unfairly discriminates against any Class that may not accept or
otherwise consent to the Plan. A plan of reorganization "does not
discriminate unfairly" if (i) the legal rights of a nonaccepting class are
treated in a manner that is consistent with the treatment of other classes
whose legal rights are similarly situated to those of the nonaccepting class,
and (ii) no class receives payments in excess of that which it is legally
entitled to receive for its claims or equity interests. The Debtors and the
CMI Equity Committee believe the Plan does not discriminate unfairly.
THE DEBTORS AND THE CMI EQUITY COMMITTEE RESERVE THE ABSOLUTE RIGHT
TO SEEK CONFIRMATION OF THE PLAN UNDER SECTION 1129(b) OF THE BANKRUPTCY CODE
IN THE EVENT THE PLAN IS NOT ACCEPTED BY ALL IMPAIRED CLASSES.
Subject to the conditions set forth in the Plan, a determination by
the Bankruptcy Court that the Plan is not confirmable, pursuant to Section
1129 of the Bankruptcy Code, will not limit or affect the Debtors' ability to
modify the Plan to satisfy the Confirmation requirements of Section 1129 of
the Bankruptcy Code.
D. CONSUMMATION
If the Plan is confirmed, the Plan will be consummated and
distributions will be made on or shortly after the Effective Date, except as
otherwise provided in the Plan.
E. CONDITIONS TO EFFECTIVE DATE
The Effective Date will not occur and the Plan will not be
consummated unless and until each of the following conditions has been
satisfied or waived by the Debtors and the CMI Equity Committee:
1. The Confirmation Order in form and substance satisfactory to the
Debtors and the CMI Equity Committee and entered by the Bankruptcy Court
shall not have been modified in any respect.
2. The Recapitalization Financing shall be funded in accordance with
the Plan and the respective governing documents for each component of the
Recapitalization Financing, and the sale of the CMBS Sale Portfolio shall
have been completed.
3. All other actions and documents necessary to implement the
transactions contemplated to be effected under this Plan on or before the
Effective Date shall have been effected or executed or, if waivable, waived
by the Person entitled to the benefit thereof.
VII. CERTAIN RISK FACTORS
The risk factors enumerated below (other than those described in
"--Risks Relating to the Necessary Recapitalization Financing" and "--
Certain Risks of Non-Confirmation"), generally assume the confirmation and
consummation of the Plan and all transactions contemplated thereby, and,
except as indicated, do not generally include matters that could prevent or
delay confirmation. See "THE PLAN OF REORGANIZATION -- Treatment of Claims
and Interests Under the Plan -- Conditions Precedent to Confirmation and
Consummation of the Plan" and "--Voting and Confirmation of the Plan" for a
discussion of such matters. Prior to deciding whether and how to vote on the
Plan, each Holder of a Claim or Interest in a solicited Class should
carefully consider all of the information contained in this Disclosure
Statement, especially the factors mentioned in the following paragraphs.
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THE INFORMATION CONTAINED UNDER THIS PART VII. "CERTAIN RISK
FACTORS" IS SUPPLEMENTED BY THE INFORMATION CONTAINED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000, A COPY OF
WHICH IS ATTACHED HERETO AS EXHIBIT H.
SUBSTANTIAL INDEBTEDNESS; LEVERAGE
The Company is now highly leveraged and will continue to be highly
leveraged after giving effect to the reorganization. At December 31, 1999,
the Company had total consolidated indebtedness of $2.0 billion (of which
$926 million was recourse debt to the Company (i.e., not match-funded)) and
stockholders' equity of $219 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business --
General" and the Consolidated Financial Statements of the Company and the
accompanying notes thereto appearing elsewhere in this Disclosure Statement.
After giving effect to the reorganization, the Company's estimated pro forma
aggregate indebtedness at September 30, 2000 would total approximately $1.1
billion (of which approximately $425 million would be recourse debt to the
Company (i.e., not match-funded) and stockholders' equity would be
approximately $236 million. See "BUSINESS PLAN" and "Exhibit B-Unaudited Pro
Forma Consolidated Financial Statements and Projected Financial Information."
The Company's management believes that, based on its projections
(which are based upon a number of assumptions), the Company will have
sufficient cash resources to pay interest and scheduled principal on its
outstanding indebtedness, after giving effect to the reorganization. See
"Exhibit B-Unaudited Pro Forma Consolidated Financial Statements and
Projected Financial Information." However, even if the reorganization is
completed, the Company's ability to meet its debt service obligations will
depend on a number of factors, including management's ability to maintain
cash flow and to generate capital internally from operating and investing
activities and expected reductions in REIT distribution requirements to
shareholders due to expected net operating losses for tax purposes, in each
case consistent with the terms agreed to with Merrill and GACC and the
Unsecured Creditors' Committee as set forth in the Plan. There can be no
assurance that targeted levels of cash flow will actually be achieved, that
reductions in REIT distribution requirements will be realized, or that, if
required, new capital will be available to the Company. The Company's ability
to maintain or increase cash flow and access new capital with, respect to the
resumption of Subordinated CMBS acquisitions and commercial mortgage loan
originations and securitizations, will depend upon, among other things,
interest rates, prevailing economic conditions and other factors, many of
which are beyond the control of the Company.
The Company's high level of debt limits its ability to obtain
additional capital, reduces income available for distributions, restricts the
Company's ability to react quickly to changes in its business and makes the
Company more vulnerable to economic downturns. In addition, the agreements
governing the Reorganized Debtors' debt may impose significant operating and
financial restrictions on the Company. See "PLAN OF REORGANIZATION."
RISKS RELATING TO NECESSARY RECAPITALIZATION FINANCING
Consummation of the Plan is conditioned upon, among other matters,
the Company obtaining New Debt and completing the CMBS Sale and the CMO-IV
Sale. See "PLAN OF REORGANIZATION." Although the Company has sold certain
CMBS in connection with the CMBS Sale, is engaged in negotiating additional
commitments for the CMBS Sale, and has agreed to terms with respect to the
New Debt, there can be no assurance that the Company will complete the CMBS
Sale or the CMO-IV Sale or obtain and satisfy all terms and conditions of the
New Debt. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and Note 5 to the Notes to Consolidated Financial
Statements for a discussion of certain CMBS sold in February and April, 2000
constituting a portion of the CMBS Sale.
RISKS RELATING TO THE PROJECTIONS
The management of the Company has prepared the projected financial
information contained in this Disclosure Statement relating to the Company
(the "Projections") in connection with the development of the Plan and in
order to present the anticipated effects of the Plan and the transactions
contemplated thereby. The Projections assume, among other matters, that the
Plan and the transactions contemplated thereby will be implemented in
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accordance with their terms and represent management's best estimate of the
results of the Company's operations following the Effective Date. The
assumptions and estimates underlying such Projections are forward-looking
and, as such, are inherently uncertain and, although considered reasonable by
management as of the date hereof, are subject to significant business,
economic and competitive risks and uncertainties that could cause actual
results to differ materially from those projected, including, among others,
(1) the uncertain ability of the Company to generate sufficient funds
internally to meet its working capital and debt service requirements; (2)
interest rate and financial market volatility; (3) the ability of the Company
to retain an adequate number and mix of employees; and (4) adverse economic
conditions and competition. Accordingly, the Projections are not necessarily
indicative of the future financial condition or results of operations of the
Company. Consequently, the projected financial information contained herein
should not be regarded as a representation by the Company, the Company's
advisors or any other person that the Projections will necessarily be
achieved. The Company does not intend to update or revise the Projections.
See "Exhibit B-Unaudited Pro Forma Consolidated Balance Sheet and Projected
Financial Information" and "PLAN OF REORGANIZATION -- The Reorganized
Debtors--Projected Financial Information."
RISKS OF LOSS OF REIT STATUS
It is anticipated that the Company will continue to operate in such
a manner as to qualify as a REIT for federal income tax purposes. If the
Company were to fail to qualify as a REIT in any taxable year, it would be
subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates, and distributions to
stockholders would not be deductible by the Company in computing its taxable
income. Any such corporate tax liability could be substantial and would
reduce the amount of cash available for distribution to stockholders, which
in turn could have an adverse impact on the value of, and trading prices for,
the Common Stock. Unless entitled to relief under certain Code provisions,
the Company also would be disqualified from taxation as a REIT for the four
taxable years following the year during which the Company ceased to qualify
as a REIT.
The Company must distribute at least 95% of its net taxable income
each year (excluding any net capital gain and certain non-cash income) in
order to maintain its status as a REIT for federal income tax purposes (the
"95% Distribution Requirement"). As a REIT, the Company is also subject to a
4% non-deductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the
sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital
gain net income for that year, and (iii) 100% of its undistributed taxable
income from prior years.
The Company intends to make distributions to its stockholders to
comply with the 95% Distribution Requirement. It is anticipated that, for the
foreseeable future the Company will not have REIT distribution requirements,
however, if the Company does have a REIT distribution requirement, a
substantial portion of the Company's distributions to meet its tax
distribution requirements will be in the form of non-cash taxable dividends.
To the extent such distributions are paid in cash, differences in timing
between the recognition of taxable income and the actual receipt of cash
could require the Company to borrow funds or sell assets on a short-term
basis to satisfy the 95% Distribution Requirement or to avoid the
non-deductible excise tax. There can be no assurance that the Company would
be able to borrow funds or sell assets on a timely basis. The requirement to
distribute a substantial portion of the Company's net taxable income could
cause the Company (i) to sell assets in adverse market conditions, (ii) to
distribute amounts that represent a return of capital, (iii) to distribute
amounts that would otherwise be spent on future investments or repayment of
debt, or (iv) to distribute non-cash dividends in lieu of cash. There can be
no assurance that non-cash taxable dividends will satisfy the Company's
taxable distribution requirements to maintain its status as a REIT.
See "BUSINESS -- Effect of Chapter 11 Filing on REIT Status and
Other Tax Matters" for a discussion of further risks of loss of REIT status,
the distribution of non-cash taxable dividends with respect to the Company's
1998 taxable income and distributions with respect to the Company's 1999
taxable income.
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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 "Business --
Loan Originations and Securitizations and Resecuritizations" and Notes 5 and
6 to Notes to Consolidated Financial Statements 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. Although it is
possible that the election by the TMPs to be treated as taxable REIT
subsidiaries could prevent the loss of CRIIMI MAE's REIT status, there can be
no assurance that a valid election could be made given the timing of a
seizure or sale of the Pledged Bonds.
PHANTOM INCOME MAY RESULT IN ADDITIONAL TAX LIABILITY
The Company's investment in Subordinated CMBS and certain other
types of mortgage related assets may cause it, under certain circumstances,
to recognize taxable income in excess of its economic income ("phantom
income") and to experience an offsetting excess of economic income over its
taxable income in later years. As a result, stockholders, from time to time,
may be required to treat distributions that economically represent a return
of capital, as taxable dividends. Such distributions would be offset in later
years by distributions representing economic income that would be treated as
returns of capital for federal income tax purposes. Accordingly, if the
Company recognizes phantom income, its stockholders may be required to pay
federal income tax with respect to such income on an accelerated basis (i.e.,
before such income is realized by the stockholders in an economic sense).
Taking into account the time value of money, such an acceleration of federal
income tax liabilities would cause stockholders to receive an after-tax rate
of return on an investment in the Company that would be less than the
after-tax rate of return on an investment with an identical before-tax rate
of return that did not generate phantom income. As the ratio of the Company's
phantom income to its total income increases, the after-tax rate of return
received by a taxable stockholder of the Company will decrease.
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EFFECT OF RATE COMPRESSION ON MARKET PRICE OF STOCK
The Company's actual earnings performance as well as the market's
perception of the Company's ability to achieve earnings growth may affect the
market price of the Common Stock. In the Company's case, the level of
earnings (or losses) depends to a significant extent upon the width and
direction of the spread between the net yield received by the Company on its
income earning assets (principally, the long term, fixed-rate assets
comprising its CMBS portfolio) and its floating-rate cost of borrowing. In
periods of narrowing or compressing spreads, the resulting pressure on the
Company's earnings may adversely affect the market value of its Common Stock.
Spread compression can occur in high or low interest rate environments and
typically results when net yield on the long-term assets adjusts less
frequently than the current rate on debt used to finance their purchase. For
example, if the Company relies on short-term, floating-rate borrowings to
finance the purchase of long-term fixed-rate CMBS assets, the Company may
experience rate compression, and a resulting diminution of earnings, if the
interest rate on the debt increases while the coupon and yield measure for
the financed CMBS remains constant. In such an event, the market price of the
Common Stock may decline to reflect the decrease in value of the Company
resulting from the spread compression. In an effort to mitigate this risk,
the Company as a matter of policy generally hedges at least 75% of the
principal amount of its variable-rate debt with interest-rate protection
agreements to protect interest cash flow against a significant rise in
interest rates.
CERTAIN RISKS OF NON-CONFIRMATION
Even if the requisite acceptances are received, there can be no
assurance that the Bankruptcy Court will confirm the Plan. The Bankruptcy
Court could decline to confirm the Plan if it were to find that any of the
statutory conditions to confirmation had not been met. Section 1129 of the
Bankruptcy Code sets forth the requirements for confirmation and requires,
among other things, a finding by the Bankruptcy Court that the confirmation
of the Plan is not likely to be followed by a liquidation or a need for
further financial reorganization and that the value of distributions to
non-accepting Holders of Claims and Interests will not be less than the value
of distributions such Holders of Claims and Interests would receive if the
Company were liquidated under Chapter 7 of the Bankruptcy Code. While there
can be no assurance that the Bankruptcy Court will conclude that these
requirements have been met, the Company believes that the Plan will not be
followed by a need for further financial reorganization and that
non-accepting Holders of Claims and Interests will receive distributions at
least as great as would be received in a liquidation pursuant to Chapter 7 of
the Bankruptcy Code. See "PLAN OF REORGANIZATION --Chapter 7 Liquidation
Analysis" and "Exhibit C - Liquidation Analysis."
The confirmation and consummation of the Plan also are subject to
certain other conditions. See "PLAN OF REORGANIZATION -- Treatment of Claims
and Interests Under the Plan -- Conditions Precedent to Confirmation and
Consummation of the Plan."
If the Plan is not confirmed, it is unclear whether a reorganization
could be implemented and what Holders of Claims and Interests would
ultimately receive with respect to their Claims and Interests. If an
alternative reorganization could not be agreed to, it is possible that CRIIMI
MAE would have to liquidate its assets, in which case it is likely that
Holders of Claims and Interests would receive less than they would have
received pursuant to the Plan. See "PLAN OF REORGANIZATION -- Chapter 7
Liquidation Analysis" and "Exhibit C - Liquidation Analysis."
NONCOMPARABILITY OF HISTORICAL FINANCIAL INFORMATION
As a result of the consummation of the Plan and the transactions
contemplated thereby, the financial condition and results of operations of
the Company from and after the Effective Date may not be comparable to the
financial condition or results of operations reflected in the historical
financial statements of the Company set forth elsewhere herein.
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RISKS OF OWNING SUBORDINATED CMBS
As an owner of the most subordinate tranches of CMBS, the Company
will be the first to bear any loss and the last to have a priority right to
the cash flow of the related mortgage pool. For example, if the Company owns
a $10 million subordinated interest in an issuance of CMBS consisting of $100
million of mortgage loan collateral, a 7% loss on the underlying mortgage
loans will result in a 70% loss on the subordinated interest.
The Company's Subordinated CMBS can change in value due to a number
of economic factors. These factors include changes in the underlying real
estate, fluctuations in Treasury rates, and supply/demand mismatches which
are reflected in CMBS pricing spreads. For instance, changes in the credit
quality of the properties securing the underlying mortgage loans can result
in interest payment shortfalls, to the extent there are mortgage payment
delinquencies, and principal losses, to the extent that there are payment
defaults and the amounts are not fully recovered. These losses may result in
a permanent decline in the value of the CMBS, and the losses may change the
Company's anticipated yield to maturity if the losses are in excess of those
previously estimated. CMBS are priced at a spread above the current Treasury
security with a maturity that most closely matches the CMBS' weighted average
life. The value of CMBS can be affected by changes in Treasury rates, as well
as changes in the spread between such CMBS and the Treasury security with a
comparable maturity. For example, the spread to Treasury of a CMBS may have
increased from 400 basis points to 500 basis points. If the Treasury security
with a comparable maturity had a constant yield of 5% then, in this example,
the yield on the CMBS would have changed from 9% to 10% and accordingly, the
value of such CMBS would have declined. Generally, increases and decreases in
both Treasury rates or spreads will result in temporary changes in the value
of the Subordinated CMBS assuming that the Company has the ability and intent
to hold its CMBS investments until maturity. However, such temporary changes
in the value of Subordinated CMBS become permanent changes realized through
the income statement when the Company no longer intends or fails to have the
ability to hold such Subordinated CMBS to maturity. The Company has
historically been unable to obtain financing at the time of acquisition that
matches the maturity of the related investments, resulting in a periodic need
to obtain short-term financing secured by the Company's CMBS. The inability
to refinance this short-term, floating-rate financing with long-term,
fixed-rate financing or a decline in the value of the collateral securing
such short-term, floating-rate indebtedness could result in a situation where
the Company is required to sell CMBS or provide additional collateral, which
could have and has had an adverse effect on the Company and its financial
position and results of operations. The Company's ability to borrow amounts
in the future may be impacted by, among other things, the credit performance
of the underlying pools of commercial mortgage loans, and other factors
affecting the Subordinated CMBS that it owns.
LIMITED PROTECTION FROM HEDGING TRANSACTIONS
To minimize the risk of interest rate increases on interest expense
as it relates to its short-term, variable-rate debt, the Company follows a
policy to hedge at least 75% of the principal amounts of its variable-rate
debt with interest-rate protection agreements in order to provide a ceiling
on the amount of interest expense payable by the Company. As of December 31,
1999, 94% of the Company's outstanding variable-rate debt was hedged with
interest-rate protection agreements that partially limit the impact of rising
interest rates above a certain defined threshold, or strike price. When these
interest-rate protection agreements expire, the Company will have increased
interest rate risk unless it is able to enter into replacement interest-rate
protection agreements. As of December 31, 1999, the weighted average
remaining term for the interest rate protection agreements was approximately
one year with a weighted average strike price of 6.7%. The highest rate for
one-month LIBOR during 1999 was 6.5%. There can be no assurance that the
Company will be able to maintain interest-rate protection agreements to meet
its hedge policy on satisfactory terms or to adequately protect against
rising interest rates on the Company's debt. In addition, the Company does
not currently hedge against all interest rate risks, including increases in
interest rate spreads and increases in Treasury rates, which adversely affect
the value of its CMBS. Moreover, hedging involves risk and typically involves
costs, including transaction costs. Such costs increase dramatically as the
period covered by the hedging increases and during periods of rising and
volatile interest rates. The Company may increase its hedging activity and,
thus, increase its hedging costs, during such periods when interest rates are
volatile or rising and hedging costs have increased.
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LIMITED LIQUIDITY OF SUBORDINATED CMBS MARKET
There is currently no active secondary trading market for
Subordinated CMBS. This limited liquidity results in uncertainty in the
valuation of the Company's portfolio of Subordinated CMBS. In addition, even
if the market for Subordinated CMBS recovers, the liquidity of such market
has historically been limited; and furthermore, during adverse market
conditions, the liquidity of such market has been severely limited, which
would impair the amount the Company could realize if it were required to sell
a portion of its Subordinated CMBS.
PENDING LITIGATION
The Company is involved in material litigation. See "GENERAL
INFORMATION -- Legal Proceedings" for descriptions of the foregoing and other
legal proceedings.
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 the 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 December 31, 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
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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.
EFFECT OF ECONOMIC RECESSION ON LOSSES AND DEFAULTS
Economic recession may increase the risk of default on commercial
mortgage loans and correspondingly increase the risk of losses on the
Subordinated CMBS backed by such loans. Economic recession may also cause
declining values of commercial mortgage loans, weakening collateral coverage
and increasing the possibility of losses in the event of a default. In
addition, an economic recession may cause reduced demand for commercial real
estate securing the mortgage loans.
ASSUMPTION REGARDING BUSINESS OF THE COMPANY AND RESUMPTION OF BUSINESS
ACTIVITIES
For the purpose of the Plan and this Disclosure Statement and the
information contained therein and herein including, but not limited to, the
projected financial information, the Company has defined its business
principally as owning and managing mortgage-related assets, and, prior to the
Chapter 11 filing, acquiring Subordinated CMBS and mortgage originations and
securitizations. Although it is anticipated that the Company will resume
Subordinated CMBS acquisitions and its mortgage origination and
securitization programs at some time in the future based on the Company's
ability to access capital, prevailing industry conditions and the general
business climate, there can be no assurance of such resumption. All decisions
concerning resumption of business activities will be made by the Board of
Directors of the Company, as determined to be in the best interests of the
Company. Consequently, there can be no certainty as to the business decisions
that will be made by the Board of Directors of the Company. Failure to resume
Subordinated CMBS acquisitions, mortgage originations and/or securitizations
could adversely impact the Company's results of operations.
The Company's ability to access additional capital will be affected
by a number of factors, many of which are not in the Company's control. These
include the cost and availability of such capital, changes in interest rates
and interest rate spreads, changes in the commercial mortgage industry and
the commercial real estate market, general economic conditions, perceptions
in the capital markets of the Company's business, covenants under the
Company's debt securities and credit facilities, results of operations,
leverage, financial condition and business prospects.
RESULTS OF OPERATIONS ADVERSELY AFFECTED BY FACTORS BEYOND COMPANY'S CONTROL
The Company's results of operations can be adversely affected by
various factors, many of which are beyond the control of the Company, and
will depend on, among other things, the level of net interest income
generated by, and the market value of, the Company's CMBS portfolio. The
Company's net interest income and results of operations will vary primarily
as a result of fluctuations in interest rates, CMBS pricing, and borrowing
costs. The Company's results of operations also will depend upon the
Company's ability to protect against the adverse effects of such fluctuations
as well as credit risks. Interest rates, credit risks, borrowing costs and
credit losses depend upon the nature and terms of the CMBS, conditions in
financial markets, the fiscal and monetary policies of the U.S. government,
international economic and financial conditions and competition, none of
which can be predicted with any certainty. Because changes in interest rates
may significantly affect the Company's CMBS and other assets, the operating
results of the Company will depend, in large part, upon the ability of the
Company to manage its interest rate and credit risks effectively while
maintaining its status as a REIT. See " -- Limited Protection from Hedging
Transactions."
BORROWING RISKS
A substantial portion of the Company's borrowings are and are
expected to continue to be in the form of collateralized borrowings. The
terms of the New Debt contemplated to be provided by Merrill and GACC and the
Company's unsecured creditors are set forth in the term sheets which are
attached as Exhibits 1 and 2 to the Plan. Holders of Claims and Interests
should refer to those Exhibits for a description of the terms of the Merrill
and GACC and unsecured creditor New Debt. The New Debt contemplated to be
provided by Merrill and GACC will be collateralized by first-priority liens
and security interests in certain assets, may be structured as a repurchase
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agreement and will be subject to a number of terms, conditions and
restrictions which are set forth in the term sheet including, without
limitation, scheduled principal and interest payments, accelerated principal
payments, restrictions and requirements with respect to the collection,
management, use and application of funds, and certain approval rights with
respect to Reorganized CMI's Board of Directors. Certain events, including,
without limitation, the failure to satisfy certain payment obligations will
result in further restrictions on the ability of the Company to take certain
actions including, without limitation, to pay cash dividends to preferred or
common shareholders. The unsecured creditor New Debt will be collateralized
by first or second priority liens or security interests in certain assets or
proceeds, and will be subject to a number of terms, conditions and
restrictions which are set forth in the term sheet including, without
limitation, scheduled principal and interest payments, and restrictions and
requirements with respect to the use of funds.
A substantial portion of the Company's borrowings are and a limited
portion of the Company's borrowings in the future, if CMBS acquisitions are
resumed, may be in the form of collateralized, short-term, floating-rate
secured borrowings. The amount borrowed under such agreements is typically
based on the market value of the CMBS pledged to secure specific borrowings.
Under adverse market conditions, the value of pledged CMBS would decline, and
lenders could initiate margin calls (in which case the Company could be
required to post additional collateral or to reduce the amount borrowed to
restore the ratio of the amount of the borrowing to the value of the
collateral). The Company may be required to sell CMBS to reduce the amount
borrowed. If these sales were made at prices lower than the carrying value of
the CMBS, the Company would experience losses.
A default by the Company under its collateralized borrowings could
result in a liquidation of the collateral. If the Company is forced to
liquidate CMBS that qualify as qualified real estate assets (under the REIT
Provisions of the Code) to repay borrowings, there can be no assurance that
it will be able to maintain compliance with the REIT Provisions of the Code
regarding asset and source of income requirements.
There can be no assurance that the Company will be able to refinance
all or any portion of the New Debt on or before the respective maturity dates
thereof.
SHAPE OF THE YIELD CURVE ADVERSELY AFFECTS INCOME
The relationship between short-term and long-term interest rates is
often referred to as the "yield curve." Ordinarily, short-term interest rates
are lower than long-term interest rates. If short-term interest rates rise
disproportionately relative to long-term interest rates (a flattening of the
yield curve), the borrowing costs of the Company may increase more rapidly
than the interest income earned on its assets. Because borrowings will likely
bear interest at short-term rates (such as LIBOR) and CMBS will likely bear
interest at medium-term to long-term rates (such as those calculated based on
the Ten-Year U.S. Treasury Rate), a flattening of the yield curve will tend
to decrease the Company's net income, assuming the Company's short-term
borrowing rates bear a strong relationship to short-term Treasury rates.
Additionally, to the extent cash flows from long-term assets are reinvested
in other long-term assets, the spread between the coupon rates of long-term
assets and short-term borrowing rates may decline and also may tend to
decrease the net income and mark-to-market value of the Company's net assets.
It is also possible that short-term interest rates may adjust relative to
long-term interest rates such that the level of short-term rates exceeds the
level of long-term rates (a yield curve inversion). In this case, as well as
in a positively sloped yield curve environment, borrowing costs could exceed
the interest income and operating losses would be incurred.
FAILURE TO MANAGE MISMATCH BETWEEN LONG-TERM ASSETS AND SHORT-TERM FUNDING
The Company's operating results will depend in large part on
differences between the income from its CMBS and its borrowing costs. The
Company anticipates that all of its CMBS, on a pro forma basis, will have
interest payment rates (i.e., coupon rates) which remain fixed until their
maturity. If the Company resumes the acquisition of Subordinated CMBS, the
Company intends to fund a significant portion of its CMBS with borrowings
having interest rates (i.e., borrowing rates) that reset more frequently,
usually monthly or quarterly. If interest rates rise, borrowing rates (and
borrowing costs) of the Company are expected to rise more quickly than coupon
rates (and investment income) on the Company's CMBS. This would decrease both
the Company's net income, potentially resulting in a net loss, and the
mark-to-market value of the Company's net assets, and would be expected to
decrease the market price of the Company's Common Stock and to slow future
acquisitions of assets. Although the Company
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intends to invest primarily in fixed-rate CMBS, the Company also may own
adjustable rate CMBS. The coupon rates of adjustable rate CMBS normally
fluctuate with reference to specific rate indices. The Company may fund these
adjustable rate CMBS with borrowings having borrowing rates which reset
monthly or quarterly. To the extent that there is a difference between (i)
the interest rate index used to determine the coupon rate of the adjustable
rate CMBS (asset index) and (ii) the interest rate index used to determine
the borrowing rate for the Company's related financing (borrowing index), the
Company will bear a "basis" interest rate risk. Typically, if the borrowing
index rises more than the asset index, the net income of the Company would be
decreased all other things being constant. Additionally, the Company's
adjustable rate CMBS may be subject to periodic rate adjustment limitations
and periodic and lifetime rate caps which limit the amount that the coupon
rate can change during any given period. No assurance can be given as to the
amount or timing of changes in interest rates or their effect on the
Company's CMBS, their valuation or income derived therefrom. During periods
of changing interest rates, coupon rate and borrowing rate mismatches could
negatively impact the Company's net income, distributions and the market
price of the Common Stock.
COMPETITION
If the Company resumes the acquisition of Subordinated CMBS
following its reorganization, the Company would compete with mortgage REITs,
specialty finance companies, banks, hedge funds, investment banking firms,
other lenders, and other entities purchasing Subordinated CMBS. Many of the
Company's competitors for Subordinated CMBS may have greater access to
capital and other resources (or the ability to obtain capital at a lower
cost) and may have other advantages over the Company.
There can be no assurance that the Company would be able to obtain
financing at borrowing rates below the asset yields of its Subordinated CMBS.
In such event, the Company may incur losses or may be forced to further
reduce the size of its Subordinated CMBS portfolio. The Company would face
competition for financing sources which may limit the availability of, and
affect the cost of, funds to the Company.
RISKS ASSOCIATED WITH TRADER ELECTION
On March 15, 2000, the Company determined to elect mark-to-market
treatment as a securities trader for 2000. See "BUSINESS-Effect of Chapter 11
Filing on REIT Status and Other Tax Matters-Taxable Income Distributions" for
further discussion. There is no assurance, however, that the Company's
election will not be challenged on the ground that it is not in fact a trader
in securities, or that it is only a trader with respect to some, but not all,
of its securities. As such, there is a risk that the Company will be limited
in its ability to recognize certain losses if it is not able to
mark-to-market its securities.
The election to be treated as a trader will result in net operating
losses ("NOLs") that generally may be carried forward for 20 years. The
Company believes that it may experience an "ownership change" within the
meaning of Section 382 of the Code. Consequently, its use of NOLs generated
before the ownership change to reduce taxable income after the ownership
change may be subject to limitation under Section 382. Generally, the use of
NOLs in any year is limited to the value of the Company's stock on the date
of the ownership change multiplied by the long-term tax exempt rate
(published by the IRS) with respect to that date.
For the year ended December 31, 2000, taxable income (loss) may be
different from the net income (loss) as calculated according to GAAP as a
result of, among other things, differing treatment of the unrealized gains
and losses on securities transactions as well as other timing differences.
For the Company's tax purposes, unrealized gains (losses) will be recognized
at the end of the year and will be aggregated with operating gains (losses)
to produce total taxable income (loss) for the year.
VIII. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences expected to result from the consummation of the Plan. This
discussion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Tax Code"), applicable Treasury Regulations, judicial
authority and current administrative rulings
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and pronouncements of the Internal Revenue Service (the "Service"). There can
be no assurance that the Service will not take a contrary view, and no ruling
from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations
may be forthcoming that could alter or modify the statements and conclusions
set forth herein. Any such changes or interpretations may or may not be
retroactive and could affect the tax consequences to Holders, the Company and
the Reorganized Debtors. It cannot be predicted at this time whether any tax
legislation will be enacted or, if enacted, whether any tax law changes
contained therein would affect the tax consequences to the Holders, the
Company and the Reorganized Debtors.
The following summary is for general information only. The tax
treatment of a Holder may vary depending upon such Holder's particular
situation. This discussion assumes that Holders of Old Securities have held
such property as "capital assets" within the meaning of Section 1221 of the
Tax Code (generally, property held for investment). This summary does not
address all of the tax consequences that may be relevant to a Holder, nor
does it address the federal income tax consequences to Holders subject to
special treatment under the federal income tax laws, such as brokers or
dealers in securities or currencies, certain securities traders, tax-exempt
entities, financial institutions, insurance companies, foreign corporations,
Holders who are not citizens or residents of the United States, Holders that
hold the Old Securities as a position in a "straddle" or as part of a
"synthetic security," "hedging," "conversion" or other integrated instrument,
Holders that have a "functional currency" other than the United States dollar
and Holders that have acquired Old Securities in connection with the
performance of services.
EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF THE PLAN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS.
TAX EFFECTS TO THE DEBTORS. The Debtors generally will each realize
cancellation of indebtedness ("COI") income to the extent that the fair
market value of any property received by Holders of their indebtedness is
less than the adjusted issue price (plus the amount of any accrued but unpaid
interest) of such indebtedness discharged thereby. Under Section 108 of the
Tax Code, however, COI income will not be recognized if the COI income occurs
in a case brought under the Bankruptcy Code, provided the taxpayer is under
the jurisdiction of a court in such case and the cancellation of indebtedness
is granted by the court or is pursuant to a plan approved by the court.
Accordingly, because the cancellation of the indebtedness of the Debtors will
occur in a case brought under the Bankruptcy Code, the Debtors will each be
under the jurisdiction of the court in such case and the cancellation of the
indebtedness will be pursuant to the Plan, the Debtors should not be required
to recognize any COI income realized as a result of the implementation of the
Plan.
Under Section 108(b) of the Tax Code, the Debtors will be required
to reduce certain tax attributes including certain losses, credits and
carryforwards, if any including tax basis in assets (but not below the amount
of liabilities remaining immediately after the discharge of indebtedness), in
an amount equal to the amount of COI income excluded from income as described
in the preceding paragraph (subject to certain modifications).
TAX EFFECTS TO THE HOLDERS OF CLAIMS. Pursuant to the Plan, in
exchange for their Claims, the Holders thereof will receive a portion of
their Allowed Claim in cash and/or in other property (the "Exchange"). The
tax effect to the Holder of a Claim will depend upon (a) whether the Claim is
treated as a "security" solely for federal income tax purposes, and (b)
whether any non-cash property received in the Exchange is treated as a
"security" solely for federal income tax purposes. An exchange of each
Holder's Claim for cash and/or other property should be treated as a
"recapitalization" and, therefore, a reorganization within the meaning of
Section 368(a) of the Tax Code if the Holder of the Claim is treated as
holding a "security" for federal income tax purposes and receives property in
the Exchange which is also treated as a "security" for federal income tax
purposes. Generally for federal income tax purposes, only debt instruments
will qualify as a "security." The test as to whether a debt instrument is a
"security" involves an overall evaluation of the nature of the debt
instrument, with the term of the debt instrument usually regarded as one of
the most significant factors. Generally, debt instruments with a term of five
years or less have not qualified as "securities" whereas debt instruments
with a term of ten years or more generally have qualified as "securities."
Accordingly, whether a Claim and the property, if any, received in the
Exchange constitute "securities" and, therefore, qualify the Exchange as a
recapitalization will depend on the terms of that particular debt instrument.
Each Holder of a Claim is urged to consult with its own personal tax advisor
as to the tax consequences of the Exchange to such Holder.
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To the extent a Holder's Claim and a portion of such Holder's
property received constitute "securities" for federal income tax purposes,
the Exchange should be treated as a "reorganization" for federal income tax
purposes. As a result, such exchanging Holders generally should not recognize
any gain or loss (except to the extent the cash and/or other property
received are attributable to accrued but unpaid interest on the Claim, in
which event the Holder would generally be required to treat such amounts as
payment of interest includible in income in accordance with the Holder's
method of accounting for tax purposes (see "Accrued Interest" below)). A
Holder of a Claim will recognize any gain realized on the Exchange to the
extent of the cash received in the Exchange (other than any cash received
which is attributable to accrued but unpaid interest on the Claim). Any such
gain would generally be long-term capital gain (subject to the market
discount rules discussed below) if the Claim had been held for more than one
year. A Holder's adjusted tax basis in its property received will be equal to
the Holder's adjusted tax basis in its Claim plus any gain recognized
(including income attributable to accrued but unpaid interest on the Claim),
less the amount of cash received pursuant to the Exchange. The Holder's tax
basis will be allocated among the non-cash property received in proportion to
the relative fair market value of each item of non-cash property received. A
Holder's holding period for the property received will generally include the
Holder's holding period for its Claim.
To the extent a Holder's Claim does not constitute, and/or no
portion of such Holder's property received constitutes "securities" for
federal income tax purposes, then an exchanging Holder would recognize gain
or loss equal to the difference between the fair market value of the property
received and the Holder's adjusted tax basis in the Claim exchanged therefor.
Any such gain or loss would generally be long-term capital gain or loss
(subject to the market discount rules discussed below) if the Claim is a
capital asset and had been held for more than one year. In this event, a
Holder's tax basis in the property received would be equal to its fair market
value on the Effective Date, and the holding period for the property received
would begin on the day immediately after the Effective Date.
A Holder of a Claim not discussed above should generally recognize
gain or loss equal to the amount of any cash plus the fair market value of
any other property received, with respect to its Claim (other than for
accrued but unpaid interest) less its adjusted basis in its Claim (other than
for accrued but unpaid interest). The character of such gain or loss as
long-term or short-term capital gain or loss or as ordinary income or loss
will be determined by a number of factors, including the tax status of the
Holder, whether the Claim constitutes a capital asset in the hands of the
Holder, whether the Claim has been held for more than one year, whether the
Claim was purchased at a discount, and whether and to what extent the Holder
had previously claimed a bad-debt deduction or a worthless-security deduction.
ACCRUED INTEREST. Holders will be treated as receiving a payment of
interest (includible in income in accordance with the Holder's method of
accounting for tax purposes) to the extent that any cash or other property
received pursuant to the Plan is attributable to accrued but unpaid interest,
if any, on such Claims. The extent to which the receipt of cash or other
property should be attributable to accrued but unpaid interest is unclear.
The Debtors intend to take the position that such cash or property
distributed pursuant to the Plan will first be allocable to the principal
amount of a Claim and then, to the extent necessary, to any accrued but
unpaid interest thereon. Each Holder should consult its own tax advisor
regarding the determination of the amount of consideration received under the
Plan that is attributable to interest (if any). A Holder generally will be
entitled to recognize a loss to the extent any accrued interest was
previously included in its gross income and is not paid in full.
If any property received pursuant to the Plan is considered
attributable to accrued but unpaid interest, a Holder's basis in such
property should be equal to the amount of interest income treated as
satisfied by the receipt of such property. The holding period in such
property should begin on the day immediately after the Effective Date.
STATED INTEREST. A holder of a debt instrument issued in the
Exchange will generally be required to report as ordinary income for federal
income tax purposes interest received or accrued on the debt instrument in
accordance with the Holder's method of tax accounting.
ORIGINAL ISSUE DISCOUNT. Because the Notes are being offered as a
part of a unit, which may include Warrants, the issue price of any debt
instrument issued may be less than such debt instrument's principal amount.
As a result, the debt instrument will be issued at a discount from its face
amount. If the discount exceeds a STATUTORY DE MINIMIS amount (1/4 of 1% of
an obligation's stated redemption price at maturity multiplied by the number
of
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complete years to its maturity), the debt instrument will be considered to be
issued with original issue discount. A Holder will be required to include a
portion of any such original issue discount as ordinary income for federal
income tax purposes each year over the term of its debt instrument so as to
provide a constant yield to maturity, in addition ot the amount of stated
interest received or accrued.
The total amount of original issue discount with respect to each
debt instrument would be the difference between its "issue price" and its
"stated redemption price at maturity." The "issue price" of a debt instrument
will generally be determined by allocating a portion of the fair market value
of the Holder's Claim to the debt instrument.
The "stated redemption price at maturity" of a debt instrument is
the sum of all payments provided by the debt instrument other than "qualified
stated interest" payments. Stated interest payable on the debt instrument
should equal the principal amount of the debt instrument.
Except as provided below, in "Premium and Market Discount," the
amount of original issue discount required to be included in a Holder's
income in any tax year is determined by allocating to each day during such
tax year in which a Holder holds a debt instrument a pro rata portion (the
"daily portion") of the total amount of original issue discount with respect
ot such debt instrument attributable to the "accrual period" in which such
day is included. The amount of original issue discount on the debt instrument
attributable to an accrual period is equal to the product of (i) the
"adjusted issue price" at the beginning of the accrual period (the issue
price plus previous accruals of original issue discount, reduced by all
payments made on the debt instrument other than a payment of qualified stated
interest) and (ii) the yield to maturity of the debt instrument, adjusted
appropriately for the length of the accrual period, less the amount of any
qualified stated interest allocable to the accrual period. The "yield to
maturity" of a debt instrument is the interest rate that will produce an
amount equal to the issue price of the debt instrument used in comparing the
present value of all payments to be made pursuant to the debt instrument.
CRIIMI MAE or its agent will report to Holders and to the Internal
Revenue Service ("IRS") the amount of original issue discount that accrues
each year.
Holders should consult their own tax advisors regarding an election
to include all interest that accrues on the debt instruments by using the
constant yield method.
PREMIUM AND MARKET DISCOUNT. If a Holder pays an amount (exclusive
of accrued and unpaid interest through the acquisition date) in excess of the
debt instrment's stated redemption price at maturity at the time of its
acquisition ("Bond Premium"), the Holder will not be required to include
original issue discount in its income and may elect to amortize the Bond
Premium. If the Bond Premium is amortized, the amount of interest which must
be included in the Holder's income from each period ending on an
interest-payment date or stated maturity, as the case may be, will be reduced
by the portion of the premium allocable to such period based on the debt
instrument's yield to maturity. This election applies to all debt instruments
acquired by the Holder during the year of election and thereafter.
If a Holder pays an amount (exclusive of accrued and unpaid interest
through the acquisition date) in excess of the debt instruments adjusted
issue price at the time of its acquisition ("Acquisition Premium) but less
that its stated redemption price at maturity, the Holder may be entitled to a
reduction in the amount of any original issue discount includable in such
Holder's income for such Acquisition Premium. The reduction will be an amount
equal to the daily portion of original issue discount for that day multiplied
by a fraction, the numerator of which is equal to the Acquisition Premium,
and the denominator of which is the excess of the stated redemption price at
maturity over the adjusted issue price of the debt instrument on the date of
purchase.
MARKET DISCOUNT. Generally, a Holder of a Claim represented by a
debt instrument who purchased its Claim at a "market discount" (i.e., at a
price below the Claim's adjusted issue price) must treat gain recognized on
the disposition of its property received as ordinary income to the extent
market discount accrued while the debt instrument was held by the Holder,
unless the Holder made an election to include such market discount in income
as it accrued.
Holders of Claims should consult their own tax advisors regarding
the amount of any market discount that accrued with respect to their property
received in the Exchange.
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The Tax Code provides that "under regulations" (which have not yet
been issued), accrued market discount on a market discount bond is not
recognized as ordinary income at the time of the bond's disposition if the
disposition occurs in a "nonrecognition transaction," including a
recapitalization. Instead, accrued market discount on a market discount bond
disposed of in a nonrecognition transaction is converted into accrued market
discount on property received in the transaction if that property is a market
discount bond. If the property received (other than cash) is not a market
discount bond, accrued market discount on the old market discount bond is
treated as ordinary income on the disposition of the property received in
exchange therefor, limited to the extent of the gain thereon.
A Holder of a Claim that has accrued market discount should not be
required to recognize that accrued market discount as ordinary income when
the Holder exchanges that instrument for property received in the Exchange
except to the extent of any realized gain which is recognized from the
receipt of cash (other than cash received which is attributable to accrued
but unpaid interest with respect to the Claim); rather the unrecognized
portion of any accrued market discount should be allocated to the property
received in the Exchange (this conclusion may depend on the issuance of
as-yet unissued implementing regulations). Although no regulations or rules
have been provided to determine how such accrued market discount should be
allocated, the accrued market discount should be allocated in the same manner
as tax basis is allocated. The portion of the accrued market discount
allocated to property received in the Exchange will be treated as ordinary
income at the disposition of such new property, but not in excess of the
total gain recognized.
Under the market discount rules, holders of Claims with accrued
market discount may have been required to defer the deduction of a portion of
the interest on any indebtedness incurred or maintained to purchase or carry
their Claims. Any interest expense which has been deferred by Holders of
claims who participate in the Exchange will continue to be deferred and will
be deductible only on disposition of any new debt instruments and Warrants
received in the Exchange. The market discount rules may also provide that any
Holder of new debt instruments acquired at a market discount may be required
to defer the deduction of a portion of the interest on any indebtedness
incurred or maintained to purchase or carry the new debt instruments until
the new debt instruments are disposed of in a taxable transaction. This rule
will not apply if the Holder elects to include accrued market discount in
income currently.
Prospective participants in the Exchange should be aware that the
market discount rules could affect the price at which a subsequent purchaser
would be willing to purchase new debt instruments.
Holders should consult their own tax advisors regarding the amount
of any market discount, if any, accrued with respect to their Claims or that
may be treated as carried over from their Claims and the limitation on
interest deductions attributable to the new debt instruments.
TAX EFFECTS TO THE HOLDERS OF SERIES B PREFERRED STOCK. Pursuant to
the Plan, if the Holders of the Series B Preferred Stock elect to authorize
the receipt of common stock equal to the unpaid dividends which have accrued
with respect to the Series B Preferred Stock, then the amount of common stock
received in satisfaction of the accrued but unpaid dividends will be treated
as ordinary income to the Holders of Series B Preferred Stock to the extent
of the Company's earnings and profits.
TAX EFFECTS TO HOLDERS OF SERIES E PREFERRED STOCK (WHICH WAS THE
FORMER SERIES C PREFERRED STOCK) AND OLD SERIES D PREFERRED STOCK. Pursuant
to the Plan, the Holder of the Old Series D Preferred Stock will receive
Series E Preferred Stock in exchange for its Old Series D Preferred Stock,
plus an amount of cash or other property equal to the unpaid dividends which
have accrued with respect to the Old Series D Preferred Stock. As a result of
the exchange, the Holder of the Old Series D Preferred Stock should not
recognize any gain or loss on the exchange except for the cash or other
property received which is attributable to the accrued but unpaid dividends.
The amount of cash or other property received in satisfaction of the accrued
but unpaid dividends with respect to the Former Series C Preferred Stock and
Old Series D Preferred Stock will be treated as ordinary income to the Holder
of the Series E Preferred Stock (which was the Former Series C Preferred
Stock) and the Old Series D Preferred Stock to the extent of the Company's
earnings and profits.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS IS FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TAX
ADVICE. ACCORDINGLY,
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EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES OF THE PLAN DESCRIBED HEREIN AND THE APPLICATION OF STATE, LOCAL
AND FOREIGN TAX LAWS. NEITHER THE PROPONENTS NOR THEIR PROFESSIONALS SHALL
HAVE ANY LIABILITY TO ANY PERSON OR HOLDER ARISING FROM OR RELATED TO THE
FEDERAL, STATE OR LOCAL TAX CONSEQUENCES OF THE PLAN OR THE FOREGOING
DISCUSSION.
IX. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
If the Plan is not confirmed and consummated, the alternatives
include (a) confirmation of some other alternative Chapter 11 plan or (b)
conversion of the Chapter 11 Case to a liquidation under Chapter 7 of the
Bankruptcy Code.
A. ALTERNATIVE CHAPTER 11 PLANS
On December 20, 1999, the Unsecured Creditors' Committee filed its
proposed Plan of Reorganization and related proposed disclosure statement. On
January 11, 2000 and February 11, 2000, the Unsecured Creditors' Committee
filed first and second amended plans of reorganization and amended proposed
disclosure statements with respect thereto. However, as previously stated,
the Unsecured Creditors' Committee now supports the Debtors' Plan and
encourages all creditors to vote in favor of the Plan. The Unsecured
Creditors' Committee has asked the Court to defer consideration of its plan
pending approval of the Debtors' Plan and the completion of mutually
acceptable final documentation. Upon confirmation of the Debtors' Plan with
documentation acceptable to the Unsecured Creditors' Committee, the Committee
will then formally withdraw its plan.
Although no other plan is before the Court at this time for
consideration, if such a plan and proposed disclosure statement with respect
thereto were to be filed, the Court could consider such plan and proposed
disclosure statement or could choose to defer consideration thereof. In
formulating and developing the Debtors' Plan, the Debtors and the CMI Equity
Committee have explored numerous other alternatives and engaged in
negotiations with various parties holding disparate interests. As noted
above, the Debtors' Plan has the support of not only the CMI Equity Committee
but also the Unsecured Creditors' Committee. The Debtors and the CMI Equity
Committee believe that the Plan deals fairly with the rights of Holders of
the various classes of Claims and Interests and enables creditors and
stockholders to realize the greatest recovery possible under the
circumstances. They further believe that alternative methods of restructuring
the Claims and Interests of the various classes will not result in a better
recovery for any Class, will diminish value and will require, at the very
least, an extensive, time-consuming and expensive negotiation and/or
litigation process.
B. LIQUIDATION UNDER CHAPTER 7
Another alternative to confirmation and consummation of the Plan is
liquidation of the Debtors under Chapter 7 of the Bankruptcy Code. Section
1129(a) of the Bankruptcy Code provides that the Bankruptcy Court may confirm
a plan only if the requirements contained in such section are met. One of
these requirements is that each non-accepting holder of an allowed claim or
an allowed interest in an impaired class must receive or retain under the
plan on account of such claim or interest property having a value as of the
effective date of the plan at least equal to the value that such holder would
receive if the debtor were liquidated under Chapter 7 of the Bankruptcy Code
on the effective date of the Plan. The Debtors have prepared the Liquidation
Analysis attached hereto as Exhibit C. Based upon such Liquidation Analysis
and after taking into account the settlements and compromises contained in
the Plan, the Debtors and the CMI Equity Committee do not believe that
Holders of Claims and Interests would receive greater recoveries if the
Debtor were to be liquidated under Chapter 7 of the Bankruptcy Code.
X. CONCLUSION AND RECOMMENDATION
The Debtors and the Official Committee of Equity Security Holders
believe that confirmation and implementation of the Plan is in the best
interests of all creditors and equity security holders and is clearly
preferable
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to liquidation of CMI, CMM and Holdings because the Plan will provide the
greatest recoveries to Holders of Claims and Interests. The Debtors' Plan
will provide the best possible recoveries to Holders of Allowed Claims and
Interests in the most feasible and expeditious manner, without additional
protracted litigation. In addition, other alternatives would involve
significant delay, uncertainty and substantial additional administrative
costs. As noted above, the Unsecured Creditors' Committee has joined the
Debtors and the CMI Equity Committee in supporting the Plan. For all of these
reasons, you are urged to return your ballot voting to accept the Debtors'
Plan.
Dated: August 24, 2000. Respectfully submitted,
CRIIMI MAE INC.,
a Maryland Corporation
By: /s/ Cynthia O. Azzara
-------------------------------------
Name: Cynthia O. Azzara
Title: Senior Vice President
CRIIMI MAE MANAGEMENT, INC.,
a Maryland Corporation
By: /s/ Cynthia O. Azzara
-------------------------------------
Name: Cynthia O. Azzara
Title: Senior Vice President
CRIIMI MAE HOLDINGS II, L.P. ,
a Delaware Limited Partnership
By: CRIIMI MAE INC.
Its General Partner
By: /s/ Cynthia O. Azzara
----------------------------------
Name: Cynthia O. Azzara
Title: Senior Vice President
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VENABLE, BAETJER AND HOWARD, LLP
By: /s/ Richard L. Wasserman
-------------------------------------
Richard L. Wasserman
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Co-Counsel for CRIIMI MAE Inc. and
CRIIMI MAE Holdings II, L.P.
AKIN GUMP STRAUSS HAUER & FELD LLP
By: /s/ Stanley J. Samorajczyk
-------------------------------------
Stanley J. Samorajczyk
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
(202) 887-4000
Co-Counsel for CRIIMI MAE Inc. and
CRIIMI MAE Holdings II, L.P.
SHULMAN, ROGERS, GANDAL, PORDY & ECKER, P.A.
By: /s/ Morton A. Faller
-------------------------------------
Morton A. Faller
11921 Rockville Pike
Third Floor
Rockville, MD 20852-2753
(301) 231-0928
Counsel for CRIIMI MAE Management, Inc.
CO-PROPONENT:
OFFICIAL COMMITTEE OF EQUITY SECURITY
HOLDERS OF CRIIMI MAE INC.
By: /s/ Michael F. Wurst
-------------------------------------
Name: Michael F. Wurst
Title: Co-Chairman
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COVINGTON & BURLING
By: /s/ Michael St. Patrick Baxter
-------------------------------------
Michael St. Patrick Baxter
Dennis B. Auerbach
1201 Pennsylvania Ave., NW
Washington, D.C. 20004-2401
(202) 662-6000
Counsel for the Official Committee
of Equity Security Holders of
CRIIMI MAE Inc.
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EXHIBIT A
THIRD AMENDED JOINT PLAN OF REORGANIZATION
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
GREENBELT DIVISION
---------------------------------------
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
)
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DEBTORS' THIRD AMENDED JOINT PLAN OF REORGANIZATION
VENABLE, BAETJER AND HOWARD, LLP AKIN, GUMP, STRAUSS, HAUER
Richard L. Wasserman & FELD, L.L.P.
Gregory A. Cross Stanley J. Samorajczyk, P.C.
1800 Mercantile Bank and Trust Building Michael S. Stamer
Two Hopkins Plaza 1333 New Hampshire Avenue, N.W.
Baltimore, Maryland 21201 Washington, D.C. 20036
(410) 244-7400 (202) 887-4000
Co-Counsel to CRIIMI MAE Inc. Co-Counsel to CRIIMI MAE Inc.
and CRIIMI MAE Holdings II, L.P. and CRIIMI MAE Holdings II, L.P.
SHULMAN, ROGERS, GANDAL, COVINGTON & BURLING
PORDY & ECKER, P.A. Michael St. Patrick Baxter
Morton A. Faller Dennis B. Auerbach
11921 Rockville Pike 1201 Pennsylvania Avenue, N.W.
Third Floor Washington, D.C. 20044
Rockville, MD 20852-2753 (202) 662-6000
(301) 231-0928
Counsel to CRIIMI MAE Management, Inc. Counsel to the Official
Committee of Equity Security
Holder of CRIIMI MAE Inc.,
Co-Proponents of the Plan
Dated: Rockville, Maryland
July 21, 2000
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TABLE OF CONTENTS
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I. INTRODUCTION..................................................................................... 2
II. DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION............................................ 2
A. Definitions................................................................................. 2
1. Administrative Claim................................................................... 2
2. Allowed Claim or Allowed Interest...................................................... 2
3. Allowed Class...Claim.................................................................. 3
4. Allowed Class...Interest............................................................... 3
5. Allowed Class A1 CMO-IV Claim.......................................................... 3
6. Bankruptcy Code........................................................................ 3
7. Bankruptcy Court....................................................................... 3
8. Bankruptcy Rules....................................................................... 3
9. Business Day........................................................................... 3
10. Cash................................................................................... 4
11. Claim.................................................................................. 4
12. Class.................................................................................. 4
13. Class A1 Cash Payment.................................................................. 4
14. Class A9/A10 Cash Payment.............................................................. 4
15. Class A9/A10 Note A.................................................................... 4
16. Class A9/A10 Note B.................................................................... 4
17. Class A9/A10 Notes..................................................................... 4
18. Clearing Systems....................................................................... 4
19. Clerk.................................................................................. 4
20. CMBS Sale Portfolio.................................................................... 4
21. CMI.................................................................................... 4
22. CMI Common Stock....................................................................... 4
23. CMI Creditors' Committee............................................................... 4
24. CMI Equity Committee................................................................... 5
25. CMI General Unsecured Claims........................................................... 5
26. CMM.................................................................................... 5
27. CMM General Unsecured Claims........................................................... 5
28. CMO-IV Additional Collateral........................................................... 5
29. CMO-IV Bonds........................................................................... 5
30. CMSLP.................................................................................. 5
31. Committees............................................................................. 5
32. Company................................................................................ 5
33. Confirmation........................................................................... 5
34. Confirmation Date...................................................................... 5
35. Confirmation Hearing................................................................... 5
36. Confirmation Order..................................................................... 5
37. Co-Proponent........................................................................... 5
38. Debtor Releasees....................................................................... 5
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39. Debtors................................................................................ 6
40. Debtors in Possession.................................................................. 6
41. Disbursing Agent....................................................................... 6
42. Disclosure Statement................................................................... 6
43. Disputed Claim......................................................................... 6
44. Disputed Interest...................................................................... 6
45. Distribution Record Date............................................................... 6
46. Docket................................................................................. 6
47. DTC.................................................................................... 6
48. Effective Date......................................................................... 6
49. Eligible Institution................................................................... 6
50. Employee Claims........................................................................ 6
51. Estates................................................................................ 6
52. File, Filed or Filing.................................................................. 7
53. Final Order............................................................................ 7
54. Former Series C Preferred Stock........................................................ 7
55. Freddie Mac............................................................................ 7
56. Freddie Mac Agreement.................................................................. 7
57. GACC................................................................................... 7
58. Guarantee Claims....................................................................... 7
59. Holder................................................................................. 7
60. Holdings............................................................................... 7
61. Holdings General Unsecured Claims...................................................... 7
62. Impaired............................................................................... 7
63. Indemnitees............................................................................ 7
64. Indenture Trustee...................................................................... 8
65. Instrument............................................................................. 8
66. Insurance Proceeds..................................................................... 8
67. Intercompany Claims.................................................................... 8
68. Interest............................................................................... 8
69 Letter of Transmittal.................................................................. 8
70. LIBOR.................................................................................. 8
71. Local Bankruptcy Rules................................................................. 8
72. Merrill................................................................................ 8
73. New Debt............................................................................... 8
74. New Equity............................................................................. 8
75. New Securities......................................................................... 8
76. Old CMI Preferred Stock................................................................ 8
77. Old Securities......................................................................... 8
78. Old Senior Note Claims................................................................. 9
79. Old Senior Notes....................................................................... 9
80. Old Series D Preferred Stock........................................................... 9
81. Order.................................................................................. 9
82. Other Secured Claim.................................................................... 9
83. Person................................................................................. 9
84. Petition Date.......................................................................... 9
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85. Plan................................................................................... 9
86. Plan Interest.......................................................................... 9
87. Plan Rate.............................................................................. 9
88. Post-Petition Tax Claims............................................................... 9
89. Priority Claim......................................................................... 10
90. Priority Tax Claim..................................................................... 10
91. Pro Rata............................................................................... 10
92. Recapitalization Financing............................................................. 10
93. Reorganization Cases................................................................... 10
94. Reorganized CMI........................................................................ 10
95. Reorganized CMI Articles of Incorporation.............................................. 10
96. Reorganized CMI Bylaws................................................................. 10
97. Reorganized CMM........................................................................ 10
98. Reorganized CMM Articles of Incorporation.............................................. 10
99. Reorganized CMM Bylaws................................................................. 10
100. Reorganized Debtors.................................................................... 10
101. Reorganized Holdings................................................................... 10
102. Second Amended and Restated Stock Option Plan.......................................... 11
103. Secured Claim.......................................................................... 11
104. Securities Claim....................................................................... 11
105. Series B Prefererred Stock............................................................. 11
106. Series E Prefererred Stock............................................................. 11
107. Series F Dividend Preferred Stock...................................................... 11
108. Stock Options.......................................................................... 11
109. Tendered Certificates.................................................................. 11
110. Tort Claim............................................................................. 11
111. UCC.................................................................................... 11
112. Unimpaired............................................................................. 11
113. Unsecured Claim........................................................................ 11
114. Voting Record Date..................................................................... 12
B. Interpretation and Computation of Time...................................................... 12
1. Defined Terms.......................................................................... 12
2. Rules of Interpretation................................................................ 12
3. Time Periods........................................................................... 12
III. DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS................................................... 12
A. CMI Classes................................................................................. 13
B. CMM Classes................................................................................. 16
C. Holdings Classes............................................................................ 17
IV. GENERAL PROVISIONS FOR TREATMENT OF CLAIMS AND INTERESTS......................................... 17
A. Unclassified Claims......................................................................... 17
1. Administrative Claims.................................................................. 17
a. General.......................................................................... 17
b. Payment of Statutory Fees........................................................ 18
2. Priority Tax Claims.................................................................... 18
3. Bar Date for Administrative Claims..................................................... 18
a. General Provisions............................................................... 18
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b. Professionals.................................................................... 19
c. Ordinary Course Liabilities...................................................... 19
d. Tax Claims....................................................................... 20
B. Identification of Classes of Claims and Interests Impaired and Not
Impaired by the Plan........................................................................ 20
1. Claims Against and Interests in CMI.................................................... 20
2. Claims Against and Interests in CMM.................................................... 20
3. Claims Against and Interests in Holdings............................................... 20
C. Treatment of Claims Against and Interests in CMI............................................ 20
1. Class A1 (Citicorp Secured Claims)..................................................... 20
2. Class A2 (First Union Secured Claim)................................................... 20
3. Class A3 (GACC Secured Claim).......................................................... 21
4. Class A4 (Lehman Secured Claim)........................................................ 21
5. Class A5 (Merrill Secured Claim)....................................................... 21
6. Class A6 (Morgan Stanley Secured Claim)................................................ 21
7. Class A7 (Other Secured Claims)........................................................ 21
8. Class A8 (Priority Claims)............................................................. 21
9. Class A9 (Old Senior Note Claims)...................................................... 21
10. Class A10 (CMI General Unsecured Claims)............................................... 22
11. Class A11 (Guarantee Claims)........................................................... 22
12. Class A12 (Freddie Mac Claims)......................................................... 22
13. Class A13 (Intercompany Claims)........................................................ 22
14. Class A14 (Series B Preferred Stock)................................................... 22
15. Class A15 (Series B Preferred Stock Securities Claims)................................. 23
16. Class A16 (Former Series C Preferred Stock)............................................ 23
17. Class A17 (Former Series C Preferred Stock Securities Claims).......................... 23
18. Class A18 (Old Series D Preferred Stock)............................................... 23
19. Class A19 (Old Series D Preferred Stock Securities Claim).............................. 24
20. Class A20 (Series F Dividend Preferred Stock).......................................... 24
21. Class A21 (CMI Common Stock)........................................................... 24
22. Class A22 (Stock Options).............................................................. 24
23. Class A23 (CMI Common Stock Securities Claims)......................................... 24
D. Treatment of Claims Against and Interests in CMM............................................ 25
1. Class B1 (First Union Secured Claims).................................................. 25
2. Class B2 (Other Secured Claims)........................................................ 25
3. Class B3 (Priority Claims)............................................................. 25
4. Class B4 (Guarantee Claims)............................................................ 25
5. Class B5 (CMM General Unsecured Claims)................................................ 25
6. Class B6 (Intercompany Claims)......................................................... 25
7. Class B7 (CMI's Interests in CMM)...................................................... 26
E. Treatment of Claims Against and Interests in Holdings....................................... 26
1. Class C1 (Citicorp Secured Claims)..................................................... 26
2. Class C2 (Other Secured Claims)........................................................ 26
3. Class C3 (Priority Claims)............................................................. 26
4. Class C4 (Guarantee Claims)............................................................ 26
5. Class C5 (Holdings General Unsecured Claims)........................................... 26
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6. Class C6 (Intercompany Claims)......................................................... 26
7. Class C7 (Interests in Holdings)....................................................... 27
F. Modification of Treatment of Claims......................................................... 27
V. DISTRIBUTIONS UNDER THE PLAN..................................................................... 27
A. Disbursing Agent............................................................................ 27
B. Timing of Distributions..................................................................... 27
C. Methods of Distributions.................................................................... 27
1. Cash Payments.......................................................................... 27
2. Compliance with Tax Requirements....................................................... 28
D. Distribution Record Date.................................................................... 28
E. Surrender of Cancelled Old Securities and Exchange of Old
Securities for New Securities............................................................... 28
1. Tender of Old Securities............................................................... 28
a. Old Securities Held in Book-Entry Form............................................. 29
b. Old Securities in Physical, Registered, Certificated Form.......................... 29
2. Delivery of New Securities in Exchange for Old Securities.............................. 29
3. Special Procedures for Lost, Stolen, Mutiliated or Destroyed
Instruments............................................................................ 30
4. Failure to Surrender Cancelled Instrument.............................................. 30
F. Release of Security Interests in or Other Claims to or against Assets
or Property of the Reorganized Debtors by Creditors Paid Pursuant
to the Plan................................................................................. 31
G. Delivery of Distributions; Undeliverable or Unclaimed Distributions......................... 31
H. Procedures for Treating Disputed Claims Under Plan of Reorganization ....................... 32
1. Disputed Claims........................................................................ 32
a. Process............................................................................ 32
b. Tort Claims........................................................................ 32
2. Objections to Claims and Interests..................................................... 33
3. Professional Claims.................................................................... 33
4. No Distributions Pending Allowance..................................................... 33
5. Distributions on Account of Disputed Claims and Interests
Once They are Allowed.................................................................. 33
I. Setoffs..................................................................................... 33
VI. INDIVIDUAL HOLDER PROOFS OF INTEREST............................................................. 34
VII. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES............................................ 34
A. Assumptions................................................................................. 34
B. Cure of Defaults in Connection with Assumption.............................................. 34
C. Rejections.................................................................................. 34
D. Bar Date for Rejection Damages.............................................................. 35
VIII. ACCEPTANCE OR REJECTION OF THE PLAN.............................................................. 35
A. Voting Classes.............................................................................. 35
B. Presumed Acceptances of Plan................................................................ 35
C. Confirmability of Plan and Cramdown......................................................... 35
IX. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN............................................... 36
A. Corporate Structure......................................................................... 36
B. Corporate Action............................................................................ 36
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1. Cancellation of Old Securities and Related Agreements.................................. 36
2. Articles of Incorporation and Bylaws for Reorganized CMI............................... 36
3. Articles of Incorporation and Bylaws for Reorganized CMM............................... 37
4. Directors and Management of Reorganized CMI............................................ 37
5. Directors and Management of Reorganized CMM and
Reorganized Holdings................................................................... 37
6. No Further Corporate Action............................................................ 38
C. Implementation.............................................................................. 38
D. Effectuating Documents and Actions.......................................................... 38
E. Term of Injunctions or Stays................................................................ 38
F. No Interest; Disallowance of Penalties and Premiums......................................... 38
G. Retiree Benefits............................................................................ 39
H. Recapitalization Financing Including Issuance of New Securities............................. 39
I. Sale of the CMBS Sale Portfolio............................................................. 39
J. Potential New Equity Investment and Rights Offering......................................... 39
K. Second Amended and Restated Stock Option Plan............................................... 40
L. Affiliate Reorganization.................................................................... 41
X. CONFIRMATION AND EFFECTIVE DATE CONDITIONS....................................................... 41
A. Conditions to Confirmation.................................................................. 41
B. Conditions to Effective Date................................................................ 42
XI. EFFECTS OF PLAN CONFIRMATION..................................................................... 42
A. Discharge of Debtors and Injunction......................................................... 42
B. Limitation of Liability..................................................................... 43
C. Releases.................................................................................... 43
D. Indemnification............................................................................. 44
E. Vesting of Assets........................................................................... 45
F. Preservation of Causes of Action............................................................ 45
G. Retention of Bankruptcy Court Jurisdiction.................................................. 45
H. Failure of Bankruptcy Court to Exercise Jurisdiction........................................ 47
I. Committees.................................................................................. 47
XII. MISCELLANEOUS PROVISIONS......................................................................... 48
A. Final Order................................................................................. 48
B. Modification of the Plan.................................................................... 48
C. Revocation of the Plan...................................................................... 49
D. Application of Section 1145 of the Bankruptcy Code and Federal
Securities Laws............................................................................. 49
E. Application of Section 1146(c) of the Bankruptcy Code....................................... 49
F. Successors and Assigns...................................................................... 49
G. Saturday, Sunday or Legal Holiday........................................................... 49
H. Committee Action............................................................................ 49
I. Post-Effective Date Effect of Evidences of Claims or Interests.............................. 50
J. Governing Law............................................................................... 50
K. No Liability for Solicitation or Participation.............................................. 50
L. Severability of CMM Provisions.............................................................. 50
M. No Admissions or Waiver of Objections....................................................... 50
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I. INTRODUCTION
CRIIMI MAE Inc. (defined herein as "CMI") and its affiliates CRIIMI
MAE Holdings II L.P. (defined herein as "Holdings") and CRIIMI MAE
Management, Inc. (defined herein as "CMM", and collectively with CMI and
Holdings, the "Debtors") hereby propose this Third Amended Joint Plan of
Reorganization (defined herein as this "Plan") for the resolution of the
Debtors' outstanding creditor claims and equity interests and request
confirmation of the Plan pursuant to Section 1129 of the Bankruptcy Code. The
Official Committee of Equity Security Holders of CMI (defined herein as the
"CMI Equity Committee" joins the Debtors as a Co-Proponent of this Plan.
All Holders of Claims and Interests are encouraged to read the Plan
and the accompanying Disclosure Statement.
No materials, other than the accompanying Disclosure Statement and
any exhibits and schedules attached thereto or referenced therein, have been
approved by the Debtors for use in soliciting acceptances or rejections of
the Plan.
II. DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION
A. Definitions.
In addition to such other terms as are defined in other sections of
the Plan, the following terms (which appear in the Plan as capitalized terms)
have the following meanings as used in the Plan:
1. "ADMINISTRATIVE CLAIM" means a Claim for payment of an
administrative expense of a kind specified in Section 503(b) of the
Bankruptcy Code and referred to in Section 507 (a) (1) of the Bankruptcy
Code, including, without limitation, the actual and necessary costs and
expenses incurred after the commencement of the Reorganization Cases of
preserving the estate or operating the business of any of the Debtors
(including wages, salaries and commissions for services), loans and advances
to any of the Debtors made after the Petition Date, compensation for legal
and other services and reimbursement of expenses awarded or allowed under
Section 330(a) or 331 of the Bankruptcy Code, and all fees and charges
against the estate under Section 1930 of title 28, United States Code.
2. "ALLOWED CLAIM" or "ALLOWED INTEREST" means a Claim against or
Interest in the Debtors:
(1) to the extent that a proof of such Claim or Interest was
timely Filed and served upon the Debtors and no objection to the Claim
or Interest, or motion to estimate the Claim or Interest for purposes
of allowance (as used hereinafter, the word "objection" shall include a
motion to estimate for purposes of allowance), is Filed within the time
fixed by the Bankruptcy Court for such objections; or
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(2) to the extent that a proof of such Claim or Interest is
deemed Filed under applicable law or pursuant to a Final Order of the
Bankruptcy Court (including, but not limited to, any Claim or Interest
listed on the Debtors' schedules, not scheduled as contingent,
unliquidated or disputed, and not superseded by a timely-filed proof of
Claim or Interest) and no objection to the Claim or Interest is Filed
within the time fixed by the Bankruptcy Court for such objections; or
(3) that is allowed pursuant to this Plan; or
(4) to the extent that a proof of such Claim or Interest is
allowed pursuant to the following sentence of this definition.
If an objection to a proof of Claim or Interest is Filed within the
time fixed by the Bankruptcy Court, the Claim or Interest shall be Allowed to
the extent of:
(1) any amount of such Claim or Interest to which no objection
was Filed; and
(2) any amount otherwise authorized by Final Order or the
Plan.
"ALLOWED ADMINISTRATIVE CLAIM," "ALLOWED PRIORITY TAX CLAIM," "ALLOWED SECURED
CLAIM" and "ALLOWED UNSECURED CLAIM" have correlative meanings.
3. "ALLOWED CLASS ... CLAIM" means an Allowed Claim in the particular
Class described.
4. "ALLOWED CLASS ... INTEREST" means an Allowed Interest in the
particular Class described.
5. "ALLOWED CLASS A1 CMO-IV CLAIM" means the Allowed Secured Claim of
the Holder of the Allowed Class A1 Claim with respect to the CMO-IV Bonds.
6. "BANKRUPTCY CODE" means title 11 of the United States Code, as now
in effect or hereafter amended if such amendments are made applicable to the
Reorganization Cases.
7. "BANKRUPTCY COURT" means the United States Bankruptcy Court for the
District of Maryland, at Greenbelt, or such other court or adjunct thereof that
exercises jurisdiction over the Reorganization Cases.
8. "BANKRUPTCY RULES" means the Federal Rules of Bankruptcy Procedure,
as applicable from time to time in the Reorganization Cases.
9. "BUSINESS DAY" means any day other than a Saturday, a Sunday or a
"legal holiday" (as defined in Bankruptcy Rule 9006(a)).
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10. "CASH" means lawful currency of the United States, a certified
check, a cashier's check or a wire transfer of immediately available funds
from any source, or a check drawn on a domestic bank from Reorganized CMI,
Reorganized CMM, Reorganized Holdings or other Person making any distribution
under this Plan.
11. "CLAIM" means a claim against any of the Debtors, whether or not
asserted or allowed, as defined in Section 101(5) of the Bankruptcy Code,
including, without limitation, Administrative Claims.
12. "CLASS" means a class of Claims or Interests designated pursuant
to the Plan.
13. "CLASS A1 CASH PAYMENT" means a payment in Cash on the Effective
Date to the Holder of the Allowed Class A1 Claim with respect to the CMO-IV
Bonds in the amount of $4.5 million.
14. "CLASS A9/A10 CASH PAYMENT" means the Cash payment to be made on
the Effective Date by CMI to Holders of Allowed Class A9 and A10 Claims as
described in Exhibit 2 hereto.
15. "CLASS A9/A10 NOTE A" means one of a series of notes, governed
by an indenture, to be issued by CMI to Holders of Allowed Class A9 and
Allowed Class A10 Claims as described in Exhibit 2 hereto.
16. "CLASS A9/A10 NOTE B" means one of a series of notes, governed
by an indenture, to be issued by CMI to Holders of Allowed Class A9 and
Allowed Class A10 Claims as described in Exhibit 2 hereto.
17. "CLASS A9/A10 NOTES" means collectively the Class A9/A10 Note
A's and Class A9/A10 Note B's.
18. "CLEARING SYSTEMS" means DTC or any similar clearing system.
19. "CLERK" means the Clerk of the Bankruptcy Court.
20. "CMBS SALE PORTFOLIO" means those commercial mortgage-backed
securities and any other assets identified on a schedule to be provided to
the Bankruptcy Court at or before the Confirmation Hearing setting forth
those commercial mortgage-backed securities and other assets to be sold as
part of funding this Plan.
21. "CMI" means CRIIMI MAE Inc., a Maryland corporation.
22. "CMI COMMON STOCK" means the common stock of CMI, par value $.01
per share.
23. "CMI CREDITORS' COMMITTEE" means the Official Committee of
Unsecured Creditors of CMI appointed by the United States Trustee.
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24. "CMI EQUITY COMMITTEE" means the Official Committee of Equity
Security Holders of CMI appointed by the United States Trustee.
25. "CMI GENERAL UNSECURED CLAIMS" means all Allowed Unsecured
Claims against CMI other than Claims against CMI of Holders of Old Senior
Notes, Unsecured Claims (if any) in Classes A8, A9, A11, A12, A13, A15, A17,
A19 and A23 as provided hereinafter, Administrative Claims against CMI and
Priority Tax Claims against CMI.
26. "CMM" means CRIIMI MAE Management, Inc., a Maryland corporation
and wholly-owned subsidiary of CMI.
27. "CMM GENERAL UNSECURED CLAIMS" means all Allowed Unsecured
Claims against CMM other than Unsecured Claims (if any) in Classes B3, B4 and
B6 as provided hereinafter, Administrative Claims against CMM and Priority
Tax Claims against CMM.
28. "CMO-IV ADDITIONAL COLLATERAL" means the following bonds and
owner trust certificates owned by the Company: CMM 1998-1, Classes K, P, XS
and R.
29. "CMO-IV BONDS" means the following bonds owned by the Company:
CMM 1998-1, Classes X/IO, F, G, H and J.
30. "CMSLP" means CRIIMI MAE Services Limited Partnership, a
Maryland limited partnership.
31. "COMMITTEES" means any statutory committees of creditors or
equity interest holders of the Debtors appointed by the United States Trustee
pursuant to Section 1102 of the Bankruptcy Code.
32. "COMPANY" means CMI and its consolidated subsidiaries.
33. "CONFIRMATION" means the entry by the Bankruptcy Court of the
Confirmation Order.
34. "CONFIRMATION DATE" means the date on which the Clerk enters the
Confirmation Order on the Docket.
35. "CONFIRMATION HEARING" means the hearing on confirmation of this
Plan.
36. "CONFIRMATION ORDER" means the Order of the Bankruptcy Court
confirming this Plan under Section 1129 of the Bankruptcy Code.
37. "CO-PROPONENT" means the CMI Equity Committee as a Co-Proponent
of this Plan with the Debtors.
38. "DEBTOR RELEASEES" shall have the meaning ascribed to such term
in Section XI.C of this Plan.
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39. "DEBTORS" means CMI, Holdings and CMM, collectively and
individually as appropriate from the context, as debtors and debtors in
possession.
40. "DEBTORS IN POSSESSION" means the Debtors, when acting in the
capacity of representatives of the Estates in the Reorganization Cases.
41. "DISBURSING AGENT" means, collectively, one or more Persons
responsible for making distributions under this Plan. The Reorganized Debtors
or such Person(s) as the Debtors may employ in their sole discretion will
serve as Disbursing Agent.
42. "DISCLOSURE STATEMENT" means the disclosure statement pursuant
to Section 1125 or Section 1126(b) of the Bankruptcy Code with respect to
this Plan (and all exhibits and schedules annexed thereto or referred to
therein), as it may be amended or supplemented from time to time.
43. "DISPUTED CLAIM" means a Claim, to the extent such Claim is not
an Allowed Claim or disallowed by a Final Order.
44. "DISPUTED INTEREST" means an Interest to the extent such
Interest is not an Allowed Interest.
45. "DISTRIBUTION RECORD DATE" means the date fixed by the
Bankruptcy Court as the record date for determining the Holders of Allowed
Claims or Allowed Interests who are entitled to receive distributions under
this Plan, which date shall not be prior to five Business Days after the
Confirmation Date and, if no such date is fixed, means five Business Days
after the Confirmation Date.
46. "DOCKET" means the docket or dockets in the Reorganization Cases
maintained by the Clerk.
47. "DTC" means The Depository Trust Company.
48. "EFFECTIVE DATE" means the first Business Day that is not less
than eleven (11) days after the Confirmation Date on which, as determined by
the Debtors, (i) all conditions to the Effective Date set forth herein have
been satisfied or waived by the Debtors, and (ii) no stay of the Confirmation
Order is in effect.
49. "ELIGIBLE INSTITUTION" shall have the meaning ascribed to such
term in Section V.E.l.b of the Plan.
50. "EMPLOYEE CLAIMS" means Claims that are asserted by employees of
the Debtors in connection with their employment, including, without
limitation, Claims arising from or relating to salaries or wages, accrued
paid vacation, health-related benefits, severance benefits, field management
and executive/administrative management incentive plans and similar employee
benefits.
51. "ESTATES" means the estates created in the Debtors'
Reorganization Cases under Section 541 of the Bankruptcy Code.
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52. "FILE," "FILED" or "FILING" means file, filed or filing with the
Bankruptcy Court in the Reorganization Cases.
53. "FINAL ORDER" means an order or judgment of the Bankruptcy
Court, as entered on the Docket in the Reorganization Cases, which has not
been reversed, stayed, modified or amended, and as to which (a) the time to
appeal, seek certiorari or request reargument or further review or rehearing
has expired and no appeal, petition for certiorari or request for reargument
or further review or rehearing has been timely filed, or (b) any appeal that
has been or may be taken or any petition for certiorari or request for
reargument or further review or rehearing that has been or may be filed has
been resolved by the highest court to which the order or judgment was
appealed, from which certiorari was sought or to which the request was made
and no further appeal or petition for certiorari has been or can be taken or
granted.
54. "FORMER SERIES C PREFERRED STOCK" means CMI's former Series C
Cumulative Convertible Preferred Stock, with a liquidation preference of $100
per share.
55. "FREDDIE MAC" means the Federal Home Loan Mortgage Corporation.
56. "FREDDIE MAC AGREEMENT" means that certain Funding Note Purchase
and Security Agreement dated as of September 22, 1995, among Freddie Mac, CMI
and CRIIMI MAE Financial Corporation II.
57. "GACC" means German American Capital Corporation.
58. "GUARANTEE CLAIMS" means any Claim against any of the Debtors
arising from or under any agreement of the Debtors guaranteeing the
obligations of another Debtor.
59. "HOLDER" means a Person who holds a Claim or Interest in such
Person's capacity as the holder of such Claim or Interest. Where the identity
of the Holder of a Claim or Interest is set forth on a register or other
record maintained by or at the direction of the Debtors, the Holder of such
Claim or Interest shall be deemed to be the Holder as identified on such
register or record unless the Debtors are otherwise notified in a writing
authorized by such Holder.
60. "HOLDINGS" means CRIIMI MAE Holdings II, L.P., a Delaware
limited partnership.
61. "HOLDINGS GENERAL UNSECURED CLAIMS" means all Allowed Unsecured
Claims against Holdings other than Unsecured Claims (if any) in Classes C3,
C4 and C6 as provided hereinafter, Administrative Claims against Holdings and
Priority Tax Claims against Holdings.
62. "IMPAIRED" shall have the meaning ascribed to it in Section 1124
of the Bankruptcy Code.
63. "INDEMNITEES" shall have the meaning ascribed to such term in
Section XI.D of the Plan.
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<PAGE>
64. "INDENTURE TRUSTEE" means State Street Bank, as indenture
trustee for the Old Senior Notes or any successor thereto.
65. "INSTRUMENT" means any share of stock, security, promissory note
or other "INSTRUMENT," within the meaning of that term, as defined in Section
9-105 (1) (i) of the UCC.
66. "INSURANCE PROCEEDS" means the insurance proceeds payable to or
on behalf of CMI with respect to an Allowed Securities Claim.
67. "INTERCOMPANY CLAIMS" means any and all Claims and causes of
action which any of the Debtors holds against any other Debtor.
68. "INTEREST" means the interest of any equity security Holder of
the Debtors, whether or not asserted, as defined in Section 101 (17) of the
Bankruptcy Code.
69. "LETTER OF TRANSMITTAL" shall have the meaning ascribed to such
term in Section V.E.l.b of the Plan.
70. "LIBOR" means the London Interbank Offered Rate for one-month
United States dollars deposits as set forth on page 3750 of Telerate as of
8:00 a.m., New York City time, on the date of determination.
71. "LOCAL BANKRUPTCY RULES" means the local rules of the Bankruptcy
Court, as applicable from time to time in the Reorganization Cases.
72. "MERRILL" means Merrill Lynch Mortgage Capital Inc.
73. "NEW DEBT" means the new secured and unsecured debt to be
borrowed by, or issued pursuant to this Plan to creditors of, the Reorganized
Debtors as part of funding this Plan and the Reorganized Debtors.
74. "NEW EQUITY" means the new equity capital (if applicable) raised
by Reorganized CMI in accordance with Section IX.J of this Plan.
75. "NEW SECURITIES" means the Class A9/A10 Notes, the Series E
Preferred Stock (to be issued in exchange for the Old Series D Preferred
Stock, provided, however, that if the Old Series D Preferred Stock is
exchanged for Series E Preferred Stock prior to the Effective Date, then such
Series E Preferred Stock shall not be deemed New Securities) and any CMI
Common Stock issued on the Effective Date as payment for accrued and unpaid
dividends to Holders of any series of CMI preferred stock (including the
Former Series C Preferred Stock and the former Series D Preferred Stock if
the Old Series D Preferred Stock is exchanged for Series E Preferred Stock
prior to the Effective Date).
76. "OLD CMI PREFERRED STOCK" means the Old Series D Preferred Stock.
77. "OLD SECURITIES" means the Old Senior Notes and the Old CMI
Preferred Stock.
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<PAGE>
78. "OLD SENIOR NOTE CLAIMS" means Claims arising from the Old
Senior Notes (including all Claims and causes of action arising therefrom or
in connection therewith).
79. "OLD SENIOR NOTES" means CMI's 9 1/8% Senior Notes due 2002 in
the aggregate original principal amount of $100 million.
80. "OLD SERIES D PREFERRED STOCK" means CMI's Series D Cumulative
Convertible Preferred Stock, with a liquidation preference of $100 per share.
81. "ORDER" means an order or judgment of the Bankruptcy Court as
entered on the Docket.
82. "OTHER SECURED CLAIM" means any Allowed Secured Claim in Class
A7, Class B2 or Class C2.
83. "PERSON" means any individual, corporation, general partnership,
limited partnership, limited liability partnership, limited liability
company, association, joint stock company, joint venture, government or
political subdivision, official committee appointed by the United States
Trustee, unofficial committee of creditors or equity holders, or other
"entity" (as defined in the Bankruptcy Code).
84. "PETITION DATE" means October 5, 1998, the date on which the
Reorganization Cases were Filed.
85. "PLAN" means this plan of reorganization for the Debtors in the
Reorganization Cases and all exhibits and schedules hereto, as such may be
amended, modified or supplemented from time to time.
86. "PLAN INTEREST" means interest at the legal rate, which shall
mean the federal judgment rate pursuant to 28 U.S.C. Section1961(a) in effect
as of the Confirmation Date unless the Holder of a Claim objects thereto on
or before the Confirmation Date, in which event the applicable rate for such
objector will be the federal rate as determined by the Bankruptcy Court for
such objector if such objector is determined to be the Holder of an Allowed
Claim.
87. "PLAN RATE" means interest at the non-default contract interest
rate provided for in the documents applicable to the Claim of the creditor
for whom the term Plan Rate is applicable. If a creditor has more than one
Allowed Claim with different documents providing for different non-default
contract interest rates for each such Allowed Claim, then the Plan Rate shall
be calculated at the non-default contract interest rate applicable to each
separate component of such creditor's Allowed Claim.
88. "POST-PETITION TAX CLAIMS" means Administrative Claims and other
Claims by a governmental unit for taxes (and for interest and/or penalties
related to such taxes) for any tax year or period, to the extent such Claims
accrue within the period from and including the Petition Date through and
including the Effective Date.
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<PAGE>
89. "PRIORITY CLAIM" means an Allowed Claim entitled to priority
under any of Sections 507 (a) (3) through 507 (a) (7) or 507 (a) (9) of the
Bankruptcy Code, but excludes Priority Tax Claims.
90. "PRIORITY TAX CLAIM" means an Allowed Claim entitled to priority
under Section 507 (a) (8) of the Bankruptcy Code.
91. "PRO RATA" means proportionately so that, with respect to any
Class or Classes, the ratio of (a) the amount of consideration distributed on
account of a particular Allowed Claim to (b) the amount of such particular
Allowed Claim, is the same as the ratio of (x) the amount of consideration
distributed on account of all Allowed Claims of the Class or Classes in which
the particular Allowed Claim is included to (y) the aggregate amount of all
Allowed Claims of that Class or Classes. Until a Disputed Claim is disallowed
by a Final Order or otherwise resolved, it will be treated in all Pro Rata
calculations at the lesser of the amount requested by the claimant and such
amount as may be capped by the Bankruptcy Court upon motion requesting such a
cap.
92. "RECAPITALIZATION FINANCING" means the total New Debt and New
Equity (if applicable) to be used in connection with funding the Plan and the
Reorganized Debtors.
93. "REORGANIZATION CASES" means the Debtors' cases under chapter 11
of the Bankruptcy Code.
94. "REORGANIZED CMI" means CMI, as it will be reorganized as of the
Effective Date in accordance with this Plan.
95. "REORGANIZED CMI ARTICLES OF INCORPORATION" means the amended
and restated articles of incorporation of Reorganized CMI that will be
effective on the Effective Date.
96. "REORGANIZED CMI BYLAWS" means the amended and restated bylaws
of Reorganized CMI that will be effective on the Effective Date.
97. "REORGANIZED CMM" means CMM as it will be reorganized as of the
Effective Date in accordance with this Plan.
98. "REORGANIZED CMM ARTICLES OF INCORPORATION" means the CMM
articles of incorporation in existence as of the Effective Date.
99. "REORGANIZED CMM BYLAWS" means the CMM bylaws in existence as of
the Effective Date.
100. "REORGANIZED DEBTORS" means Reorganized CMI, Reorganized CMM
and Reorganized Holdings, collectively and individually, as appropriate from
the context.
101. "REORGANIZED HOLDINGS" means Holdings as it will be reorganized
as of the Effective Date in accordance with this Plan.
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<PAGE>
102. "SECOND AMENDED AND RESTATED STOCK OPTION PLAN" means CMI's
Second Amended and Restated Stock Option Plan for Key Employees to be
effective on the Effective Date.
103. "SECURED CLAIM" means any Claim that is secured by a lien on
property in which the Estates have an interest or that is subject to setoff
under Section 553 of the Bankruptcy Code, to the extent of the value of the
Claim Holder's interest in the Estates' interest in such property or to the
extent of the amount subject to setoff, as applicable, as determined pursuant
to Section 506 (a) or Section 1111 (b) of the Bankruptcy Code and any
repurchase agreement Claim based upon the repurchase price thereunder but
only to the extent of the value of the Claim Holder's interest in the
property that is the subject of the repurchase agreement.
104. "SECURITIES CLAIM" means (a) any Claim arising from a claim for
rescission of a purchase or sale of any Series B Preferred Stock, Former
Series C Preferred Stock, Old Series D Preferred Stock or CMI Common Stock,
or for damages arising from the purchase or sale of any such securities, or
(b) any Claim for indemnity, reimbursement or contribution on account of any
such Claim.
105. "SERIES B PREFERRED STOCK" means CMI's Series B Cumulative
Convertible Preferred Stock.
106. "SERIES E PREFERRED STOCK" means CMI's Series E Cumulative
Convertible Preferred Stock into which shares of Former Series C Preferred
Stock and Old Series D Preferred Stock have been or will be exchanged and
which has the terms, rights and preferences summarized in Exhibit 3 hereto
and as set forth in the Articles Supplementary relating to the Series E
Preferred Stock.
107. "SERIES F DIVIDEND PREFERRED STOCK" means CMI's Series F
Redeemable Cumulative Dividend Preferred Stock.
108. "STOCK OPTIONS" means the stock options to acquire CMI Common
Stock outstanding as of the Effective Date.
109. "TENDERED CERTIFICATES" shall have the meaning ascribed to such
term in Section V.E.l.b of the Plan.
110. "TORT CLAIM" means any Claim related to personal injury,
property damage or loss, products liability or other similar Claims against
any Debtor, and shall not include Securities Claims or Claims arising under,
based upon or related to Stock Options.
111. "UCC" means the Maryland Uniform Commercial Code, as in effect
at any relevant time.
112. "UNIMPAIRED" means with respect to any Claim or Interest that
such Claim or Interest is not Impaired.
113. "UNSECURED CLAIM" means any Claim that is not a Secured Claim.
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<PAGE>
114. "VOTING RECORD DATE" means the date set by the Bankruptcy Court
for determining the Holders of Old Senior Notes, Class A10 Claims, Series B
Preferred Stock, Former Series C Preferred Stock, Old CMI Preferred Stock,
Series F Dividend Preferred Stock and CMI Common Stock entitled to vote to
accept or reject this Plan.
B. Interpretation and Computation of Time.
1. Defined Terms.
Any term used in this Plan that is not defined in this Plan, in
Article II (Definitions) or elsewhere, but that is defined in the Bankruptcy
Code, the Bankruptcy Rules or the Local Bankruptcy Rules, shall have the
meaning ascribed to that term in the Bankruptcy Code, the Bankruptcy Rules or
the Local Bankruptcy Rules, as the case may be.
2. Rules of Interpretation.
For purposes of this Plan: (a) whenever it appears appropriate from
the context, each term, whether stated in the singular or the plural, shall
include both the singular and the plural; (b) any reference in this Plan to a
contract, instrument, release or other agreement or document being in a
particular form or on particular terms and conditions means that such
document shall be substantially in such form or substantially on such terms
and conditions; provided, however, that any change to such form, terms, or
conditions which is material to a party to such document shall not be made
without such party's consent; (c) any reference in this Plan to an existing
document or exhibit Filed or to be Filed means such document or exhibit, as
it may have been or may be amended, modified or supplemented from time to
time; (d) unless otherwise specified in a particular reference, all
references in this Plan to paragraphs, sections, articles and exhibits are
references to paragraphs, sections, articles and exhibits of or to this Plan;
(e) the words "herein," "hereof," "hereto," "hereunder" and others of similar
import refer to this Plan in its entirety rather than to a particular portion
of this Plan only; (f) captions and headings to articles and paragraphs are
inserted for convenience of reference only and are not intended to be a part
of or to affect the interpretations of this Plan; and (g) the rules of
construction set forth in Section 102 of the Bankruptcy Code shall apply.
3. Time Periods.
In computing any period of time prescribed or allowed by this Plan,
the provisions of Bankruptcy Rule 9006(a) shall apply.
III. DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS
The following is a designation of the Classes of Claims and
Interests under this Plan. In accordance with Section 1123(a)(1) of the
Bankruptcy Code, Administrative Claims and Priority Tax Claims have not been
classified and are excluded from the following Classes. A Claim or Interest
is classified in a particular Class only to the extent that the Claim or
Interest qualifies within the description of that Class, and is classified in
another Class or Classes to the extent that any remainder of the Claim or
Interest qualifies within the description of such other Class or
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<PAGE>
Classes. A Claim or Interest is classified in a particular Class only to the
extent that the Claim or Interest is an Allowed Claim or Allowed Interest in
that Class and has not been paid, released or otherwise satisfied before the
Effective Date; a Claim or Interest which is not an Allowed Claim or Allowed
Interest is not in any Class. A Disputed Claim or Disputed Interest, to the
extent that it subsequently becomes an Allowed Claim or Allowed Interest,
shall be included in the Class for which it would have qualified had it not
been disputed. Notwithstanding anything to the contrary contained in this
Plan, no distribution shall be made on account of any Claim or Interest to
the extent such Claim or Interest is not an Allowed Claim or an Allowed
Interest. In addition, for purposes of the classification and treatment of
Secured Claims under this Plan, any transfers of Claims occurring after the
Petition Date shall not impact the classification or treatment of Secured
Claims as provided in this Plan or the status of an Unsecured Claim as of the
Petition Date to continue to be treated under this Plan as an Unsecured Claim.
A. CMI Classes
<TABLE>
<S> <C>
Class A1 - Citicorp Secured Claims Class A1 consists of all Allowed
Secured Claims against CMI of
Citicorp Securities, Inc., Salomon
Smith Barney Inc., Citicorp Real
Estate, Inc. and/or CitiBank N.A. or
any other Holder of a Secured Claim
against CMI under, arising from or
related to that certain Master
Repurchase Agreement between CMI and
Citicorp Securities, Inc. dated as
of August 1, 1997 or any documents
executed in connection therewith or
related thereto.
Class A2 - First Union Secured Claim Class A2 consists of all Allowed
Secured Claims against CMI of First
Union National Bank or any other
Holder of a Secured Claim against
CMI under, arising from or related
to (i) that certain Master
Assignment Agreement between First
Union National Bank and CMI dated as
of June 30, 1998 or any documents
executed in connection therewith or
related thereto or (ii) that certain
Guaranty by CMI in favor of and for
the benefit of Signet Bank/Virginia
entered into as of June 30, 1995 or
that certain Collateral Assignment
of Partnership Interests from CMI in
favor of Signet Bank/Virginia dated
as of June 30, 1995 or that certain
Stock Pledge Agreement by CMI in
favor of Signet Bank/Virginia dated
as of June 30, 1995 or that certain
Credit Agreement between CMM and
Signet Bank/Virginia dated as of
June 30, 1995 or any documents
executed in connection with or
related to any of the foregoing.
A-13
<PAGE>
Class A3 - GACC Secured Claim Class A3 consists of all Allowed
Secured Claims against CMI of German
American Capital Corp. or any other
Holder of a Secured Claim against
CMI under, arising from or related
to that certain Master Loan and
Security Agreement between CMI and
German American Capital Corp. dated
as of March 31, 1998 or any
documents executed in connection
therewith or related thereto.
Class A4 - Lehman Secured Claim Class A4 consists of all Allowed
Secured Claims against CMI of Lehman
Ali Inc. or any other Holder of a
Secured Claim against CMI under,
arising from or related to that
certain Master Assignment Agreement
between CMI and Lehman Ali Inc.
dated as of May 29, 1998 or any
documents executed in connection
therewith or related thereto.
Class A5 - Merrill Secured Claim Class A5 consists of all Allowed
Secured Claims against CMI of
Merrill Lynch Mortgage Capital Inc.
or any other Holder of a Secured
Claim against CMI under, arising
from or related to that certain
Master Assignment Agreement between
CMI and Merrill Lynch Mortgage
Capital Inc. dated as of September
25, 1997 or any documents executed
in connection therewith or related
thereto.
Class A6 - Morgan Stanley Secured Claim Class A6 consists of any Allowed
Secured Claims against CMI of Morgan
Stanley & Co. International Ltd. or
any other Holder of a Secured Claim
against CMI under, arising from or
related to that certain Master
Repurchase Agreement between Morgan
Stanley & Co. International Limited
and CMI dated as of May 8, 1998 or
any documents executed in connection
therewith or related thereto.
Class A7 - Other Secured Claims Class A7 consists of any Allowed
Secured Claims against CMI other
than the Secured Claims specified in
Classes A1 through A6.
Class A8 - Priority Claims Class A8 consists of all Allowed
Priority Claims against CMI.
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<PAGE>
Class A9 - Old Senior Note Claims Class A9 consists of all Allowed
Claims against CMI of Holders of Old
Senior Notes under, arising from or
related to the Old Senior Notes.
Class A10 - CMI General Unsecured Claims Class A10 consists of all Allowed
Unsecured Claims against CMI other
than the Unsecured Claims (if any)
in Classes A8, A9, A11, A12, A13,
A15, A17, A19 and A23 and other than
Administrative Claims and Priority
Tax Claims. Class A11 - Guarantee
Claims Class A11 consists of all
Allowed Claims against CMI of
Holders of Guarantee Claims based
upon CMI's guarantee of obligations
of CMM or Holdings, as the case may
be.
Class A12 - Freddie Mac Claims Class A12 consists of Claims against
CMI of Freddie Mac numbered 335 and
497, on the July 20, 1999 claims
register, in the amount of
$230,448,487.24 each.
Class A13 - Intercompany Claims Class A13 consists of all Allowed
Claims against CMI of CMM or
Holdings.
Class A14 - Series B Preferred Stock Class A14 consists of all Allowed
Series B Preferred Stock Interests
in CMI.
Class A15 - Series B Preferred Stock Class A15 consists of all Allowed
Securities Claims Securities Claims on account of
Series B Preferred Stock against
CMI.
Class A16 - Former Series C Preferred Class A16 consists of all Allowed
Stock Former Series C Preferred Stock
Interests in CMI.
Class 17 - Former Series C Preferred Class A17 consists of all Allowed
Stock Securities Claims Securities Claims on account of
Former Series C Preferred Stock
against CMI.
Class A18 - Old Series D Preferred Stock Class A18 consists of all Allowed
Old Series D Preferred Stock
Interests in CMI.
Class A19 - Old Series D Preferred Stock Class A19 consists of all Allowed
Securities Claims on Securities Claim account of Old
Series D Preferred Stock against
CMI.
Class A20 - Series F Dividend Preferred Class A20 consists of all Allowed
Stock Series F Dividend Preferred Stock
Interests in CMI.
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<PAGE>
Class A21 - CMI Common Stock Class A21 consists of all Allowed
CMI Common Stock Interests in CMI.
Class A22 - Stock Options Class A22 consists of all Allowed
Stock Option Interests in CMI.
Class A23 - CMI Common Stock Securities Class A23 consists of all Allowed
Securities Claims on Claims account
of CMI Common Stock against CMI.
B. CMM Classes
Class B1 - First Union Secured Claims Class B1 consists of all Allowed
Secured Claims against CMM of First
Union National Bank or any other
Holder of a Secured Claim against
CMM under, arising from or related
to that certain Credit Agreement
between CMM and Signet Bank/Virginia
dated as of June 30, 1995 or any
documents executed in connection
therewith or related thereto.
Class B2 - Other Secured Claims Class B2 consists of any Allowed
Secured Claims against CMM other
than the Secured Claims specified in
Class B1.
Class B3 - Priority Claims Class B3 consists of all Allowed
Priority Claims against CMM.
Class B4 - Guarantee Claims Class B4 consists of all Allowed
Claims against CMM of Holders of
Guarantee Claims based upon CMM's
guarantee of obligations of CMI or
Holdings, as the case may be.
Class B5 - CMM General Unsecured Claims Class B5 consists of all Allowed
Unsecured Claims against CMM other
than the Unsecured Claims (if any)
in Classes B3, B4 and B6 and other
than Administrative Claims and
Priority Tax Claims.
Class B6 - Intercompany Claims Class B6 consists of all Allowed
Claims against CMM of CMI or
Holdings.
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<PAGE>
Class B7 - CMI's Interests in CMM Class B7 consists of all Allowed
Interests in CMM of CMI.
C. Holdings Classes
Class C1 - Citicorp Secured Claims Class C1 consists of all remaining
Allowed Secured Claims (if any)
against Holdings of Citicorp
Securities, Inc. and/or Salomon
Smith Barney Inc.
Class C2 - Other Secured Claims Class C2 consists of any Allowed
Secured Claims against Holdings
other than the Secured Claims
specified in Class C1.
Class C3 - Priority Claims Class C3 consists of all Allowed
Priority Claims against Holdings.
Class C4 - Guarantee Claims Class C4 consists of all Allowed
Claims against Holdings of Holders
of Guarantee Claims based upon
Holdings' guarantee of obligations
of CMI or CMM, as the case may be.
Class C5 - Holdings General Unsecured Class C5 consists of all Allowed
Claims Unsecured Claims against Holdings
other than the Unsecured Claims (if
any) in Classes C3, C4 and C6 and
other than Administrative Claims and
Priority Tax Claims.
Class C6 - Intercompany Claims Class C6 consists of all Allowed
Claims against Holdings of CMI or
CMM.
Class C7 - Interests in Holdings Class C7 consists of all Allowed
Interests in Holdings of CMI and
CMSLP.
</TABLE>
IV. GENERAL PROVISIONS FOR TREATMENT OF CLAIMS AND INTERESTS
A. Unclassified Claims.
1. Administrative Claims.
a. General.
Subject to certain additional requirements for professionals and
certain other entities set forth below, Reorganized CMI, Reorganized CMM or
Reorganized Holdings, as the case may
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<PAGE>
be, shall pay to each Holder of an Allowed Administrative Claim, on account
of its Administrative Claim and in full satisfaction thereof, Cash equal to
the amount of such Allowed Administrative Claim on the later of the Effective
Date or the day on which such Claim becomes an Allowed Claim, unless the
Holder and Reorganized CMI, Reorganized CMM or Reorganized Holdings, as the
case may be, shall have agreed to other treatment of such Claim, or an order
of the Bankruptcy Court provides for other terms, in which case such Allowed
Administrative Claim shall be paid in accordance with such agreement or
Bankruptcy Court order, as applicable; provided, that if incurred in the
ordinary course of business or otherwise assumed by the Debtors pursuant to
this Plan (including Administrative Claims of governmental units for taxes),
an Allowed Administrative Claim will be assumed on the Effective Date and
paid, performed or settled by Reorganized CMI, Reorganized CMM or Reorganized
Holdings, as the case may be, when due in accordance with the terms and
conditions of the particular agreement(s) governing the obligation in the
absence of the Reorganization Cases.
b. Payment of Statutory Fees.
All fees payable pursuant to 28 U.S.C. Section 1930(a)(6) (U.S.
Trustee Fees) shall be paid by the Debtors or the Reorganized Debtors, as
applicable, when such fees are due and owing.
2. Priority Tax Claims.
Unless otherwise agreed to by the Debtors or Reorganized CMI,
Reorganized CMM or Reorganized Holdings, as the case may be, and a Holder of
a Priority Tax Claim, each Holder of an Allowed Priority Tax Claim shall
receive, at the sole option of Reorganized CMI, Reorganized CMM or
Reorganized Holdings, as the case may be, (i) Cash equal to the unpaid
portion of such Allowed Priority Tax Claim on the later of the Effective Date
and the date on which such Claim becomes an Allowed Priority Tax Claim, or as
soon thereafter as is practicable, or (ii) equal quarterly Cash payments in
an aggregate amount equal to such Allowed Priority Tax Claim, together with
interest at a fixed annual rate to be determined by the Bankruptcy Court or
otherwise agreed to by Reorganized CMI, Reorganized CMM or Reorganized
Holdings, as the case may be, and such Holder, over a period through the
sixth anniversary of the date of assessment of such Allowed Priority Tax
Claim, or upon such other terms determined by the Bankruptcy Court to provide
the Holder of such Allowed Priority Tax Claim deferred Cash payments having a
value, as of the Effective Date, equal to such Allowed Priority Tax Claim.
The Holders of Allowed Priority Tax Claims are not entitled to vote on this
Plan. Pursuant to Section 1123(a)(1) of the Bankruptcy Code, Priority Tax
Claims are not designated a Class of Claims for purposes of voting on this
Plan.
3. Bar Date for Administrative Claims.
a. General Provisions.
Except as provided below for (i) non-tax liabilities incurred in the
ordinary course of business by the Debtors in Possession and (ii)
Post-Petition Tax Claims, requests for payment of Administrative Claims must
be Filed and served on counsel for the Debtors and Reorganized CMI,
Reorganized CMM or Reorganized Holdings, as the case may be, no later than
(x) sixty (60) days after the Effective Date, or (y) such later date, if any,
as the Bankruptcy Court shall
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<PAGE>
order upon application made prior to the end of such 60-day period. Holders
of Administrative Claims (including, without limitation, professionals
requesting compensation or reimbursement of expenses and the Holders of any
Claims for federal, state or local taxes) that are required to File a request
for payment of such Claims and that do not File such requests by the
applicable bar date shall be forever barred from asserting such Claims
against the Debtors, Reorganized CMI, Reorganized CMM or Reorganized
Holdings, or any of their respective properties.
b. Professionals.
All professionals or other Persons requesting compensation or
reimbursement of expenses pursuant to Sections 327, 328, 330, 331, 503(b),
506(b) or 1103 of the Bankruptcy Code for services rendered on or before the
Effective Date (including, without limitation, any compensation requested by
any professional or any other Person for making a substantial contribution in
the Reorganization Cases) shall File and serve on Reorganized CMI,
Reorganized CMM or Reorganized Holdings, as the case may be, and counsel for
Reorganized CMI, Reorganized CMM or Reorganized Holdings, as the case may be,
an application for final allowance of compensation and reimbursement of
expenses no later than sixty (60) days after the Effective Date. Objections
to applications of professionals or other Persons for compensation or
reimbursement of expenses must be Filed and served on the Reorganized
Debtors, counsel for the Reorganized Debtors and the requesting professional
or other Person not later than ninety (90) days after the Effective Date.
On or as soon as reasonably practicable after the Effective Date,
Reorganized CMI shall pay the contractual claims of the Indenture Trustee for
its fees and expenses including its reasonable attorneys' fees and expenses.
To the extent, after being furnished with supporting documents for such fees
and expenses, Reorganized CMI disputes the reasonableness of any such fees
and expenses, Reorganized CMI shall negotiate in good faith to resolve such
dispute. To the extent that Reorganized CMI and the Indenture Trustee are
unable to resolve any dispute, the dispute shall be resolved by the
Bankruptcy Court. The Indenture Trustee shall not attach or set off any of
its fees and expenses against distributions to Holders of Old Senior Notes
and shall not otherwise withhold or delay any such distributions.
c. Ordinary Course Liabilities.
Except as provided herein, holders of Administrative Claims based on
liabilities incurred in the ordinary course of the Debtors' businesses (other
than Claims of governmental units for taxes or Claims and/or penalties
related to such taxes) shall not be required to File any request for payment
of such Claims. Such Administrative Claims shall be assumed and paid by
Reorganized CMI, Reorganized CMM or Reorganized Holdings, as the case may be,
pursuant to the terms and conditions of the particular transactions giving
rise to such Administrative Claims, without any further action by the Holders
of such Claims. Any dispute with respect to ordinary course liabilities shall
be submitted to the Bankruptcy Court for resolution unless resolved by
agreement of the parties.
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<PAGE>
d. Tax Claims.
All requests for payment of Post-Petition Tax Claims, for which no
bar date has otherwise been previously established, must be Filed on or
before the later of (i) sixty (60) days following the Effective Date, and
(ii) 120 days following the filing of the tax return for such taxes for such
tax year or period with the applicable governmental unit. Any Holder of any
Post-Petition Tax Claim that is required to File a request for payment of
such taxes and that does not File such a Claim by the applicable bar date
shall be forever barred from asserting any such Post-Petition Tax Claim
against the Debtors, Reorganized CMI, Reorganized CMM or Reorganized
Holdings, or any of their respective properties, whether any such
Post-Petition Tax Claim is deemed to arise prior to, on or subsequent to the
Effective Date.
B. Identification of Classes of Claims and Interests Impaired and Not
Impaired by the Plan.
1. Claims Against and Interests in CMI.
Classes A8, A12, A15, A17, A19, A22 and A23 are not Impaired by the
Plan. Classes A1, A2, A3, A4, A5, A6, A7, A9, A10, A11, A13, A14, A16, A18, A20
and A21 are Impaired Classes under the Plan.
2. Claims Against and Interests in CMM.
Classes B3, B4 and B7 are not Impaired by the Plan. Classes B1, B2, B5
and B6 are Impaired Classes under the Plan.
3. Claims Against and Interests in Holdings.
Classes C3, C4 and C7 are not Impaired by the Plan. Classes C1, C2, C5
and C6 are Impaired Classes under the Plan.
C. Treatment of Claims Against and Interests in CMI.
1. Class A1 (Citicorp Secured Claims).
The Holder of the Allowed Class A1 Claim shall receive on the Effective
Date the treatment of its Allowed Secured Claim set forth on Exhibit 4 hereto,
or such other treatment as may be agreed to by CMI and the Holder of the Allowed
Class A1 Claim. As set forth in Exhibit 4, the treatment set forth therein
resolves all Claims of the Holder of the Allowed Class A1 Claim, and the
affiliates thereof referenced in Exhibit 4, against each of the Debtors, the
Reorganized Debtors and CRIIMI MAE Brick Church, Inc.
2. Class A2 (First Union Secured Claim).
The Holder of the Allowed Class A2 Claim shall receive on the Effective
Date payment in full in Cash of any remaining balance of its Allowed Class A2
Claim with interest on the principal balance of such Allowed Claim calculated at
the Plan Rate.
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3. Class A3 (GACC Secured Claim).
The Holder of the Allowed Class A3 Claim shall receive on the Effective
Date the treatment of its Allowed Secured Claim set forth on Exhibit 1 hereto,
or such other treatment as may be agreed to by CMI and the Holder of the Allowed
Class A3 Claim.
4. Class A4 (Lehman Secured Claim).
The Holder of the Allowed Class A4 Claim shall receive on the Effective
Date payment in full in Cash of any remaining balance of its Allowed Class A4
Claim with interest on the principal balance of such Allowed Claim calculated at
the Plan Rate.
5. Class A5 (Merrill Secured Claim).
The Holder of the Allowed Class A5 Claim shall receive on the Effective
Date the treatment of its Allowed Secured Claim set forth on Exhibit 1 hereto,
or such other treatment as may be agreed to by CMI and the Holder of the Allowed
Class A5 Claim.
6. Class A6 (Morgan Stanley Secured Claim).
The Holder of the Allowed Class A6 Claim shall receive on the Effective
Date payment in full in Cash of any remaining balance of its Allowed Class A6
Claim with interest on the principal balance of such Allowed Claim calculated at
the Plan Rate.
7. Class A7 (Other Secured Claims).
The Holder of an Allowed Class A7 Claim (if any) shall receive on the
Effective Date either (i) payment in full in Cash of the Allowed Class A7 Claim
with interest on the principal balance of any such Allowed Claim calculated at
the Plan Rate, (ii) if CMI so elects, the collateral securing the Allowed Class
A7 Claim (if any) in full satisfaction of such Claim, or (iii) such other
treatment as may be agreed to by CMI and the Holder(s), if any, of Allowed Class
A7 Claim(s).
8. Class A8 (Priority Claims).
The Holders of Allowed Class A8 Claims shall receive on the Effective
Date payment in full in Cash of Allowed Class A8 Claims including Plan Interest
thereon.
9. Class A9 (Old Senior Note Claims)
The Holders of Allowed Class A9 Claims shall receive on the Effective
Date the treatment of their Allowed Claims set forth on Exhibit 2 hereto.
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10. Class A10 (CMI General Unsecured Claims).
The Holders of Allowed Class A10 Claims shall receive on the Effective
Date the treatment of their Allowed Claims as set forth on Exhibit 2 hereto.
With respect to the Class A10 convenience class referred to in Exhibit 2 hereto,
as part of the treatment of Allowed Class A10 Claims, there shall be a
convenience class option as follows: any Holder of an Allowed Class A10 Claim
whose Allowed Claim is for $150,000 or less and elects the convenience class
treatment on its ballot, or whose Allowed Claim is for an amount in excess of
$150,000 and elects in writing on its ballot to reduce its claim to $150,000 and
accept convenience class treatment thereof, shall be entitled to receive payment
in Cash on the Effective Date of the allowed amount of such Holder's Allowed
Class A10 Claim in full satisfaction of said Claim, with accrued and unpaid
pre-petition and post-petition interest thereon calculated at the non-default
contract rate of interest in such Holder's documents for those Holders of
Allowed Class A10 Claims electing convenience class treatment who have a
contract, the invoice rate (capped at 9-1/8%) for those Holders of Allowed Class
A10 Claims electing convenience class treatment who have an invoice rate, and 6%
for all others. For purposes of calculating the $150,000 amount in the preceding
sentence, the amount of allowed post-petition interest on any such Claim (which
interest shall be paid as part of such Claim) will be excluded from such
calculation. The total amount to be paid by CMI with respect to the foregoing
convenience class option shall be paid from the funds in the Class A9/A10 Cash
Payment.
11. Class A11 (Guarantee Claims).
If, and only to the extent that, an Allowed Class A11 Claim is not
fully treated with respect to such Holder's underlying Allowed Claim under the
Plan treatment for Claims against CMM or Holdings, as the case may be, any
remaining Allowed Class A11 Claim (if any) shall be included as part of the CMI
General Unsecured Claims and treated for all purposes as part of Class A10.
12. Class A12 (Freddie Mac Claims).
CMI's obligation under the Freddie Mac Agreement shall be deemed
reaffirmed on the Effective Date, and the Claims of Freddie Mac numbered 335 and
497 on the July 2, 1999 claims register, each in the amount of $230,448,487.24,
shall be deemed withdrawn and thereby disallowed as of the Effective Date.
13. Class A13 (Intercompany Claims).
No payment shall be made under the Plan to Holders of Class A13 Claims
on account of such Claims.
14. Class A14 (Series B Preferred Stock).
Each Holder of Series B Preferred Stock as of the Effective Date shall
retain its Series B Preferred Stock; provided that if the Holders of Series B
Preferred Stock as of the Voting Record Date vote as a Class by the requisite
amount to accept the Plan, the Articles Supplementary
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relating to the Series B Preferred Stock (which will be part of the
Reorganized CMI Articles of Incorporation) will be deemed amended to permit
the payment of dividends on Series B Preferred Stock, including accrued and
unpaid dividends, in CMI Common Stock or Cash (or a combination thereof), at
the election of Reorganized CMI, with such payment of dividends to be
consistent with Exhibits 1 and 2 hereto.
15. Class A15 (Series B Preferred Stock Securities Claims).
Each Holder of an Allowed Class A15 Claim (if any) shall, if, as and
when any such Claim is Allowed by Final Order, receive in full satisfaction
of any such Allowed Class A15 Claim its share of any Insurance Proceeds
applicable thereto plus, if such Allowed Class A15 Claim (if any) is not paid
in full from such Insurance Proceeds, CMI Common Stock in an amount equal in
value, as of the date of issuance thereof, to the balance (if any) of such
Allowed Class A15 Claim, provided that any such Claim not timely filed (and
in any event not Filed before the Confirmation Date) shall be released and
discharged under this Plan and the Confirmation Order.
16. Class A16 (Former Series C Preferred Stock).
Former Series C Preferred Stock has been exchanged for Series E
Preferred Stock. Each Holder of Series E Preferred Stock as of the
Distribution Record Date shall retain its Series E Preferred Stock and such
Series E Preferred Stock shall have the terms, rights and preferences
summarized in Exhibit 3 hereto and as set forth in the Articles Supplementary
relating to the Series E Preferred Stock (to be part of the Reorganized CMI
Articles of Incorporation). All accrued and past due dividends on Former
Series C Preferred Stock shall be paid on the Effective Date in CMI Common
Stock or Cash, at the election of Reorganized CMI, with such payment of
dividends to be consistent with Exhibits 1 and 2 hereto.
17. Class A17 (Former Series C Preferred Stock Securities Claims).
Each Holder of an Allowed Class A17 Claim (if any) shall, if, as and
when any such Claim is Allowed by Final Order, receive in full satisfaction
of any such Allowed Class A17 Claim its share of any Insurance Proceeds
applicable thereto plus, if such Allowed Class A17 Claim (if any) is not paid
in full from such Insurance Proceeds, CMI Common Stock in an amount equal in
value, as of the date of issuance thereof, to the balance (if any) of such
Allowed Class A17 Claim, provided that any such Claim not timely filed (and
in any event not filed before the Confirmation Date) shall be released and
discharged under this Plan and the Confirmation Order.
18. Class A18 (Old Series D Preferred Stock).
Each Holder of Old Series D Preferred Stock as of the Distribution
Record Date, if not previously exchanged, shall receive on the Effective Date
in exchange for its Old Series D Preferred Stock an identical number of
shares of Series E Preferred Stock issued effective as of the Effective Date,
and such Series E Preferred Stock shall have the terms, rights and
preferences summarized in Exhibit 3 hereto and as set forth in the Articles
Supplementary relating to the
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Series E Preferred Stock (to be part of the Reorganized CMI Articles of
Incorporation). All shares of Old Series D Preferred Stock, if not previously
exchanged and cancelled, shall be deemed cancelled as of the Effective Date.
All accrued and past due dividends on Old Series D Preferred Stock shall be
paid on the Effective Date in CMI Common Stock or Cash, at the election of
Reorganized CMI, with such payment of dividends to be consistent with
Exhibits 1 and 2 hereto.
19. Class A19 (Old Series D Preferred Stock Securities Claim).
Each Holder of an Allowed Class A19 Claim (if any) shall, if, as and
when any such Claim is Allowed by Final Order, receive in full satisfaction
of any such Allowed Class A19 Claim its share of any Insurance Proceeds
applicable thereto plus, if such Allowed Class A19 Claim (if any) is not paid
in full from such Insurance Proceeds, CMI Common Stock in an amount equal in
value, as of the date of issuance thereof, to the balance (if any) of such
Allowed Class A19 Claim, provided that any such Claim not timely filed (and
in any event not filed before the Confirmation Date) shall be released and
discharged under this Plan and the Confirmation Order.
20. Class A20 (Series F Dividend Preferred Stock).
Each Holder of Series F Dividend Preferred Stock as of the Effective
Date shall retain its Series F Dividend Preferred Stock; provided that if the
Holders of Series F Dividend Preferred Stock as of the Voting Record Date
vote as a Class by the requisite amount to accept the Plan, the Articles
Supplementary relating to the Series F Dividend Preferred Stock will be
deemed amended to permit the payment of dividends on Series F Dividend
Preferred Stock, including any accrued and unpaid dividends, in CMI Common
Stock or Cash (or a combination thereof), at the election of Reorganized CMI,
with such payment of dividends to be consistent with Exhibits 1 and 2 hereto.
21. Class A21 (CMI Common Stock).
Each Holder of CMI Common Stock as of the Effective Date shall
retain its CMI Common Stock.
22. Class A22 (Stock Options).
Each Holder of a Stock Option as of the Effective Date shall retain
its Stock Option.
23. Class A23 (CMI Common Stock Securities Claims).
All Holders of Allowed Class A23 Claims (if any) as of the Effective
Date shall receive in full satisfaction of any such Allowed Class A23 Claims
their share of any Insurance Proceeds applicable thereto plus, if such
Allowed Class A23 Claims (if any) are not paid in full from such Insurance
Proceeds, CMI Common Stock in an amount equal in value, as of the date of
issuance thereof, to the balance (if any) of such Allowed Class A23 Claims.
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D. Treatment of Claims Against and Interests in CMM.
1. Class B1 (First Union Secured Claims).
The Holder of the Allowed Class B1 Claim shall receive on the
Effective Date payment in full in Cash of any remaining balance of its
Allowed Class B1 Claim with interest on the principal balance of such Allowed
Claim calculated at the Plan Rate.
2. Class B2 (Other Secured Claims)
The Holder of an Allowed Class B2 Claim (if any) shall receive on
the Effective Date either (i) payment in full in Cash of the Allowed Class B2
Claim with interest on the principal balance of any such Allowed Claim
calculated at the Plan Rate, (ii) if CMM so elects, the collateral securing
the Allowed Class B2 Claim (if any) in full satisfaction of such Claim, or
(iii) such other treatment as may be agreed to by CMM and the Holder(s), if
any, of Allowed Class B2 Claim(s).
3. Class B3 (Priority Claims).
The Holders of Allowed Class B3 Claims shall receive on the
Effective Date payment in full in Cash of Allowed Class B3 Claims including
Plan Interest thereon.
4. Class B4 (Guarantee Claims).
The Holders of Allowed Class B4 Claims (if any) shall be paid, if,
as and when any such Claim is allowed by Final Order, in Cash in full by CMM
or Reorganized CMM including Plan Interest thereon if, and only to the
extent, not fully treated with respect to such Holder's underlying Allowed
Claim under the Plan treatment for Claims against CMI or Holdings, as the
case may be.
5. Class B5 (CMM General Unsecured Claims).
The Holders of Allowed Class B5 Claims shall receive on the
Effective Date payment in full in Cash of Allowed Class B5 Claims, with
accrued and unpaid pre-petition and post-petition interest thereon calculated
at the non-default contract rate of interest in such Holder's documents for
those Holders of Allowed Class B5 Claims who have a contract, the invoice
rate (capped at 9-1/8%) for those Holders of Allowed Class B5 Claims who have
an invoice rate, and 6% for all other Holders of Allowed Class B5 Claims.
6. Class B6 (Intercompany Claims).
No payment shall be made under the Plan to Holders of Class B6 Claims
on account of such Claims.
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7. Class B7 (CMI's Interests in CMM).
The Holder of the Class B7 Interest shall retain its Interest under
this Plan.
E. Treatment of Claims Against and Interests in Holdings.
1. Class C1 (Citicorp Secured Claims).
The Holder of any remaining Allowed Class C1 Claim (if any) shall be
included in and satisfied as part of the treatment of the Holder of the Allowed
Class A1 Claim as set forth on Exhibit 4 hereto.
2. Class C2 (Other Secured Claims).
The Holder of an Allowed Class C2 Claim (if any) shall receive on the
Effective Date either (i) payment in full in Cash of the Allowed Class C2 Claim
with interest on the principal balance of any such Allowed Claim calculated at
the Plan Rate, (ii) if Holdings so elects, the collateral securing the Allowed
Class C2 Claim (if any) in full satisfaction of such Claim, or (iii) such other
treatment as may be agreed to by Holdings and the Holder(s), if any, of Allowed
Class C2 Claim(s).
3. Class C3 (Priority Claims).
The Holders of Allowed Class C3 Claims shall receive on the Effective
Date payment in full in Cash of Allowed Class C3 Claims including Plan Interest
thereon.
4. Class C4 (Guarantee Claims).
The Holders of Allowed Class C4 Claims (if any) shall receive if, as
and when any such Claim is allowed by Final Order payment in Cash in full
including Plan Interest thereon if, and only to the extent, not fully treated
with respect to such Holder's underlying Allowed Claim under the Plan treatment
for Claims against CMI or CMM, as the case may be.
5. Class C5 (Holdings General Unsecured Claims).
The Holders of Allowed Class C5 Claims (if any) shall, if, as and when
any such Claim is allowed by Final Order, receive payment in full in Cash of any
such Allowed Class C5 Claim with any accrued and unpaid pre-petition and
post-petition interest thereon calculated at the non-default contract rate of
interest in such Holder's documents for any Holders of Allowed Class C5 Claims
who have a contract, the invoice rate (capped at 9-1/8%) for any such Holders
who have an invoice rate, and 6% for any other Holders of Allowed C5 Claims.
6. Class C6 (Intercompany Claims).
No payment shall be made under this Plan to Holders of Class C6 Claims
on account of such Claims.
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7. Class C7 (Interests in Holdings).
The Holders of the Class C7 Interests shall retain their Interests
under this Plan.
F. Modification of Treatment of Claims.
The Debtors and the CMI Equity Committee reserve for themselves and the
Reorganized Debtors the right to modify the treatment of any Allowed Claim or
Interest in any manner adverse only to the Holder of such Claim or Interest at
any time after the Effective Date upon the consent of the creditor or interest
holder whose Allowed Claim or Interest, as applicable, is being adversely
affected.
V. DISTRIBUTIONS UNDER THE PLAN
A. Disbursing Agent.
The Reorganized Debtors, or such Person(s) as the Debtors may employ
in their sole discretion, will act as Disbursing Agent under this Plan. The
Disbursing Agent shall make all distributions of Cash required to be
distributed under the applicable provisions of this Plan and any documents
executed in connection therewith. The Disbursing Agent may employ or contract
with other entities to assist in or make the distributions required by this
Plan and any documents executed in connection therewith. Each Disbursing
Agent will serve without bond, and each Disbursing Agent, without further
Bankruptcy Court approval, will receive reasonable compensation for
distribution services rendered pursuant to this Plan and reimbursement of
reasonable out-of-pocket expenses incurred in connection with such services
from the Reorganized Debtors on terms acceptable to the Reorganized Debtors.
B. Timing of Distributions.
Except as otherwise provided in this Plan with respect to any
particular Claim or Interest, property to be distributed hereunder on account
of Allowed Claims and Allowed Interests (a) shall be distributed on the date
provided for distribution with respect to that Class or as soon as
practicable thereafter to each Holder of an Allowed Claim or an Allowed
Interest in that Class that is an Allowed Claim or an Allowed Interest as of
said distribution date, and (b) shall be distributed to each Holder of an
Allowed Claim or an Allowed Interest of that Class that becomes an Allowed
Claim or Allowed Interest after the distribution date as soon as practicable
after the Order of the Bankruptcy Court allowing such Claim or Interest
becomes a Final Order.
C. Methods of Distributions.
1. Cash Payments.
Cash payments made pursuant to this Plan will be in United States
dollars. Cash payments to foreign creditors may be made, at the option of the
Debtors or the Reorganized Debtors, in such funds and by such means as are
necessary or customary in a particular foreign
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jurisdiction. Cash payments made pursuant to this Plan in the form of checks
issued by Reorganized Debtors shall be null and void if not cashed within 90
days of the date of the issuance thereof. Requests for reissuance of any
check shall be made directly to the Disbursing Agent as set forth in Section
V.G below. Cash payments may, at the option of the Debtors or Reorganized
Debtors, be made by wire transfer.
2. Compliance with Tax Requirements.
In connection with the distributions set forth herein, to the extent
applicable, the Disbursing Agent shall comply with all tax withholding and
reporting requirements imposed on it by any governmental unit, and all
distributions pursuant to this Plan shall be subject to such withholding and
reporting requirements. The Disbursing Agent shall be authorized to take any
and all actions that may be necessary or appropriate to comply with such
withholding and reporting requirements.
Notwithstanding any other provision contained herein: (i) each
Holder of an Allowed Claim or Allowed Interest that is to receive a
distribution of Cash pursuant to this Plan shall have sole and exclusive
responsibility for the satisfaction and payment of any tax obligations
imposed by any governmental unit, including income, withholding and other tax
obligations, on account of such distribution; and (ii) no distribution shall
be made to or on behalf of such Holder pursuant to this Plan unless and until
such Holder has made arrangements reasonably satisfactory to the Disbursing
Agent for the payment and satisfaction of such tax obligations. Any
distributions pursuant to this Plan will, pending the implementation of such
arrangements, be treated as an undeliverable distribution pursuant to Section
V.G of this Plan.
D. Distribution Record Date.
As of the close of business on the Distribution Record Date, the
transfer registers for the Old Securities maintained by the Debtors, or their
respective agents, will be closed. The Disbursing Agent and its respective
agents and the Indenture Trustee will have no obligation to recognize the
transfer of any Old Securities occurring after the Distribution Record Date,
and will be entitled for all purposes relating to this Plan to recognize and
deal only with those Holders of record as of the close of business on the
Distribution Record Date.
E. Surrender of Cancelled Old Securities and Exchange of Old Securities for
New Securities.
1. Tender of Old Securities.
The mechanism by which Holders of Allowed Claims and Allowed
Interests surrender their Old Securities in order to receive Cash, if and as
applicable under this Plan, and to exchange such Old Securities for New
Securities (as applicable), shall be determined based upon the manner in
which the Old Securities were issued and the mode in which they are held, as
set forth below.
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a. Old Securities Held in Book-Entry Form
Old Securities held in book-entry form through bank and broker nominee
accounts shall be mandatorily cancelled and (i) Cash distributed, if and as
applicable under this Plan, and (ii) mandatorily exchanged for New Securities
(as applicable) through the facilities of such nominees and the systems of the
applicable securities depository or Clearing System holding such Old Securities
on behalf of the brokers or banks.
b. Old Securities in Physical, Registered, Certificated Form
Each Holder of Old Securities in physical, registered, certificated
form will be required, on or before the Effective Date, to deliver its physical
notes or certificates (the "Tendered Certificates") to the Disbursing Agent,
accompanied by a properly executed letter of transmittal, to be distributed by
the Disbursing Agent after the Confirmation Date and containing such
representations and warranties as are described in the Disclosure Statement (a
"Letter of Transmittal").
Any Cash or New Securities to be distributed pursuant to this Plan on
account of any Allowed Claim or Allowed Interest represented by an Old Security
held in physical, registered, certificated form shall, pending such surrender,
be treated as an undeliverable distribution pursuant to Section V.G below.
Signatures on a Letter of Transmittal must be guaranteed by an Eligible
Institution (as defined below), unless the Old Securities tendered pursuant
thereto are registered in the name of the Person signing the Letter of
Transmittal or are tendered for the account of an Eligible Institution. If
signatures on a Letter of Transmittal are required to be guaranteed, such
guarantees must be by a member firm of a registered national securities exchange
in the United States, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or a
correspondent in the United States (each of which is an "Eligible Institution").
If Old Securities are registered in the name of a Person other than the Person
signing the Letter of Transmittal, the Old Securities, in order to be tendered
validly, must be endorsed or accompanied by a properly completed power of
authority, with signature guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Letters of Transmittal and Tendered Certificates will
be resolved by the applicable Disbursing Agent, whose determination shall be
final and binding, subject only to review by the Bankruptcy Court upon
application with due notice to any affected parties in interest. CMI reserves
the right, on behalf of itself and the Disbursing Agent, to reject any and all
Letters of Transmittal and Tendered Certificates not in proper form, or Letters
of Transmittal and Tendered Certificates, the Disbursing Agent's acceptance of
which would, in the opinion of the Disbursing Agent or its counsel, be unlawful
or would subject the Disbursing Agent to liability.
2. Delivery of New Securities in Exchange for Old Securities.
On the Effective Date, Reorganized CMI or the Disbursing Agent shall
issue, and cause to be authenticated, the New Securities and shall apply to DTC
to make the New Securities
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eligible for deposit at DTC. With respect to Holders of Old Securities who
hold such Old Securities through nominee accounts at bank and broker
participants in DTC or any similar clearing system, the Disbursing Agent
shall deliver the New Securities to DTC or to the registered address
specified by the Clearing System. The Clearing System (or its depositary)
shall return the applicable Old Securities to the Disbursing Agent for
cancellation.
The Disbursing Agent will request that DTC effect a mandatory
exchange of the applicable Old Securities for the applicable New Securities
by crediting the accounts of its participants with the applicable New
Securities in exchange for the Old Securities. On the effective date of such
exchange, each DTC participant will effect a similar exchange for accounts of
the beneficial owners holding Old Securities through such firms. Neither the
Debtors, Reorganized Debtors nor the Disbursing Agent shall have any
responsibility or liability in connection with the Clearing Systems' or such
participants' effecting, or failure to effect, such exchanges.
Holders of Old Securities holding such Old Securities outside a
Clearing System will be required to surrender their Old Securities by
delivering them to the Disbursing Agent, along with properly executed Letters
of Transmittal (as described above in Section V.E.1.b). The Disbursing Agent
shall forward the New Securities on account of such Old Securities in
accordance with the instructions contained in the Letters of Transmittal.
3. Special Procedures for Lost, Stolen, Mutilated or Destroyed
Instruments.
Any Holder of a Claim or an Interest evidenced by an Instrument that
has been lost, stolen, mutilated or destroyed will, in lieu of surrendering
such Instrument, deliver to the Disbursing Agent: (a) an affidavit of loss or
other evidence reasonably satisfactory to the Disbursing Agent of the loss,
theft, mutilation or destruction; and (b) such security or indemnity as may
reasonably be required by the Disbursing Agent or the applicable Reorganized
Debtor to hold the Disbursing Agent and such Reorganized Debtor harmless from
any damages, liabilities or costs incurred in treating such individual as a
Holder of an Instrument. Upon compliance with this Section, the Holder of a
Claim or Interest evidenced by any such lost, stolen, mutilated or destroyed
Instrument shall, for all purposes under this Plan and notwithstanding
anything to the contrary contained herein, be deemed to have surrendered such
Instrument.
4. Failure to Surrender Cancelled Instrument.
Any Holder of Old Securities holding such Old Securities in
physical, registered or certificated form who has not properly completed and
returned to the Disbursing Agent a Letter of Transmittal, together with the
applicable Tendered Certificates, within two years after the Effective Date
shall have its claim for a distribution pursuant to this Plan on account of
such Instrument discharged and shall be forever barred from asserting any
such claim against Reorganized CMI, Reorganized CMM or Reorganized Holdings
or their properties. In such cases, any Cash or New Securities held for
distribution on account of such claim shall be disposed of pursuant to the
provisions of Section V.G hereof.
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F. Release of Security Interests in or Other Claims to or against Assets or
Property of the Reorganized Debtors by Creditors Paid Pursuant to the Plan.
Any Holder of a Secured Claim whose Secured Claim is being paid in
full in accordance with Section IV.C, IV.D or IV.E of the Plan shall
cooperate in all respects with the Reorganized Debtors and shall execute such
documents and release and return to the Reorganized Debtors such assets or
property of the Debtors or Reorganized Debtors, as applicable, that such
creditor is holding, directly or indirectly, as collateral or in custody, and
release and return all escrows created or existing in respect to any such
Claim, and, if applicable, unwind any alleged repurchase agreements or claims
to assets or property subject to such alleged repurchase agreements.
Furthermore, any and all Holders of such Secured Claims shall execute such
documents and take such actions as may be reasonably required by the
Reorganized Debtors to effectuate the transfer or retransfer back to the
Reorganized Debtors of all collateral security, or assets or property held
subject to alleged repurchase agreements, free and clear of all liens,
security interests, claims or interests in or to such collateral, assets or
property by such Holder, and shall confirm the foregoing in writing if
requested by the Reorganized Debtors.
G. Delivery of Distributions; Undeliverable or Unclaimed Distributions.
Any Person that is entitled to receive a Cash distribution under
this Plan but that fails to cash a check within 90 days of its issuance shall
be entitled to receive a reissued check from Reorganized CMI, Reorganized CMM
or Reorganized Holdings, as the case may be, for the amount of the original
check, without any interest, if such Person requests the Disbursing Agent to
reissue such check and provides the Disbursing Agent with such documentation
as the Disbursing Agent reasonably requests to verify that such Person is
entitled to such check, prior to the second anniversary of the Effective
Date. If a Person fails to cash a check within 90 days of its issuance and
fails to request reissuance of such check prior to the second anniversary of
the Effective Date, such Person shall not be entitled to receive any
distribution under this Plan.
Subject to Bankruptcy Rule 9010, all distributions to any Holder of
an Allowed Claim or an Allowed Interest shall be made to the address of such
Holder on the books and records of the Debtors or their agents, unless
Reorganized CMI, Reorganized CMM or Reorganized Holdings, as applicable, has
been notified in writing of a change of address. If the distribution to any
Holder of an Allowed Claim or Allowed Interest is returned to a Disbursing
Agent as undeliverable, such Disbursing Agent shall use reasonable efforts to
determine the current address of such Holder, but no distribution shall be
made to such Holder unless and until the applicable Disbursing Agent has
determined or is notified in writing of such Holder's then-current address,
at which time such distribution shall be made to such Holder without any
additional interest on such distribution after the Effective Date.
Undeliverable distributions shall remain in the possession of the applicable
Disbursing Agent pursuant to Section V.A of the Plan until such time as a
distribution becomes deliverable. Undeliverable Cash or New Securities shall
be held in trust by the applicable Disbursing Agent for the benefit of the
potential claimants of such funds or securities, and will be accounted for
separately. Any Disbursing Agent holding undeliverable Cash shall invest such
Cash in a manner consistent with the Debtors' investment and deposit
guidelines. Any interest paid, and any other amounts earned, with respect to
such undeliverable Cash pending its distribution in accordance with this Plan
shall be property of Reorganized CMI, Reorganized CMM or Reorganized
Holdings, as the case may be. Any
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unclaimed or undeliverable distributions (including Cash and New Securities)
shall be deemed unclaimed property under Section 347 (b) of the Bankruptcy
Code at the expiration of two years after the Effective Date and, after such
date, all such unclaimed property shall revert to Reorganized CMI,
Reorganized CMM, or Reorganized Holdings, as the case may be, and the Claim
or Interest of any Holder with respect to such property shall be discharged
and forever barred.
H. Procedures for Treating Disputed Claims Under Plan of Reorganization.
1. Disputed Claims.
a. Process.
If any of the Debtors or Reorganized Debtors disputes any Claim,
such dispute shall be determined, resolved or adjudicated, as the case may
be, under applicable law. Among other things, any Debtor or Reorganized
Debtors may elect, at its sole option, to object or seek estimation under
Section 502 of the Bankruptcy Code with respect to any proof of Claim filed
by or on behalf of a Holder of a Claim or any proof of Interest filed by or
on behalf of a Holder of an Interest.
b. Tort Claims.
All Tort Claims are Disputed Claims. Any unliquidated Tort Claim
that is not otherwise settled or resolved pursuant to Section V.H.l.a above
shall be determined and liquidated under applicable law in the Bankruptcy
Court or the administrative or judicial tribunal in which it is pending on
the Confirmation Date or, if no such action was pending on the Confirmation
Date, in the Bankruptcy Court or any administrative or judicial tribunal of
appropriate jurisdiction. Pursuant to Section IX.E hereof, the automatic stay
arising pursuant to Section 362 of the Bankruptcy Code shall be vacated as of
the Effective Date as to all Tort Claims. Any Tort Claim determined and
liquidated pursuant to a judgment obtained in accordance with this Section
V.H. l.b and applicable non-bankruptcy law that is no longer subject to
appeal or other review and that is not paid by applicable insurance coverage
shall be deemed to be an Allowed Claim in Class A10, B5 or C5, as applicable,
in such liquidated amount and satisfied in accordance with this Plan. Nothing
contained in this Section V.H.l.b shall constitute or be deemed a waiver of
any claim, right or cause of action that the Debtors or the Reorganized
Debtors may have against any Person in connection with or arising out of any
Tort Claim, including, without limitation, any rights under Section 157(b) of
title 28, United States Code.
2. Objections to Claims and Interests.
Except insofar as a Claim or Interest is allowed hereunder,
Reorganized CMI, Reorganized CMM and Reorganized Holdings shall be entitled
and reserve the right to object to Claims and Interests. Except as otherwise
provided in Section V.H.3 below and except as otherwise ordered by the
Bankruptcy Court, objections to any Claim or Interest, including, without
limitation, Administrative Claims, shall be Filed and served upon the Holder
of such Claim or Interest no later than 90 days after the Effective Date,
unless such period is extended by the Bankruptcy Court, which extension may
be granted on an ex parte basis without notice or
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hearing. After the Confirmation Date, only the Debtors, Reorganized CMI,
Reorganized CMM or Reorganized Holdings shall have the authority to File,
settle, compromise, withdraw or litigate to judgment objections to Claims and
Interests. From and after the Confirmation Date, the Debtors, Reorganized
CMI, Reorganized CMM or Reorganized Holdings may settle or compromise any
Disputed Claim or Disputed Interest in an amount or of a value of $75,000 or
less, other than Claims or Interests of Insiders (as defined in the
Bankruptcy Code), without approval of the Bankruptcy Court. Except as (i)
specified otherwise herein, or (ii) ordered by the Bankruptcy Court, all
Disputed Claims or Disputed Interests shall be resolved by the Bankruptcy
Court. The failure of the Debtors to object to any Claim or Interest for
voting purposes shall not be deemed to be a waiver of the Debtors' or
Reorganized Debtors right to object to any Claim or Interest in whole or in
part thereafter.
3. Professional Claims.
Except as otherwise ordered by the Bankruptcy Court, objections to
Claims of professionals shall be governed by the provisions of Section
IV.A.3.b hereof.
4. No Distributions Pending Allowance.
Notwithstanding any other provisions of this Plan, no payments or
distributions will be made on account of a Disputed Claim or a Disputed
Interest until such Claim or Interest becomes an Allowed Claim or Allowed
Interest. If an interest-bearing reserve account is established for a
Disputed Claim, interest accruing on such Claim after the establishment of
such reserve account (if it is ultimately Allowed by Final Order or
settlement between such Holder and the applicable Reorganized Debtor) shall
be limited to interest actually earned on the reserve account for such Claim.
5. Distributions on Account of Disputed Claims and Interests Once
They are Allowed.
Within 30 days after the end of each calendar quarter following the
Effective Date, the applicable Disbursing Agent will make all distributions
on account of any Disputed Claim or Disputed Interest that has become an
Allowed Claim or Allowed Interest during the preceding calendar quarter. Such
distributions will be made pursuant to the provisions of the Plan governing
the applicable Class. Holders of Disputed Claims or Disputed Interests that
are ultimately allowed will also be entitled to receive, on the basis of the
amount ultimately allowed, any interest payments, dividends or other payments
made to the Class to which such Claim or Interest belongs, but held pending
distribution.
I. Setoffs.
Except with respect to any contract, instrument, release, indenture
or other agreement or document created in connection with this Plan, the
Debtors, Reorganized CMI, Reorganized CMM or Reorganized Holdings, as the
case may be, may, pursuant to Section 553 or Section 502(d) of the Bankruptcy
Code or applicable nonbankruptcy law, set off against any Allowed Claim and
the distributions to be made pursuant to this Plan on account of such Claim
(before any distribution is made on account of such Claim), the claims,
rights and causes of action of any nature that the Debtors, Reorganized CMI,
Reorganized CMM or Reorganized Holdings may
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hold against the Holder of such Allowed Claim; provided, however, that
neither the failure to effect such a setoff nor the allowance of any Claim
hereunder shall constitute a waiver or release by the Debtors, Reorganized
CMI, Reorganized CMM or Reorganized Holdings of any such claims, rights and
causes of action that the Debtors, Reorganized CMI, Reorganized CMM or
Reorganized Holdings may possess against such Holder.
VI. INDIVIDUAL HOLDER PROOFS OF INTEREST
Holders of Interests in Classes A14, A16, A18, A20, A21, A22, B7 and
C7 are not required to File proofs of Interests unless they disagree with the
number of shares set forth on the applicable stock register.
VII. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
A. Assumptions.
Except as otherwise provided herein, on the Effective Date, pursuant
to Section 365 of the Bankruptcy Code, the Reorganized Debtors will assume
each executory contract and unexpired lease entered into by the Debtors prior
to the Petition Date that has not previously (a) expired or terminated
pursuant to its own terms or (b) been assumed or rejected pursuant to Section
365 of the Bankruptcy Code. The Confirmation Order will constitute an Order
of the Bankruptcy Court approving the assumptions described in this Article
VII, pursuant to Section 365 of the Bankruptcy Code, as of the Effective Date.
B. Cure of Defaults in Connection with Assumption.
Any monetary amounts by which each executory contract or unexpired
lease to be assumed pursuant to the Plan is in default will be satisfied,
pursuant to Section 365 (b) (1) of the Bankruptcy Code, at the option of the
Debtors, Reorganized CMI, Reorganized CMM or Reorganized Holdings, as the
case may be: (a) by payment of the default amount in Cash on the Effective
Date or as soon as practicable thereafter; or (b) on such other terms as are
agreed to by the parties to such executory contract or unexpired lease.
If there is a dispute regarding: (i) the amount of any cure
payments; (ii) the ability of Reorganized CMI, Reorganized CMM or Reorganized
Holdings to provide "adequate assurance of future performance" (within the
meaning of Section 365 of the Bankruptcy Code) under the contract or lease to
be assumed; or (iii) any other matter pertaining to assumption, the cure
payments required by Section 365 (b) (1) of the Bankruptcy Code will be made
following the entry of a Final Order resolving the dispute and approving the
assumption.
C. Rejections.
Except as otherwise provided herein, on the Effective Date, pursuant
to Section 365 of the Bankruptcy Code, the Debtors will reject each of the
executory contracts and unexpired leases listed on a schedule to be filed
prior to the Confirmation Hearing (the "Contract Rejection Schedule");
provided, however, that the Debtors reserve the right, at any time prior to
the Effective Date, to amend such schedule to delete any executory contract
or unexpired lease listed
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therein, thus providing for its assumption pursuant to Sections VII.A and B
above. Each contract and lease listed on the Contract Rejection Schedule will
be rejected only to the extent that any such contract or lease constitutes an
executory contract or unexpired lease. Listing a contract or lease on the
Contract Rejection Schedule does not constitute an admission by the Debtors,
Reorganized CMI, Reorganized CMM or Reorganized Holdings that such contract
or lease is an executory contract or unexpired lease or that the Debtors,
Reorganized CMI, Reorganized CMM or Reorganized Holdings has any liability
thereunder. The Confirmation Order shall constitute an Order of the
Bankruptcy Court approving such rejections, pursuant to Section 365 of the
Bankruptcy Code, as of the Effective Date.
D. Bar Date for Rejection Damages.
If the rejection of an executory contract or unexpired lease
pursuant to the preceding Section VII.C gives rise to a Claim by the other
party or parties to such contract or lease, such Claim shall be forever
barred and shall not be enforceable against the Debtors, Reorganized CMI,
Reorganized CMM or Reorganized Holdings, their successors or properties
unless (a) a stipulation with respect to the amount and nature of such Claim
has been entered into by either of the Debtors, Reorganized CMI, Reorganized
CMM or Reorganized Holdings, as applicable, and the Holder of such Claim in
connection with the rejection of such executory contract or unexpired lease,
or (b) a Proof of Claim is Filed and served on Reorganized CMI, Reorganized
CMM or Reorganized Holdings, as the case may be, and counsel for Reorganized
CMI, Reorganized CMM or Reorganized Holdings, as the case may be, within 30
days after the Effective Date or such earlier date as established by the
Bankruptcy Court. Unless otherwise ordered by the Bankruptcy Court,. all
Allowed Claims arising from the rejection of executory contracts or unexpired
leases shall be treated as Claims in Class A10, B5 or C5, as applicable.
VIII. ACCEPTANCE OR REJECTION OF THE PLAN
A. Voting Classes.
The Holders of Allowed Claims and Interests in Classes A1, A2, A3,
A4, A5, A6, A7, A9, A10, A11, A13, A14, A16, A18, A20, A21, B1, B2, B5, B6,
C1, C2, C5 and C6 are Impaired and shall be entitled to vote to accept or
reject this Plan.
B. Presumed Acceptances of Plan.
The Holders of Allowed Claims and Interests in Classes A8, A12, A15,
A17, A19, A22, A23, B3, B4, B7, C3, C4 and C7 are not Impaired under the Plan
and, therefore, are conclusively presumed to accept the Plan.
C. Confirmability of Plan and Cramdown
To the extent that any Impaired Class votes to reject the Plan or is
deemed to have rejected this Plan, the Debtors and the CMI Equity Committee
will request that the Bankruptcy Court confirm this Plan under the "cramdown"
provisions of Section 1129(b) of the Bankruptcy Code.
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IX. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN
A. Corporate Structure.
On the Effective Date, CMI will become Reorganized CMI, CMM will
become Reorganized CMM, and Holdings will became Reorganized Holdings.
Reorganized CMM will be a wholly-owned subsidiary of Reorganized CMI, and
Reorganized CMI will be the general partner of Reorganized Holdings.
B. Corporate Action.
1. Cancellation of Old Securities and Related Agreements.
On the Effective Date, except as otherwise provided by this Plan,
the Old Securities and all instruments, indentures and agreements evidencing
or governing such Old Securities shall be deemed terminated, canceled,
extinguished and of no further force or effect without any further action on
the part of the Bankruptcy Court, or any Person or any government entity or
agency, and except as otherwise provided herein, the Debtors and the
Reorganized Debtors shall be released from any and all obligations under such
securities, instruments, indentures and agreements. Holders of cancelled Old
Securities will have no rights arising from or relating to such Old
Securities or the cancellation thereof, except the rights provided pursuant
to this Plan.
2. Articles of Incorporation and Bylaws for Reorganized CMI.
On the Effective Date, Reorganized CMI shall be deemed to have
adopted the Reorganized CMI Articles of Incorporation and the Reorganized CMI
Bylaws pursuant to applicable nonbankruptcy law and Section 1123(a)(5)(I) of
the Bankruptcy Code. The Reorganized CMI Articles of Incorporation contain
amendments providing for, among other matters, an increase in authorized
shares from 120 million to 375 million, (consisting of 300 million shares of
common stock and 75 million shares of preferred stock); authority for the
Board of Directors to increase authorized shares without action by
stockholders; new excess share provisions relating to the transfer,
acquisition and redemption of capital stock addressing ownership limitations
for CMI and the treatment of excess stock intended to ensure compliance with
the Internal Revenue Code of 1986 (such excess share provisions are also
intended to serve as an antitakeover device in connection with any hostile
acquisition, even though Reorganized CMI's REIT status would not be
threatened by such acquisition); deletion of certain antitakeover provisions
(however CMI will remain subject to the Maryland business combination
statute); a change in the vote required for (a) removal of directors, (b)
amendments to Article XI (excess share provisions), and (c) amendments to
Article XIII (conflict with terms of any class or series of preferred stock)
from a majority to 66 2/3; changes in how vacancies on the Board of Directors
and newly created directorships are filled; and prohibition of the issuance
of nonvoting equity securities to the extent required by Section 1123(a)(6)
of the Bankruptcy Code. The Reorganized CMI Bylaws contain amendments
providing for, among other matters, advance notice of matters to be presented
at annual meetings of stockholders and advance notice of nominees for
director. The Reorganized CMI Articles of Incorporation and the Reorganized
CMI Bylaws will become effective, without any requirement of further action
by stockholders of CMI or Reorganized CMI, on the Effective Date. The
Reorganized CMI Articles of
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Incorporation shall be filed with the Maryland Department of Assessments and
Taxation on the Effective Date.
3. Articles of Incorporation and Bylaws for Reorganized CMM.
On the Effective Date, Reorganized CMM shall be deemed to have
adopted the Reorganized CMM Articles of Incorporation and the Reorganized CMM
Bylaws pursuant to applicable non-bankruptcy law and Section 1123(a)(5)(I) of
the Bankruptcy Code. The Reorganized CMM Articles of Incorporation will be
amended to prohibit the issuance of nonvoting equity securities to the extent
required by Section 1123 (a) (6) of the Bankruptcy Code. The Reorganized CMM
Articles of Incorporation and the Reorganized CMM Bylaws will become
effective, without any requirement of further action by the stockholder of
CMM or Reorganized CMM, on the Effective Date. If the foregoing amendment is
required, then the Reorganized CMM Articles of Incorporation shall be filed
with the Maryland Department of Assessments and Taxation on the Effective
Date.
4. Directors and Management of Reorganized CMI.
As of the Effective Date, the Persons identified at or before the
Confirmation Hearing in a schedule to be Filed by CMI with the Bankruptcy
Court will serve as the initial members of the Board of Directors of
Reorganized CMI. Such Persons shall be deemed elected to the Board of
Directors of CMI, and such elections shall be deemed effective as of the
Effective Date, without any requirement of further action by stockholders of
CMI or Reorganized CMI. The initial officers of Reorganized CMI shall be
selected by the Board of Directors of Reorganized CMI and their names will be
disclosed in a schedule to be Filed with the Bankruptcy Court at or before
the Confirmation Hearing. Subject to any requirement of Bankruptcy Court
approval under Section 1129(a)(5) of the Bankruptcy Code, those persons
identified or designated as directors and officers of Reorganized CMI in the
schedule to be Filed with the Bankruptcy Court at or before the Confirmation
Hearing shall assume their offices as of the Effective Date and shall
continue to serve in such capacities thereafter, pending further action of
the Board of Directors or stockholders of Reorganized CMI in accordance with
the Reorganized CMI Bylaws, Reorganized CMI Articles of Incorporation and
applicable state law.
5. Directors and Management of Reorganized CMM and Reorganized
Holdings.
As of the Effective Date, the Persons identified at or before the
Confirmation Hearing in a schedule to be Filed by CMM with the Bankruptcy
Court will serve as the initial members of the Board of Directors of
Reorganized CMM. Such Persons shall be deemed elected to the Board of
Directors of CMM, and such elections shall be deemed effective as of the
Effective Date, without any requirement of further action by stockholders of
CMM or Reorganized CMM. The initial officers of Reorganized CMM shall be
selected by the Board of Directors of Reorganized CMM and their names will be
disclosed in a schedule to be Filed with the Bankruptcy Court at or before
the Confirmation Hearing. Subject to any requirement of Bankruptcy Court
approval under Section 1129(a)(5) of the Bankruptcy Code, those persons
identified or designated as directors and officers of Reorganized CMM in the
schedule to be Filed with the Bankruptcy Court at or before the Confirmation
Hearing shall assume their offices as of the Effective Date and shall
continue to serve in such capacities thereafter, pending further action of
the Board of
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Directors or the stockholder of Reorganized CMM in accordance with the
Reorganized CMM Bylaws, Reorganized CMM Articles of Incorporation and
applicable state law.
As of the Effective Date, Reorganized CMI shall remain the sole
general partner of Reorganized Holdings and CMSLP shall remain the sole
limited partner in Reorganized Holdings. It is contemplated that at some time
after the Effective Date, Reorganized Holdings will be dissolved unless the
partners in Reorganized Holdings otherwise determine.
6. No Further Corporate Action.
Each of the matters provided for under this Plan involving the
corporate structure of any Debtor or Reorganized Debtor or corporate action
to be taken by or required of any Debtor or Reorganized Debtor (including,
without limitation, approval of the issuance of the New Securities) shall, as
of the Effective Date, be deemed to have occurred and be effective as
provided herein, and shall be authorized and approved in all respects without
any requirement of further action by stockholders or directors of any of the
Debtors or Reorganized Debtors.
C. Implementation.
The Debtors, Reorganized CMI, Reorganized CMM and Reorganized
Holdings are hereby authorized and directed to take all necessary steps, and
perform all necessary acts, to consummate the terms and conditions of this
Plan on and after the Effective Date. On or before the Effective Date, the
Debtors may File with the Bankruptcy Court such agreements and other
documents as may be necessary or appropriate to effectuate or further
evidence the terms and conditions of this Plan and the other agreements
referred to herein or contemplated hereby.
D. Effectuating Documents and Actions.
The Debtors, Reorganized CMI, Reorganized CMM and Reorganized
Holdings, as the case may be, and each of their respective appropriate
officers shall be authorized to execute and deliver such contracts,
instruments, releases, and other agreements or documents and take such other
actions as may be necessary or appropriate to effectuate and further evidence
the terms and conditions of this Plan, the transactions provided for in the
Plan and all other actions in connection herewith.
E. Term of Injunctions or Stays.
Unless provided in the Confirmation Order or otherwise, all
injunctions or stays imposed in the Reorganization Cases pursuant to Sections
105 and 362 of the Bankruptcy Code or otherwise in effect on the Confirmation
Date shall remain in full force and effect until the Effective Date.
F. No Interest; Disallowance of Penalties and Premiums.
Except as expressly provided herein, no Holder of an Allowed Claim
or Allowed Interest shall receive interest on the distribution to which such
Holder is entitled hereunder, regardless of whether such distribution is made
on the Effective Date or thereafter. Any and all Claims for or
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in the nature of penalties or premiums allegedly owing shall be disallowed
including, but not limited to, prepayment penalties, penalty interest,
makewhole premiums or prepayment premiums.
G. Retiree Benefits.
On and after the Effective Date, to the extent required by Section
1129(a)(13) of the Bankruptcy Code, Reorganized CMI, Reorganized CMM or
Reorganized Holdings, as the case may be, shall continue to pay all retiree
benefits (if any), as the term "retiree benefits" is defined in Section
1114(a) of the Bankruptcy Code, maintained or established by the Debtors
prior to the Confirmation Date.
H. Recapitalization Financing Including Issuance of New Securities.
On the Effective Date, the Recapitalization Financing shall be
funded and become effective and the CMBS Sale Portfolio, if not already sold,
shall be sold as parts of effectuating consummation of this Plan. On the
Effective Date, Reorganized CMI will issue the New Securities in accordance
with this Plan. The issuance of the New Securities and all securities
issuable upon conversion of the New Securities is hereby authorized pursuant
to Section 1145 of the Bankruptcy Code, without further action under
applicable law. In addition, on the Effective Date, the Reorganized Debtors
will implement and, to the extent applicable, receive the proceeds of the New
Debt in accordance with the terms of the applicable documents with respect
thereto. On the Effective Date, all securities, instruments, corporate
documents, and agreements entered into pursuant to or contemplated by the
Plan, including, without limitation, the New Securities, any other security
and any instrument, corporate document, or agreement entered into in
connection with any of the transactions referenced in this Section or Section
IX.I, shall become effective, binding and enforceable in accordance with
their respective terms and conditions upon the parties thereto without
further act or action under applicable law, regulation, order or rule, and
shall be deemed to become effective simultaneously.
I. Sale of the CMBS Sale Portfolio.
On or before the Effective Date, the commercial mortgage-backed
securities and any other assets in the CMBS Sale Portfolio shall be sold in
accordance with the terms of this Plan and any Orders with respect thereto
entered by the Bankruptcy Court. The net proceeds thereof shall be used to
pay Allowed Secured Claims in accordance with any Orders entered by the
Bankruptcy Court with respect thereto and otherwise used as part of the
funding of this Plan.
J. Potential New Equity Investment and Rights Offering.
Although not required to fund this Plan, the Debtors, in
consultation with the CMI Equity Committee, may seek new equity capital from
one or more investors to partially fund the Reorganized Debtors and this Plan
as Recapitalization Financing. In such event, this Plan will be amended to
appropriately reflect such new equity capital transaction, in a manner
consistent with Exhibits 1 and 2 hereto. If new equity capital is sought, it
is likely to take the form of a private issuance of preferred stock with such
relative rights and preferences as may be agreed to consistent with the terms
of this Plan.
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In the event new equity capital is sought from an investor, it is
also anticipated that an offering of rights to purchase common stock or a new
series of preferred stock, with rights and preferences similar to the
preferred stock likely to be issued to the new equity capital investor but
with limited voting rights, would be made to Holders of CMI Common Stock.
Such rights offering would be developed in consultation with the CMI Equity
Committee. Such rights offering would commence on the Effective Date and
would be for a percentage of the aggregate face value of the securities
issued to the new equity capital investor. All or a portion of the proceeds
of the rights offering may be used to redeem at face value the securities
issued to the new equity investor.
Even if CMI does not seek new equity from an investor, an offering
of rights to purchase CMI Common Stock may be made to Holders of CMI Common
Stock in connection with this Plan. Such rights offering would be developed
in consultation with the CMI Equity Committee.
In the event new equity capital is sought from an investor and a
rights offering is made to Holders of CMI Common Stock or a rights offering
is made to Holders of CMI Common Stock independent of any new equity
investment by an investor, the CMI Common Stock will be exchanged for new CMI
Common Stock (on a one share per one share basis) and rights (one right per
share) structured to ensure that the value of the CMI Common Stock exchanged
exceeds the value of the fresh capital raised in the rights offering, thereby
making the exchange principally in exchange for an interest and only partly
for cash and rendering applicable the limited transactional exemption from
securities law registration afforded by Section 1145 of the Bankruptcy Code.
If a rights offering is made and an exchange of CMI Common Stock, consistent
with the foregoing, is effected, then CMI's existing Series B Preferred
Stock, Old Series D Preferred Stock, Series E Preferred Stock and Stock
Options would be exchanged for new Series B Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Stock Options, as applicable.
K. Second Amended and Restated Stock Option Plan.
On or prior to the Effective Date, the Second Amended and Restated
Stock Option Plan will be adopted by CMI to be effective on the Effective
Date and, by voting to accept this Plan, all Holders of Class A21 Interests
shall be deemed to have ratified and approved the Second Amended and Restated
Stock Option Plan. Additionally, upon entry of a Confirmation Order, the
Bankruptcy Court shall, consistent with Maryland and federal law, be deemed
to have approved the Second Amended and Restated Stock Option Plan (including
the increase in the number of shares of CMI Common Stock with respect to
which options may be granted and the extension of the time in which options
may be granted) on behalf of CMI's stockholders and in satisfaction of
Section 422 of the Internal Revenue Code. Following the Effective Date, the
Board of Directors of Reorganized CMI may further amend or modify the Second
Amended and Restated Stock Option Plan in accordance with the terms thereof
and any such further amendment or modification shall not require amendment of
this Plan. The Second Amended and Restated Stock Option Plan amends CMI's
Amended and Restated Stock Option Plan for Key Employees to, among other
matters, provide for an increase in the number of shares of CMI Common Stock
with respect to which options may be granted from 2,092,903 (as adjusted from
2 million shares as a result of the junior preferred stock dividend paid to
common stockholders in November 1999 and consistent with a Bankruptcy Court
Order which limits the full adjustment
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to 2,198,831 shares, contemplated by the terms and provisions of the Second
Amended and Restated Stock Option Plan, until CMI emerges from Chapter 11) to
4,500,000; to extend the time in which options may be granted under the Plan
from June 30, 2000 until June 30, 2002, and to effect changes consistent with
current securities and tax laws. After the Effective Date it is expected that
common stockholder approval of the material terms of the Second Amended
Employee Stock Option Plan will be sought for purposes of becoming exempt
from the deduction limits set forth in Section 162(m) of the Internal Revenue
Code.
CMI's Non-Employee Director Stock Option Plan in place prior to the
Effective Date shall remain in place after the Effective Date and Reorganized
CMI shall continue to honor such option plan.
L. Affiliate Reorganization.
In order to secure certain financing contemplated under this Plan
with the commercial mortgage backed securities representing the equity
interests in CBO-1 and CBO-2 (the "Equity Interests"), CMI anticipates that,
as a part of this Plan, either (i) a reorganization of certain CMI affiliated
entities will be effected resulting in REIT subsidiaries holding the Equity
Interests or owning the stock in the qualified REIT subsidiaries holding the
Equity Interests, or (ii) the qualified REIT subsidiaries holding the Equity
Interests or the trusts holding the underlying assets will elect REIT status
(and other actions will be taken as necessary to effect such election); with
the intent to secure such financing with a pledge of stock in the REITs, in
lieu of a direct pledge of the Equity Interests. In addition, certain other
actions may be taken as necessary to implement the foregoing. All of the
actions taken in accordance with this Section shall be consistent with the
provisions of Exhibit 2 hereto governing the treatment of Class A9 and Class
A10.
X. CONFIRMATION AND EFFECTIVE DATE CONDITIONS
A. Conditions to Confirmation.
Confirmation of this Plan is conditioned upon satisfaction of the
applicable provisions of Section 1129 of the Bankruptcy Code and entry of a
Confirmation Order by the Bankruptcy Court in form and substance satisfactory
to the Debtors and the CMI Equity Committee. Among other things, the
Confirmation Order shall authorize and direct that the Debtors, Reorganized
CMI, Reorganized CMM and Reorganized Holdings take all actions necessary or
appropriate to enter into, implement and consummate the contracts,
instruments, releases, leases, indentures and other agreements or documents
created in connection with or contemplated by this Plan, including, but not
limited to, those actions contemplated by the provisions of this Plan set
forth in Section XII hereof, and shall provide that all New Securities to be
issued to Holders of Claims and Interests pursuant to this Plan and all
securities issuable upon the conversion of the New Securities are exempt from
registration under federal and state securities laws (other than the Trust
Indenture Act) pursuant to Section 1145 of the Bankruptcy Code and that the
solicitation of Holders of CMI Common Stock, Series B Preferred Stock and Old
Senior Notes is exempt under Rule 14a-2(a)(4) of the proxy regulations under
the Securities Exchange Act of 1934.
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B. Conditions to Effective Date.
The Effective Date will not occur and this Plan will not be
consummated unless and until each of the following conditions has been
satisfied or waived by the Debtors and the CMI Equity Committee:
1. The Confirmation Order in form and substance satisfactory to the
Debtors and the CMI Equity Committee and entered by the Bankruptcy Court
shall not have been modified in any respect.
2. The Recapitalization Financing shall be funded in accordance with
the terms of this Plan and the sale of the CMBS Sale Portfolio shall have
been completed.
3. All other actions and documents necessary to implement the
transactions contemplated by this Plan on or before the Effective Date shall
have been effected or executed.
XI. EFFECTS OF PLAN CONFIRMATION
A. Discharge of Debtors and Injunction.
Except as otherwise provided in the Plan or the Confirmation Order:
(i) on the Effective Date, the Debtors shall be deemed discharged and
released to the fullest extent permitted by Section 1141 of the Bankruptcy
Code from all Claims and Interests, including, but not limited to, demands,
liabilities, Claims and Interests that arose before the Effective Date and
all debts of the kind specified in Sections 502(g), 502(h) or 502(i) of the
Bankruptcy Code, whether or not (a) a proof of Claim or proof of Interest
based on such Claim, debt or Interest is Filed or deemed Filed pursuant to
Section 501 of the Bankruptcy Code, (b) a Claim or Interest based on such
Claim, debt or Interest is allowed pursuant to Section 502 of the Bankruptcy
Code, or (c) the Holder of a Claim or Interest based on such Claim, debt or
Interest has accepted the Plan; and (ii) all Persons shall be precluded from
asserting against Reorganized CMI, Reorganized CMM and Reorganized Holdings,
their respective successors, or their respective assets or properties any
other or further Claims or Interests based upon any act or omission,
transaction, or other activity of any kind or nature that occurred prior to
the Effective Date. Except as otherwise provided in the Plan or the
Confirmation Order, the Confirmation Order shall act as a discharge of any
and all Claims against and all debts and liabilities of the Debtors, as
provided in Sections 524 and 1141 of the Bankruptcy Code, and such discharge
shall void any judgment against the Debtors at any time obtained to the
extent that it relates to a Claim discharged.
Except as otherwise provided in the Plan or the Confirmation Order,
on and after the Effective Date, all Persons who have held, currently hold or
may hold a debt, Claim or Interest discharged pursuant to the terms of the
Plan are permanently enjoined from taking any of the following actions on
account of any such discharged debt, Claim or Interest: (i) commencing or
continuing in any manner any action or other proceeding against the Debtors,
Reorganized CMI, Reorganized CMM or Reorganized Holdings, or their respective
successors or their respective properties; (ii) enforcing, attaching,
collecting or recovering in any manner any judgment, award, decree or order
against the Debtors, Reorganized CMI, Reorganized CMM or Reorganized
Holdings, or their respective successors or their respective properties;
(iii) creating, perfecting or enforcing any lien or encumbrance against the
Debtors, Reorganized CMI, Reorganized CMM or Reorganized
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<PAGE>
Holdings, or their respective successors or their respective properties; and
(iv) commencing or continuing any action, in any manner, in any place that
does not comply with or is inconsistent with the provisions of the Plan or
the Confirmation Order. Any Person, including but not limited to the Debtors,
Reorganized CMI, Reorganized CMM or Reorganized Holdings, injured by any
willful violation of such injunction shall recover actual damages, including
costs and attorneys' fees, and, in appropriate circumstances, may recover
punitive damages, from the willful violator.
B. Limitation of Liability.
None of the Debtors, Reorganized CMI, Reorganized CMM or Reorganized
Holdings, the members of the Committees, the Indenture Trustee, or any of
their respective employees, officers, directors, agents, or representatives,
or any professional persons employed by any of them (including, without
limitation, their respective Designated Professionals), shall have any
responsibility, or have or incur any liability, to any Person whatsoever (i)
for any matter expressly approved or directed by the Confirmation Order or
(ii) under any theory of liability (except for any claim based upon willful
misconduct or gross negligence) for any act taken or omission made in good
faith directly related to formulating, implementing, confirming, or
consummating the Plan, the Disclosure Statement, or any contract, instrument,
release or other agreement or document created in connection with or
contemplated by the Plan; provided, that nothing in this Section XI.B shall
limit the liability of any Person for breach of any express obligation it has
under the terms of this Plan, or any documents executed in connection
therewith or pursuant thereto, or under any other agreement or document
entered into by such Person in accordance with or pursuant to the terms of
this Plan (except to the extent expressly provided in the Confirmation Order)
or for any breach of a duty of care owed to any other Person occurring after
the Effective Date.
C. Releases.
On the Effective Date, each of the Debtors shall release
unconditionally, and hereby is deemed to release unconditionally (i) each of
the Debtors' then-current and former officers, directors, shareholders,
employees, consultants, attorneys, accountants, financial advisors and other
representatives (solely in their capacities as such) (collectively, the
"Debtor Releasees") and (ii) the Committees and, solely in their capacity as
members or representatives of the Committees, each member, consultant,
attorney, accountant, financial advisor or other representative of the
Committees (collectively, the "Committee Releasees") from any and all claims,
obligations, suits, judgments, damages, rights, causes of action and
liabilities whatsoever, whether known or unknown, foreseen or unforeseen,
existing or hereafter arising, in law, equity or otherwise, based in whole or
in part upon any act or omission, transaction, event or other occurrence
taking place on or after the Petition Date and up to and including the
Effective Date in any way relating to the Reorganization Cases, the Plan or
the Disclosure Statement.
On the Effective Date, each Holder of a Claim or Interest shall be
deemed to have unconditionally released the Debtor Releasees and the
Committee Releasees from any and all claims, obligations, suits, judgments,
damages, rights, causes of action and liabilities whatsoever
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<PAGE>
which any such holder may be entitled to assert, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, in law, equity or
otherwise, based in whole or in part upon any act or omission, transaction,
event or other occurrence taking place on or after the Petition Date and up
to and including the Effective Date in any way relating to the Reorganization
Cases, the Plan or the Disclosure Statement, excepting, however, from such
release any obligation owing to a Holder of an Allowed Claim or Allowed
Interest provided for in this Plan or the Confirmation Order.
D. Indemnification.
The obligations of the Debtors as of the Petition Date to indemnify
their present and former directors or officers, respectively, against any
obligations pursuant to the Debtors' articles of incorporation, by-laws,
applicable state law or specific agreement or resolution, or any combination
of the foregoing, shall survive confirmation of the Plan, remain unaffected
thereby, be assumed by Reorganized CMI, Reorganized CMM or Reorganized
Holdings, as the case may be, and not be discharged. The Debtors shall fully
indemnify, and Reorganized CMI, Reorganized CMM or Reorganized Holdings, as
the case may be, shall assume the Debtors' obligations to indemnify, any
Person by reason of the fact that he or she is or was serving as a director,
officer, employee, agent, professional, member, or other authorized
representative (in each case, as applicable) of any of the Debtors
(collectively, the "Indemnitees") against any claims, liabilities, actions,
suits, damages, fines, judgments or expenses (including reasonable attorneys'
fees and expenses), arising during the course of, or otherwise in connection
with or in any way related to, the negotiation, preparation, formulation,
solicitation, dissemination, implementation, confirmation and consummation of
the Plan and the transactions contemplated thereby and the Disclosure
Statement in support thereof, provided, however, that the foregoing
indemnification shall not apply to any liabilities arising from the gross
negligence or willful misconduct of any Indemnitee. In addition, Reorganized
CMI shall fully indemnify the CMI Equity Committee and its professionals
against any claims, liabilities, actions, suits, damages, fines, judgments or
expenses (including reasonable attorneys' fees and expenses) as a result of
or arising from the CMI Equity Committee being a co-proponent of the Plan and
Disclosure Statement provided, however, that the foregoing indemnification
shall not apply to any liabilities arising from gross negligence or willful
misconduct of any such indemnitee. For purposes of the following sentences in
this Section, reference to the term "Indemnitee" shall include the CMI Equity
Committee and its professionals. If any claim, action or proceeding is
brought or asserted against an Indemnitee in respect of which indemnity may
be sought from Reorganized CMI, Reorganized CMM or Reorganized Holdings, the
Indemnitee shall promptly notify Reorganized CMI, in writing and, in any such
event, Reorganized CMI shall assume the defense thereof including the
employment of counsel reasonably satisfactory to the Indemnitee, and the
payment of all expenses of such Indemnitee. The Indemnitee shall have the
right to employ separate counsel in any such claim, action or proceeding and
to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the Indemnitee unless (a) Reorganized CMI
has agreed to pay the fees and expenses of such counsel, or (b) Reorganized
CMI shall have failed to assume promptly the defense of such claim, action or
proceeding or to employ counsel reasonably satisfactory to the Indemnitee in
any such claim action or proceeding, or (c) the named parties in any such
claim, action or proceeding (including any impleaded parties) include both
the Indemnitee and Reorganized CMI, Reorganized CMM or Reorganized Holdings,
as the case may be, and the Indemnitee believes, in the exercise of its
business
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<PAGE>
judgment and in the opinion of its legal counsel, reasonably satisfactory to
Reorganized CMI, that the joint representation of Reorganized CMI,
Reorganized CMM or Reorganized Holdings, as the case may be, and the
Indemnitee will likely result in a conflict of interest (in which case, if
the Indemnitee notifies Reorganized CMI in writing that it elects to employ
separate counsel at the expense of Reorganized CMI, Reorganized CMI shall not
have the right to assume the defense of such action or proceeding on behalf
of the Indemnitee). In addition, neither Reorganized CMI, nor Reorganized CMM
nor Reorganized Holdings shall effect any settlement or release from
liability in connection with any matter for which the Indemnitee would have
the right to indemnification from Reorganized CMI, Reorganized CMM or
Reorganized Holdings unless such settlement contains a full and unconditional
release of the Indemnitee, or a release of the Indemnitee reasonably
satisfactory in form and substance to the Indemnitee. Anything herein to the
contrary notwithstanding, no Securities Claims shall be treated as part of
Classes A9 or A10 under the Plan.
E. Vesting of Assets.
Except as otherwise provided in the Plan or the Confirmation Order,
on the Effective Date, all property of CMI's Estate shall vest in Reorganized
CMI and all property of CMM's Estate shall vest in Reorganized CMM and all
property of Holdings' estate shall vest in Reorganized Holdings, all free and
clear of all Claims, liens, encumbrances and Interests of Holders of Claims
and Holders of Old Securities. From and after the Effective Date, Reorganized
CMI, Reorganized CMM and Reorganized Holdings may operate their business and
use, acquire and dispose of property and settle and compromise claims or
interests arising on or after the Effective Date without supervision by the
Bankruptcy Court and free of any restrictions of the Bankruptcy Code, the
Bankruptcy Rules or the Local Bankruptcy Rules, other than those restrictions
expressly imposed by the Plan or the Confirmation Order.
F. Preservation of Causes of Action.
Except as otherwise provided herein, or in any contract, instrument,
release or other agreement entered into in connection with or pursuant to the
Plan, Reorganized CMI, Reorganized CMM and Reorganized Holdings shall retain
(and may enforce) any claims, rights and causes of action that the Debtors or
the Estates may hold against any Person, including, but not limited to, any
claims, rights or causes of action under Sections 544 through 550 of the
Bankruptcy Code or any similar provisions of state law, or any other statute
or legal theory.
G. Retention of Bankruptcy Court Jurisdiction.
To the maximum extent permitted by the Bankruptcy Code and other
applicable law, the Bankruptcy Court shall have jurisdiction of all matters
arising out of, and related to, the Reorganization Cases and the Plan
pursuant to, and for the purpose of, Sections 105(a) and 1142 of the
Bankruptcy Code, including, without limitation, jurisdiction to:
1. Allow, disallow, determine, liquidate, classify, estimate or
establish the priority or secured or unsecured status of any Claim or
Interest, including the resolution of any request for payment of any
Administrative Claim, the resolution of any objections to the allowance or
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<PAGE>
priority of Claims or Interests and the resolution of any dispute as to the
treatment necessary to reinstate a Claim pursuant to this Plan;
2. Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or this
Plan, for periods ending before the Effective Date;
3. Resolve any matters related to the assumption or rejection of any
executory contract or unexpired lease to which any of the Debtors is a party
or with respect to which any of the Debtors may be liable, and to hear,
determine and, if necessary, liquidate any Claims arising therefrom;
4. Ensure that distributions to Holders of Allowed Claims or Allowed
Interests are accomplished pursuant to the provisions of this Plan;
5. Decide or resolve any motions, adversary proceedings, contested
or litigated matters and any other matters and grant or deny any applications
involving the Debtors, Reorganized CMI, Reorganized CMM or Reorganized
Holdings that may be pending on the Effective Date;
6. Enter such Orders as may be necessary or appropriate to implement
or consummate the provisions of this Plan and all contracts, instruments,
releases, indentures and other agreements or documents created in connection
with or pursuant to this Plan, the Disclosure Statement or the Confirmation
Order, except as otherwise provided herein;
7. Resolve any cases, controversies, suits or disputes that may
arise in connection with the consummation, interpretation or enforcement of
this Plan or the Confirmation Order, including the release and injunction
provisions set forth in and contemplated by this Plan and the Confirmation
Order, or any entity's rights arising under or obligations incurred in
connection with this Plan or the Confirmation Order;
8. Enter such Orders as may be necessary or appropriate to correct
any defect, cure any omission, or reconcile any inconsistency in this Plan or
the Confirmation Order as may be necessary to carry out the purposes and
intent of this Plan;
9. Enter such Orders as may be necessary or appropriate to enforce,
implement or interpret the terms and conditions of this Plan and resolve any
objections filed with respect to any actions proposed to be taken in
connection with or pursuant to the provisions of this Plan;
10. Enter such Orders as may be necessary or appropriate to approve
agreements, settlements or compromises in connection with matters pending on
the Effective Date or arising thereafter in connection with implementation of
provisions of this Plan;
11. Determine all adversary proceedings and contested matters to
recover or enforce rights with respect to property of any of the Debtors or
their Estates or to obtain other relief relating to causes of actions or
claims under the Bankruptcy Code or other applicable law including, but not
limited to, any actions brought under Sections 541 through 553 of the
Bankruptcy Code;
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<PAGE>
12. Determine matters concerning state, local or federal taxes
pursuant to Sections 346, 505, 525, 1146 and any other tax-related provisions
of the Bankruptcy Code;
13. Enter such Orders as may be necessary or appropriate to enforce
and interpret the provisions of the Confirmation Order;
14. Subject to any restrictions on modifications provided herein or
in any contract, instrument, release, indenture or other agreement or
document created in connection with this Plan, modify this Plan before or
after the Effective Date pursuant to Section 1127 of the Bankruptcy Code or
modify the Disclosure Statement, the Confirmation Order or any contract,
instrument, release, indenture or other agreement or document created in
connection with or pursuant to this Plan, the Disclosure Statement or the
Confirmation Order, or remedy any defect or omission or reconcile any
inconsistency in any Bankruptcy Court Order, this Plan, the Disclosure
Statement, the Confirmation Order or any contract, instrument, release,
indenture or other agreement or document created in connection with or
pursuant to this Plan, the Disclosure Statement or the Confirmation Order, in
such manner as may be necessary or appropriate to consummate this Plan, to
the extent authorized by the Bankruptcy Code;
15. Issue injunctions, enter and implement other Orders or take such
other actions as may be necessary or appropriate to restrain interference by
any entity with consummation, implementation or enforcement of this Plan or
the Confirmation Order;
16. Enter and implement such Orders as are necessary or appropriate
if the Confirmation Order is for any reason modified, stayed, reversed,
revoked or vacated;
17. Except as otherwise provided in this Plan, or with respect to
specific matters, in the Confirmation Order or any other Order entered in
connection with the Reorganization Cases, determine any other matters that
may arise in connection with or relating to this Plan, the Disclosure
Statement, the Confirmation Order or any contract, instrument, release,
indenture or other agreement or document created in connection with or
pursuant to this Plan, the Disclosure Statement or the Confirmation Order; and
18. Enter an Order or Orders closing the Reorganization Cases.
H. Failure of Bankruptcy Court to Exercise Jurisdiction.
If the Bankruptcy Court abstains from exercising or declines to
exercise jurisdiction, or is otherwise without jurisdiction over any matter
arising out of the Reorganization Cases, including the matters set forth in
Section XI.G above, Section XI.G shall not prohibit or limit the exercise of
jurisdiction by any other court having competent jurisdiction with respect to
such matter.
I. Committees.
On the Effective Date, all Committees shall be dissolved and the
members of such Committees and their professionals shall be released and
discharged from all further rights and duties arising from or related to the
Reorganization Cases. The professionals retained by such Committees and the
members thereof shall not be entitled to compensation or reimbursement of
expenses incurred for services rendered after the Effective Date other than
for services rendered
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<PAGE>
in connection with any application for allowance of compensation and
reimbursement of expenses pending as of, or timely Filed after, the Effective
Date.
XII. MISCELLANEOUS PROVISIONS
A. Final Order.
Any requirement in this Plan that an Order be a Final Order may be
waived by the Debtors (or Reorganized Debtors, if applicable); provided, that
nothing contained herein or elsewhere in this Plan shall prejudice the right
of any party in interest to seek a stay pending appeal with respect to such
order.
B. Modification of the Plan.
The Debtors and the CMI Equity Committee reserve the right to modify
this Plan at any time prior to the Confirmation Date as provided for by
Section 1127 of the Bankruptcy Code or as otherwise permitted by law without
additional disclosure pursuant to Section 1125 of the Bankruptcy Code, except
as the Bankruptcy Court may otherwise order.
If, after receiving sufficient acceptances but prior to Confirmation
of this Plan, the Debtors and the CMI Equity Committee seek to modify this
Plan, the Debtors and the CMI Equity Committee can use such previously
solicited acceptances only to the extent permitted by applicable law.
The Debtors and the CMI Equity Committee reserve the right after the
Confirmation Date and before the Effective Date to modify the terms of this
Plan or waive any conditions to the effectiveness thereof if and to the
extent the Debtors and the CMI Equity Committee determine that such
modifications or waivers are necessary or desirable to consummate this Plan.
The Debtors will give such Holders of Claims and Interests notice of such
modifications or waivers as may be required by applicable law and the
Bankruptcy Court, and any such modifications shall be subject to the approval
of the Bankruptcy Court to the extent required by, and in accordance with,
Section 1127 of the Bankruptcy Code.
The CMI Equity Committee will join in modifications proposed by the
Debtors in accordance with the foregoing in the exercise of such Committee's
reasonable discretion.
Anything in this Section XII.B. to the contrary notwithstanding, any
modifications of or amendments to, or waivers of any conditions to the
effectiveness of, this Plan prior to the Effective Date that materially
affect the treatment or recovery of the Holders of Class A9 or A10 Allowed
Claims require the consent of the CMI Creditors' Committee; provided,
however, that it is hereby agreed that any change in the amount of payments,
timing of payments, term of the New Debt as defined in Exhibit 2 hereto,
Collateral as defined in Exhibit 2 hereto, liens, rights or default remedies
available to the Holders of Class A9/A10 Notes or of any other specific
provisions of Exhibit 2 hereto shall be deemed material for purposes of this
paragraph.
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<PAGE>
C. Revocation of the Plan.
The Debtors reserve the right to revoke or withdraw this Plan prior
to the Confirmation Date. If the Debtors revoke or withdraw this Plan, or if
Confirmation does not occur, then this Plan shall be null and void, and all
of the Debtors' respective obligations with respect to the Claims and
Interests shall remain unchanged and nothing contained herein or in the
Disclosure Statement shall be deemed an admission or statement against
interest or to constitute a waiver or release of any claims by or against
either Debtor or any other Person or to prejudice in any manner the rights of
either Debtor or any Person in any further proceedings involving either
Debtor or any Person.
D. Application of Section 1145 of the Bankruptcy Code and Federal Securities
Laws.
All New Securities to be issued to Holders of Claims and Interests
pursuant to this Plan, and all securities issuable upon the conversion of any
of the New Securities shall be exempt from registration under federal and
state securities laws pursuant to Section 1145 of the Bankruptcy Code. The
solicitation of Holders of CMI Common Stock, Series B Preferred Stock and Old
Senior Notes shall be exempt under Rule 14a-2(a)(4) of the proxy regulations
under the Securities Exchange Act of 1934.
E. Application of Section 1146(c) of the Bankruptcy Code.
The implementation and enforcement of any provisions of this Plan
transferring assets or property, including but not limited to sales of the
commercial mortgage-backed securities and any other property in the CMBS Sale
Portfolio, and the making, delivery or recording of any "instrument of
transfer" in connection with or pursuant to this Plan, shall not be taxed
under any law imposing a stamp tax, transfer tax or a similar tax pursuant to
Section 1146(c) of the Bankruptcy Code.
F. Successors and Assigns.
The rights, benefits and obligations of any Person named or referred
to in this Plan shall be binding on, and shall inure to the benefit of, any
heir, executor, trustee, administrator, successor or assign of such Person.
G. Saturday, Sunday or Legal Holiday.
If any payment or act under this Plan is required to be made or
performed on a date that is not a Business Day, then the making of such
payment or the performance of such act may be completed on the next
succeeding Business Day, but shall be deemed to have been completed as of the
required date.
H. Committee Action.
With respect to the action of any of the Committees under this Plan,
any such action shall be duly authorized by majority vote of committee
members at a meeting, in person or by
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<PAGE>
telephone, at which a quorum of such committee is present or by majority
consent of the members of such committee then serving.
I. Post-Effective Date Effect of Evidences of Claims or Interests.
Except as otherwise specified herein, notes, bonds, stock
certificates and other evidences of Claims against or Interests in the
Debtors, and all Instruments of the Debtors (in either case, other than those
executed and delivered as contemplated hereby in connection with the
consummation of this Plan), shall, effective upon the Effective Date,
represent only the right to participate in the distributions contemplated by
this Plan.
J. Governing Law.
Unless a rule of law or procedure is supplied by (i) federal law
(including the Bankruptcy Code, the Bankruptcy Rules or the Local Bankruptcy
Rules), (ii) an express choice of law provision in any agreement, contract,
instrument, or document provided for, or executed in connection with, this
Plan, or (iii) applicable non-bankruptcy law, the rights and obligations
arising under this Plan and any agreements, contracts, documents, and
instruments executed in connection with or pursuant to this Plan shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Maryland without giving effect to the principles of conflict of laws
thereof.
K. No Liability for Solicitation or Participation.
As specified in Section 1125 (e) of the Bankruptcy Code, Persons
that solicit acceptances or rejections of this Plan and/or that participate
in the offer, issuance, sale, or purchase of securities offered or sold under
or in connection with this Plan, in good faith and in compliance with the
applicable provisions of the Bankruptcy Code, shall not be liable, on account
of such solicitation or participation, for violation of any applicable law,
rule, or regulation governing the solicitation of acceptances or rejections
of this Plan or the offer, issuance, sale, or purchase of securities.
L. Severability of CMM Provisions.
If so ordered by the Bankruptcy Court at the Confirmation Hearing,
the Plan provisions herein for CMM may be confirmed independently of
confirmation of the Plan provisions for CMI and Holdings.
M. No Admissions or Waiver of Objections.
Notwithstanding anything herein to the contrary, if the Effective
Date does not occur, nothing contained in this Plan shall be deemed as an
admission by the Debtors, the CMI Equity Committee or any other party with
respect to any matter set forth herein, including, without limitation,
liability on any Claim or the propriety of any Claims classification. Neither
the
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<PAGE>
Debtors nor the CMI Equity Committee are bound by any statements herein or in
the Disclosure Statement as judicial admissions.
DATED: July 21, 2000
<TABLE>
<S> <C>
CRIIMI MAE Inc.
a Maryland corporation
By: /s/ Cynthia O. Azzara
------------------------------
Name: Cynthia O. Azzara
Title: Senior Vice President
CRIIMI MAE Management, Inc.
a Maryland corporation
By: /s/ Cynthia O. Azzara
------------------------------
Name: Cynthia O. Azzara
Title: Senior Vice President
CRIIMI MAE Holdings II, L.P.
a Delaware Limited Partnership
By: CRIIMI MAE Inc.
its General Partner
By: /s/ Cynthia O. Azzara
------------------------------
Name: Cynthia O. Azzara
Title: Senior Vice President
VENABLE, BAETJER AND HOWARD, LLP AKIN, GUMP, STRAUSS HAUER
& FELD L.L.P.
By: /s/ Richard L. Wasserman By: /s/ Stanley J. Samorajczyk
------------------------------- --------------------------
Richard L. Wasserman Stanley J. Samorajczyk
Gregory A. Cross Michael S. Stamer
1800 Mercantile Bank and Trust Building 1333 New Hampshire Ave., NW
Two Hopkins Plaza Washington, D.C. 20036
Baltimore, Maryland 21201 (202) 887-4000
(410) 244-7400
</TABLE>
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<PAGE>
SHULMAN, ROGERS, GANDAL,
PORDY & ECKER, P.A.
By: /s/ Morton A. Faller
--------------------------------
Morton A. Faller
11921 Rockville Pike
Third Floor
Rockville, MD 20852-2753
(301) 231-0928
CO-PROPONENT:
Official Committee of Equity Security Holders
of CRIIMI MAE Inc.
By: /s/ Michael F. Wurst
--------------------------------
Name: Michael F. Wurst
Title: Co-Chairman
COVINGTON & BURLING
By: /s/ Michael St. Patrick Baxter
--------------------------------
Michael St. Patrick Baxter
Dennis B. Auerbach
1201 Pennsylvania Ave., NW
Washington, D.C. 20044
(202) 662-6000
Attorneys for the Official Committee
of Equity Security Holders of CRIIMI MAE Inc.
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<PAGE>
EXHIBIT 1
AMENDED AND RESTATED TERMS OF CHAPTER 11
PLAN TREATMENT OF MERRILL LYNCH
MORTGAGE CAPITAL INC. AND
GERMAN AMERICAN CAPITAL CORPORATION
CRIIMI MAE Inc. ("CMI") and Merrill Lynch Mortgage Capital Inc. and
German American Capital Corporation ("MLMCI/GACC"), agree to the following terms
and conditions to be included in a Second Amended Plan of Reorganization to be
filed by CMI. This Term Sheet is subject to the filing of a plan of
reorganization and disclosure statement consistent with the terms and conditions
set forth herein and to agreement upon the form and substance of the New Secured
Debt Documents, the MLMCI/GACC Trust Agreement and the CBO I/Nomura Trust
Agreement (as such terms are hereinafter respectively defined). This Term Sheet
is intended to amend and restate in its entirety the term sheet appended to the
Amended Plan of Reorganization filed by CMI, CRIIMI MAE Management, Inc., CRIIMI
MAE Holdings II, L.P. (together, the Debtors) on December 23, 1999 (the
"Existing Term Sheet"), subject to reinstatement of the Existing Term Sheet in
the event the Official Committee of Unsecured Creditors of CMI (the "Unsecured
Creditors Committee") opposes, or fails to support (or be a co-proponent of) the
Second Amended Plan (as hereinafter defined).
Overview: Subject to the conditions outlined in this
Term Sheet, MLMCI/GACC and CMI will jointly
support an a Second Amended Plan of
Reorganization filed by the Debtors, the
Official Committee of Equity Security
Holders of CMI (the "Equity Committee") or
by the Debtors and/or the Equity Committee
and/or the Unsecured Creditors Committee as
co-proponents (the "Second Amended Plan"),
providing for MLMCI/GACC to receive, in
respect of the Class A3 (GACC) and Class A5
(MLMCI) Claims (the "Claims"), (a) an
up-front cash payment in reduction of the
Claims on the effective date of the Second
Amended Plan (the "Effective Date"), as
described in the section of this Term Sheet
captioned "Initial Paydown"; (b) treatment
of the Claims as described in this Term
Sheet; and (c) the receipt by MLMCI/GACC, on
the Effective Date, of new secured debt of
CMI (the "New Secured Debt") on the terms
and conditions described in this Term Sheet.
The Secured Notes and other documents that
will evidence and secure the New Secured
Debt are sometimes referred to in this Term
Sheet, collectively, as the "New Secured
Debt Documents."
<PAGE>
Initial Paydown: $100 million in immediately available funds,
payable to MLMCI and GACC on the Effective
Date in reduction of the Claims, pari passu
in proportion to the respective allowed
amounts of such Claims, plus any accrued but
unpaid interest owing to MLMCI/GACC
(accruing at the contract non-default rate)
(the "Initial Paydown"), plus any legal fees
and expenses incurred by MLMCI and GACC in
connection with drafting, negotiating and
finalizing the New Secured Debt Documents
not to exceed $500,000. [Assumes that GACC
will have been paid in full on its non-CBO
Claim at the specified allocated debt amount
(accruing interest at the contract
non-default rate).]
Borrower: CMI or a subsidiary thereof reasonably
acceptable to MLMCI/GACC. The New Secured
Debt will be a full recourse obligation of
CMI.
Principal The original principal amount of the New
Amount: Secured Debt will be equal to (a) the
allowed secured Claims of MLMCI and GACC,
which will be equal to the aggregate
outstanding principal amount of the MLMCI
and GACC debt, plus any accrued and unpaid
interest thereon, as of the date immediately
preceding the Effective Date, without offset
or reduction for any reason (including,
without limitation, post-petition interest),
minus (b) $100 million, minus (c) any
additional principal paydown paid on the
Effective Date in accordance with the Second
Amended Plan.
Collateral: The New Secured Debt will be secured by
first-priority liens and security interests
in the assets listed on the attached
Schedule A, which shall include the
CCC-rated and unrated classes of "CBO II".
The assets identified on Schedule A are
sometimes referred to in this Term Sheet,
collectively, as the "Collateral". The
Collateral will be held in a "collateral
trust" for the benefit of MLMCI/GACC, its
successors and assigns, and the holders of
Note A and Note B (as those terms are
respectively defined in the Unsecured
Creditors' Term Sheet) (the "Noteholders"),
as their respective interests may appear
(the "MLMCI/GACC Collateral Trust").
MLMCI/GACC
2
<PAGE>
or their designee will be irrevocably
appointed as trustee and collateral agent of
the MLMCI/GACC Collateral Trust. MLMCI/GACC
will hold a senior beneficial interest in
the MLMCI/GACC Collateral Trust and the
Noteholders will hold a subordinate
beneficial interest in the MLMCI/GACC
Collateral Trust which shall be consistent
with the terms and conditions set forth
herein and which shall afford the
Noteholders the substantive benefits
intended to be provided to the Noteholders
by the "soft second lien" arrangement as set
forth in the Unsecured Creditors Term Sheet.
The respective rights and priorities of
MLMCI/GACC, on the one hand, and the
Noteholders, on the other hand, with respect
to the Collateral will be set forth in the
trust agreement establishing the MLMCI/GACC
Collateral Trust (the "MLMCI/GACC Trust
Agreement"). The Noteholders will not be
entitled, without the prior written approval
of MLMCI/GACC, (a) to foreclose or otherwise
realize upon their subordinate beneficial
interest in the Collateral, (b) to take any
action for the specific purpose of delaying
or interfering with the rights of MLMCI/GACC
with respect to the Collateral, (c) to take
any action adverse to MLMCI/GACC in a
non-bankruptcy court enforcement proceeding
with respect to the Collateral; provided,
however, that nothing herein shall relieve
MLMCI/GACC from acting in accordance with
their obligations under the Plan, the
MLMCI/GACC Trust Agreement and applicable
laws. The Collateral will not be encumbered
by or otherwise subject to liens or security
interests in favor of any creditor other
than MLMCI/GACC and the Noteholders (to the
extent of their respective beneficial
interests in the MLMCI/GACC Collateral
Trust).
In addition, the Second Amended Plan will
provide for the assets listed on Schedule B
(CBO I and Nomura Bonds) (collectively the
"CBO I/Nomura Assets") to be held in a
collateral trust for the benefit of the
Noteholders and MLMCI/GACC, as their
respective interests may appear (the "CBO
I/Nomura Collateral Trust"). MLMCI/GACC or
their designee will be irrevocably appointed
as trustee and collateral agent of the CBO
I/Nomura Collateral Trust, the Noteholders
will hold a senior beneficial interest in
the CBO I/Nomura Collateral Trust and
MLMCI/GACC will hold a subordinate
beneficial interest in the CBO I/Nomura
Collateral Trust. The respective rights and
3
<PAGE>
priorities of the Noteholders, on the one
hand, and MLMCI/GACC, on the other hand,
with respect to the CBO I/Nomura Assets will
be set forth in the trust agreement
establishing the CBO I/Nomura Collateral
Trust (the "CBO I/Nomura Trust Agreement")
which shall be consistent with the terms and
conditions set forth herein and which shall
afford the Noteholders the substantive
benefits intended to be provided to the
Noteholders by the first priority lien
arrangement set forth in the Unsecured
Creditors Term Sheet. The CBO I/Nomura Trust
Agreement will provide, in a manner
acceptable to MLMCI/GACC, the Unsecured
Creditors Committee, the Equity Committee,
the Debtors and their respective counsel,
that in the event MLMCI/GACC become entitled
under the terms of the New Secured Debt
Documents to foreclose upon, sell or
otherwise realize upon the Collateral or any
portion thereof upon the occurrence of the
scheduled Maturity Date or any accelerated
maturity following an Event of Default (as
such term is defined in the New Secured Debt
Documents), MLMCI and GACC will also be
entitled to sell or transfer the Assets;
provided, however, that any net sales price
realized from the sale of the CBO I/Nomura
Assets shall be remitted to the Noteholders
until the allowed amount of their respective
claims are paid in full and then will be
paid to MLMCI/GACC until the New Secured
Debt has been paid in full and then to CMI.
If the Collateral is sold along with the CBO
I/Nomura Assets (or any of them), there
shall be a commercially reasonable
allocation of the net proceeds of such sale.
Any further transfer or pledge of the CBO
I/Nomura Assets (or any interest therein)
prior to the New Secured Debt having been
paid in full will require the prior written
consent of MLMCI/GACC.
Maturity Date: Business Day immediately preceding the
fourth (4th) anniversary of the Effective
Date.
Facility Fee: One and one-half percent (1 1/2%) of
the original principal amount of the New
Secured Debt, such Facility Fee to be paid
on the Effective Date of the Second Amended
Plan.
Interest Rate: 30-day LIBOR, plus 325 basis points
(3.25%), payable monthly in arrears. The New
Secured Debt
4
<PAGE>
Documents will also contain customary
"default rate", "late charge" and "LIBOR
breakage" provisions.
Scheduled In addition to interest on the New Secured
Principal Debt at the floating rate specified in the
Paydown: section of this Term Sheet captioned
"Interest Rate" (the "Interest"), MLMCI/GACC
will also be entitled to receive,
concurrently with each monthly payment of
interest required under the New Secured Debt
Documents, a principal amortization payment
in an amount sufficient, as of the date of
such payment, to amortize the principal
amount of the New Secured Debt then
outstanding over the period commencing on
the date of such payment and ending on the
fifteenth anniversary of the Effective Date
(the "Scheduled Principal Paydown"). The
combined payment of Scheduled Principal
Paydown and Interest required to be made on
each monthly payment date under the New
Secured Debt Documents is sometimes referred
to in this Term Sheet as the "Required
Payment."
Cash A cash management account, in the name of
Management CMI (the "Cash Management Account"), will be
Account: established on the Effective Date at a bank
mutually acceptable to MLMCI/GACC and CMI.
Other than as set forth in this Section, all
payments received by CMI after the Effective
Date relating to any assets owned by CMI on
the Effective Date ("Monthly Cash Flow")
will be deposited directly into the Cash
Management Account; provided, however, that
the cash flow received directly or
indirectly by CMI from the Miscellaneous
Collateral as defined in the Unsecured
Creditors Term Sheet (collectively referred
to hereinafter as the "Miscellaneous
Collateral") will be excluded from Monthly
Cash Flow and will not be deposited into the
Cash Management Account; and provided
further, that the income, expenses and
assets of CRIIMI MAE Services Limited
Partnership ("CMSLP") shall be retained by
CMSLP. All payments relating to the CMM
1998-1 Bonds (CMO IV) shall, if so required
by the secured creditor to whom such Bonds
are pledged as collateral, be excluded from
Monthly Cash Flow and will not be deposited
into the Cash Management Account. Except as
otherwise provided in the sections of this
Term Sheet entitled "Payment Cap" and
"Transition
5
<PAGE>
Events," CMI may pay from the Cash
Management Account (i) all general operating
and administrative expenses for CMI,
including affiliates, to the extent such
expenses do not exceed the total as set
forth in an operating budget approved
annually (or as otherwise modified with the
consent of MLMCI/GACC) by MLMCI/GACC with
respect to the fiscal year in question, such
approval not to be unreasonably withheld
(provided, however, that all income retained
by CMSLP shall be applied toward payment of
CMSLP expenses before any of such expenses
are charged to the Cash Management Account,
and provided further, that the New Secured
Debt Documents will contain provisions
acceptable to MLMCI/GACC prohibiting income
and assets of CMI from being redirected to
CMSLP); (ii) interest owing on Note A and
current-pay interest owing on Note B, (iii)
principal paydowns on Note A of $5 million
on the date that is twenty-four (24) months
after the Effective Date, $15 million on the
date that is thirty-six (36) months after
the Effective Date and $15 million on the
date that is forty-eight (48) months after
the Effective Date; (iv) cash dividends, not
to exceed $4.1 million in the aggregate in
any twelve-month period, on the Class F
Preferred Stock and Class G Preferred Stock;
(v) cash dividends on any Preferred Stock
issued to satisfy REIT distribution
requirements (the "PIK Dividend"), but only
to the extent payment of such cash dividends
is required in order to satisfy REIT
distribution requirements; (vi) cash
dividends owing to any new equity investor;
and (vii) payments such as excise taxes
necessary to maintain CMI's REIT status
(collectively, the "Monthly Cash Payments").
The parties agree that in the event of an
extension beyond the 4 year term of this
Term Sheet or refinance of the New Secured
Debt, the foregoing budget shall be modified
to permit payment of loan extension fees,
accrued unpaid interest and principal
repayment to the Noteholders when due.
Payment Cap: The total amount of the Monthly Cash
Payments during the first 24 months after
the Effective Date will be limited to the
extent necessary, as determined by
MLMCI/GACC, in accordance with criteria or
methodology to be agreed upon by CMI and
MLMCI and set forth in the New Secured Debt
Documents, to
6
<PAGE>
permit CMI to pay MLMCI/GACC from the Cash
Management Account (x) an Accelerated
Principal Paydown (as defined herein)
equivalent to at least $25 million in the
first 12 months after the Effective Date,
and (y) a total Accelerated Principal
Paydown of $50 million by the end of the
twenty-fourth (24th) month after the
Effective Date. The total amount of the
Monthly Cash Payments during the 25th
through 48th months after the Effective Date
will be limited to the extent necessary to
permit CMI to pay MLMCI/GACC from the CMI
Collection Account and the Cash Management
Account monthly principal amortization
payments in amounts sufficient to amortize
the remaining principal amount of the New
Secured Debt on the schedule contemplated by
the last paragraph of the section of this
Term Sheet captioned "Transition Events".
The limitations on Monthly Cash Payments set
forth in this section are referred to
hereinafter as the "Payment Cap".
CMI Collection A cash collateral account, in the name of
Account: CMI but under the dominion and control of
MLMCI/GACC (the "CMI Collection Account"),
will be established on the Effective Date at
a bank mutually acceptable to CMI and
MLMCI/GACC. All cash flow received in
respect of the Collateral (including,
without limitation, principal and interest
payments on the CMBS assets included in the
Collateral) will be deposited by the party
receiving such cash flow into the CMI
Collection Account. Pursuant to the Second
Amended Plan, MLMCI/GACC will be granted a
perfected first priority security interest
and the Noteholders will be granted a "soft
second" security interest in the CMI
Collection Account through an arrangement
consistent with the MLMCI/GACC collateral
trust. MLMCI/GAAC shall be paid the Required
Payment from the CMI Collection Account. In
the event the funds available in the Cash
Management Account
7
<PAGE>
are insufficient to enable CMI to make all
Monthly Cash Payments permitted or required
to be made by CMI in respect of any month,
subject to the Payment Cap, and to maintain
a minimum balance in the Cash Management
Account as provided in the section of this
Term Sheet labeled "Cash Sweep", MLMCI/GACC
will cause funds in the amount of the
shortfall to be transferred from the CMI
Collection Account to the Cash Management
Account. CMI will earn interest on all
monies deposited into the CMI Collection
Account.
Notwithstanding anything appearing to the
contrary in this Term Sheet, (i) only those
funds, if any, remaining in the CMI
Collection Account after payment of the
Required Payment due on the monthly payment
date occurring at the end of the related
collection period will be transferred from
the CMI Collection Account to the Cash
Management Account; (ii) no cash dividends
will be paid on any Preferred or Common
Stock at any time when the funds available
in the CMI Collection Account (taking
account of any funds transferred from the
Cash Management Account to the CMI
Collection Account in accordance with clause
(iii) below) are insufficient to pay
MLMCI/GACC the Required Payment next
becoming due; (iii) if the amount of funds
available in the CMI Collection Account on
the monthly payment date at the end of the
related collection period is less than the
amount of the Required Payment due on such
monthly payment date, funds in the amount of
the shortfall which would otherwise have
been available to pay cash dividends to
Preferred Stockholders or any new equity
investor will be transferred from the Cash
Management Account to the CMI Collection
Account and applied toward such Required
Payment; and (iv) nothing in this section or
elsewhere in this Term Sheet shall be
interpreted to limit CMI's obligation to pay
any Required Payment on the date when due,
to subordinate MLMCI/GACC's right to receive
any Required Payment to any other CMI
creditor's right to receive any payment
owing to such creditor, or to limit CMI's
right or ability to transfer additional
funds from the Cash Management Account, if
necessary, to pay the Required Payment.
Cash Sweep: After the Effective Date of the Second
Amended Plan, MLMCI/GACC may begin making
cash sweeps of the Cash Management Account
and the CMI Collection Account on the last
day of each calendar month (the "Cash
Sweep"); provided, however, that so long as
no Event of Default under the New Secured
Debt Documents shall have occurred and be
continuing, the Cash Sweep shall not reduce
the amount remaining in the Cash Management
Account below
8
<PAGE>
the sum of (a) $7.5 million plus (b) the
amount jointly determined by CMI and
MLMCI/GACC in the exercise of their good
faith business judgment to be the amount by
which (i) the Monthly Cash Payments to be
made by CMI over the next succeeding month,
subject to the Payment Cap, will exceed (ii)
the funds that will be deposited in the Cash
Management Account over the same month, plus
(c) amounts necessary (on an accrual basis)
to pay quarterly and semi-annual debt
service obligations of the Debtors to the
Noteholders. The net proceeds of the Cash
Sweep shall be paid to MLMCI/GACC and
applied to reduce the principal amount of
the New Secured Debt (the "Accelerated
Principal Paydown").
Subject to the provisions set forth in the
section of this Term Sheet captioned
"Transition Events", when MLMCI/GACC have
received a paydown of the original principal
amount of the New Secured Debt totaling $150
million (including the $100 million initial
principal paydown and any other principal
paydowns referred to in the section of this
Term Sheet captioned "Principal Amount")
(the "Required Principal Paydown"), the Cash
Sweep will terminate and all monies in the
CMI Collection Account will be paid to CMI
on a monthly basis, but only if and to the
extent that MLMCI/GACC have received the
full Revised Payment (and the full Required
Payment) for the month in question.
Transition Events: If MLMCI/GACC have not been paid the
Required Principal Paydown prior to the end
of the twenty-fourth (24th) month after the
Effective Date, then, notwithstanding
anything appearing to the contrary in the
section of this Term Sheet captioned "Cash
Management Account", CMI may not pay any
Preferred or Common Stock cash dividends
(other than to a new equity investor, to the
extent of the lesser of 12% per annum and $5
million, or the PIK Dividend, but only if
and to the extent payment of the PIK
Dividend is required in order to maintain
CMI's REIT status, in each case subject to
the Payment Cap), until MLMCI/GACC have
received the Required Principal Paydown.
9
<PAGE>
If at any time realized losses on the
Collateral (including losses by reason of
appraisal reduction, as such term is defined
in the underlying pooling and servicing
agreement or trust indenture with respect to
the affected CMBS asset or, if no such
definition is provided, as such term is
defined in the New Secured Debt Documents)
exceed a loss threshold (consistent with
loan loss information and projections
reviewed and approved by MLMCI/GACC) to be
specified in the New Secured Debt Documents
(the "Loss Threshold Amount"), then,
notwithstanding anything appearing to the
contrary in the section of this Term Sheet
captioned "Cash Management Account",
(x) CMI may not pay any
Preferred or Common Stock cash
dividends otherwise permitted
under "Cash Management Account"
to be paid by CMI (other than
the PIK Dividend, but only if
and to the extent payment of the
PIK Dividend is required in
order to maintain CMI's REIT
status, subject to the Payment
Cap), and
(y) Until such time as
MLMCI/GACC have received the
Required Principal Paydown, CMI
will be required to pay to
MLMCI/GACC, in addition to any
other payments required under
this Term Sheet, all net cash
flow received from assets
acquired by CMI after the
Effective Date,
until (i) realized losses (including losses
by reason of appraisal reduction) no longer
exceed the Loss Threshold Amount, or (ii)
MLMCI/GACC have been paid from extrinsic
sources (i.e., from outside equity
investment or from funds CMI would otherwise
be entitled under the New Secured Debt
Documents to dividend or distribute to its
equity securityholders, but not from the
income from the Collateral or other
operating cash flow of CMI, except to the
extent that CMI would otherwise be entitled
to dividend or distribute such income or
cash flow to its equity securityholders)
cash in the amount by which realized losses
(including losses by reason of appraisal
reduction, defined as aforesaid) exceed the
Loss Threshold Amount.
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<PAGE>
In the event the payment of cash dividends
on the Preferred and/or Common Stock is
suspended in accordance with the provisions
of either of the two preceding paragraphs,
the applicable Payment Cap will be deemed to
have been reduced by the amount of such cash
dividends CMI would otherwise have been
entitled to pay until MLMCI/GACC have
received the payment provided for in those
paragraphs.
If on any monthly payment date MLMCI/GACC do
not receive a payment at least equivalent to
the Required Payment due on such monthly
payment date, an Event of Default will occur
under the New Secured Debt Documents, in
which case MLMCI/GACC, in addition to any
other contractual, legal and equitable
remedies they are entitled to exercise, will
be entitled, at their option, to resume or
continue (as applicable) the Cash Sweep
(provided, however, that the exercise by
MLMCI/GACC of their right to resume or
continue the Cash Sweep shall not constitute
a waiver or cure of the Event of Default).
After MLMCI/GACC have been paid the Required
Principal Paydown, MLMCI/GACC shall be paid,
on each monthly payment date during the
remainder of the New Secured Debt term, (i)
Interest at the applicable rate required
under the New Secured Debt Documents, plus
(ii) a principal amortization payment in an
amount sufficient, as of the date of such
payment, to amortize the principal amount of
the New Secured Debt then outstanding over
the period commencing on the date of such
payment and ending on the thirteenth (13th)
anniversary of the Effective Date (the
interest payment specified in clause (i) and
the principal payment described in clause
(ii) being referred to hereinafter,
collectively, as the "Revised Payment"), and
if at any time MLMCI/GACC do not receive the
Revised Payment, the Cash Sweep will resume
until MLMCI/GACC have received payments
aggregating the same amounts that would have
been paid if all Revised Payments had been
made in accordance with this Term Sheet.
Resumption of the Cash Sweep by MLMCI/GACC
upon their failure to receive the Revised
Payment will be in addition to, and not in
lieu of, the exercise by MLMCI/GACC of
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<PAGE>
any other contractual, legal or equitable
remedies in the event any Required Payment
is not received when due.
Loan Extension: If CMI has not paid MLMCI/GACC the entire
amount of the New Secured Debt (i) within 24
months of the Effective Date, CMI shall pay
MLMCI/GACC an Extension Fee equivalent to
1.5% of the remaining principal balance of
the New Secured Debt at the end of the 24th
month after the Effective Date; (ii) within
30 months of the Effective Date, CMI shall
pay MLMCI/GACC an Extension Fee equivalent
to 1.5% of the remaining principal balance
of the New Secured Debt at the end of the
30th month after the Effective Date; (iii)
within 36 months of the Effective Date, CMI
shall pay MLMCI/GACC an Extension Fee
equivalent to 1.5% of the principal balance
of the New Secured Debt remaining at the end
of the 36th month after the Effective Date;
and (iv) within 42 months of the Effective
Date, CMI shall pay MLMCI/GACC an Extension
Fee equivalent to 1.5% of the remaining
principal balance of the New Secured Debt at
the end of the 42nd month after the
Effective Date. Failure to pay any Extension
Fee on the date when due will constitute an
Event of Default under the New Secured Debt
Documents.
Equity Investment: Notwithstanding the provisions of this
paragraph, CMI shall be entitled to pay to
the Noteholders the first $10 million of any
net equity investment that it receives,
irrespective of whether such equity
investment is received prior to or after the
Effective Date. Subject to the provisions of
this paragraph, CMI shall be entitled to
utilize the proceeds of any equity
investments (including proceeds of sale of
assets purchased with proceeds of equity
investments) without restriction. If,
however, there are realized losses on the
Collateral (including losses resulting from
appraisal reductions, as described in the
second paragraph of the section of this Term
Sheet captioned "Transition Events") in
excess of the Loss Threshold Amount and
MLMCI/GAAC are not otherwise compensated for
such losses in the manner specified in the
section of this Term Sheet captioned
"Transition Events", after paying the
aforementioned $10 million to the
Noteholders CMI shall pay (i) 50% of the
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<PAGE>
proceeds it subsequently receives from any
equity investment of less than $50 million
(including proceeds of sale of assets
purchased with the proceeds of such equity
investment) to reduce indebtedness and (ii)
75% of the portion of any aggregate equity
investment it subsequently receives that
exceeds $50 million (including proceeds of
sale of assets purchased with the proceeds
of such equity investment) to reduce
indebtedness. In addition, if after paying
the aforementioned $10 million to the
Noteholders CMI elects or is obligated to
use any portion of the proceeds of an equity
investment (or any portion of the proceeds
of sale of assets purchased with the
proceeds of such equity investment) to
reduce the principal amount of any
indebtedness, then the portion of the
proceeds of such equity investment that is
used to reduce indebtedness shall be
allocated in accordance with the
Indebtedness Ratio(1)(provided, however,
that in the case of a post Effective Date
equity investment MLMCI/GACC shall receive
the first $5 million after the $10 million
paid to the Noteholders); and further
provided, however, that CMI may use the
first $27 million of proceeds of any equity
investment received prior to the Effective
Date to reduce its indebtedness to any
creditor without the restrictions set forth
in this Equity Investment paragraph pay to
the Noteholders (but subject, nevertheless,
to the restriction set forth in the section
of this Term Sheet captioned "Noteholder
Paydown"). The amounts paid to MLMCI/GACC
and the Noteholders shall be applied to
reduce the amount of outstanding principal
of and accrued interest on their respective
indebtednesses.
Paydown: Notwithstanding any other provision of this
Term Sheet permitting or authorizing CMI to
utilize certain funds to reduce the amount
of principal indebtedness owing to the
Noteholders, and in addition to any other
provision of this Term Sheet restricting
payments to the Noteholders, the New Secured
Debt Documents will require that, at such
time as the outstanding principal
indebtedness owing to the Noteholders on
--------
1 As used in this section, and in the section of this Term Sheet captioned
"Noteholder Paydown", the term "Indebtedness Ratio" means the ratio of (a) the
outstanding principal balance of the New Secured Debt, determined as of the
Effective Date, to (b) the outstanding aggregate principal balance of Note A and
Note B, also determined as of the Effective Date.
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<PAGE>
Note A and Note B (excluding that portion of
the principal amount of Note B representing
capitalized interest) has been reduced (from
whatever source of funds, including, by way
of example only and not by way of
limitation, proceeds of equity investments,
proceeds of asset sales and cash flow from
operations) to or below $100 million, any
funds which CMI would otherwise have been
permitted or authorized to use to reduce the
amount of principal indebtedness owing to
the Noteholders, and which CMI in fact uses
to reduce indebtedness, will be allocated
according to the Indebtedness Ratio;
provided, however, that the foregoing
requirement shall not apply to payments to
the Noteholders expressly provided by the
Unsecured Creditors Term Sheet and with
respect to which the Debtor does not have
discretion.
Board: A majority of the Board of Directors of CMI,
as of the Effective Date, shall be
newly-appointed independent directors
approved by MLMCI/GACC and the Official
Committee of Equity Security Holders if
Class A21 votes, or is deemed to have voted,
in favor of the Second Amended Plan and the
Unsecured Creditors Committee if Classes A9
and A10 vote in favor of the Second Amended
Plan (MLMCI/GACC and the Committee(s) having
approval rights as aforesaid being referred
to hereinafter as the "Approval Parties");
provided, however, that the Approval
Parties' approval will not be required with
respect to those (and only those) directors,
if any, of the aforesaid majority who are
appointed by a new equity investor approved
by MLMCI/GACC.
Optional Prior to the Maturity Date, CMI may prepay
Redemption: the New Secured Debt in whole or in part,
without any penalty or premium, except for
payment of actual costs, if any of breaking
any LIBOR contracts.
Miscellaneous: The New Secured Debt Documents will not
contain any mark to market provisions other
than as set forth in this Term Sheet.
CMI will be required under the New Secured
Debt Documents to deliver to MLMCI/GACC all
publicly filed financial information when
and to the extent
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<PAGE>
same is available to the general public. In
addition to such public financial
information, CMI will also be required to
provide financial information including
monthly reconciliation of balances,
principal and interest with respect to each
CMBS asset included in the Collateral, any
servicing, remittance and delinquency
reports (in a format reasonably acceptable
to CMI), and such other information as
MLMCI/GACC may reasonably require.
MLMCI/GACC agrees to keep any non-public
information confidential.
CMI and MLMCI/GAAC will cooperate in good
faith to develop a fair and reasonable
hedging program.
The New Secured Debt Documents will require
CMI to submit annual operating budgets, in
form and level of detail reasonably
acceptable to MLMCI/GACC, to MLMCI/GACC for
review and approval.
The New Secured Debt Documents will provide
for events of default (including grace or
cure periods, where appropriate) customary
for transactions of this type. The New
Secured Debt Documents will entitle
MLMCI/GACC, upon the occurrence of such an
event of default, to exercise rights and
remedies (including, without limitation,
rights and remedies with respect to
realization upon the Collateral) consistent
with the provisions of this Term Sheet and
otherwise satisfactory to MLMCI/GACC. In the
event the Collateral is "sold" to MLMCI/GACC
or any affiliates of MLMCI/GACC (the "Deemed
Sale"), the Noteholders shall receive the
value of the Collateral as determined in a
commercially reasonable manner less the
amount owed to MLMCI/GACC secured by such
assets and the costs of sale (up to the
total amount owed to the Noteholder);
provided, however, that if MLMCI/GACC agrees
to sell the Collateral to a third party
within 30 days of a Deemed Sale then
MLMCI/GACC shall pay to the Noteholders any
net "profit" received on the resale (up to
the total amount owed to the Noteholders).
The Noteholders shall also be paid the value
of the CBO I/Nomura Assets, as determined in
a commercially reasonable manner, in the
event of any Deemed Sale of the CBO I/Nomura
Assets. Receipt of any monies paid in
accordance
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<PAGE>
with this paragraph shall not be deemed a
waiver of the right of the Noteholders or
CMI to contest any sale; provided, however,
that no such action will occur until after
the Deemed Sale has occurred. The Collateral
Trust documents will confirm that MLMCI/GACC
will not be held to a fiduciary standard,
irrespective of the legal capacity in which
MLMCI/GACC or any of its agents are acting.
The New Secured Debt Documents will contain
provisions intended to ensure that
MLMCI/GACC will obtain the substantive
benefits of this Term Sheet by prohibiting
technical circumvention of the requirement
that certain cash flow and payments be
deposited in the Cash Management Account or
the CMI Collection Account (for example, by
selling an asset owned by CMI on the
Effective Date and using the proceeds to
purchase a new asset the cash flow from
which would not otherwise be required to be
deposited into the Cash Management Account),
and the requirement that proceeds of equity
investments be applied in the prescribed
manner (for example, by using the proceeds
of an equity investment to purchase a new
asset, reselling such asset and applying the
proceeds of such resale in a manner that the
proceeds of the equity investment itself
could not have been applied).
The scheduled maturity of Note A will not be
earlier than the fifth (5th) anniversary of
the Effective Date, and the scheduled
maturity of Note B will not be earlier than
the sixth (6th) anniversary of the Effective
Date. The New Secured Debt Documents will
require CMI to obtain the approval of
MLMCI/GACC of any modification of such notes
that would change the scheduled maturity
thereof to any earlier date. Not more than
$105 million of the aggregate principal
amount of Note A and Note B will be
allocated to Note A. The Noteholders'
exclusive remedies for any failure to pay
scheduled Note A amortization will be either
(i) to sell some or all of the Miscellaneous
Collateral or (ii) to increase the per annum
interest rate on the delinquent Note A
amortization installment(s) by 200 basis
points.
The New Secured Debt will be structured as a
"repurchase agreement" consistent with the
-16-
<PAGE>
provisions of this Term Sheet between CMI,
as seller, and MLMCI/GACC, as purchaser,
with respect to the CMBS that would
otherwise constitute Collateral, unless
counsel for CMI and counsel for MLMCI/GACC,
acting reasonably and in good faith,
collectively determine that such structure
would materially and adversely affect CMI's
REIT status or have material and adverse
consequences for CMI under the Investment
Company Act of 1940, as amended.
The MLMCI/GACC indebtedness shall be allowed
pursuant to the Second Amended Plan based
upon the contract (non-default) rate of
interest.
Nothing contained in this Term Sheet that
restricts CMI's ability to make a payment
shall be deemed to excuse the borrower from
any obligations to the Noteholders. The
provisions of this Term Sheet are
conditioned upon the third party valuation
provisions being deleted from the Unsecured
Creditors Term Sheet.
Pursuant to the Second Amended Plan, the
Debtors and MLMCI/GACC will exchange mutual
releases in customary form on the Effective
Date.
-17-
<PAGE>
This Term Sheet does not constitute a vote
or agreement to vote for the Second Amended
Plan, and no such vote or agreement to vote
has been solicited by CMI or anyone acting
on its behalf. MLMCI/GAAC's acceptance or
rejection of the Second Amended Plan is
conditioned upon their review and approval
of all aspects of the Unsecured Creditors'
Term Sheet and the Second Amended Plan and
Disclosure Statement. The Effective Date of
the Second Amended Plan must occur no later
than July 1, 2000.
CRIIMI MAE Inc.
By: /s/ David B. Iannarone
---------------------------------
German American Capital Corporation
By:
---------------------------------
By:
---------------------------------
Merrill Lynch Mortgage Capital Inc.
By:
---------------------------------
-18-
<PAGE>
This Term Sheet does not constitute a vote
or agreement to vote for the Second Amended
Plan, and no such vote or agreement to vote
has been solicited by CMI or anyone acting
on its behalf. MLMCI/GAAC's acceptance or
rejection of the Second Amended Plan is
conditioned upon their review and approval
of all aspects of the Unsecured Creditors'
Term Sheet and the Second Amended Plan and
Disclosure Statement. The Effective Date of
the Second Amended Plan must occur no later
than July 1, 2000.
CRIIMI MAE Inc.
By:
---------------------------------
German American Capital Corporation
By:
---------------------------------
By:
---------------------------------
Merrill Lynch Mortgage Capital Inc.
By: /s/ Bruce L. Ackerman
---------------------------------
-19-
<PAGE>
This Term Sheet does not constitute a vote
or agreement to vote for the Second Amended
Plan, and no such vote or agreement to vote
has been solicited by CMI or anyone acting
on its behalf. MLMCI/GAAC's acceptance or
rejection of the Second Amended Plan is
conditioned upon their review and approval
of all aspects of the Unsecured Creditors'
Term Sheet and the Second Amended Plan and
Disclosure Statement. The Effective Date of
the Second Amended Plan must occur no later
than July 1, 2000.
CRIIMI MAE Inc.
By:
---------------------------------
German American Capital Corporation
By:
---------------------------------
By: /s/ Eric Schwartz
---------------------------------
Merrill Lynch Mortgage Capital Inc.
By:
---------------------------------
-20-
<PAGE>
This Term Sheet does not constitute a vote
or agreement to vote for the Second Amended
Plan, and no such vote or agreement to vote
has been solicited by CMI or anyone acting
on its behalf. MLMCI/GAAC's acceptance or
rejection of the Second Amended Plan is
conditioned upon their review and approval
of all aspects of the Unsecured Creditors'
Term Sheet and the Second Amended Plan and
Disclosure Statement. The Effective Date of
the Second Amended Plan must occur no later
than July 1, 2000.
CRIIMI MAE Inc.
By:
---------------------------------
German American Capital Corporation
By: /s/ Jon A. Vaccarro
---------------------------------
Jon A. Vaccarro
By:
---------------------------------
Merrill Lynch Mortgage Capital Inc.
By:
---------------------------------
-21-
<PAGE>
EXHIBIT 2
_________
AMENDED TERMS OF CHAPTER 11 PLAN
TREATMENT OF CLASS A9 AND
CLASS A10 CLAIMS BY THE DEBTORS'
THIRD AMENDED JOINT PLAN OF REORGANIZATION
CRIIMI MAE Inc. ("CMI"), the Official Committee of Equity Security
Holders of CRIIMI MAE Inc. (the "Equity Committee") and the Official Committee
of Unsecured Creditors of CRIIMI MAE Inc. (the "Unsecured Committee") agree to
the following terms and conditions for treatment of Class A9 and Class A10
Claims in a Debtors' Third Amended Joint Plan of Reorganization to be filed by
CMI and the Equity Committee. This Term Sheet is subject to the filing of a Plan
of Reorganization and Disclosure Statement consistent with the terms and
conditions set forth herein and to agreement upon the form and substance of the
New Debt Documents (as hereinafter defined).
OVERVIEW: Subject to the conditions outlined in this Term
Sheet, the Unsecured Committee, the Equity
Committee and CMI will jointly support a Third
Amended Plan of Reorganization filed by CMI,
CRIIMI MAE Management, Inc., CRIIMI MAE
Holdings II L.P. (together, the "Debtors") (the
"Third Amended Plan") and the Equity Committee
providing for the Unsecured Creditors of CMI to
receive in respect of the Class A9 (old senior
note claims) and Class A10 (CMI general
unsecured claims) (collectively, the "Claims"),
(a) an initial cash payment in reduction of the
Claims on the effective date of the Third
Amended Plan (the "Effective Date"), as
described in the section of this Term Sheet
captioned "Initial Paydown"; (b) treatment of
the Claims as described in this Term Sheet; and
(c) the receipt by holders of the Claims on the
Effective Date, of new secured debt of CMI on
the terms and conditions described in this Term
Sheet (the "New Debt"). The notes and other
documents that will evidence and secure the New
Debt are sometimes referred to in this Term
Sheet, collectively, as the "New Debt
Documents." The Debtors' Plan, including the
Merrill/GACC term sheet attached thereto, shall
be modified to make them consistent with the
terms set forth in this Term Sheet.
INITIAL PAYDOWN: $75 million in immediately available funds,
payable on the Effective Date (i) first, to pay
in full all Allowed Claims in the Class A10
Convenience Class and (ii) second, in reduction
of the Claims, pari passu to all remaining
Class A9 and A10 claimants, in proportion to
the respective allowed amount of such Claims.
The allowed amount of Class A9 and A10
Unsecured Claims shall be calculated to include
prepetition and
<PAGE>
postpetition interest (through the Effective
Date) using the contractual non-default rate of
interest for those creditors who have a
contract; the invoice rate (capped at 9-1/8%)
for those creditors with an invoice rate; and
6% for all others (the Allowed Claims,
including prepetition and postpetition interest
as described above, is referred to hereinafter
as the "Allowed Unsecured Claims"). The allowed
claims of CRIIMI MAE Management, Inc. shall not
be paid out of the proceeds of the Initial
Paydown and the holders of those claims shall
not receive any of the New Debt.
BORROWER: The New Debt will be a full recourse obligation
of CMI.
PRINCIPAL The original principal amount of the New Debt
AMOUNT: will be divided into two notes. The first note
shall be in the amount of $105 million
(hereinafter referred to as "Note A"). The
second note (hereinafter referred to as "Note
B") shall be equal to the Allowed Unsecured
Claims minus (b) $75 million, minus (c) $105
million which is the amount of Note A.
COLLATERAL: Consistent with the terms described on Schedule
I hereto (the "Collateral Schedule"), as
previously agreed to between the Unsecured
Committee and CMI, Note A will be secured by
first priority liens and security interests in
the "Miscellaneous Collateral" listed on the
attached Collateral Schedule, which includes,
inter alia, the AIM Fund Proceeds, Insured
Mortgage Proceeds (CMO I-III) and Mezzanine
Loans, and Brick Church (if not sold prior to
the Effective Date) (collectively referred to
hereinafter as the "Miscellaneous Collateral").
Note A shall also be secured by a first
priority lien and security interest in the CBO
I and Nomura unrated ("CBOI/Nomura Assets"), as
set forth on the Collateral Schedule, pursuant
to a collateral trust or similar arrangement
acceptable to CMI, MLMCI/GACC, the Equity
Committee and the Unsecured Committee, which
shall provide, inter alia, that a designee,
assignee or successor of Merrill Lynch Mortgage
Capital Inc. ("MLMCI" or "Merrill") and German
American Capital Corporation ("GACC") will
serve as collateral trustees for the benefit of
holders of Note A providing for payment of the
proceeds of any sale of the CBOI/Nomura Assets
to the holders of Note A and, after Note A has
been fully repaid, Note B. The Collateral Trust
documents shall provide that the holders of
Note A and the holders of Note B will not be
permitted to take actions (i) adverse to
MLMCI/GACC
-2-
<PAGE>
in any state court enforcement proceeding with
respect to the CBOI/Nomura Assets or (ii) for
the specific purpose of delaying or impeding
the sale of the CBOI/Nomura Assets by
MCMCI/GACC, so long as MLMCI/GACC are acting in
accordance with their obligations under the
Plan, the Collateral Trust documents, and
applicable law. The holders of Note A and Note
B shall also not have the right to foreclose or
otherwise enforce their liens against the CBO
I/Nomura Assets without the consent of
MLMCI/GACC. As set forth on the Collateral
Schedule, the holders of Note A shall also
receive a "soft second lien" against the assets
listed on Schedule A to the MLMCI/GACC Term
Sheet ("MLMCI/GACC Assets") and (if possible) a
second lien against the CMO IV Assets, which
are also listed on the attached Collateral
Schedule. The "soft second lien" means that the
holder shall not be permitted to take any
action (including the right to foreclose or
otherwise enforce its lien unless the holder
obtains the consent of the holder of the first
priority lien) (i) adverse to MLMCI/GACC in any
state court enforcement proceeding with respect
to the MLMCI/GACC Assets or (ii) for the
specific purpose of delaying or interfering
with the rights of MLMCI/GACC with respect to
the MLMCI/GACC Assets, so long as MLMCI/GACC
are acting in accordance with their obligations
under the Plan, the Collateral Trust documents,
and applicable law. The rights of the holders
of the soft second lien shall include the right
to credit bid in the event of a foreclosure
sale by the holders of the first lien.
The Collateral Trust or similar arrangement for
the CBOI/Nomura Assets shall terminate if and
when (a) Merrill/GACC have been repaid their
debt in full or such debt is otherwise
satisfied (provided, however, the Collateral
Trust shall continue if the Merrill/GACC debt
is refinanced until the refinance lender's debt
is fully satisfied), or (b) Merrill/GACC sell,
take for its own account or otherwise disposes
of the MLMCI/GACC Assets and are not selling
the CBOI/Nomura Assets in accordance with the
Collateral Trust documents. In such event, the
CBOI/Nomura Assets will be treated for all
purposes except for purposes of amortization as
Miscellaneous Assets. There will be no other
junior liens on the CBOI/Nomura Assets;
provided, however that MLMCI/GACC may hold a
subordinate beneficial interest in the
Collateral Trust with rights similar to a soft
second lien.
-3-
<PAGE>
The holders of Note A shall not have the right
to liquidate the MLMCI/GACC Assets or the
CBOI/Nomura Assets without the consent of the
holder of the MLMCI/GACC note, but (a) if the
CBOI/Nomura Assets are sold for any reason, the
holders of Note A (and, once Note A has been
repaid, Note B) shall receive all proceeds (net
of costs of sale) thereof, until the A and B
Notes are fully repaid, and (b) if the
MLMCI/GACC Assets are sold to a third party for
any reason, the holders of Note A (and, once
Note A has been repaid, Note B) shall receive
all proceeds, net of costs of sale and amounts
necessary to repay the claims of Merrill and
GACC secured by the MLMCI/GACC Assets, until
Note A and Note B are fully repaid, and (c) the
holders of Note A and Note B shall be entitled
to credit bid at any foreclosure sale of assets
in which they have a security interest.
If Merrill/GACC take back the MLMCI/GACC Assets
(in any form) or such assets are sold to an
affiliate of Merrill or GACC, the Holders of
Note A (and once Note A has been repaid, Note
B) shall receive the difference between (a) the
value of such assets net of costs of sales, if
any, at the time they are sold or taken back,
and (b) the outstanding amount of the principal
and interest owed by CMI to Merrill and GACC
under the Plan and secured by such assets.
If the Merrill/GACC claims and their interest
in the MLMCI/GACC Assets is documented as a
repurchase agreement pursuant to the Plan, then
Note A and Note B, and the related
documentation, shall assure that in the event
Merrill and/or GACC exercise their rights under
the repurchase agreements, the holders of Note
A and Note B, as applicable, receive the full
difference between the value, net of costs of
sale, if any, of the MLMCI/GACC Assets (as
determined by a third-party valuation) and the
outstanding amount of the principal and
interest owed by CMI to MLMCI/GACC under the
Plan and shall provide the holders of Note A
and Note B with rights equivalent to soft
second and third liens on the Merrill/GACC
Assets had the Merrill/GACC claims been
documented as a secured loan transaction. If
the relevant Repurchase Agreement is deemed to
be a secured loan transaction, the interest of
holders of Note A and Note B in the
Merrill/GACC Assets shall be treated as soft
second and third liens, respectively. In the
event that CMI exercises its right to
repurchase the MLMCI/GACC Assets, and the
MLMCI/GACC debt is not refinanced, the holders
of Note A and Note B shall have respectively
first and
-4-
<PAGE>
second priority liens on such assets, with such
assets thereafter treated for all purposes
except for purposes of amortization as
Miscellaneous Assets.
Any sale or other disposition of the
CBOI/Nomura Assets and/or the MLMCI/GACC Assets
shall be on commercially reasonable terms. If
the CBOI/Nomura Assets (or any of them) are
sold along with the MLMCI/GACC Assets (or any
of them), there shall be a fair allocation of
the net proceeds from such sale.
If the debt owing to MLMCI/GACC is refinanced,
the holders of Note A and Note B will continue
to have second and third liens respectively on
the MLMCI/GACC Assets junior to a first lien
held by the refinance lender, a similar
collateral trust or similar arrangement on the
CBOI/Nomura Assets with the refinance lender
and the same rights that they have vis-a-vis
MLMCI/GACC under the Plan. The amount of such
first lien will not be greater than the
outstanding balance of the debt owing to
MLMCI/GACC at the time of the refinance unless
such greater amount is paid to the holders of
Note A or Note B.
The holders of Note B shall receive a lien and
security interest on all assets pledged to the
holders of Note A subordinate to the prior
liens and security interests of Note A,
provided that the holders of Note B shall be
prohibited from exercising their lien rights
until Note A has been paid in full and an Event
of Default has occurred.
MATURITY DATE: Note A - business day immediately preceding the
fifth (5th) anniversary of the Effective Date.
Note B - business day immediately preceding the
sixth (6th) anniversary of the Effective Date.
INTEREST RATE: Note A - 11.75% cash coupon paid quarterly in
arrears.
Note B - 13% cash coupon, paid semi-annually in
arrears through the fifth anniversary of said
Note with such interest for the sixth year of
said Note payable one-half on the fifth
anniversary of said Note and one-half on the
Maturity Date, plus a 7% accreting coupon
accreting semi-annually in arrears paid on the
Maturity Date.
-5-
<PAGE>
SCHEDULED In addition to interest on the New Debt
PRINCIPAL specified in the section of this Term Sheet
PAYDOWN: captioned "Interest Rate" (the "Interest"), the
holders of Note A will also be entitled to
receive all cash flow received directly or
indirectly by CMI (provided however that the
income, expenses and assets of CRIIMI MAE
Services Limited Partnership ("CMSLP") shall
stay with CMSLP) including interest, return of
principal, fees, and all other payments payable
on or arising from the Miscellaneous
Collateral, which shall be paid to the holders
of Note A quarterly in arrears. In addition,
the holders of Note A shall receive scheduled
amortization of $5 million payable on or before
24 months from the Effective Date of the Plan,
$15 million payable on or before 36 months from
the Effective Date of the Plan, and $15 million
payable on or before 48 months from the
Effective Date of the Plan. CMI must pay as
much of each scheduled amortization payment as
it has the ability to pay after CMI pays the
other obligations established by this Term
Sheet and Plan, including maintenance of CMI's
$7.5 million working capital reserve.
The holders of Note B shall not receive any
scheduled amortization payments.
LOAN FEES: If CMI has not paid the entire amount of the
New Debt (i) within 48 months of the Effective
Date, CMI shall pay the holders of Note A and
Note B a Loan Fee equivalent to 1.5% of their
respective portions of the remaining principal
balance of the New Debt at the end of the 48th
month after the Effective Date; (ii) within 54
months of the Effective Date, CMI shall pay the
holders of Note A and Note B a Loan Fee
equivalent to 1.5% of their respective portions
of the remaining principal balance of the New
Debt at the end of the 54th month after the
Effective Date; (iii) within 60 months of the
Effective Date, CMI shall pay the holders of
Note A and Note B a Loan Fee equivalent to 1.5%
of their respective portion of the remaining
principal balance of the New Debt at the end of
the 60th month after the Effective Date; and
(iv) within 66 months of the Effective Date,
CMI shall pay the holders of Note B a Loan Fee
equivalent to 1.5% of their respective portion
of the remaining principal balance of the New
Debt at the end of the 66th month after the
Effective Date. Failure to make a loan fee
payment shall result in the amount of that
payment being proportionally added to the
principal balance of Note A and Note B and
shall not otherwise constitute a default under
Note A or Note B, provided
-6-
<PAGE>
that CMI must make the loan fee payments on
time if after paying the other obligations
permitted by this Term Sheet and the Plan,
including CMI's $7.5 million working capital
reserve CMI has the ability to do so. At the
option of the Unsecured Committee made prior to
the Effective Date, the loan fees for Note B
may be converted to an increase in the interest
rate on Note B, which would be effective on the
same dates as the loan fees would become due
and in an amount such that the increase in
interest rate would have no economic
consequences when compared to the alternative
of paying the loan fee.
EQUITY Subject to the provisions of this paragraph and
INVESTMENT: the other provisions of this Term Sheet CMI
shall be entitled to utilize the proceeds of
any equity investments (including the proceeds
from the sale of assets purchased with proceeds
of equity investments) without restriction
provided, however, that the first $10 million
of net proceeds from any new equity investment
will be paid promptly upon its receipt by CMI
to the holders of Note A (or Note B, if Note A
has been fully repaid) as an additional
principal paydown.
OPTIONAL Prior to the respective Maturity Dates for the
PREPAYMENT: A Note and the B Note, CMI may prepay the New
Debt in whole or in part without any penalty or
premium.
EVENTS OF DEFAULT: Failure to pay the holders of Note A any of the
Scheduled Principal Paydown shall be an event
of default which, if not cured within 30 days,
shall entitle the holders of Note A to
foreclose upon and sell the Miscellaneous
Collateral with the net proceeds of such sale
being credited by the holders of Note A or B,
as applicable (i) first, to payment of any
accrued and unpaid interest on the A Note, (ii)
second, to all outstanding but unpaid Scheduled
Principal Paydown payments, (iii) third, to
future payments of Scheduled Principal Paydown,
(iv) fourth, to the outstanding principal
balance of Note A, (v) fifth, to accrued and
unpaid interest on the Note B, (vi) sixth, to
the holders of Note B to reduce the then
outstanding principal balance of Note B and
(vii) seventh, after all amounts owed by CMI to
the holders of Notes A and B have been fully
paid, to CMI.
The following defaults shall entitle the
holders of the Note A and Note B, as
applicable, to exercise the remedies described
in the immediately preceding paragraph and take
any other actions available to the holder of a
full recourse obligation (except remedies
-7-
<PAGE>
specifically excluded in this Term Sheet or the
Loan Documents) (A) failure to pay interest on
the Note A and Note B within 30 days of the
date, as required herein and in those notes,
(B) any default and expiration of applicable
cure periods under the debt obligations of CMI
to Merrill/GACC provided MLMCI/GACC have taken
or are taking action to enforce default
remedies or have improved any rights granted to
them under the Plan or their loan documents
with the consent of CMI, (C) failure to remedy
a breach of a Covenant (as defined herein)
within 60 days, and (D) other defaults
reasonably agreed to by CMI, the Equity
Committee, and the Unsecured Committee.
COVENANTS: The Note A and Note B loan documents will
contain covenants substantially in the form
attached as Schedule II.
MISCELLANEOUS: If the holders of Note A do not receive all or
any portion of a Scheduled Principal Paydown in
any year and the Miscellaneous Collateral has
not been sold, the holders of Note A shall
receive additional interest of 200 basis points
on any unpaid amortization amount until such
time as the amount is paid.
CMI will not pay any cash dividends or redeem
preferred stock on or prior to the Effective
Date and, until the holders of Note A and Note
B are paid in full, the Company will not be
permitted to redeem preferred stock or pay
dividends other than (i) to pay $4.1 million
annually in preferred dividends and (ii) to pay
cash dividends in an amount not to exceed 13%
per annum to a new equity investor pursuant to
the terms of this Term Sheet and the MLMCI/GACC
Term Sheet (provided, however, CMI shall be
permitted to use the net proceeds of any new
equity investment above $10 million for any
purpose except paying dividends in excess of
those permitted by this Term Sheet or
redemption of preferred stock other than
redemption of preferred stock as part of an
exchange for new preferred stock). CMI will not
use dividend(s) or distributions received from
CMSLP to pay dividends on CMI stock or for the
redemption of preferred stock. In the Event of
a Default under the Note A or Note B that
remains uncured during any applicable cure
periods, cash dividends will be suspended on
CMI stock unless dividends must be paid on the
Series F and Series [G] PIK preferred stock to
maintain CMI's REIT status.
-8-
<PAGE>
Any declared default under the MLMCI/GACC debt
which remains uncured after the expiration of
any applicable cure period and as to which
MLMCI/GACC have taken or are taking action to
enforce default remedies or as a consequence of
which MLMCI/GACC have improved any rights
granted to them under the Plan or their loan
documents with the consent of CMI shall
constitute a default under Note A and Note B.
Any change in ownership such that 51 percent of
the common stock of CMI is or becomes held by
any one entity, individual or related group of
entities or individuals shall require the
consent of the holders of 51 percent of the
outstanding Note A and Note B debt, voting for
these purposes as a single class.
Any amendments to the Debtors' Plan that
materially affect the treatment or recovery of
the unsecured creditors require the consent of
the Unsecured Committee; provided, however,
that the parties agree that any change in the
amount of payments, timing of payments, term of
New Debt, Collateral, liens, rights, or default
remedies available to the holders of Note A and
Note B or other specific provisions in the Term
Sheet shall be deemed material.
If CMI needs to pay a deficiency dividend, CMI
will have the option to satisfy any required
deficiency dividend payment with a PIK or cash,
provided that cash shall be paid only to the
extent that CMI reasonably determines that cash
payments are necessary to preserve its REIT
status. If CMI chooses to satisfy the
deficiency dividend in whole or in part in
cash, the holders of Note A and/or Note B shall
have a right to convert the principal amount of
such note, in whole or in part, to an equal
amount of par value of voting preferred stock.
Such preferred stock would be senior to all
other preferred stock and would have a dividend
yield equal to the interest rate on the note
converted. Such preferred stock would be the
recipient of all cash distributions (including
redemption distributions) to be made in order
to preserve CMI's REIT status. The preferred
stock would have sufficient voting power (which
would not decline as redemptions occur) to
cause redemptions of such preferred stock to be
treated as dividends for federal income tax
purposes. If cash distributions and/or PIK
distributions were not sufficient to preserve
REIT status, CMI would use such other mechanism
or mechanisms that CMI and the holders of Note
A and
-9-
<PAGE>
Note B may agree upon at the time in order to
attempt to preserve REIT status.
The holders of Note A shall receive a negative
pledge of all assets acquired by CMI after the
Effective Date. No liens or security interests
may be granted on any such assets other than
purchase money security interests.
If plan projections for real estate losses are
exceeded (the applicable threshold may be the
same as the "Loss Threshold" referenced in the
MLMCI/GACC Term Sheet, if that threshold is
agreed to by MLMCI, GACC, CMI, the Unsecured
Committee and the Equity Committee), then CMI
may not use its cash to purchase B pieces or
for any other expense except (a) payment of
debt under the Plan, (b) payment of dividends
legally required to preserve CMI's REIT status,
and (c) ordinary course operating expenses
until the default is cured.
-10-
<PAGE>
CRIIMI MAE Inc.
By: /s/
--------------------------
Cynthia Azzara
Senior Vice President
Official Committee of Unsecured Creditors
of CRIIMI MAE Inc.
By: /s/
--------------------------
Paul Meiring
Chairman
Official Committee of Equity Security
Holders of CRIIMI MAE Inc.
By: /s/
--------------------------
Michael St. Patrick Baxter
Dennis Auerbach
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, DC 20044
Attorney for the Official Committee
of Equity Security Holders of
CRIIMI MAE Inc.
-11-
<PAGE>
SCHEDULE I
COLLATERAL SCHEDULE
The Series A Notes and Series B Notes will be secured by the following to the
extent provided in the Term Sheet:
I. MISCELLANEOUS COLLATERAL
The Miscellaneous Collateral, as defined in the Term Sheet, and the
liens on such collateral, shall be as follows:
A. INSURED MORTGAGE COLLATERAL. A valid and perfected first priority
collateral assignment of all right, title and interest of CMI, through its
three wholly-owned subsidiaries referenced below, in and to the Insured
Mortgage Proceeds which consist of the CMO-I Excess Payments, CMO-II Excess
Payments and CMO-III Excess Payments (in each case as defined below) and, as
to CMO-I only, together with a valid and perfected first priority pledge of
the certificate(s) representing the Interest Strip, as defined in the related
Participation Agreement.
"CMO-I EXCESS PAYMENTS" means (a) payments of excess interest and
prepayment penalties, including, without limitation, all Excess
Amounts, as defined in the related Participation Agreement and (b)
distributions of any of the assets constituting the Trust Estate,
including, without limitation, any Whole Loan PCs, Non-Interest
Strip PCs (in each case, pledged to the trust and remaining after
discharge of the trust or release of the pledge thereon) and any
proceeds therefrom (remaining after discharge of the trust or
release of the pledge thereon) that, with respect to each of the
foregoing payments and distributions, CMI receives directly or from
CRIIMI MAE Financial Corp., a wholly-owned subsidiary, by virtue of
and attributable to the FHA insured mortgage loans and GNMA
mortgage-backed securities that are pledged, as of the date of the
Plan, by CRIIMI MAE Financial Corp. to secure CRIIMI MAE Financial
Corporation's 7% Collateralized Mortgage Obligations.
"CMO-II EXCESS PAYMENTS" means (a) payments of excess interest and
prepayment penalties, including, without limitation, payments of
any Funding Surplus, as defined in the Funding Note Purchase and
Security Agreement, and payments of any excess funds from the
Collection Account on any Prepayment Date, and (b) distributions on
account of the Collateral, including, without limitation, the
Pledged Securities, pledged to Freddie Mac (in each case, remaining
after discharge of such pledge) and any proceeds therefrom
(remaining after discharge of such pledge) that, with respect to
each of the foregoing payments and distributions, CMI receives
directly or from CRIIMI MAE Financial Corporation II, a wholly-owned
subsidiary, by virtue of and attributable to the
<PAGE>
Freddie Mac Giant GNMA-backed securities that are pledged, as of
the date of the Plan, by CRIIMI MAE Financial Corporation II, to
secure Freddie Mac's Structured Pass-Through Securities
(Guaranteed), Series C007.
"CMO-III EXCESS PAYMENTS" means (a) payments of excess interest and
prepayment penalties, including, without limitation, payments of
any Funding Surplus and Excess Funds, as defined in the Funding
Note Issuance and Security Agreement, and payments of any excess
funds from the Collection Account on any Prepayment Date, and (b)
distributions on account of the Collateral, including, without
limitation, the Pledged Securities, pledged to Fannie Mae (in each
case, remaining after discharge of such pledge) and any proceeds
therefrom (remaining after discharge of such pledge) that, with
respect to each of the foregoing payments and distributions, CMI
receives directly or from CRIIMI MAE Financial Corporation III, a
wholly-owned subsidiary, by virtue of and attributable to certain
GNMA mortgage-backed securities that are pledged, as of the date of
the Plan, by CRIIMI MAE Financial Corporation III, to secure Fannie
Mae's Guaranteed Grantor Trust Pass-Through Certificates issued by
Fannie Mae Grantor Trust 1995-T5.
B. AIM FUND COLLATERAL. a valid and perfected first priority
collateral assignment of all right, title and interest of CMI, through
CRIIMI, Inc. and any affiliates of CRIIMI, Inc. receiving any Aim Fund
Proceeds, and of CMI and CMM, through CRI-Aim Investment L.P., in and to the
Aim Fund Proceeds (as defined below), together with a valid and perfected
first priority pledge of CMI's and CMM's partnership interests in CRI-Aim
Investment L.P. and, if permitted under the Aim Acquisition L.P. Partnership
Agreement, CRI-Aim Investment L.P.'s partnership interest in Aim
Acquisition L.P.
"AIM FUND PROCEEDS" means all proceeds (including, without
limitation, payments, distributions, fees, compensation,
reimbursements and the like) received by CMI from CRIIMI, Inc., a
wholly-owned subsidiary of CMI, or affiliates of CRIIMI, Inc.
receiving any Aim Fund Proceeds, by virtue of and attributable to
the partnership interests held by CRIIMI, Inc. in the four publicly
traded AIM Fund Partnerships, (i) American Insured Mortgage
Investors Partnership, (ii) American Insured Mortgage Investors -
Series 85, L.P., (iii) American Insured Mortgage Investors L.P. -
Series 86, and (iv) American Insurance Mortgage Investors L.P. -
Series 88, and all proceeds received by CMI and CMM from CRI-AIM
Investment L.P. by virtue of or attributable to their ownership
interests in CRI-AIM Investment L.P., which holds a partnership
interest in AIM Acquisition, L.P., the advisor to the Aim Fund
Partnerships.
2
<PAGE>
C. MEZZANINE NOTES. A valid and perfected first priority assignment of
all right, title and interest of CMI and CM Mallers Building, Inc.,
respectively, in and to the Mezzanine Notes (as defined below) and a valid
and perfected first priority collateral assignment of the partnership
interests and related collateral (including any guarantees) securing such
Mezzanine Notes.
"MEZZANINE NOTES" means those six notes identified below
evidencing six loans secured by certain partnership interests
made to various borrowers by CMI and CM Mallers Building, Inc.
<TABLE>
<CAPTION>
<S> <C>
1. Lender- CRIIMI MAE Inc.
Borrower- Jemal's CM Limited Partnership
Original Principal Amount- $2,260,000.00
Date- June 29, 1998
2. Lender- CRIIMI MAE Inc.
Borrower- MBSCO Limited Partnership
Original Principal Amount- $500,000.00
Date- September 16, 1998
3. Lender- CRIIMI MAE Inc.
Borrower- MDR Shoppes Limited Partnership
Original Principal Amount- $955,000.00
Date- April 6, 1988
4. Lender- CM Mallers Building, Inc.
Borrower- The Jewelry Center Limited Partnership
Original Principal Amount- $2,070,000.00
Date- February 20, 1998
5. Lender- CRIIMI MAE Inc.
Borrower- Mission Falls Corporation
Original Principal Amount- $600,000.00
Date- September 14, 1998
6. Lender- CRIIMI MAE Inc.
Borrower- MDR Plaza Limited Partnership
Original Principal Amount- $700,000.00
Date- September 29, 1997
</TABLE>
D. BRICK CHURCH PROPERTY. A valid and perfected first priority
collateral assignment of any (a) net cash flow (after debt service and
operating expenses) attributable to the Brick Church Property (defined below)
and (b) net proceeds from the sale or other disposition of the Brick Church
Property received, in each case, by CMI, through CRIIMI MAE Brick Church, Inc.
3
<PAGE>
"BRICK CHURCH PROPERTY" means the Holiday Inn Express hotel located
in Nashville, Tennessee owned by CMI's wholly-owned subsidiary CRIIMI
MAE Brick Church, Inc.
II. CBO-I BONDS AND NOMURA BOND
The lien on the CBO-1 Bonds and the Nomura bond shall be as set forth
below, and pursuant to and consistent with an intercreditor agreement,
participation agreement, collateral trust or similar arrangement (for all
purposes of this Term Sheet, referred to as an "Intercreditor Arrangement")
which effectuates the specific terms and conditions set forth on the Term
Sheet and which is acceptable to CMI, Merrill/GACC and the Unsecured
Committee and as more specifically set forth in and subject to the terms of
the Plan.
A. CBO-1 BONDS. Subject to the terms of an Intercreditor Arrangement
as referenced above, a valid and perfected first priority lien on the CBO-1
Bonds (as defined below) securing the payment to holders of Series A Notes or
Series B Notes, as appropriate, of any net proceeds received by CMI, through
CRIIMI MAE QRS 1, Inc., upon any sale of the CBO-1 Bonds, subject to II.C.
and II.D. below.
"CBO-1 BONDS" means the following bonds and owner trust
certificates owned by the Company; CMM 1996-C1, Classes F, P, R
and XS.
Subject to change in connection with the affiliate reorganization
referenced in II.D. below, the Series A Notes or Series B Notes, as
appropriate, shall also be secured by (a) a valid and perfected first
priority pledge by CMI of the capital stock in CRIIMI MAE QRS-1, Inc.;
provided, however, that such stock pledge may not be realized on in any
manner that would cause CRIIMI MAE QRS-1, Inc. to cease to be a qualified REIT
subsidiary, and (b) a valid and perfected first priority security interest in
proceeds received by CMI through CRIIMI MAE QRS-1, Inc. attributable to the
CBO-1 Bonds; provided however that such stock pledge and security interest in
proceeds shall be subject to (y) all rights of Merrill and GACC, as set forth
in the term sheet among CMI, Merrill and GACC, and (z) the terms and
conditions of an Intercreditor Arrangement among CMI, Merrill, GACC and the
Unsecured Committee, relating to, among other matters, the CBO-1 Bonds and
proceeds attributable thereto.
B. NOMURA BOND. Subject to the terms of an Intercreditor Arrangement
as referenced above, a valid and perfected first priority lien on the Nomura
Bond securing the payment to holders of Series A Notes or Series B Notes, as
appropriate, of any net proceeds received by CMI upon the sale of the Nomura
Bond, subject to II.C. below.
C. TERMINATION OF INTERCREDITOR ARRANGEMENT. If and when (a)
Merrill/GACC have been repaid their debt in full or such debt is otherwise
satisfied (provided, however, the Intercreditor Arrangements referenced above
shall continue if the Merrill/GACC debt is refinanced until the refinance
lender's debt is fully satisfied), or (b) Merrill/GACC sells, takes for its
own account or otherwise disposes of the CBO-2 Bonds and are not
4
<PAGE>
acting to sell the CBO-1 Bonds and Nomura Bond, then the Intercreditor
Arrangements referenced above shall terminate and the liens on the CBO-1
Bonds and Nomura Bond shall become valid and perfected first priority liens
on the CBO-1 Bonds and the Nomura Bond securing the indebtedness evidenced by
the Series A Notes or Series B Notes, as appropriate, subject to and in
accordance with the terms of the Term Sheet and the Plan, and further,
subject to II.D. below.
D. AFFILIATE REORGANIZATION. The first priority lien on the CBO-1
Bonds referenced in both II.A and II.C. above shall be structured so as to be
direct or, if necessary in connection with an affiliate reorganization
referenced in the Plan, indirect (with such indirect structure to be
reasonably acceptable to the Unsecured Committee), which affiliate
reorganization shall be reasonably acceptable to CMI, Merrill/GACC and the
Unsecured Committee.
III. CBO-2 BONDS
The lien on the CBO-2 Bonds shall be as set forth below and as more
specifically set forth in the Term Sheet and the Plan, and shall be subject
to terms and conditions acceptable to CMI, Merrill/GACC and the Unsecured
Committee, which terms and conditions shall include those to be set forth in
an Intercreditor Arrangement acceptable to such parties, such that (i) the
liens shall constitute "direct or indirect soft second liens" and (ii) in the
event that the Merrill and GACC claims are documented as repurchase
agreements pursuant to the Plan, the holders of Series A Notes or Series B
Notes, as appropriate, shall receive the full difference between the value of
the CBO-2 Bonds (as determined by a third party valuation) and the
outstanding amount of the debt owed by CMI to Merrill/GACC under the Plan.
CBO-2 BONDS. A valid and perfected soft second priority lien on
the CBO-2 Bonds (as defined below), which lien shall be structured so as
to be direct or, if necessary in connection with an affiliate
reorganization referenced in the Plan, indirect (with such structure to
be reasonably acceptable to the Unsecured Committee), which affiliate
reorganization shall be reasonably acceptable to CMI, Merrill/GACC and
the Unsecured Committee.
"CBO-2 BONDS" means the bonds and owner trust certificates owned
by the Company referenced on Schedule A hereto.
Subject to change in connection with the affiliate reorganization
referenced above, the Series A Notes or Series B Notes, as appropriate, shall
also be secured by (a) to the extent permitted by Citicorp, a valid and
perfected first priority pledge by CMI of the capital stock in CRIIMI MAE
CMBS Corp.; provided, however, that such stock pledge may not be realized on
in any manner that would cause CRIIMI MAE CMBS Corp. to cease to be a qualified
REIT subsidiary, and (b) a valid and perfected security interest in proceeds
received by CMI through CRIIMI MAE CMBS Corp. attributable to the CBO-2
Bonds; provided however that such stock pledge and security interest in
proceeds shall be subject to (x) all rights of Merrill and GACC, as set forth
in the term sheet among CMI, Merrill and GACC, (y) the terms and conditions
of an Intercreditor
5
<PAGE>
Arrangement, among CMI, Merrill, GACC and the Unsecured Committee, relating
to, among other matters, the CBO-2 Bonds and proceeds attributable thereto,
and (z) the terms and conditions of any Intercreditor Arrangement among CMI,
Citicorp and the Unsecured Committee.
IV. CMO-IV BONDS AND CMO-IV ADDITIONAL COLLATERAL
CMO-IV BONDS. If permitted by Citicorp, a valid and perfected soft
second priority lien on the CMO-IV bonds and the CMO-IV Additional Collateral
(in each case as defined below), which lien shall be structured so as to be
direct or, if necessary in connection with an affiliate reorganization
referenced in the Plan, indirect (with such structure to be reasonably
acceptable to the Unsecured Committee), which affiliate reorganization shall
be reasonably acceptable to CMI, Merrill/GACC and the Unsecured Committee.
1. "CMO-IV BONDS" means the following bonds owned by the Company:
CMM 1998-1, Classes X/IO, F, G, H and J.
2. "CMO-IV ADDITIONAL COLLATERAL" means the following bonds and
owner trust certificates owned by the Company: CMM 1998-1, Classes K,
P, XS and R.
Subject to change in connection with the affiliate reorganization
referenced above, the Series A Notes or Series B Notes, as appropriate, shall
also be secured by, to the extent permitted by Citicorp, (a) a valid and
perfected first priority pledge by CMI of the capital stock in CRIIMI MAE CMBS
Corp.; provided, however, that such stock pledge may not be realized on in
any manner that would cause CRIIMI MAE CMBS Corp. to cease to be a qualified
REIT subsidiary, and (b) a valid and perfected security interest in proceeds
received by CMI through CRIIMI MAE CMBS Corp. attributable to the CMO-IV
Bonds and CMO-IV Additional Collateral; provided however, that such stock
pledge and security interest in proceeds shall be subject to the terms and
conditions of any Intercreditor Arrangement among CMI, Citicorp and the
Unsecured Committee, relating to, among other matters, the CMO-IV Bonds,
CMO-IV Additional Collateral and proceeds attributable to both.
CMI and the Unsecured Committee acknowledge that, with respect to the
Miscellaneous Collateral described in I. above, all cash proceeds and
distributions attributable to such Miscellaneous Collateral are intended to
be made available to the Unsecured Committee (provided, however, that as
acknowledged and agreed to by the Unsecured Committee, the sub advisor fee
paid to CMSLP in connection with the Aim fund Partnerships shall not be made
available to the Unsecured Committee) and agree to take all reasonable action,
including the execution of all reasonable documents, to effect such intent.
In order to effectuate the rights and entitlement of the Unsecured
Committee to cash proceeds, payments and/or distributions, as set forth
herein, CMI and CMM shall agree and covenant, subject, in each case, to any
restrictions or constraints imposed under
6
<PAGE>
applicable law, applicable constituent documents and/or applicable operative
documents, to take such actions as are necessary to insure that all such
proceeds, payments and/or distributions received by entities other than CMI
and CMM are promptly paid to CMI or CMM, as applicable.
The foregoing collateral descriptions will be modified if it is
determined that a better lien can be granted consistent with the Term Sheet,
Plan and any and all applicable constituent and operative documents, after
review of such constituent and operative documents by the Unsecured Committee.
References herein to the Unsecured Committee shall include any successor
thereto.
7
<PAGE>
SCHEDULE A
CBO-2
<TABLE>
<CAPTION>
Transaction Tranches Rating Face Amount
<S> <C> <C> <C>
CMM 1998-C1 D1 BB+ 159,500,000
CMM 1998-C1 D2 BB+ 159,501,000
CMM 1998-C1 E BB 70,889,000
CMM 1998-C1 F BB- 35,444,000
CMM 1998-C1 G B+ 88,612,000
CMM 1998-C1 H1 B 88,611,000
CMM 1998-C1 H2 B 88,611,000
CMM 1998-C1 J B- 106,334,000
CMM 1998-C1 IE CCC 70,889,000
CMM 1998-C1 IE NR 230,389,951
------------
1,098,780,951
</TABLE>
8
<PAGE>
SCHEDULE II
SUMMARY OF COVENANTS FOR SERIES A AND SERIES B NOTES
<TABLE>
<S> <C>
Minimum Excess Cash Flow The Minimum Excess Cash Flow covenant will be
calculated as follows:
Gross Cash Flows (as defined), less cash
flow from Miscellaneous Collateral, if
any, will equal Adjusted Gross Cash Flows.
Adjusted Gross Cash Flows will be reduced
by (i) all general operating and
administrative expenses form CMI and its
affiliates (excluding CMSLP), (ii) cash
interest expense, and (iii) allowed cash
dividends to shareholders (Adjusted Gross
Cash Flows, less items (i) through (iii),
will be defined as the "Excess Cash Flow").
Excess Cash Flow must be greater than or
equal to the principal amortization
payable to MLMCI/GACC based on a 15-year
mortgage amortization schedule:
PERIOD MINIMUM EXCESS CASH FLOW (1)
------ ----------------------------
3 months ended [ ] [insert 15-year amortization
6 months ended [ ] schedule per period]
9 months ended [ ]
12 months ended [ ]
12 months ended [ ]
12 months ended [ ]
12 months ended [ ]
12 months ended [ ]
Gross Cash Flow shall include (i) cash payments
received and accruals on securities held as long
as payment on such accruals are not delinquent by
more than 45 days from scheduled receipt and
(ii) all other cash income. Gross Cash Flows
will not include cash distributions, if any,
from CMSLP. (Cash flows and cash expenses
related to Match Funded Debt will be excluded
from this calculation).
(1)-Amounts will be inserted based upon
one-month LIBOR as of the Effective Date (and
the related spread over LIBOR) and based upon
such LIBOR rate remaining constant throughout
the term of Note A and B, assuming a 15-year
mortgage amortization schedule per period. The
Minimum Excess Cash Flow will be calculated for
the first three, six, nine and twelve month
periods on a cumulative basis beginning with the
first full fiscal quarter after the Effective
Date. Subsequently, all Minimum Excess Cash Flow
covenant tests will be calculated each fiscal
quarter and will include the trailing
twelve-month period.
Dividends Dividends will be limited to:
- Preferred Stock cash dividends not to exceed
$4.1 million per year
- Preferred dividends in connection with an equity
investment before or after the Effective Date as
long as: (i) the cash dividend rate does not
exceed 13% per year, (ii) the Company has
sufficient liquidity on a projected basis to
make interest and mandatory amortization
payments during the upcoming 12-month period,
and (iii) the Company is in compliance with
other covenants.
Asset Sales Proceeds from the sale of assets, after
repayment of debt having a lien on such assets,
will be used only to: (i) reinvest in
income-producing assets (including securities
trading assets) within a 180-day reinvestment
period or (ii) repay, on a pro rata basis: (1)
Merrill/GAAC, (2) the Series A and B Notes and
(3) Citibank's debt, if any, related to CMO IV.
</TABLE>
<PAGE>
Transactions with Any transaction with an affiliate must be on an
Affiliates arms-length basis. To the extent that the proposed
transaction exceeds $2.0 million, a board resolution
(excluding the respective affiliate, if applicable) is
required. To the extent that the proposed transaction
exceeds $25 million, the opinion of a nationally
recognized investment bank, professional services firm, or
similar expert is required.
Purchase of The Company will not be permitted to purchase CMBS Assets
Assets upon a rated "B" or lower if any event of default occurs
Default (including a cross-default to other debt).
Limitation on Debt The Company and its subsidiaries will not be permitted to
incur additional debt other than: (i) Refinancing Debt,
(ii) Non-Recourse Repo Debt, (iii) senior bank debt not
to exceed $25.0 million, (iv) capital lease obligations
not to exceed $400,000 and (v) debt permitted under the
Interest Coverage Ratio provision below.
REFINANCING DEBT includes: (1) the extension of existing
debt or (2) debt incurred solely to refinance existing debt
as long as such new debt incurred: (i) has an average
weighted life no shorter than the debt being refinanced,
(ii) has lower annual principal amortization requirements
(prior to the maturity of the Series A and Series B
Notes) than the debt being refinanced and (iii) has cash
interest expense that is not materially greater than the
debt being refinanced.
NON-RECOURSE REPO DEBT includes debt under repurchase
obligations or similar types of financings, regardless of
title, as long as: (i) the Company is in compliance with
all other terms and covenants and (ii) the only recourse
of the lender in the repo debt in the event of a default is
the underlying collateral/securities purchased with such
debt.
The Company cannot incur debt that is senior to the
Series A and Series B Notes.
Interest Coverage In addition to the debt described in clauses (i-iv)
Ratio above, the Company and its subsidiaries may incur
additional debt if, pro forma for incurring such debt,
the Company's Interest Coverage Ratio for the trailing
twelve-month period (or for such shorter time period if
fewer than twelve months have expired post Effective
Date) is greater than 1.5X.
The Company cannot issue debt pursuant to the Interest
Coverage Ratio that: (i) matures prior to the maturity of
the Series B Notes or (ii) is callable prior to the
maturity of the Series A and B Notes. The preceding
sentence will not apply to non-amortizing purchase money
repo debt (recourse) used to acquire CMBS Assets and
having a maturity of less than 2 years.
Interest Coverage Ratio shall be calculated as: (1)(i)
Gross Cash Flow, less (ii) cash flow from the
Miscellaneous Collateral, if any, less (iii) G&A and
other cash operating expenses divided by (2) cash
interest expense excluding cash loan extension fees.
Default; Exercise 60-day notice and cure for all covenants. A waiver of
of Remedies default for any of the above covenants or acceleration or
exercise of any remedies will require a vote of a
majority in principal amount of the holders of the A and
B Notes voting as a single class.
<PAGE>
EXHIBIT 3
SERIES E CONVERTIBLE PREFERRED STOCK TERM SHEET
ISSUER: CRIIMI MAE Inc. ("CRIIMI MAE", "CMI" or the "Company")
HOLDER: MeesPierson Investments Inc. now known as Fortis Proprietary
Capital Inc. ("Fortis")
ISSUE AMOUNT: $10.3 million (103,000 Preferred Shares (defined
below)). If the Subsequent Exchange (defined below) occurs,
then the Corporation shall issue another $10.0 million of
Preferred Shares to Fortis. "Subsequent Exchange" shall mean
the exchange of 100,000 shares of the Company's Series D
Cumulative Convertible Preferred Stock, par value $0.01 (the
"Series D Preferred Stock") by Fortis for 100,000 shares of
the Preferred Shares on or prior to July 31, 2000.
LIQUIDATION VALUE: $100 per share
SECURITIES: Series E Cumulative Convertible Preferred Shares ("Preferred
Shares")
DIVIDEND: 1. From the date of issuance of the relevant share(s) of
Preferred Shares to Fortis through the Effective Date
of the Company's Reorganization Plan (the "Effective
Date"), cumulative, floating-rate dividends based upon
3-month LIBOR plus 75 basis points, accruing quarterly,
and payable, on the Effective Date, in common stock,
which will not require registration to trade ("Dividend
Securities").
2. After the Effective Date, cumulative, floating rate
dividends based upon 3-month LIBOR plus 250 basis
points, payable quarterly in cash or Dividend
Securities at CMI's option.
3. Unpaid dividends shall compound quarterly.
DIVIDEND SHARE The amount of shares received as Dividend Securities will be
AMOUNT: equal to the dividend dollar amount divided by the average
of the five (5) closing trade prices of the common stock for
the five (5) previous trading days prior to the dividend
payment date.
<PAGE>
CONVERSION The Preferred Shares will become convertible into CRIIMI MAE
FEATURE: common stock at the option of Fortis beginning three months
after the Effective Date in accordance with the following
schedule:
1. Up to 25,750 (to be increased to 50,750, if the
Subsequent Exchange Occurs) Preferred Shares may be
converted beginning at the end of 3 months, 9 months,
12 months and 15 months after the Effective Date
without regard to the price of CRIIMI MAE's common
stock.
2. Beginning 4 months after the Effective Date and ending
8 months after the Effective Date, Fortis may convert
up to 7,500 (to be increased to 15,000, if the
Subsequent Exchange occurs) additional Preferred Shares
in any 21 trading day period so long as the price of
the common stock remained above $3.00 per share for
each of the previous 21 trading days.
3. Beginning 10 months after the Effective Date, Fortis
may convert up to 5,000 (to be increased to 10,000, if
the Subsequent Exchange occurs) additional Preferred
Shares in any 21 trading day period so long as the
price of the common stock remained above $3.00 per
share for each of the previous 21 trading days.
4. In no event may Fortis convert (i) more than 25,750 (to
be increased to 50, 750, if the Subsequent Exchange
occurs) Preferred Shares in any 21 trading day period,
or (ii) Preferred Shares resulting in Fortis owning 5%
or more of CMI's then outstanding common stock.
CONVERSION PRIOR TO THE EFFECTIVE DATE. In the event that
the Effective Date does not occur on or before December 31,
2000, then 5,000 (to be increased to 10,000, if the
Subsequent Exchange occurs) Preferred Shares shall become
convertible at the option of Fortis into fully paid and
non-assessable shares of CMI common stock in January 2001
and in each month thereafter until the Effective Date. In no
event may Fortis convert (i) more than 5,000 (to be
increased to 10,000, if the Subsequent Exchange occurs)
Preferred Shares (or less than 1,000 Preferred Shares at any
one time) during any calendar month or (ii) any Preferred
Shares into CMI common stock if such conversion would result
in Fortis owning 5% or more of CMI's then outstanding common
stock.
CONVERSION
SETTLEMENT: Upon conversion, Fortis shall receive the common shares and
accrued and unpaid dividends on the Series E Preferred
Shares within five business days following completion of the
Conversion Pricing Period.
<PAGE>
CONVERSION PRICE: Fortis may convert its Preferred Shares into common
stock, which will not require registration to trade, at a
price per share equal to the Closing Trade Price for a Valid
Trading Day within the Conversion Pricing Period mutually
acceptable to CMI and Fortis or, if no Closing Trade Price
is mutually acceptable to CMI and Fortis, the Average
Closing Trade Price of CMI common stock over the applicable
Conversion Pricing Period.
CLOSING TRADE The last trade price for CMI common shares (a) as
PRICE: reported on the stock exchange composite tape, or (b) if the
CMI common stock is traded over-the-counter, the last
reported bid quotation for the common stock or the survivor
common stock as the case may be, for such trading day.
AVERAGE CLOSING Calculated by dividing (i) the sum of the closing
TRADE PRICE: trade prices as reported on the stock exchange
composite tape for CMI common stock on each Valid Trading
Day during the applicable Conversion Pricing Period, by (ii)
the total number of Valid Trading Days in such Conversion
Pricing Period.
CONVERSION 21 trading days preceding the date of delivery of the notice
PRICING PERIOD: of conversion, subject to earlier termination as agreed upon
by CMI and Fortis.
VALID Any trading day during a Conversion Pricing Period in which
TRADING DAY: either (i) the Minimum Daily Price has been exceeded,
or (ii) the Minimum Daily Price has not been exceeded and
Fortis and CMI agree to include such day as a Valid Trading
Day in such Conversion Pricing Period.
MINIMUM Either (i) 75% of the Closing Trade Price for the trading
DAILY PRICE: day immediately preceding either the date of delivery
of the Holder Conversion Notice to the Company or the
Mandatory Conversion Date, as the case may be, or (ii) an
amount agreed upon by Fortis and CMI at the beginning of any
Conversion Pricing Period, that shall be applicable for
every trading day during a Conversion Pricing Period.
MANDATORY Any outstanding Preferred Shares will be converted on the
CONVERSION: second anniversary of the Effective Date.
OPTIONAL Upon thirty (30) days prior written notice to Fortis, the
REDEMPTION: Preferred Shares will be redeemable, in whole or in part, at
anytime at CRIIMI MAE's discretion at 106% plus accrued and
unpaid dividends.
<PAGE>
EXHIBIT 4
CHAPTER 11 TREATMENT OF CLAIMS OF SALOMON SMITH BARNEY INC.,
CITICORP REAL ESTATE, INC. AND CITICORP SECURITIES, INC.
CRIIMI MAE Inc. ("CMI"), on the one hand, and Salomon Smith Barney Inc.
("SSB"), Citicorp Real Estate, Inc. ("CREI") and Citicorp Securities, Inc.
("CSI"), on the other hand, (collectively "CSI") agree to the following terms
and conditions for the treatment of the claims of CSI in the Debtors' Third
Amended Joint Plan of Reorganization filed by CMI and the Official Committee
of Equity Security Holders of CRIIMI MAE Inc. (the "Equity Committee"). This
Term Sheet is subject to the filing of a plan of reorganization and
disclosure statement consistent with the terms and conditions set forth
herein.
OVERVIEW: Subject to the conditions outlined in this Term Sheet, CMI
and CSI will support a Third Amended Plan of
Reorganization filed by CMI, CRIIMI MAE Management, Inc.,
CRIIMI MAE Holdings II, LP, (together, the "Debtors") (the
"Third Amended Plan") and the Equity Committee providing
for CSI to receive payment in full and final satisfaction
of their Class A1 Class A10 and any remaining claims on
or before the Effective Date (collectively, the "Claims")
of the following: (a) all principal and interest owing on
the CMM 1998-1 Classes F through J and IO Bonds (the
"Retained Bonds"), the MCFI 1998-MC1 Classes H through M
Bonds (the "MC1 Bonds") and the MCFI 1998-MC2 Classes F
through K Bonds (the "MC2 Bonds") (collectively the
"Bonds"); (b) all principal and non-default interest
related costs and expenses (including attorneys fees and
costs in the approximate amount of $15,000) owing on
account of the Brick Church Loan Agreement; and (c) the
payment of $4,000,000 in cash.
CALCULATION
OF INTEREST: The interest owing to CSI on account of the MC1, MC2 and
Retained Bonds shall be calculated at the contract
non-default rate of interest with all payments from the MC1
and MC2 bonds received by CSI since the Petition Date
credited by CSI as if CSI had applied them when received
to reduce principal and interest owing on such Bonds.
Following execution of this Term Sheet, the Debtors will
file a Stipulation with the Court authorizing SSB to
apply all payments it has received and that it receives
in the future from the MC1 and MC2 bonds to the payment
of principal and
<PAGE>
interest in accordance with the provisions of this Term
Sheet.
BRICK CHURCH: CREI shall be repaid in full on or before the Effective
Date all amounts owing pursuant to the Guaranty of
Payment dated January 15, 1998 made by CMI to CREI
including, if unpaid by CRIIMI MAE Brick Church, Inc.
non-default interest and related costs and expenses
(including attorneys fees and costs estimated to be
approximately $15,000).
REMAINING
CLAIMS: CSI will be paid $4,000,000 in cash on the Effective Date in
full and final satisfaction of all remaining asserted or
unasserted claims of CSI, CREI or SSB in the Debtors'
cases. These claims shall include, without limitation, all
claims asserted by SSB for the payment of attorneys' fees,
deficiency amounts and unpaid exit fees relating to the
Stipulation and Consent Order Regarding Mortgage Loan
Origination Agreement with CREI and the Order Regarding Sale
of Certain Triple B Bonds.
BOND SALES: SSB will cooperate with CMI to sell the Bonds prior to the
Effective Date. If any of the Bonds are sold or
refinanced prior to the Effective Date, CSI will be paid an
amount of money corresponding to the amount of outstanding
principal and interest (as calculated above) then owing with
respect to the Bonds that are sold. The remaining proceeds
from the sale of the Bonds shall be placed in an interest
bearing escrow account to which CSI's lien claim with
respect to the Bonds prior to their sale shall, pending
further order of the Bankruptcy Court, attach to the funds
in the account to the same extent, and with the same
validity such claim had with respect to the Bonds, SSB and
CMI will cooperate and take all actions necessary to
facilitate the sale or refinancing of the Bonds.
RETAINED BOND
LITIGATION: The adversary proceeding between CMI and CSI in connection
with the Retained Bonds, styled CRIIMI MAE INC. V. CITICORP
SECURITIES, INC., Adv. No. 98-1637 (DK) will be dismissed on
the Effective Date.
2
<PAGE>
Interpleaded
Funds: On the Effective Date, CSI will release all
claims to the funds interpleaded with the
Bankruptcy Court in Adversary Proceeding No.
98-1605 (DK) and will cooperate with CMI to
obtain dismissal of the action.
BBB Bonds: SSB owes CMI certain funds from the re-sale of
the BBB Bonds which will be paid to CMI prior to
the Effective Date.
CRIIMI MAE Inc.
By: /s/
-----------------------------
David B. Iannarone
Senior Vice President
General Counsel
CRIIMI MAE MANAGEMENT, Inc.
By: /s/
-----------------------------
David B. Iannarone
Senior Vice President
General Counsel
CRIIMI MAE HOLDINGS II, L.P.
By: /s/
-----------------------------
David B. Iannarone
Senior Vice President
General Counsel
SALOMON SMITH BARNEY INC.
By: /s/
-----------------------------
D. Le Page
CITICORP REAL ESTATE, INC.
By: /s/
-----------------------------
Michael W. Broido, Vice President
CITICORP NORTH AMERICA, INC.
By: /s/
-----------------------------
Charles Durans
<PAGE>
EXHIBIT B
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
CRIIMI MAE INC.
Unaudited ProForma Condensed Consolidated Balance Sheet (Net of Match Funded
Debt or "MFD")
AMOUNTS IN MILLIONS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
MATCH FUNDING 12/31/1999 PROFORMA ADJ. 9/30/2000 EMERGENCE 9/30/2000
12/31/1999 RECLASS NET OF MFD 01/00 TO NET PROFORMA ADJUSTMENTS REORGANIZED
9/00 (1) (2)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and Cash Equivalents 91.6 - 91.6 114.9 206.6 (183.0) 23.5
CMBS Assets 1,179.3 (278.2) 901.1 (355.2) 545.9 - 545.9
Insured Mtg Securities 394.9 (378.7) 16.1 (4.1) 12.0 - 12.0
Originated Loans 470.2 (399.8) 70.4 (70.4) - - -
Equity Basis Subsidiaries 34.9 - 34.9 (1.6) 33.3 - 33.3
Receivables and Other Assets 122.8 (7.6) 115.2 (57.2) 58.0 - 58.0
----------------------------------------------------------------------------------------------------
TOTAL ASSETS 2,293.7 (1,064.2) 1,229.4 (373.6) 855.8 (183.0) 672.8
----------------------------------------------------------------------------------------------------
LIABILITIES:
Accounts and Other Payables 92.0 (7.6) 84.4 (36.7) 47.7 (35.7) 12.0
CBO Debt-CMBS 278.2 (278.2) - - - - -
CMO Debt-Insured Mtg Securities 378.7 (378.7) - - - - -
CMO Debt-Originated Loans 399.8 (399.8) - - - - -
------ ------- ---- ---- ---- ---- -----
1,056.6 (1,056.6) - - - - -
Secured Financing 732.9 - 732.9 (363.4) 369.5 (369.5) -
Unsecured Notes 100.0 - 100.0 - 100.0 (100.0) -
Other Unsecured Debt 91.0 - 91.0 3.8 94.9 (94.9) -
Other Secured Debt 1.8 - 1.8 (1.8) - - -
---- ---- ---- ----- ---- ---- ----
925.7 - 925.7 (361.3) 564.4 (564.4) -
Merrill/GACC Debt (new) - - - - - 269.5 269.5
Note A (new) - - - - - 105.0 105.0
Note B (new) - - - - - 50.5 50.5
---- ---- ---- ---- ---- ----- -----
- - - - - 425.0 425.0
Total Liabilities 2,074.3 (1,064.2) 1,010.1 (398.0) 612.0 (175.0) 437.0
SHAREHOLDERS' EQUITY:
Preferred Equity Face Value 60.2 - 60.2 - 60.2 - 60.2
Dividend Preferred Equity Face Value 8.5 - 8.5 15.9 24.4 - 24.4
Common Equity 150.6 - 150.6 8.5 159.2 (8.0) 151.2
------ ---- ------ ---- ------ ----- ------
159.1 - 159.1 24.4 183.5 (8.0) 175.6
----------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY 2,293.7 (1,064.2) 1,229.4 (373.7) 855.8 (183.0) 672.8
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents activities from January 1, 2000 to September 30, 2000 exclusive
of cash payment and debt issuance to creditors pursuant to the Plan.
(2) Represents cash payments and debt issuance to creditors pursuant to the
Plan.
<PAGE>
The unaudited pro forma condensed consolidated balance sheet (the "Pro
Forma Balance Sheet") presented on the preceding page is based upon the
historical balance sheet of the Company as of December 31, 1999. The Pro Forma
Balance Sheet gives effect to (i) the reclassification of non-recourse debt and
related interest payable against the corresponding CMBS, Insured Mortgage, and
Originated Loan assets as reported on the Company's GAAP basis consolidated
balance sheet as of December 31, 1999 (the "Match Funding Reclassification"),
(ii) pro forma adjustments to reflect the anticipated results of operations from
December 31, 1999 through September 30, 2000 (the "Assumed Effective Date"), and
(iii) the reorganization, as detailed in the Plan, assuming the Plan becomes
effective on the Assumed Effective Date (collectively, the "Pro Forma
Adjustments"). Although the Company's financial results are not normally
presented reflecting the Match Funding Reclassification, the Company believes
that this presentation more clearly depicts the economic impact of the
transactions contemplated by the Plan.
The Company does not qualify for "fresh start reporting" under the
provisions of the American Institute of Certified Public Accountants' Statement
of Position ("SOP") 90-7 "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" because (i) the Company's reorganization value of
assets immediately before the date of Confirmation is expected to exceed the
total of all post-petition liabilities and allowed Claims, and (ii) the Holders
of existing voting shares immediately before Confirmation will receive more than
50 percent of the voting shares of the emerging entity.
THE PRO FORMA BALANCE SHEET IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY
AND SHOULD NOT BE CONSTRUED TO BE AN ACTUAL STATEMENT OF THE FINANCIAL
CONDITION, OR REFLECT OPERATING RESULTS, OF THE COMPANY ASSUMING THE
TRANSACTIONS DESCRIBED HEREIN ARE CONSUMMATED ON THE RESPECTIVE DATES INDICATED,
AND IS NOT INTENDED TO BE PREDICTIVE OR REPRESENTATIVE OF THE FINANCIAL
CONDITION OR RESULTS OF OPERATIONS OF THE COMPANY AT ANY FUTURE DATE OR FOR ANY
FUTURE PERIOD.
The Pro Forma Adjustments are based on available information and upon
certain assumptions that the Company believes are reasonable under the
circumstances. The Pro Forma Balance Sheet and accompanying notes should be read
in conjunction with the historical consolidated financial statements of the
Company, including the notes thereto, and the other information pertaining to
the Company appearing elsewhere in this Disclosure Statement. In addition, the
independent public accountants of the Company, Arthur Andersen LLP, have neither
examined nor compiled or provided any other assurance report on the Pro Forma
Balance Sheet in accordance with Generally Accepted Auditing Standards, and
accordingly, assume no responsibility for it.
2
<PAGE>
PROJECTED FINANCIAL INFORMATION
CRIIMI MAE INC.
Projected Condensed Consolidated Basis Balance Sheet-Net of Match Funded Debt
("MFD")
AMOUNTS IN MILLIONS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
EFFECTIVE DATE 1 2 3 4 5 6 7 8
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents 23.5 23.5 16.7 8.9 5.0 3.7 20.1 30.3 41.4
CMBS Assets Net of MFD 545.9 549.0 552.5 558.5 566.9 578.1 591.3 606.9 623.5
Insured Mortgage Securities, Net of MFD 12.0 11.3 10.8 10.3 10.0 9.7 9.5 9.3 9.2
Equity Basis Subsidiaries 33.3 32.8 32.9 32.6 31.8 30.6 29.0 27.0 24.7
Receivables and Other Assets 58.0 52.8 48.5 44.3 42.0 44.5 40.0 38.1 36.9
-------------------------------------------------------------------------------------------
TOTAL ASSETS 672.8 669.5 661.5 654.6 655.7 666.5 689.9 711.6 735.8
-------------------------------------------------------------------------------------------
Accounts and Other Payables 12.0 16.3 17.3 15.2 14.8 11.3 12.0 12.0 12.0
Merrill/GACC Debt 269.5 244.5 219.4 206.1 - - - - -
Note A 105.0 97.3 85.6 64.6 47.5 - - - -
Note B 50.5 54.2 58.1 62.3 66.8 71.7 - - -
Merrill/GACC Replacement Debt - - - - 193.5 176.6 158.0 137.5 115.0
Note A Replacement Debt - - - - - 43.9 43.9 43.9 43.9
Note B Replacement Debt - - - - - - 79.1 79.1 79.1
------ ------ ------ ------ ------ ------ ------- ------- -------
425.0 396.0 363.1 333.0 307.8 292.2 281.0 260.6 238.1
Preferred Equity Face Value 60.2 44.9 39.9 39.9 39.9 39.9 39.9 39.9 39.9
Dividend Preferred Equity Face Value 24.4 24.4 24.4 24.4 24.4 24.4 24.4 24.4 24.4
Common Equity 151.2 187.9 216.9 242.2 268.8 298.8 332.6 374.9 421.5
------ ------ ------ ------ ------ ------ ------ ------ -----
175.6 212.3 241.3 266.6 293.2 323.2 357.0 399.2 445.9
-------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 672.8 669.5 661.5 654.6 655.7 666.5 689.9 711.6 735.8
-------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
CRIIMI MAE INC.
Projected Cashflows - Net of Match Funded Debt ("MFD")
AMOUNTS IN MILLIONS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASHFLOWS
CBO 1 Retained Bonds 11.0 10.9 10.9 11.0 10.8 11.3 11.4 11.2
CBO 2 Retained Bonds 72.0 72.1 72.2 72.0 71.9 71.7 71.3 72.1
Nomura 1998 D-6 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
Effect of Credit Losses and Int.
Shortfalls on Cashflow (4.9) (5.6) (8.4) (10.6) (12.4) (13.8) (14.6) (14.8)
----- ----- ----- ------ ------ ------ ------ ------
$ 80.9 $ 80.1 $ 77.5 $ 75.2 $ 73.1 $ 72.0 $ 70.8 $ 71.3
Insured Mortgage Securities - Net of MFD 3.5 3.2 3.0 2.8 2.6 2.4 2.3 2.1
AIM Funds Gen. Ptnrship and Investment
LP Interests 3.1 2.5 1.9 1.5 1.2 1.0 0.8 0.6
Mezzanine Loans 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
Short-Term Interest Income 1.6 1.4 0.9 0.5 0.3 0.8 1.7 2.4
Servicing Affiliates distributions - - - - - - - -
---- ---- ---- ---- ---- ---- ---- ----
90.2 88.3 84.4 81.0 78.3 77.2 76.6 77.5
INTEREST EXPENSE
Merrill/GACC Debt (25.8) (23.3) (21.4) (20.1) - - - -
Note A (11.9) (10.7) (8.8) (6.6) (5.4) - - -
Note B (6.8) (7.3) (7.8) (8.4) (14.0) (4.8) - -
Merrill/GACC Extension Fees - (3.3) (6.4) (2.9) - - - -
Note A Extension Fees - - - (0.7) (1.3) - - -
Note B Extension Fees - - - (1.0) (3.3) - - -
Merrill/GACC Replacement Debt - - - - (19.4) (17.7) (15.9) (13.8)
Note A Replacement Debt - - - - - (5.2) (5.2) (5.2)
Note B Replacement Debt - - - - - - (10.3) (10.3)
LIBOR Cap Hedge Cashflows 0.4 0.0 - - - - - -
---- ---- ---- ---- ---- ---- ---- ------
(44.1) (44.6) (44.4) (39.7) (43.5) (27.7) (31.3) (29.3)
---------------------------------------------------------------------------------------
NET INTEREST MARGIN 46.1 43.6 40.0 41.4 34.8 49.5 45.3 48.2
---------------------------------------------------------------------------------------
General Operating & Administrative (10.0) (10.0) (10.0) (10.2) (10.8) (11.0) (11.2) (11.2)
---------------------------------------------------------------------------------------
CASHFLOW FROM OPERATIONS 36.1 33.6 30.0 31.2 23.9 38.5 34.1 37.0
---------------------------------------------------------------------------------------
DEBT AMORTIZATION
Merrill/GACC Debt (25.0) (25.1) (13.3) (14.6) - - - -
Note A Miscellaneous Collateral Amortization (7.7) (6.8) (6.0) (5.4) (4.9) - - -
Note A Other Scheduled Amortization - (5.0) (15.0) (11.6) - - - -
Merrill/GACC Replacement Debt
- - - - (16.9) (18.6) (20.4) (22.5)
---- ---- ---- ---- ------ ------ ------ ------
(32.6) (36.9) (34.3) (31.6) (21.8) (18.6) (20.4) (22.5)
DEBT FACILITY MATURITIES/REFINANCING
Principal Amount of Replacement Financing - - - 193.5 43.9 79.1 - -
Replacement Financing Origination Fees - - - (1.9) (1.3) (2.2) - -
Emergence Debt Principal Repayments - - - (191.5) (42.6) (77.0) - -
---- ---- ---- ------- ------ ------ ---- ----
Net Proceeds - - - - - - - -
---------------------------------------------------------------------------------------
Cashflow Available to Equity 3.5 (3.3) (4.3) (0.5) 2.2 19.9 13.7 14.5
---------------------------------------------------------------------------------------
DIVIDENDS
Dividend Preferred Cash Dividends (3.5) (3.5) (3.5) (3.5) (3.5) (3.5) (3.5) (3.5)
---------------------------------------------------------------------------------------
NET INCR/DECR IN CASH - (6.8) (7.8) (3.9) (1.3) 16.4 10.2 11.0
---------------------------------------------------------------------------------------
CASH RECONCILIATION
Opening Balance 23.5 23.5 16.7 8.9 5.0 3.7 20.1 30.3
Net Increase/Decrease - (6.8) (7.8) (3.9) (1.3) 16.4 10.2 11.0
---------------------------------------------------------------------------------------
ENDING CASH BALANCE 23.5 16.7 8.9 5.0 3.7 20.1 30.3 41.4
---------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
CRIIMI MAE INC.
Projected Tax Basis (Loss) Income - Net of Match Funded Debt ("MFD")
AMOUNTS IN MILLIONS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TAX BASIS INCOME
CBO1, CBO2, and Nomura NR 112.0 115.4 120.2 123.7 127.5 131.3 131.2 128.3
Effect of Credit Losses and Int.
Shortfalls on Tax Income (2.6) (5.8) (9.2) (12.0) (14.5) (16.4) (17.7) (18.2)
-------- -------- -------- -------- -------- -------- -------- --------
$ 109.5 $ 109.6 $ 111.0 $ 111.7 $ 113.0 $ 114.9 $ 113.4 $ 110.1
Insured Mortgage Securities - Net of MFD 2.8 2.6 2.4 2.3 2.1 2.0 1.9 1.8
AIM Funds Gen. Ptnrship and Investment
LP Interests 1.0 0.8 0.6 0.5 0.4 0.3 0.2 0.2
Mezzanine Loans and Short Term Interest 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
Short-Term Interest Income 1.6 1.4 0.9 0.5 0.3 0.8 1.7 2.4
Servicing Affiliates - Equity Income 1.6 1.7 0.9 0.2 (0.4) (0.9) (1.4) (1.9)
-------- -------- -------- -------- -------- -------- -------- --------
117.6 117.2 117.0 116.3 116.5 118.1 116.9 113.7
INTEREST EXPENSE
Merrill/GACC Debt (25.8) (23.3) (21.4) (20.1) - - - -
Note A (11.9) (10.7) (8.8) (6.6) (5.4) - - -
Note B (10.5) (11.2) (12.0) (12.9) (13.8) (15.1) - -
Merrill/GACC Extension Fees - (3.3) (6.4) (2.9) - - - -
Notes A&B Extension Fees - - - (1.7) (4.7) - - -
Merrill/GACC Replacement Debt - - - - (19.4) (17.7) (15.9) (13.8)
Note A Replacement Debt - - - - - (5.2) (5.2) (5.2)
Note B Replacement Debt - - - - - - (10.3) (10.3)
Gain on LIBOR Cap Hedges 0.4 0.0 - - - - - -
Amort of Deferred Costs (2.4) (1.4) (1.3) (1.3) (1.6) (1.6) (1.9) (1.2)
-------- -------- -------- -------- -------- -------- -------- --------
(50.1) (50.0) (50.0) (45.5) (44.9) (39.6) (33.2) (30.4)
---------------------------------------------------------------------------------------
NET INTEREST MARGIN 67.5 67.2 67.0 70.8 71.5 78.5 83.6 83.3
---------------------------------------------------------------------------------------
General Operating & Administrative (10.0) (10.0) (10.0) (10.0) (10.0) (10.0) (10.0) (10.0)
Credit Loss Deduction - Estimated (2.4) (8.0) (12.9) (13.7) (11.4) (10.0) (7.8) (5.3)
Amortization of Mark to Market Adjustment (119.5) (119.5) (119.5) (29.9) - - - -
Deductions for Dividends Paid - - - (7.8) (7.8) (7.8) (7.8) (7.8)
NOL Carryforward Utilization - - - (8.5) (38.1) (45.7) (52.3) (54.2)
---------------------------------------------------------------------------------------
TAXABLE (LOSS) INCOME (1) (64.4) (70.2) (75.4) 0.9 4.2 5.1 5.8 6.0
---------------------------------------------------------------------------------------
DIVIDENDS
Series B (4.3) (4.3) (4.3) (4.3) (4.3) (4.3) (4.3) (4.3)
Series E (1.5) (0.2) - - - - - -
Series F and Series G Dividend Preferred (3.5) (3.5) (3.5) (3.5) (3.5) (3.5) (3.5) (3.5)
---------------------------------------------------------------------------------------
Subtotal (9.3) (8.0) (7.8) (7.8) (7.8) (7.8) (7.8) (7.8)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
CASH DIVIDENDS TO COMMON - - - - - - - -
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
NET OPERATING LOSS
NOL Created (64.4) (70.2) (75.4) - - - - -
Taxable Income before NOL Usage - - - 9.4 42.3 50.7 58.1 60.2
Alternative Minimum Tax Limitation - - - (0.9) (4.2) (5.1) (5.8) (6.0)
-------- -------- -------- -------- -------- -------- -------- --------
NOL Utilized - - - 8.5 38.1 45.7 52.3 54.2
-------- -------- -------- -------- -------- -------- -------- --------
NOL Carryforward Amount (2) (133.1) (203.4) (278.8) (269.3) (227.0) (176.3) (118.2) (58.0)
---------------------------------------------------------------------------------------
</TABLE>
(1) - The Company, due to Alternative Minimum Tax NOL usage limitations,
accrues and pays tax at 20% of the AMT Taxable Income beginning in
Period 4 of this Projection Statement.
(2) - Beginning in Period 4, this amount represents the AMT NOL carryforward.
5
<PAGE>
The preceding projected financial data (the "Projections") were
prepared by CRIIMI MAE based upon various assumptions including assumptions
about the economy and financial markets in general, and the related effect on
the Reorganized Company's future financial condition and results of operations.
The Projections are provided for informational purposes only. The
Company does not generally publish its business plans and strategies or make
external projections of its anticipated financial position or results of
operations. Accordingly, the Company does not intend to update or otherwise
revise the Projections to reflect circumstances existing since their preparation
in July 2000, or to reflect the occurrence of unanticipated events, even in the
event that any or all of the underlying assumptions are shown to be in error.
Furthermore, the Company does not intend to update or revise the Projections to
reflect changes in general economic or industry conditions. However, the
Company's regular quarterly and annual financial statements, and the
accompanying discussion and analysis, contained in the Company's Quarterly SEC
Reports on Form 10-Q and Annual Reports on Form 10-K, will contain disclosure
concerning the Company's actual financial condition and operating results during
the period covered by such Reports.
The Projections were prepared for the limited purpose of providing
information in conjunction with the Plan. Accordingly, the Projections were not
prepared to comply with guidelines for prospective financial statements
published by the American Institute of Certified Public Accountants regarding
financial projections, and are not intended to comply with Rule 11-02 of
Regulation S-X of the SEC. The Company believes that while not consistent with
its traditional GAAP and SEC reporting, the Projections present the net assets
and recourse debt obligations in a more relevant and understandable format for
the purpose of this Disclosure Statement. The Company's independent public
accountants, Arthur Andersen LLP, have neither compiled nor examined, or
provided any other assurance report in accordance with Generally Accepted
Auditing Standards, on the accompanying projected financial information, to
determine the reasonableness thereof and, accordingly, have not expressed any
opinion or any other form of assurance with respect thereto.
Projected unaudited consolidated financial statements for the Company
are included for eight annual periods commencing on the Assumed Effective Date.
Additional information relating to the principal assumptions used in
preparing the Projections is set forth below. See "CERTAIN RISK FACTORS" for a
discussion of various other factors that could materially affect the Company's
financial condition, results of operations, businesses, prospects and
securities.
The following points represent the significant assumptions underlying
the Pro Forma Balance Sheet and Projections.
6
<PAGE>
SIGNIFICANT ASSUMPTIONS RELATED TO THE PRO FORMA BALANCE SHEET AND PROJECTIONS
PRE-EMERGENCE ASSET SALE TRANSACTIONS:
The Projections assume that the CMBS Sale Portfolio is sold as follows:
- Morgan Wells and Lehman/First Union Bonds were sold in February and April
2000, respectively.
- Balance of the CMBS Sale Portfolio is sold on or before September 30, 2000.
- The combined sales price of the CMBS Sale Portfolio, inclusive of the
Company's economic interest in the Originated Loans (CMO-IV), is
approximately $433 million, $351 million of which is used to pay related
secured debt.
General:
- THE DEBTORS' PLAN IS EFFECTIVE ON SEPTEMBER 30, 2000 (THE "ASSUMED
EFFECTIVE DATE").
- THE PRO FORMA BALANCE SHEET AND THE PROJECTIONS ARE PRESENTED NET OF THE
NON-RECOURSE DEBT ASSOCIATED WITH THE COMPANY'S ASSETS. THE NON-RECOURSE
DEBT WAS ISSUED IN RELATION TO THE COMPANY'S 1996 AND 1998 CMBS
RE-SECURITIZATION TRANSACTIONS (CBO-1 AND CBO-2), THE INSURED MORTGAGE
SECURITIES (CMO-I, CMO-II, CMO-III) AND THE ORIGINATED LOANS (CMO-IV),
COLLECTIVELY ("THE MATCH FUNDED DEBT"). IT IS ANTICIPATED THAT THE MATCH
FUNDED DEBT AND CORRESPONDING ASSETS RELATED TO THE CMO-IV TRANSACTION WILL
BE REMOVED FROM THE COMPANY'S BALANCE SHEET WHEN SUCH ECONOMIC INTERESTS
ARE SOLD.
- THE PRO FORMA BALANCE SHEET ANTICIPATES THE RECOGNITION OF NEW DEBT AT FAIR
VALUE, WITH THE RELATED ORIGINATION AND PROFESSIONAL FEES RECOGNIZED AS
CURRENT EXPENSE ITEMS AS OPPOSED TO CAPITALIZED ITEMS IN ACCORDANCE WITH
SOP 90-7. THE COMPANY DOES NOT CURRENTLY ANTICIPATE A DIFFERENCE BETWEEN
THE NEW DEBT'S FAIR VALUE AND ITS PREVIOUS CARRYING AMOUNT, ALTHOUGH THERE
CAN BE NO ASSURANCE THAT SUCH A DIFFERENCE WILL NOT OCCUR. ANY DIFFERENCE
BETWEEN THE NEW DEBT'S FAIR VALUE AND ITS PREVIOUS CARRYING AMOUNT WILL BE
RECOGNIZED AS AN EXTRAORDINARY ITEM.
- For all Projection periods, the Company assumes that one month LIBOR
remains constant at 6.8%. This LIBOR benchmark is utilized to calculate the
interest cost on the Merrill/GACC Debt facility, its successor facility,
and as a proxy for the Series E Preferred Stock floating rate dividend
accrual benchmark, and to estimate the Company's reinvestment income.
THE COMPANY'S BUSINESS PLAN:
The Projections are a base line measure and assume that no additional purchases
of CMBS are made during the Projection period. It is not the Company's intention
to accumulate net excess cash generated from its existing assets; rather, the
base line Projections are intended to demonstrate the amount of excess cash that
the core group of assets would, based upon assumptions, generate under the
Company's reorganized debt structure. Any excess cash generated by the core
group of assets, exclusive of that used to service the Company's debt, pay
operating expenses, or make required cash dividend payments, is assumed to be
retained in cash or short-term investments and reinvested at one month LIBOR.
Although the Company contemplates that such cash would, in part, fund its
securities trading, acquisition, and other investment activities, it has not
projected the results of any such activities. The Company expects to continue to
operate its business in such a manner that it will not be required to register
as an investment company under the Investment Company Act of 1940 and the rules
and regulations thereunder.
7
<PAGE>
FINANCIAL STATEMENT PRESENTATION
GENERAL:
- The Projections have not been prepared or presented in a manner consistent
with the Company's traditional GAAP reporting, although the Company
believes that the method of presentation (reflecting the Match Funding
Reclassification) is more relevant and understandable in presenting the
economics of the transactions contemplated by the Plan.
- The periods presented are annual periods beginning with the Assumed
Effective Date. The years presented do not represent calendar years.
BALANCE SHEETS:
- The Company's assets, as presented in the Pro Forma Balance Sheet at
December 31, 1999, equal the reported fair value, or amortized cost as
appropriate, less the amortized cost of the related Match Funded Debt,
arriving at a Net of Match Funded Debt presentation. The resulting asset
presentation is subsequently adjusted for discount and/or premium
amortization to reflect the passage of time in the Projection periods. The
projected balance sheet treatment of the CMBS and Insured Mortgage
Securities, while reflective of the normal estimated discount and/or
premium amortization related to the assets, is not intended to represent
the fair value of the Company's retained portion of such assets for any
given Projection period.
- Liabilities presented on the Pro Forma and projected balance sheets are
only those liabilities that are recourse to the Company.
PROJECTED CASHFLOWS:
- The Projected Cashflows are presented reflecting the Match Funding
Reclassification.
- For purposes of the Projections, it is assumed that the Company neither
receives, nor funds, any cash to or from its primary servicing affiliate,
CRIIMI MAE Services Limited Partnership ("CMSLP").
PROJECTED TAX BASIS (LOSS)/INCOME:
- Tax Basis (Loss)/Income presentation is presented reflecting the Match
Funding Reclassification.
- For purposes of the Projections, the effect of "writing down" the CMBS
portfolio, resulting from the Company's trader status election as discussed
below, is in effect throughout the Projection period.
IMPACT OF TRADER ELECTION:
- The Company has elected to be classified as a securities trader for tax
purposes.
- Such election impacts the Projections primarily through:
- Recognition of approximately $478 million of mark-to-market
adjustments to the tax basis of the CMBS securing the Company's CBO
assets on a straight line basis over years one through four of the
Projections;
- Corresponding downward adjustment of the tax basis of the Company's
retained CMBS assets;
- Subsequent to the $478 million mark-to-market adjustment, a relative
increase in the tax yield and taxable income of the Company's CMBS due
to such decrease in tax basis;
- Creation of tax basis net operating losses for the first four years of
the Projections, primarily resulting from the recognition of the
aforementioned mark-to-market adjustments. Any accumulated and unused
net operating loss carryforward is utilized to offset the majority of
taxable income in periods five through eight of the Projections.
8
<PAGE>
ASSETS:
CMBS ASSETS (AND RELATED CREDIT LOSSES):
- The Projections assume that the Company's CMBS assets, after giving effect
to the sale of the CMBS Sale Portfolio, include the retained bonds from its
CBO-1 and CBO-2 resecuritizations, and the unrated bond from the NASC 1998
D-6 securitization. Economically, the Company holds approximately $111
million, $1.1 billion, and $47 million face amount of bonds from CBO-1,
CBO-2 and NASC 1998 D-6, respectively. Collectively, the Company's CMBS
have a weighted average coupon of approximately 6.8%.
- The Projections utilize the Company's most recent estimates of future
credit losses on the CMBS assets described above.
- The tax basis credit loss deductions are assumed to be realized through a
proportionate reduction in the then current tax basis of the bonds when
compared to the assumed face amount of the loss.
- The magnitude and timing of credit losses have a direct impact on the
Company's cashflow. The Company projects interest shortfalls during the
periods covered by the Projections that are equal to approximately one
year's coupon interest income on the succeeding year's assumed CMBS
principal loss. The Company assumes that such interest shortfalls on
delinquent loan payments are not recovered.
INSURED MORTGAGE SECURITIES:
- Prepay at a constant prepayment rate ("CPR") of 10% during the period
covered by the Projections.
- The assets are presented reflecting the Match Funding Reclassification on
the balance sheet.
- The face amount of the mortgage securities is assumed to be $393 million
with corresponding aggregate CMO bond balances of $379 million.
- The weighted average coupon on the collateral is assumed at 7.7% and the
weighted average coupon on the related bonds is assumed at 7.0%.
EQUITY BASIS SUBSIDIARIES:
- The Company, through CRIIMI Inc., owns general partnership interests in AIM
84, AIM 85, AIM 86, and AIM 88. Such interests represent 2.9%, 3.9%, 4.9%
and 4.9% of the AIM fund net cashflow respectively. In addition, through
CRI/AIM Investment LP, the Company owns a 20% interest in the advisor to
the AIM funds. The advisor earns a fee based on AIM fund invested asset
balances. The Projections include cashflows related to the Company's
ownership interests, assuming a 21% CPR on the mortgages and invested
assets underlying the AIM funds.
- The Company carries its investment in servicing affiliates, CRIIMI MAE
Services L.P. and CRIIMI MAE Services Inc., utilizing the equity method of
accounting. For purposes of the Projections, it is assumed that the Company
neither receives, nor funds, any cash to or from these servicing
affiliates.
RECEIVABLES AND OTHER ASSETS:
- Pro forma Receivables and Other Assets include the following approximate
amounts:
- $14 million of intangible costs related to the merger of certain
business in 1995, and $14 million of debt issuance and other deferred
costs,
- $7 million of Mezzanine Notes that generate cashflow of approximately
15% per annum during the periods covered by the Projections,
- $12 million of miscellaneous assets, including a $3 million Deferred
Compensation Note Receivable, and
- $11 million of normalized interest receivable on assets.
Intangible assets are amortized in the Projections, while Mezzanine Loans
and Interest Receivable are assumed to remain constant throughout the
Projection period.
9
<PAGE>
LIABILITIES:
ACCOUNTS AND OTHER PAYABLES:
- Pro forma Accounts and Other Payables include the following approximate
amounts:
- $5 million of normalized accounts payable,
- $4 million of normalized interest payable on recourse debt,
- $3 million of CRIIMI MAE Management, Inc. note payable (offset through
other assets),
- Accounts and Other Payables are assumed to remain constant throughout
the Projection period with the exception of increases/decreases
reflecting the accrual and payment of extension fees to Merrill/GACC
and Notes A and B as discussed below.
Debt Facilities
MERRILL LYNCH/GACC DEBT: (SEE PLAN SECTION IV)
- Accrues and pays an interest rate of one month LIBOR plus 325bps per annum.
- Interest accrues on the average balance outstanding as of the beginning and
end of each period presented.
- Principal repayments are made in the following manner:
- Year 1 - All net cash flow available to the Company, after maintenance
of working capital, and the payment of:
- all interest due on debt,
- general and administrative expenses,
- Note A Miscellaneous Collateral amortization.
- Collectively these items are known as (the "Cash Sweep").
- Year 2 - Merrill/GACC Cash Sweep continues until the aggregate
principal paydown is equal to $50 million, assumed to occur within 24
months of the Assumed Effective Date.
- Years 3 and 4 - Merrill/GACC facility receives principal amortization
assuming the original principal amount is fully amortized, utilizing
mortgage-type amortization, by the 13th anniversary of the Assumed
Effective Date, with the interest rate remaining constant at one month
LIBOR plus 325bps.
- Extension fees are paid in cash to Merrill/GACC, at a rate of 1.5% of
the then outstanding principal balance, at the end of months 24, 30,
36 and 42.
NOTE A: (SEE PLAN SECTION IV)
- 5 year term and an interest rate of 11.75% per annum.
- Interest accrues on the average balance outstanding as of the beginning and
end of each period presented.
- Principal amortization (payable quarterly) beginning in year 1 and
throughout the five year term in an amount equal to the sum of the
following:
- Insured Mortgage Proceeds,
- AIM Fund Proceeds, and
- Mezzanine Note Proceeds.
- Collectively, these items are known as the "Miscellaneous Collateral
Amortization".
- Scheduled amortization payments of $0, $5 million, $15 million, and $15
million payable at the end of years 1, 2, 3 and 4, respectively. No
scheduled amortization is payable in year 5, as the remaining unpaid
principal amount of the note is due at the end of such year. If the Note A
holders do not receive all or any portion of a Scheduled Principal Paydown
in any year and the Miscellaneous Collateral has not been sold, the Note A
holders shall receive additional interest of 200 basis points on any unpaid
amortization amount until such time as the amount is paid. The Projections
make such adjustments where appropriate.
- Extension fees are paid in cash, at a rate of 1.5% of the then outstanding
principal balance, at the end of months 48 and 54.
10
<PAGE>
NOTE B (SEE PLAN SECTION IV)
- 6 year term, a cash interest rate of 13.00%, plus an accretion or negative
amortization rate of 7.00% of the outstanding principal balance.
- Interest is paid semi-annually in arrears through the fifth anniversary of
the Note with interest for the sixth year of the Note payable one-half on
the fifth anniversary of the Note and one-half on maturity date. Both the
cash and non-cash components accrue on the average balance outstanding as
of the beginning and end of each period presented.
- No cash principal amortization during its term.
- Total outstanding principal amount, including all accretion, is paid at the
end of year 6.
- Extension fees are paid in cash, at a rate of 1.5% of the then outstanding
principal balance, at the end of months 48, 54, and 60.
Refinancing of Debt Facilities
MERRILL/GACC REPLACEMENT DEBT:
- At the end of the 4 year period, it is assumed that the outstanding
principal balance of the Merrill/GACC facility is refinanced into a
hypothetical 8 year, fully amortizing facility. The terms of the
Merrill/GACC facility do not provide for any extension beyond the original
4 year period.
- Interest accrues and is payable at the same rate, one month LIBOR plus
325bps.
- An origination fee of 1.0% of the principal balance.
NOTE A REPLACEMENT DEBT:
- At stated maturity, 5 years after the Assumed Effective Date, it is assumed
that the outstanding principal balance is refinanced into a hypothetical
high-yield note. The terms of Note A do not provide for any extension
beyond the original 5 year term.
- Interest accrues and is payable at a rate of 11.75% per annum.
- No principal amortization.
- An origination fee of 3.0% of the principal balance.
NOTE B REPLACEMENT DEBT:
- At stated maturity, 6 years after the Assumed Effective Date, it is assumed
that the outstanding principal balance is refinanced into a hypothetical
high-yield note. The terms of Note B do not provide for any extension
beyond the original 6 year term.
- Interest accrues and is payable at a rate of 13.00% per annum.
- No principal amortization.
- No accretion coupon or negative amortization provisions.
- An origination fee of 3.0% of the principal balance.
11
<PAGE>
Preferred Stock
SERIES B PREFERRED STOCK:
- The entire amount, approximately $39 million face value, of Series B
Preferred Stock remains outstanding throughout the Projection period.
- The Company is seeking approval, through the Plan, to pay dividends on the
Series B Preferred Stock, including those accrued as of the Effective Date
(approximately $8.7 million), in cash or common stock at the Company's
option. It is assumed in the Projections that such dividends are paid in
common stock.
- Dividends accrue at 10.875% per annum prospectively, and are assumed paid
in CRIIMI MAE common stock.
SERIES D PREFERRED STOCK:
- All outstanding shares of Series D Preferred Stock, $10.0 million, are
exchanged for Series E Preferred Stock on a share-for-share basis before
the Assumed Effective Date.
- All accrued but unpaid dividends on the Series D Preferred Stock
(approximately $1.3 million) are paid in CRIIMI MAE common stock on the
Assumed Effective Date.
SERIES E PREFERRED STOCK:
- All accrued but unpaid dividends on the portion of the Series E Preferred
Stock which includes the previously exchanged Series C Preferred Stock
(approximately $1.7 million) are paid in CRIIMI MAE common stock on the
Assumed Effective Date.
- All shares of Series E Preferred Stock, $20.3 million after giving effect
to the exchange of Series D Preferred Stock, are converted into CRIIMI MAE
common stock within 15 months of the Assumed Effective Date.
- The Series E Preferred Stock accrues dividends at a rate of three month
LIBOR plus 250bps per annum after the Assumed Effective Date, and such
accrued dividends are paid in CRIIMI MAE common stock.
SERIES F DIVIDEND PREFERRED STOCK:
- The Company is seeking approval, through the Plan, to pay dividends on the
Series F Dividend Preferred Stock in cash or common stock at the Company's
option.
- The $5.9 million of currently outstanding Series F Dividend Preferred Stock
accrues dividends at a rate of 12% per annum, and the Projections assume
that such dividends are paid in cash.
SERIES G DIVIDEND PREFERRED STOCK:
- It is assumed that approximately $37 million of Series G Dividend Preferred
Stock is issued in 2000 in relation to 1999 taxable income.
- Dividends on the Series G Dividend Preferred Stock will be payable in cash
or common stock at the Company's option.
- 50% of the Series G Dividend Preferred Stock is assumed converted into
CRIIMI MAE common stock, and the outstanding balance is assumed to pay
dividends at a rate of 15% per annum. The Projections assume that such
dividends are paid in cash.
Common Stock:
- THE SECURITIES TRADER ELECTION AND REQUIRED RECOGNITION OF MARK-TO MARKET
ADJUSTMENTS CREATE TAX BASIS NET OPERATING LOSSES AND CARRYFORWARDS
THROUGHOUT THE PROJECTION PERIOD. BECAUSE THE COMPANY'S COMMON DIVIDENDS
ARE BASED ON TAXABLE INCOME AND RELATED REIT DISTRIBUTION REQUIREMENTS, NO
DIVIDENDS ARE ASSUMED PAID TO HOLDERS OF THE COMPANY'S COMMON STOCK DURING
THE PROJECTION PERIOD.
12
<PAGE>
GENERAL OPERATING AND ADMINISTRATIVE EXPENSES:
- General operating and administrative expenses represent the normalized
personnel, facility and operating costs the Company anticipates
experiencing. Such amounts approximate $10 million per year.
- General operating and administrative expenses increase beginning in year 4
due to assumed taxes relating to Alternative Minimum Tax usage limitations.
The Projections assume a non-deductible 20% tax on AMT Taxable Income.
- The general operating and administrative costs of operating CMSLP are
included net of revenues in the "Servicing Affiliates" caption in the
Estimated Tax Basis (Loss) Income Projection.
13
<PAGE>
EXHIBIT C
LIQUIDATION ANALYSIS
Section 1129(a) of the U.S. Bankruptcy Code states that the court shall confirm
a plan of reorganization only if certain requirements are met. One of these
requirements (Section 1129(a) (7) (A) (ii)) is that with respect to each
impaired class of claims or interests, each holder of a claim or interest of
such class must accept the plan or receive or retain property of a value, as of
the Effective Date of the plan, that is not less than the amount that holders of
such claims or interests would receive or retain if the Debtors were liquidated
under Chapter 7 on such date.
As previously disclosed in Section VII of the Disclosure Statement, CERTAIN RISK
FACTORS, the value of the Company's Subordinated CMBS and other mortgage assets
can change due to a number of economic factors. These factors include changes in
the underlying real estate, fluctuations in U.S. Treasury rates, and changes in
risk premiums (commonly referred to in industry practice as "spreads") for
purchasing Subordinated CMBS and other mortgage assets. The Company's management
believes that only a limited number of investors currently exist with the real
estate expertise, infrastructure, and available capital required to evaluate and
execute an acquisition of the Company's Subordinated CMBS and other mortgage
assets. Furthermore, there is currently no active secondary market for the
Company's Subordinated CMBS and other mortgage assets. The size of the Company's
portfolio, the unprecedented nature of a liquidation of such portfolio, and the
limited liquidity of the secondary CMBS market results in uncertainty in the
valuation of the Company's portfolio of Subordinated CMBS and other mortgage
assets. The Company's management has prepared its liquidation analysis (the
"Liquidation Analysis") assuming the Company is unable to preserve its REIT
status and a court appointed trustee liquidates the assets of the Debtors'
estate not in a "firesale", but over a period of approximately six months (see
Significant Assumptions in the Notes to Liquidation Analysis).
Underlying the Liquidation Analysis are a number of estimates and assumptions
that, although formulated and considered reasonable by the Debtors, are
inherently subject to significant economic, competitive, and other uncertainties
and contingencies beyond the control of the Debtors. The Liquidation Analysis is
also based on assumptions with regard to liquidation decisions that are subject
to change. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE VALUES REFLECTED IN
THIS LIQUIDATION ANALYSIS WOULD BE REALIZED IN A CHAPTER 7 CASE. ACTUAL RESULTS
COULD VARY MATERIALLY FROM THOSE SHOWN HEREIN.
The Liquidation Analysis has been prepared solely for the purpose of estimating
the distributable liquidation proceeds available in a hypothetical Chapter 7
case and does not necessarily represent values that may be appropriate for any
other purpose. Nothing contained in these valuations is intended nor shall it be
construed to be an admission by the Company for any other purpose. The
independent public accountants of the Company have neither examined nor compiled
or provided any assurance report on the Liquidation Analysis thereon in
accordance with Generally Accepted Auditing Standards.
C-1
<PAGE>
CRIIMI MAE INC.
LIQUIDATION ANALYSIS
SEE ACCOMPANYING NOTES TO LIQUIDATION ANALYSIS
<TABLE>
<CAPTION>
Liquidation Estimated Recovery
Proceeds Allowed Claims Recovery Percentage
----------- -------------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash (1) $ 259,042,470
Sale of Investments (2) 387,245,722
Other Assets (3) 72,817,321
-------------
Liquidation Value of Assets $ 719,105,512
-------------
CHAPTER 7 ADMINISTRATIVE EXPENSES:
Tax Liabilities (4) $ (87,200,000) $ (87,200,000) 100%
Professionals (5) (6,000,000) (6,000,000) 100%
Trustee Fees (6) (6,820,000) (6,820,000) 100%
Operating Expenses (7) (2,500,000 (2,500,000) 100%
CHAPTER 11 ADMINISTRATIVE AND PRIORITY CLAIMS:
Professionals (8) (18,911,077) (18,911,077 100%
Other (9) (11,381,896) (11,381,896) 100%
SECURED DEBT (10) (450,410,727) (450,410,727) 100%
UNSECURED CLAIMS (11) (201,788,589) (135,881,812) 67%
-------------
TOTAL ESTIMATED CASH AVAILABLE FOR EQUITY
DISTRIBUTION $ 0
-------------
EQUITY:
Preferred Stock: (12)
Series B $ 0 0%
Series D $ 0 0%
Series E $ 0 0%
Series F (Dividend Preferred) $ 0 0%
Available Cash for Distribution to Common
Shareholders $ 0
-------------
Common Shares Outstanding (13) 62,353,170
-------------
Cash Distribution per Common Share $ 0 0%
-------------
</TABLE>
--------------------------------------------------------------------------------
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NOTES TO LIQUIDATION ANALYSIS
SIGNIFICANT ASSUMPTIONS
The following notes describe the significant assumptions that are reflected in
the Liquidation Analysis:
LOSS OF REIT STATUS THROUGH CHAPTER 7 LIQUIDATION SIGNIFICANTLY REDUCES
RECOVERABILITY TO CREDITORS AND SHAREHOLDERS
The Liquidation Analysis assumes that CRIIMI MAE is not able to distribute
sufficient taxable dividends for either its 1999 or 2000 tax years to satisfy
REIT distribution requirements and, therefore, is unable to preserve its REIT
status. In addition, due to the loss of REIT status, the Company's taxable
mortgage pools ("TMPs") are assumed to lose their qualified REIT subsidiary
("QRS") exemptions and are treated as separate tax-paying entities. As a result
of the loss of REIT status and the QRS exemptions, the aggregate liquidating
distribution, as reflected herein, has been significantly diminished by
corporate federal and state income tax liabilities (excluding penalties and
interest) and a reduction in liquidation proceeds resulting from the sale of
CBO-1, CBO-2 and CMO-IV (collectively referred to herein as the "Trusts") as
TMPs. The liquidating distribution may be further reduced by penalties and
interest associated with the potential late payment of 1999 and 2000 corporate
federal and state tax liabilities.
The amount of cash available for distribution for 1999 and 2000 could be
increased in total by approximately $254 million if the Company's REIT status
were preserved. The Company's ability to maintain its REIT status through the
adequate distribution of dividends (among other requirements) could increase the
ultimate recovery by preserving the QRS exemptions of the TMPs currently owned
by the Company. Based upon management's assumptions, it is currently estimated
that the loss of the Company's REIT status results in a reduction in the
liquidation proceeds by approximately $167 million from the sale of the Trusts
as TMPs and an additional $87 million due to corporate federal and state income
tax liabilities (excluding penalties and interest). These reductions result in a
decrease in the ultimate recovery of the unsecured creditors' allowed claims by
approximately $66 million as reflected in the Liquidation Analysis set forth
above. The following paragraphs describe the risks associated with the Company's
loss of its REIT status:
DEVALUATION OF THE CMBS ASSETS DUE TO TMP RISK. An entity that
constitutes a "taxable mortgage pool" as defined in the Tax Code 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 by the TMPs. Based on
this definition, CBO-1, CBO-2 and CMO-IV (collectively the "Trusts")
are TMPs. The statutory provisions and regulations governing the tax
treatment of TMPs (the "TMP Rules") provide an exemption for TMPs whose
equity interests are wholly owned by a REIT (or a qualified REIT
subsidiary or "QRS"). Since it is assumed that the Company's REIT
status is not maintained for 1999 or 2000, the Trusts would no longer
qualify for the exemption granted to a QRS and the Trusts would be
required to pay a separate corporate level tax on income derived from
their underlying mortgage assets. As a result of the tax on the TMPs,
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) would instead be
applied to satisfy corporate federal and state income tax liabilities.
Since the equity interests and bonds owned by the Company are the most
subordinated securities of the Trusts and are the first to absorb
payment shortfalls, the loss of the QRS exemption under the TMP rules
would have a material adverse effect on the payments received on these
securities and the liquidation value of the Trusts.
C-3
<PAGE>
The Company's aggregate estimated tax liability (i) has been calculated on a
consolidated basis, (ii) assumes the Company loses its REIT status, and (iii)
assumes that the TMPs lose their QRS exemptions and are taxed as separate
taxpaying entities. Under this scenario, CRIIMI MAE would likely recognize a
taxable loss, while each TMP would have positive taxable income as a separate
corporation. The taxable income associated with CBO-1, CBO-2, and CMO-IV is
estimated at $110 million for 1999 and $108 million for 2000. The $218 million
of taxable income, which cannot be offset by CRIIMI MAE's taxable losses, would
give rise to an aggregate tax liability of approximately $87 million (excluding
penalties and interest) through liquidation, thereby reducing cash available for
distribution to unsecured creditors and shareholders. The liquidating
distribution may be further reduced by penalties and interest associated with
the potential late payment of 1999 and 2000 corporate federal and state tax
liabilities.
THE LIQUIDATION PERIOD
This Liquidation Analysis assumes a conversion of the Company's Chapter 11
reorganization to a Chapter 7 liquidation effective July 1, 2000 and involves a
six-month liquidation of all remaining assets through December 31, 2000 (the
"Liquidation Period"). Cash proceeds from the sale of each asset are used to
retire, to the extent of available funds, any related secured debt at the time
the assets are sold, with excess cash accumulated in an interest bearing account
for the payment of the remaining liabilities in December 2000.
LIQUIDATION ANALYSIS PREPARED ON A CONSOLIDATED BASIS FOR THE DEBTOR ENTITIES
The Liquidation Analysis assumes the liquidation of CRIIMI MAE Inc. and its
consolidated subsidiaries (which includes the debtor entities CRIIMI MAE
Management, Inc. and CRIIMI MAE Holdings II, L.P. and certain non-debtor
entities). With respect to CRIIMI MAE Management, Inc. and CRIIMI MAE Holdings
II, L.P., the following summarizes the results of an assumed Chapter 7
liquidation of those entities:
CRIIMI MAE MANAGEMENT, INC. ("CRIIMI MAE MANAGEMENT")
The total pre- and post-petition liabilities of CRIIMI MAE Management as of
December 31, 1999 were approximately $9.1 million. The total estimated
liquidation value of the assets of CRIIMI MAE Management as of December 31, 1999
was in excess of $13 million. Accordingly, in a Chapter 7 liquidation of CRIIMI
MAE Management, it is estimated that all pre- and post-petition creditors and
all administrative expenses in the Chapter 7 case would be paid in full, with a
net residual value available to the estate of CRIIMI MAE Inc. as the sole
shareholder of CRIIMI MAE Management.
CRIIMI MAE HOLDINGS II, L.P. ("CRIIMI MAE HOLDINGS")
The assets of CRIIMI MAE Holdings (the retained investment grade securities
("BBB/BBB-") from CMO-IV) were sold in October 1999 under the terms of a
Stipulation and Order entered by the Bankruptcy Court, with the proceeds thereof
used to retire the outstanding indebtedness of CRIIMI MAE Holdings with respect
thereto. Accordingly, the Debtor believes that there are no remaining creditors
of CRIIMI MAE Holdings or assets to be liquidated in a Chapter 7 case.
NOTES
The following are the footnote explanations related to the Liquidation Analysis:
1. The cash balance represents the Company's consolidated cash balance of
approximately $91.6 million as of December 31, 1999, approximately $88.3
million of additional net investment income the Company expects to earn
from January 1, 2000 through the end of the Liquidation Period, and the net
proceeds of approximately $79 million from the sale of the CMBS Sale
Portfolio which was assumed to occur in the first and second quarter of
2000. The net investment income is comprised of the Company's net interest
margin on its mortgage assets and earnings from its equity investments.
This
C-4
<PAGE>
amount also includes short-term interest income related to cash on hand, at
an assumed rate of 5%. The net investment income does not include any
administrative expenses, which are accounted for below, or the payment of
any post-petition interest expense associated with the unsecured claims.
Furthermore, the corporate federal and state income tax liabilities
(excluding penalties and interest) of approximately $87 million and the
reduction of liquidation proceeds resulting from the sale of the Trusts as
TMPs of approximately $167 million have been reflected in the Liquidation
Analysis attached hereto under Chapter 7 Administrative Expenses - Tax
Liabilities and Assets - Sale of Investments. As of February 29, 2000, the
Company's estimated consolidated cash balance totaled approximately $107
million.
2. Sale of investments represents the Company's estimate of the proceeds it
would receive related to the sale of its investments under this Liquidation
Analysis. The following details the assumptions used to calculate proceeds
from the sale of these investments:
(a) SUBORDINATED CMBS: The Company's management used the same discounted
cash flow methodology as used in its Form 10-K filing as of December
31, 1999 in determining the sale proceeds for its Subordinated CMBS
during the Liquidation Period. The cash flows were discounted using a
discount rate that, in the Company's view, was commensurate with the
market's perception of risk of comparable assets under a comparable
liquidation scenario, and included an estimate for the market effect
associated with the Company's portfolio liquidation. The Company used
a variety of sources to determine its discount rate including
institutionally-available research reports, discussions with the
Company's secured lenders, and communications with dealers and active
Subordinated CMBS investors regarding the valuation of comparable
securities. The proceeds from the sale of such CMBS were derived using
the following assumptions:
(i) The proceeds were calculated for those CMBS investments in which
the Company had an economic interest as of December 31, 1999,
except for the CMBS Sale Portfolio which was assumed to be sold
in the first and second quarters of 2000. The net proceeds (gross
sale proceeds net of the corresponding secured debt) totaling
approximately $79 million were derived using the assumptions
described in 2.(a) above, 2.(a)(iii) below, and the required
rates of return as negotiated between the Company and one of its
secured lenders under the terms of a Stipulation and Order
approved by the Bankruptcy Court and settled by the Company and
its secured lender on February 29, 2000. The aggregate net
proceeds have been included herein under Assets - Cash. Any
match-funded CMBS assets and corresponding match-funded
liabilities were excluded from this Liquidation Analysis.
(ii) The CMBS and related servicing rights for each issuance were
assumed to be sold jointly and in their entirety, and are net of
a broker's fee equal to 62.5 basis points of the gross sale
proceeds.
(iii) All non-CRIIMI MAE issued CMBS assets were priced assuming a 0%
CPR (Constant Prepayment Rate) and 0% CDR (Constant Default Rate)
since the inherent risks associated with defaults and losses are
accounted for in the spreads and discount rates used to determine
the gross sale proceeds. These assumptions are consistent with
the valuation methodology used for quarterly SEC reporting and
market convention for the sale of such securities.
(iv) The retained securities from CBO-1, CBO-2 and CMO-IV were priced
assuming the Company loses its REIT status retroactive to January
1, 1999. Accordingly, these Trusts become subject to corporate
federal and state income tax liabilities as a result of the loss
of the QRS exemptions for the TMPs. The gross taxable earnings
for each Trust were computed using the original pricing speeds
and current tax yields on the underlying collateral. The
deductible payments from each Trust were computed based upon the
original pricing speeds and current tax yields of the securities
that were issued by each Trust. Any excess taxable income over
the deductible payment from each Trust represents the net taxable
income of that Trust. It was further assumed that each Trust
would pay corporate federal and state income taxes at an
aggregate effective tax rate of 40%. The gross cash flow for each
Trust was reduced by the
C-5
<PAGE>
associated tax liability and all remaining cash flow was
allocated to each security in accordance with the payment
priorities as detailed in the respective pooling and servicing
agreements. The resulting cash flows on securities held by the
Company were then discounted using yields derived as discussed in
2.(a)(v), (vi), and (vii) below.
(v) The Company's management projected the U.S. Treasury curve for
the assumed future sale dates using a forward rate curve
extracted from Bloomberg. An appropriate U.S. Treasury rate was
then interpolated based on the projected U.S. Treasury curve and
weighted-average life of each CMBS.
(vi) Credit spreads for comparably rated CMBS were derived from the
sources cited in 2.(a) above and adjusted based on qualitative
and quantitative factors, such as the market's perception of the
issuers and the credit fundamentals of the commercial real estate
underlying each pool of commercial mortgage loans.
(vii) Credit spread adjustments, ranging from 150 to 600 basis points,
were added to credit spreads determined in 2.(a)(vi) above in
determining the appropriate discount rate for the CRIIMI MAE
issued CMBS retained by the Company. These incremental
adjustments reflect yield premiums that would likely occur if a
portfolio of this size were sold in the secondary market during
the third and fourth quarters of 2000.
(b) INSURED MORTGAGE SECURITIES: For each of the residual economic
interests in CMO-I, CMO-II, and CMO-III, CRIIMI MAE used pricing
assumptions consistent with those used by typical buyers of Interest
Only securities. Accordingly, the sale proceeds were computed assuming
a pricing speed of 100% CPR after the expiration of any lockout and
yield maintenance period on the underlying mortgage securities. The
projected cash flows were discounted at a credit spread of 600 basis
points over the interpolated U.S. Treasury rate as of the assumed sale
date. The sale proceeds for the residual interests are net of a
broker's fee equal to 62.5 basis points of the gross sale proceeds.
The Company's only non-securitized GNMA MBS was priced to sell at 97%
of its face amount and is net of a broker's fee equal to 62.5 basis
points of the gross sale proceeds.
(c) EQUITY METHOD INVESTEES: The value of the AIM general partner ("GP")
investment was determined by dividing the value of the publicly traded
Limited Partnership ("LP") units, as extracted from Bloomberg, by the
LPs' interest and multiplying the result by each GP's interest
(ranging from 2.9% to 4.9%). The assumed value of each GP's interest
was compared to its indirect ownership interest in the mortgage loans
underlying each fund and further reduced based on an assumed 20% per
annum run-off rate of the underlying mortgage assets. An additional
discount of 25% was applied to reflect the liquidity premium that may
be associated with the liquidation of the Company and the risk of
owning a GP interest.
CRIIMI MAE Services, L.P. ("CMSLP")(CRIIMI MAE's servicing affiliate)
is assumed to continue to operate through December 2000. (It should be
noted, however, that this assumption may not be achievable due to the
potential loss of key personnel in a Chapter 7 scenario. The loss of
such key personnel coupled with the Chapter 7 liquidation of the
Company is likely to adversely impact the rating of CMSLP as servicer,
lead to the replacement of CMSLP as servicer on then-existing CMBS
transactions and may result in an adverse impact on bond ratings, a
negative impact on the value of the Company's remaining CMBS and the
incurring of additional costs and other potential defaults and claims
by the Company.) Notwithstanding the foregoing qualifications, for
purposes of this analysis, servicing assets, consisting primarily of
direct and master servicing contracts, were assumed to be sold in
connection with the sale of the related CMBS using pricing assumptions
consistent with those used by typical buyers of such securities.
Accordingly, the sale proceeds were computed assuming a pricing speed
of 1% CPR during any lockout period, 2% CPR during any yield
maintenance period, 5% CPR during any prepayment
C-6
<PAGE>
penalty period, and 15% CPR after the expiration of any yield
maintenance or prepayment penalty period on the underlying mortgage
securities. The projected cash flows were discounted at a credit
spread of 800 basis points over the interpolated U.S. Treasury rate
as of the assumed sale date. The sale proceeds for the residual
interests are net of a broker's fee equal to 62.5 basis points of
the gross sale proceeds. Furthermore, proceeds from the sale of the
special servicing rights have been included in the sale proceeds of
the related CMBS, as the purchaser of the controlling class has the
right to appoint the special servicer.
3. Other Assets include the following:
(a) The Company's mezzanine loans were assumed to be sold at 70% of their
face amount to reflect the credit risk associated with owning these
assets. As of December 31, 1999, the Company owned approximately $7.5
million (face amount) of mezzanine loans. The proceeds are net of a
broker's fee equal to 62.5 basis points of the gross sale proceeds.
(b) Brick Church (REO) was assumed to be sold for a net amount equal to
the associated secured obligation of the property, and is net of a 3%
broker's fee based on the gross sale proceeds.
(c) All fixed assets were assumed to be sold at 10% of their carrying
value.
(d) The Company has assumed the collection of certain receivables.
4. The aggregate taxable income associated with CBO-1, CBO-2, and CMO IV,
estimated at $110 million for 1999 and $108 million for 2000, would give
rise to corporate federal and state tax liabilities (excluding penalties
and interest) of approximately $44 million for 1999 and $43 million for
2000. Furthermore, the Company may be subject to penalties and interest
associated with the potential late payment of 1999 and 2000 corporate
federal and state tax liabilities.
5. This amount, estimated at approximately $1 million per month, includes the
professional expenses required to liquidate the Company and perform other
functions for the Trustee during the Chapter 7 case.
6. This amount represents the fees of the Chapter 7 Trustee. Although the
Chapter 7 Trustee could receive up to 3% of the estate proceeds distributed
to creditors, Chapter 7 Trustee fees have been estimated at 1% of payments
made to creditors due to the large size of the Debtors' estate.
7. Unlike most Chapter 7 scenarios, the nature of the Debtor's assets will
require that the Chapter 7 Trustee retain critical employees and operate
the Company, on a reduced basis, during the Liquidation Period. Operating
expenses are assumed to be reduced by 50% during the period of liquidation
as compared to the level of operating expenses assumed while the Company is
in Chapter 11 as discussed in Note 9 below. This is primarily a result of
the reduction of the workforce in a Chapter 7 liquidation.
8. This amount includes the professional fees incurred during the Debtors'
Chapter 11 cases that have not been paid, as well as estimated professional
fees to be incurred by the Company through June 30, 2000.
9. This amount includes the following: (1) payment of post-petition trade
payables, (2) estimated payment of the retention bonus payable to remaining
employees in April 2000 and severance paid to employees terminated upon
liquidation, and (3) other ongoing operating costs through June 30, 2000.
The estimated operating costs are assumed to be $2.5 million per quarter.
10. Secured debt includes variable rate secured borrowings (excluding the
secured debt associated with the CMBS Sale Portfolio which was assumed to
be retired using the proceeds from the sales assumed to occur in the first
and second quarters of 2000), other secured financing facilities and
accrued and unpaid interest as of December 31, 1999, at contractual,
non-default rates. From January 1, 2000
through December 31, 2000, it is assumed that interest is paid on a current
basis at contractual, non-
C-7
<PAGE>
default rates.
11. Unsecured claims include senior unsecured notes, other unsecured financing
facilities, trade payables, and other unsecured claims (excluding any
post-petition accrual of interest thereon). The total
presented does not include any amounts for the allowance of any disputed
claims or any rejection damage claims in a Chapter 7 liquidation of the
Debtors.
12. The Liquidation Analysis references the Series F Preferred Stock (Dividend
Preferred) distributed in the fourth quarter of 1999 for the distribution
of the remaining 1998 taxable income, of which 756,453 shares were
converted into common stock in November 1999 and 263,788 shares were
converted into common stock in February 2000. Furthermore, the Company also
entered into a Preferred Stock Exchange Agreement on February 22, 2000
pursuant to which it exchanged 103,000 shares of Series C Cumulative
Convertible Preferred Stock for 103,000 shares of Series E Cumulative
Convertible Preferred Stock. In addition, no dividends are assumed to be
paid on any outstanding preferred or common shares and no options are
assumed to be converted into common stock. The number of shares of Series
B, D, E, and F outstanding as of February 29, 2000 was 1,593,982, 100,000,
103,000 and 586,354, respectively.
13. The number of shares of common stock outstanding as of February 29, 2000
was 62,353,170.
While the Unsecured Creditors' Committee supports the Plan and believes that the
Plan satisfies the best interests test under Section 1129(a)(7) of the
Bankruptcy Code, the foregoing calculations and analysis represent the work
product of the Debtors.
C-8
<PAGE>
EXHIBIT D
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CRIIMI MAE Financial Statements:
Report of Independent Public Accountants .............................................................. D-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 .......................................... D-2
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 ................ D-3
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998, 1997 ..... D-4
Consolidated Statements of Cash Flow for the years ended December 31, 1999, 1998 and 1997 ............. D-5
Notes to Consolidated Financial Statements ............................................................ D-6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
CRIIMI MAE Inc.
We have audited the accompanying consolidated balance sheets of
CRIIMI MAE Inc. (CRIIMI MAE) and its subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income and comprehensive
income, changes in shareholders' equity and cash flows for the years ended
December 31, 1999, 1998 and 1997. These financial statements are the
responsibility of CRIIMI MAE's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CRIIMI
MAE and its subsidiaries as of December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1999, 1998 and 1997, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming
that CRIIMI MAE will continue as a going concern. As discussed in Note 1 to the
financial statements, on October 5, 1998, CRIIMI MAE filed for relief under
Chapter 11 of the U.S. Bankruptcy Code which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to this
matter are also described in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
CRIIMI MAE be unable to continue as a going concern.
Arthur Andersen LLP
Vienna, VA
March 31, 2000
D-1
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Assets:
Mortgage assets:
Subordinated CMBS, at fair value $ 1,179,270,306 $ 1,274,185,678
Insured mortgage securities, at fair value 394,857,239 488,095,221
Investment in originated loans, at amortized cost 470,204,780 499,076,030
Equity investments 34,929,523 42,868,469
Receivables 69,483,337 46,992,337
Other assets 53,276,333 62,520,146
Restricted cash and cash equivalents 38,036,624 2,353,560
Other cash and cash equivalents 53,603,104 21,826,512
---------------- ---------------
Total assets $ 2,293,661,246 $ 2,437,917,953
================ ===============
Liabilities:
LIABILITES NOT SUBJECT TO CHAPTER 11 PROCEEDINGS:
Collateralized bond obligations-CMBS $ 278,165,968 $ 117,831,435
Collateralized mortgage obligations-insured mortgage securities 378,711,602 456,101,720
Collateralized mortgage obligations-originated loans 399,768,513 386,752,951
Payables and accrued expenses 29,886,888 17,124,124
LIABILITIES SUBJECT TO CHAPTER 11 PROCEEDINGS:
Variable-rate secured borrowings-CMBS 732,904,775 932,236,674
Other financing facilites 3,050,000 3,050,000
Payables and accrued expenses 26,455,952 13,690,004
Senior unsecured notes 100,000,000 100,000,000
Other financing facilities 89,749,522 89,749,522
Payables and accrued expenses 35,619,440 13,504,618
---------------- ---------------
Total liabilities 2,074,312,660 2,130,041,048
---------------- ---------------
Shareholders' equity:
Convertible preferred stock, $0.01 par; 25,000,000 shares authorized;
2,647,124 and 1,816,982 shares issued and outstanding, respectively 26,471 18,170
Common stock, $0.01 par; 120,000,000 shares authorized; 59,954,604
and 52,898,100 shares issued and outstanding, respectively 599,546 528,981
Accumulated other comprehensive income (207,421,788) (251,255,309)
Accumulated deficit (148,434,915) --
Additional paid-in capital 574,579,272 558,585,063
---------------- ---------------
Total shareholders' equity 219,348,586 307,876,905
---------------- ---------------
Total liabilities and shareholders' equity $ 2,293,661,246 $ 2,437,917,953
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated finanical
statements.
D-2
<PAGE>
CRIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Subordinated CMBS $ 154,205,383 $ 143,656,307 $ 79,669,816
Insured mortgage securities 33,405,171 43,062,743 49,425,401
Originated loans 34,712,674 20,588,112 --
------------- ------------ ------------
Total interest income 222,323,228 207,307,162 129,095,217
------------- ------------ ------------
Interest and related expenses:
Fixed-rate collateralized bond obligations-CMBS 22,054,939 8,945,570 11,351,890
Fixed-rate collateralized mortgage obligtions-insured 33,382,959 39,503,033 42,795,773
Fixed-rate collateralized mortgage obligations-originated loans 27,479,268 14,772,782 --
Fixed-rate senior unsecured notes 9,125,004 9,689,621 1,065,843
Variable-rate secured borrowings-CMBS 52,195,828 59,628,760 21,958,309
Other financing facilities 7,098,832 3,728,665 747,599
------------ ------------ ------------
Total interest expense 151,336,830 136,268,431 77,919,414
------------- ------------ ------------
Net interest margin 70,986,398 71,038,731 51,175,803
------------- ------------ ------------
Equity in (losses) earnings from investments (1,243,562) 2,617,728 3,612,230
Other income 3,024,068 4,278,878 2,609,354
Net gain on mortgage security dispositions 2,127,691 1,196,499 17,343,481
Gain on originated loan dispositions 403,383 -- --
General and administrative expenses (12,049,256) (14,623,407) (9,610,579)
Amortization of assets acquired in the Merger (2,877,576) (2,877,576) (2,877,564)
Losses on warehouse obligations (8,000,000) (30,378,173) --
Reorganization items:
Impairment on CMBS (156,896,831) -- --
Other (22,003,128) (9,856,947) --
Gain on sale of CMBS -- 28,800,408 --
Realized loss on reverse repurchase obligation -- (4,503,177) --
Write-off capitalized loan organization costs -- (3,284,037) --
------------- ------------ ------------
(197,515,211) (28,629,804) 11,076,922
------------- ------------ ------------
Minority interest in net income of consolidated subsidiary -- (40,334) (8,065,109)
Net (loss) income before dividends accrued or paid on preferred shares (126,528,813) 42,368,593 54,187,616
Dividends accrued or paid on preferred shares (5,840,152) (6,997,859) (6,472,540)
------------- ------------ ------------
Net (loss) income available to common shareholders $(132,368,965) $ 35,370,734 $47,715,076
============= ============ ============
Net (loss) income available to common shareholders per common share:
Basic $ (2 45) $ 0 75 $ 1 29
============= ============ ============
Diluted $ (2 45) $ 0 74 $ 1 25
============= ============ ============
Shares used in computing basic earnings
per share, exclusive of shares held in treasury 53,999,782 47,280,371 36,993,130
============= ============ ============
Comprehensive (loss) income:
Net (loss) income before dividends paid or accrued on preferred shares $(126,528,813) $ 42,368,593 $ 54,187,616
Other comprehensive income (loss) 43,833,521 (252,338,120) (7,833,417)
------------- ------------ ------------
Comprehensive (loss) income $ (82,695,292) $(209,969,527) $ 46,354,199
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
D-3
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Preferred Common Other Total
Stock Par Stock Par Comprehensive Additional Accumulated Treasury Shareholders'
Value Value Income Paid-in Capital Deficit Stock Equity
--------- --------- ------------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $24,900 $319,128 $ 8,916,228 $342,462,380 $ - $(5,051,373) 346,671,263
Net income - - - - 54,187,616 - 54,187,616
Dividends paid or accrued on
preferred shares - - - - (6,472,540) - (6,472,540)
Dividends of $1.29 per weighted
average common share - - - - (47,715,076) - (47,715,076)
Return of capital of $0.13 per
weighted average share - - - (5,320,553) - - (5,320,553)
Conversion of preferred shares
income common shares (8,106) 22,402 - (14,296) - - -
Stock options exercised - 738 - 623,393 - - 624,131
Adjustment to unrealized gains
on investments - - 994,083 - - - 994,083
Adjustment to unrealized losses
on investments - - (8,827,500) - - - (8,827,500)
Shares issued 1,500 64,435 - 110,773,628 - - 110,839,563
------- -------- ------------- ------------ ------------- ------------- -------------
Balance at December 31, 1997 18,294 406,703 1,082,811 448,524,552 - (5,051,373) 444,980,987
Net income - - - - 42,368,593 - 42,368,593
Dividends paid or accrued on
preferred shares - - - - (6,997,859) - (6,997,859)
Dividends of $0.75 per weighted
average common share - - - - (35,370,734) - (35,370,734)
Return of capital of $0.42 per
weighted average share - - - (19,582,467) - - (19,582,467)
Conversion of preferred shares
into common shares (2,624) 49,464 - (46,840) - - -
Stock options exercised 897 - 827,176 - - 828,073
Adjustment to unrealized gains
on investments - - 4,016,052 - - - 4,016,052
Adjustment to unrealized losses
on investments - - (256,354,172) - - - (256,354,172)
Shares issued 2,500 77,345 - 133,908,587 - - 133,988,432
Treasury shares retired - (5,428) - (5,045,945) - 5,051,373 -
------- -------- ------------- ------------ ------------- ------------- -----------
Balance at December 31, 1998 18,170 528,981 (251,255,309) 558,585,063 - - 307,876,905
Net loss - - - - (126,525,063) - (126,528,813)
Dividends accrued on preferred
shares - - - - (5,840,152) - (5,840,152)
Conversion of preferred shares
into common shares (7,765) 70,545 - (62,780) - - -
Common shares issued - 20 - 7,105 - - 7,125
Adjustment to unrealized losses
on investments - - 43,833,521 - - - 43,833,521
Preferred shares issued 16,066 - - 16,049,884 (16,065,950) - -
------- -------- ------------- ------------ ------------- ------------- -------------
Balance at December 31, 1999 $26,471 $599,546 $(207,421,788) $574,579,272 $(148,434,915)$ - $219,348,586
------- -------- ------------- ------------ ------------- ------------- -------------
------- -------- ------------- ------------ ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
D-4
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(126,528,813) $ 42,368,593 $ 54,187,616
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Amortization of discount and deferred financing costs on debt 8,701,571 6,503,100 3,893,343
Amortization of assets acquired in the Merger 2,877,576 2,877,576 2,877,564
Other amortization and depreciation 2,407,103 2,030,183 920,058
(Discount) Premium amortization on mortgage assets (1,004,995) 424,293 (451,758)
Net gain on mortgage security dispositions (2,127,691) (1,196,499) (17,343,481)
Gain on originated loan dispositions (403,383) -- --
Equity in losses (earnings) from investments 1,243,562 (2,617,728) (3,612,230)
Impairment on CMBS 156,896,831 -- --
Change in other reorganization items accrual 12,146,181 9,856,947 --
Losses on warehouse obligations 8,000,000 30,378,173 --
Cash gain on sale of CMBS -- (28,800,408) --
Realized loss on reverse repurchase obligation -- 4,503,177 --
Write-off of capitalized origination costs -- 3,284,037 --
Minority interests in earnings of consolidated subsidiary -- 40,334 8,065,109
Valuation adjustment to hedges -- -- 28,250
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents (35,683,064) (2,353,560) --
Increase in receivables and other assets (30,194,006) (35,231,425) (5,587,245)
Increase in payables and accrued expenses 29,733,222 16,793,946 1,162,165
------------- ---------------- -------------
Net cash provided provided by operating activities 26,064,094 48,860,739 44,139,391
------------- ---------------- -------------
Cash flows from investing activities:
Proceeds from mortgage securities dispositions 74,003,394 117,414,346 83,492,408
Proceeds from originated loan dispositions 19,617,622 -- --
Proceeds from sale of CMBS 18,076,047 -- --
Proceeds from sale of collateralized bond obligations -- 334,919,531 --
Proceeds of originated loans -- (495,825,576) --
Purchase of Subordinated CMBS -- (852,560,342) (553,913,225)
Return of loan origination reserve from securitization -- 71,877,560 --
Funding of loan origination reserve -- (75,433,979) (29,514,700)
Payment of deferred costs -- (8,959,628) (840,747)
Distributions received from AIM Investments 6,250,991 5,115,547 4,463,485
Distributions received from CMSLP -- 3,114,000 --
Receipt of principal payments 12,837,554 14,338,531 10,368,624
Servicing rights acquired and contributed to CMSLP -- (3,880,235) (12,692,597)
Collateral calls on reverse repurchase obligation -- (4,766,916) --
Purchase of real estate owned property -- -- (4,146,652)
Purchase of mortgages and advances on construction loans -- -- (285,430)
------------- ---------------- -------------
Net cash provided by (used in) investing activities 130,785,608 (894,647,161) (503,068,834)
------------- ---------------- -------------
Cash flows from financing activities:
Proceeds from debt issuances -- 1,998,430,321 666,636,095
Principal payments on securitized mortgage debt obligations (106,543,623) (443,566,240) (36,726,708)
Principal payments on secured borrowings and other debt facilities (18,529,487) (1,147,770,905) (198,667,423)
Proceeds from sale of CMO bonds -- 390,068,687 --
Increase in deferred financing costs -- (5,975,059) (6,133,915)
Dividends (including return of capital) accrued or paid to shareholders,
including minority interests -- (60,499,169) (86,499,860)
Proceeds from issuance of convertible preferred stock -- 25,000,000 15,000,000
Proceeds from issuance of common stock -- 109,816,505 96,463,694
------------- ---------------- -------------
Net cash (used in) provided by financing activities (125,073,110) 865,504,140 450,071,883
------------- ---------------- -------------
Net increase (decrease) in other cash and cash equivalents 31,776,592 19,717,718 (8,857,560)
Other cash and cash equivalents, beginning of year 21,826,512 2,108,794 10,966,354
------------- ---------------- -------------
Other cash and cash equivalents, end of year $ 53,603,104 $ 21,826,512 $ 2,108,794
------------- ---------------- -------------
------------- ---------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-5
<PAGE>
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"). Prior to the filing by CRIIMI MAE Inc.
(unconsolidated) and two of its 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"), 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) backed by pools of
commercial 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.
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) risks related to the necessary Recapitalization Financing under the
Company's Second Amended Joint Plan of Reorganization; (3) risk of loss of REIT
status; (4) taxable mortgage pool risk; (5) risk of phantom income resulting in
additional tax liability; (6) the effect of rate compression on the market price
of the Company's stock; (7) substantial leverage; (8) inherent risks in owning
Subordinated CMBS; (9) the limited protection provided by hedging transactions;
(10) risk of foreclosure on CMBS assets; (11) the limited liquidity of the CMBS
market; (12) pending litigation; (13) risk of being considered an investment
company; (14) possible effects of an economic recession on losses and defaults;
(15) borrowing risks; (16) the shape of the yield curve could adversely affect
income; and (17) risks associated with the trader election.
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 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 nor
in any way affiliated with the United States government or any United States
government agency.
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
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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 value required in the
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, 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 has significantly reduced the number of employees in its origination and
underwriting operations. In connection with these reductions, the Company closed
its five regional loan origination offices.
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 15 for further
discussion.
CRIIMI MAE is working diligently toward emerging from bankruptcy as a
successfully reorganized company. In furtherance of such effort, the Debtors
filed (i) a Joint Plan of Reorganization on September 22, 1999, (ii) an Amended
Joint Plan of Reorganization and proposed Joint Disclosure Statement on December
23, 1999, and (iii) a Second Amended Joint Plan of Reorganization (the "Plan")
and proposed Amended Joint Disclosure Statement (the "Proposed Disclosure
Statement") on March 31, 2000. The Plan was filed with the support of the
Official Committee of Equity Security Holders of CRIIMI MAE (the "Equity
Committee"), which is a co-proponent of the Plan. Subject to the completion of
mutually acceptable documentation evidencing the secured financing to be
provided by the unsecured creditors (the "Unsecured Creditor Debt
Documentation"), the Official Committee of Unsecured Creditors of CRIIMI MAE
(the "Unsecured Creditors' Committee") has agreed to support confirmation of the
Debtors' Plan. The Company, the Equity Committee and the Unsecured Creditors'
Committee are now all proceeding toward confirmation of the Plan. Under the
Plan, Merrill Lynch and German American Capital Corporation ("GACC"), two of the
Company's largest secured creditors, would provide a significant portion of the
recapitalization financing contemplated by the Plan. The Bankruptcy Court has
scheduled a hearing for April 25 and 26, 2000 on approval of the Proposed
Disclosure Statement.
On December 20, 1999, the Unsecured Creditors' Committee filed its own
plan of reorganization and proposed disclosure statement with the Bankruptcy
Court which, in general, provided for the liquidation of the assets of the
Debtors. On January 11, 2000 and February 11, 2000, the Unsecured Creditors'
Committee filed its first and second amended plans of reorganization,
respectively, with the Bankruptcy Court and amended proposed
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disclosure statements with respect thereto. However, as a result of successful
negotiations between the Debtors and the Unsecured Creditors' Committee, the
Unsecured Creditors' Committee has agreed to the treatment of unsecured claims
under the Debtors' Plan, subject to completion of mutually acceptable Unsecured
Creditor Debt Documentation, and has asked the Bankruptcy Court to defer
consideration of its second amended plan of reorganization and second amended
proposed disclosure statement.
THE PLAN OF REORGANIZATION
The Plan contemplates the payment in full of all of the allowed
claims of the Debtors primarily through recapitalization financing (including
proceeds from CMBS sales) aggregating at least $856 million (the
"Recapitalization Financing"). Approximately $275 million of the
Recapitalization Financing would be provided by Merrill Lynch and GACC
through a secured financing facility, approximately $155 million would be
provided through new secured notes issued to some of the Company's major
unsecured creditors, and another $35 million would be obtained from another
existing creditor in the form of an additional secured financing facility
(collectively, the "New Debt"). The sale of select CMBS (the "CMBS Sale"),
the proceeds of which are expected to be used to pay down existing debt, is
contemplated to provide the balance of the Recapitalization Financing. The
Company may seek new equity capital from one or more investors to partially
fund the Plan, although new equity is not required to fund the Plan.
In connection with the Plan, substantially all cash flows are
expected to be used to satisfy principal, interest and fee obligations under
the New Debt. The $275 million secured financing would provide for (i)
interest at a rate of one month LIBOR plus 3.25%, (ii) principal
prepayment/amortization obligations, (iii) extension fees after two years and
(iv) maturity on the fourth anniversary of the effective date of the Plan.
The Plan contemplates that the $35 million secured financing would provide
for terms similar to those referenced in the preceding sentence; however, the
proposed lender has not agreed to any terms of the $35 million secured
financing and there can be no assurance that an agreement for this financing
will be obtained or that, if obtained, the terms will be as referenced above.
The approximate $155 million secured financing would be effected through the
issuance of two series of secured notes under two separate indentures. The
first series of secured notes, representing an aggregate principal amount of
approximately $105 million, would provide for (i) interest at a rate of
11.75% per annum, (ii) principal prepayment/amortization obligations, (iii)
extension fees after four years and (iv) maturity on the fifth anniversary of
the effective date of the Plan. The second series of secured notes,
representing an aggregate principal amount of approximately $50 million,
would provide for (i) interest at a rate of 13% per annum with additional
interest at the rate of 7% per annum accreting over the debt term, (ii)
extension fees after four years and (iii) maturity on the sixth anniversary
of the effective date of the Plan. Each component of the New Debt described
above will be secured by substantially all of the assets of the Company, such
that only limited existing assets will be held free and clear of liens and
encumbrances. It is contemplated that there will be restrictive covenants,
including financial covenants, in connection with the New Debt.
The Plan also contemplates that the holders of the Company's common
stock will retain their stock. Under the Plan, no cash dividends, other than
a maximum of $4.1 million to preferred shareholders, can be paid to existing
shareholders. See "Effect of Chapter 11 on REIT Status and Other Tax
Matters-Taxable Income Distributions" below for further discussion. Subject
to the respective approvals by the holders of the Company's Series B
Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") and
the Series F Redeemable Cumulative Dividend Preferred Stock (the "Series F
Preferred Stock" or "junior preferred stock"), the Plan contemplates an
amendment to their respective relative rights and preferences to permit the
payment of accrued and unpaid dividends in cash or common stock, at the
Company's election. The Plan further contemplates amendments to the relative
rights and preferences of the Series D Cumulative Convertible Preferred Stock
(the "Series D Preferred Stock"), through an exchange of Series D Preferred
Stock for Series E Cumulative Convertible Preferred Stock (the "Series E
Preferred Stock"), similar to those amendments effected in connection with
the recent exchange of the former Series C Cumulative Convertible Preferred
Stock (the "Series C Preferred Stock") for Series E Preferred Stock. See
"MARKET FOR THE REGISTRANT'S COMMON STOCK AND OTHER RELATED STOCKHOLDER
MATTERS-Exchange of Series C Preferred Stock for Series E Preferred Stock"
for a discussion of the exchange of Series C Preferred Stock for Series E
Preferred Stock.
Reference is made to the Plan and Proposed Disclosure Statement,
previously filed with the Securities and Exchange Commission (the "SEC") as
exhibits to a Form 8-K, for a complete description of the financing
contemplated to be obtained under the Plan from the respective existing
creditors including, without limitation, payment terms, restrictive covenants
and collateral, and a complete description of the treatment of preferred
stockholders. Although the Company has commitments for substantially all of
the New Debt and has certain of the CMBS contemplated to be sold in
connection with the CMBS Sale, there can be no assurance that the Company
will obtain the Recapitalization Financing, that the Plan will be confirmed
by the Bankruptcy Court, or that the Plan, if
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confirmed, will be consummated. The Plan also contemplates certain amendments
to the Company's articles of incorporation, including an increase in
authorized shares from 120 million to 375 million (consisting of 300 million
of common shares and 75 million of preferred shares).
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 taxable income for the year ended
December 31, 1999 of approximately $37.5 million would generate a tax liability
of up to $15.0 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 year ended December 31, 1999. The Company anticipates distributing all, or a
substantial portion of, its 1999 taxable income in the form of non-cash taxable
dividends. There can be no assurance that the Company will be able to make such
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. The Company has accrued $1,105,000 for the excise tax payable
for 1999. The accrual was calculated based on the taxable income for the year
ended December 31, 1999.
THE COMPANY'S 1998 TAXABLE INCOME
On September 14, 1999, the Company declared a dividend payable to
common shareholders of approximately 1.61 million shares of a new series of
junior preferred stock with a face value of $10 per share. See Note
12 for further discussion. The purpose of the dividend was to distribute
approximately $15.7 million in undistributed 1998 taxable income. To the extent
that it is determined that such amount was not distributed, the Company would
bear a corporate level income tax on the undistributed amount. There can be no
assurance that all of the Company's tax liability will be eliminated by payment
of such junior preferred stock
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dividend. The Company paid the junior preferred stock dividend on November 5,
1999. The junior preferred stock dividend was taxable to common shareholder
recipients.
TAXABLE INCOME DISTRIBUTIONS
The recently issued Internal Revenue Service Revenue Procedure 99-17
provides securities and commodities traders with the ability to elect
mark-to-market treatment for 2000 by including an election with their timely
filed 1999 federal tax extension. The election applies to all future years as
well, unless revoked with the consent of the Internal Revenue Service. On March
15, 2000, the Company determined to elect mark-to-market treatment as a
securities trader for 2000 and, accordingly, will recognize gains and losses
prior to the actual disposition of its securities. Moreover, some if not all of
those gains and losses, as well as some if not all gains or losses from actual
dispositions of securities, will be treated as ordinary in nature and not
capital, as they would be in the absence of the election. Therefore, any net
operating losses generated by the Company's trading activity will offset the
Company's ordinary taxable income, and thereby reduce required distributions to
shareholders by a like amount. See "BUSINESS-Risk Factors-Risks Associated with
Trader Election" for further discussion. If the Company does have a REIT
distribution requirement (and such distributions would be permitted under the
Plan), a substantial portion of the Company's distributions would be in the form
of non-cash taxable dividends.
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. Although it is possible that the election by
the TMPs to be treated as taxable REIT subsidiaries could prevent the loss of
CRIIMI MAE's REIT status, there can be no assurance that a valid election could
be made given the timing of a seizure or sale of the Pledged Bonds.
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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 exempted by the
Investment Company Act.
To qualify for the Investment Company Act exemption, 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 December 31, 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The consolidated financial statements of CRIIMI MAE are prepared on the
accrual basis of accounting in accordance with 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.
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RECLASSIFICATIONS
Certain amounts in the consolidated financial statements for the years
ended December 31, 1998 and December 31, 1997 have been reclassified to conform
to the 1999 presentation.
CONSOLIDATION AND MINORITY INTERESTS
The consolidated financial statements reflect the financial position,
results of operations and cash flows of CRIIMI MAE; CM Management; Holdings II;
CRIIMI, Inc.; CRIIMI MAE Financial Corporation; CRIIMI MAE Financial Corporation
II; CRIIMI MAE Financial Corporation III; CRIIMI MAE QRS 1, Inc.; CRIIMI MAE
Holding, Inc. (currently inactive); CRIIMI MAE Holdings L.P. (currently
inactive); and CRIIMI MAE CMBS Corporation for all periods presented. All
intercompany accounts and transactions have been eliminated in consolidation.
CRIIMI MAE owned approximately 57% of CRI Liquidating throughout 1997.
CRI Liquidating was dissolved as of December 31, 1997. The ownership interests
of the other shareholders in the equity and net income of CRI Liquidating are
reflected as minority interests in the accompanying consolidated financial
statements.
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 proceedings will be adjusted. The gain or loss resulting from the
entries to record the adjustment will be recorded as a reorganization item. In
1998, the Company wrote-off all $2.8 million of debt discounts and deferred debt
costs related to liabilities subject to Chapter 11 proceedings which resulted in
these liabilities being carried at their face amount.
REORGANIZATION ITEMS
Reorganization items are items of income or expense that are realized
or incurred by CRIIMI MAE because it is in reorganization. These include, but
are not limited to the following:
- Short-term interest income that would not have been earned but for the
Bankruptcy.
- Professional fees and similar types of expenditures directly relating to
the Chapter 11 proceeding.
- Employee Retention Program costs and severance payments.
- Loss accruals or realized gains or losses resulting from activities of the
reorganization process such as the sale of certain investments, rejection
of certain executory contracts and the write-off of debt issuance costs and
debt discounts. See Note 5 for a further discussion of other than temporary
impairment recognized on CMBS.
For the years ended December 31, 1999 and 1998, reorganization items
were approximately $178.9 and $9.9 million, respectively. The components of this
total are as follows:
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<TABLE>
<CAPTION>
REORGANIZATION ITEM 1999 1998
--------------------------------------------- -------------- ----------------
<S> <C> <C>
Short-term interest income $ (1,518,667) $ --
Professional fees 17,822,154 5,219,000
Write-off of debt discounts and deferred costs -- 2,835,210
Employee Retention Program accrued costs 1,589,236 612,885
Excise tax accrued 1,105,000 300,000
Other 3,005,405 889,852
-------------- ----------------
Subtotal 22,003,128 9,856,947
Impairment on CMBS 156,896,831 --
-------------- ----------------
Total $178,899,959 $9,856,947
============== ================
</TABLE>
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 year ending December 31, 1999. See Note 20.
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.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consist of cash, certificates of
deposit and interest bearing securities maturing within three months from the
date of purchase that have been legally restricted pursuant to various
stipulation and consent orders providing for adequate protection with certain of
the Company's creditors or due to agreements that require certain CMBS interest
income and/or CMBS sales proceeds to be held in segregated accounts. In
addition, restricted cash and cash equivalents include balances held in separate
trusts controlled by a trustee for the benefit of employees. See Note 17
"Litigation-Bankruptcy Related Litigation" for further discussion of these
arrangements.
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. These transfers of financial assets are
accounted for in accordance with SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS 125").
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
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 calculated 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
D-13
<PAGE>
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.
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 this 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 this time,
such securities were carried at their amortized cost basis as the Company had
the ability and intent to hold these securities to maturity.
INSURED MORTGAGE SECURITIES
Mortgage income consists of amortization of the discount or premiums
plus the stated mortgage interest payments received or accrued. 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.
As discussed in Note 7, as a result of the CBO-2 transaction involving
the sale of a portion of its Subordinated CMBS portfolio, 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.
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 Certificates 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.
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. 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.
EQUITY INVESTMENTS
CRIIMI, Inc., a wholly owned subsidiary of CRIIMI MAE, owns all of the
general partnership interests in American Insured Mortgage Investors, American
Insured Mortgage Investors - Series 85, L.P., 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 the 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 advisory partnership, which provides for recording CRIIMI
MAE's share of net earnings or losses in the AIM Funds and
D-14
<PAGE>
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 December 31, 1999 and 1998, Services Inc.
held a 27% general partner interest in CMSLP.
As of December 31, 1999 and 1998, 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.
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 or intent 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
judgements as to whether or not other than temporary impairment has occurred.
See Note 5 for a discussion of impairment recognized in 1999. Impairment was not
recognized in 1998 or 1997.
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. The Company did not recognize any impairment
on its insured mortgage securities in 1999, 1998 or 1997.
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 original effective interest rate or the fair value of the collateral if
the loan is collateral dependent. The Company did not recognize impairment on
its originated loans in 1999, 1998 or 1997.
D-15
<PAGE>
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. The Company did not recognize impairment on its equity
investments in 1999, 1998 or 1997.
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.
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 is
currently held for sale. In June 1997, CRIIMI MAE acquired a real estate
property in a foreclosure sale from a CMBS trust. CRIIMI MAE also serves as the
special servicer and owns a portion of the subordinated tranches in the same
trust. As of December 31, 1999 and 1998, CRIIMI MAE's investment in REO property
totaled approximately $3.6 and $3.9 million, respectively. REO property acquired
through foreclosure is recorded at fair value on the date of foreclosure. REO
property held for sale is accounted for at the lower of its cost basis or fair
value less costs to sell. REO assets held for the long term 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
D-16
<PAGE>
warehouse period. As a result of the Chapter 11 filing, CRIIMI MAE wrote off all
capitalized costs in connection with its warehouse programs in December 1998. As
of December 31, 1999, there are no reserve account balances with respect to
either the Citibank or Prudential 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.
SHAREHOLDERS' EQUITY
CRIIMI MAE has authorized 120,000,000 shares of $0.01 par value common
stock and has issued 59,954,604 and 52,898,100 shares as of December 31, 1999
and 1998, respectively. All shares issued, exclusive of any shares held in
treasury, are outstanding. As of December 31, 1999 and 1998, 1,013 and 7,245,
respectively, shares were held for issuance pending presentation of predecessor
units and were considered outstanding.
As of December 31, 1999, CRIIMI MAE has authorized 25,000,000 shares of
$0.01 par value convertible preferred stock, of which 3,000,000 shares have been
designated as Series B Cumulative Convertible Preferred Stock, 300,000 shares
have been designated as Series C Cumulative Convertible Preferred Stock, 300,000
shares have been designated as Series D Preferred Stock and 1,610,000 shares
have been designated as Series F Redeemable Cumulative Dividend Preferred Stock.
At December 31, 1999, CRIIMI MAE had 1,593,982 Series B Preferred Stock
outstanding, 103,000 Series C Preferred Stock outstanding, 100,000 Series D
Preferred Stock outstanding and 850,142 Series F Preferred Stock outstanding. At
December 31, 1998, CRIIMI MAE had 1,593,982 Series B Preferred Stock
outstanding, 123,000 Series C Preferred Stock outstanding and 100,000 Series D
Preferred Stock outstanding.
INCOME TAXES
CRIIMI MAE has elected to qualify as a REIT for tax purposes under
Sections 856-860 of the Internal Revenue Code for the 1999 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
their ownership, assets, income and distributions of taxable income. The income
from certain CRIIMI MAE activities, including origination and servicing, will
not be considered as Qualifying Income under Section 856. CRIIMI MAE will
monitor and minimize the levels of Non-Qualifying Income in order to meet REIT
qualification criteria. See also Note 1.
Dividends related to 1999 taxable income were not paid in 1999,
therefore no excess inclusion was reported in 1999. In 1998, CRIIMI MAE
generated $0.1456 per common share of excess inclusion income from CBO-1. The
excess inclusion income is taxable at the shareholder level, as CRIIMI MAE
intends to distribute substantially all of its taxable income. Excess inclusion
income cannot be offset by a net operating loss and is considered unrelated
taxable business income under Section 511.
D-17
<PAGE>
PER SHARE AMOUNTS
Basic earnings per share amounts for 1999, 1998 and 1997 represent net
income (loss) available to common shareholders divided by the weighted average
common shares outstanding during each year. Diluted earnings per share amounts
for 1999, 1998 and 1997 represent basic earnings per share adjusted for dilutive
common stock equivalents which for CRIIMI MAE include stock options and certain
series of preferred stock. For the year ended December 31, 1999, no common stock
equivalents were considered in the calculation of diluted earnings per share due
to the net loss. See Note 13 for a reconciliation of basic earnings per share to
diluted earnings per share.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Since the consolidated statements of cash flows are intended to reflect
only cash receipt and cash payment activity, the consolidated statements of cash
flows do not reflect investing and financing activities that affect recognized
assets and liabilities while not resulting in cash receipts or cash payments. In
1999, the Company sold certain investments treated as financings under FAS 125
resulting in total proceeds of approximately $198.9 million, of which $180.8
million was used to pay off the related secured borrowing and the remaining
$18.1 million was remitted to the Company. As these sales never resulted in the
Company receiving the gross proceeds, but rather the net proceeds, only the net
proceeds of $18.1 million received by the Company are reflected in the statement
of cash flows.
Cash payments made for interest for the years ended December 31, 1999,
1998 and 1997, were $112,561,866, $109,502,466, and $72,824,682, respectively.
COMPREHENSIVE INCOME
Comprehensive income includes net earnings as currently reported by the
Company adjusted for other comprehensive income. Other comprehensive income for
the Company is changes in unrealized gains and losses related to the Company's
CMBS and mortgages accounted for as available for sale. The table below breaks
out other comprehensive income for the periods presented into the following two
categories: (1) the changes to unrealized gains and losses that relate to the
CMBS and mortgages which were disposed of or impaired during the period with the
resulting gain or loss reflected in net earnings (reclassification adjustments)
and (2) the change in the unrealized gain or loss related to those investments
that were not disposed of or impaired during the period.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Reclassification adjustment for (gains) losses from dispositions $ (760,694) $ (963,748) $ (8,648,062)
included in net income
Reclassification adjustment for impairment loss recognized on 111,745,210 -- --
CMBS included in net income
Unrealized holding (losses) gains arising during the period (67,150,995) (251,374,372) 814,645
--------------- ------------- --------------
Net adjustment to unrealized (losses) gains on investments
$ 43,833,521 $(252,338,120) $ (7,833,417)
--------------- ------------- --------------
</TABLE>
NEW ACCOUNTING STATEMENTS
During 1998, the 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 believes the impact of FAS 133 on its financial statements
will be immaterial.
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<PAGE>
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 December 31, 1999 As of December 31, 1998
------------------------------------------------------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
ASSETS:
Subordinated CMBS $ 1,374,080,226 $ 1,179,270,306 $ 1,529,898,540 $ 1,274,185,678
Insured mortgage securities 407,469,108 394,857,239 483,637,668 488,095,221
Investment in originated loans 470,204,780 422,643,902 499,076,030 480,485,570
Restricted cash and cash equivalents 38,036,624 38,036,624 2,353,560 2,353,560
Other cash and cash equivalents 53,603,104 53,603,104 21,826,512 21,826,512
Accrued interest and principal receivable 69,483,337 69,483,337 46,992,337 46,992,337
Interest rate protection agreements 1,119,280 1,465,496 2,531,371 992,516
LIABILITIES:
Liabilities not subject to Chapter 11 proceedings: Securitized mortgage
obligations:
Collateralized bond obligations-CMBS $ 278,165,968 $ 253,084,864 $ 117,831,435 $ 105,799,081
Collateralized insured mortgage securities
obligations 378,711,602 381,129,836 456,101,720 486,179,236
Collateralized mortgage obligations-originated
loans 399,768,513 373,634,008 386,752,951 381,481,150
Liabilities subject to Chapter 11 proceedings:
Variable-rate secured borrowings-CMBS 732,904,775 N/A 932,236,674 N/A
Senior unsecured notes 100,000,000 86,000,000 100,000,000 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:
SUBORDINATED CMBS
Prior to 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 December 31, 1999 and 1998. As a result, the Company calculated
the estimated fair market value of its Subordinated CMBS portfolio as of
December 31, 1999 and 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 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,
institutionally available research reports and 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 December 31, 1999 and 1998, it has disclosed
the range of discount rates by rating category used in determining these fair
market values in Note 5.
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
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<PAGE>
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 and continued throughout 1999 with
the issuance of newly created CMBS totaling approximately $58.3 billion for
1999. The market for Subordinated CMBS has, however, been slower to recover.
It is difficult, if not impossible, to predict when or if the CMBS market
and, in particular, the Subordinated CMBS market, will recover. Even if the
market for Subordinated CMBS recovers, the liquidity of such market has
historically been limited. Additionally, during adverse market conditions,
the liquidity of such market has been severely limited. Therefore,
management's estimate of the value of the Company's CMBS 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.
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.
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 as of December
31, 1999 and 1998. 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 9.1% and 8.0% for
December 31, 1999 and 1998, respectively, which the Company believes was
commensurate with the market's perception of risk and value.
RESTRICTED AND OTHER 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 as of December
31, 1999 and 1998 is calculated using a discounted cash flow methodology similar
to the discussion on Subordinated CMBS above. 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 December 31, 1999 and 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.
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<PAGE>
5. SUBORDINATED CMBS
During 1997, FAS 125 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
Subordinated CMBS ("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. In CBO-2, the Company sold, in
a private placement, securities with a face amount of $468 million and 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 excess 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.
The CBO-2 transaction requires reclassification of CRIIMI MAE's
entire portfolio of mortgage securities (consisting of mortgage security
collateral and CMBS) from Held to Maturity to Available for Sale. Therefore,
CRIIMI MAE's securities, effective the second quarter of 1998, are reflected
on the balance sheet at fair market value. At December 31, 1999, the
amortized cost of the CMBS exceeded the fair market value by approximately
$194.8 million (after taking into account the $156.9 million impairment
write-down of certain CMBS subject to the CMBS Sale as of December 31, 1999,
which resulted in amortized cost being written down to fair value) as
compared to $255.7 million as of December 31, 1998 and is reflected as a
decrease in shareholders' equity.
D-21
<PAGE>
At December 31, 1999, CRIIMI MAE held the following securities with respect to
its CMBS portfolio:
<TABLE>
<CAPTION>
Original December 31, 1999
Anticipated Yield Anticipated Yield
Pool (1) to Maturity (2) to Maturity (2)(3)
--------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Retained Securities from
CRIIMI 1996 C1 (CBO-1) 19.5% 20.6%(4)
DLJ Mortgage Acceptance Corp.
Series 1997 CF2 Tranche B-30C (6) 8.2% 8.2%
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%(5)
Mortgage Capital Funding, Inc.
Series 1998-MC1 (6) 8.9% 9.0%
Chase Commercial Mortgage Securities Corp.
Series 1998-1 (6) 8.8% 8.8%
First Union/Lehman Brothers
Series 1998 C2 (6) 8.9% 9.0%
Morgan Stanley Capital I, Inc.
Series 1998-WF2 (6) 8.5% 8.6%(5)
Mortgage Capital Funding, Inc.
Series 1998-MC2 (6) 8.7% 8.8%
Weighted Average 9.7%(1) 10.1%(1)
</TABLE>
(1) CRIIMI MAE, through CMSLP, performs servicing functions on a total CMBS
pool of approximately $28 billion as of December 31, 1999. Of the $28
billion of mortgage loans, approximately $273.3 million are being specially
serviced, of which approximately $167.5 million are being specially
serviced due to payment default (including $26.8 million of Real Estate
Owned) and the remainder is being specially serviced due to non-financial
covenant default. Through December 31, 1999, CMSLP has resolved and
transferred out of special servicing approximately $439.8 million of the
approximately $713.1 million that has been transferred into special
servicing. Through December 31, 1999, actual losses on mortgage loans
underlying the CMBS transactions are lower than the Company's original loss
estimates.
(2) Represents the anticipated weighted average yield over the expected average
life of the Company's Subordinated CMBS portfolio as of the date of
acquisition and December 31, 1999, respectively, based on management's
estimate of the timing and amount of future credit losses and prepayments.
(3) Unless otherwise noted, changes in the December 31, 1999 anticipated yield
to maturity from that originally anticipated are primarily the result of
changes in prepayment assumptions relating to mortgage collateral.
(4) The increase in the anticipated yield resulted from the reallocation of
CBO-1 asset basis in conjunction with the CBO-2 resecuritization. While it
had no impact on the anticipated yield, the unrated bond from CBO-1
experienced an approximately $1.6 million principal write-down in 1999 due
to a loss on the foreclosure of two underlying loans.
(5) 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 (the "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 a $205.8 million face amount and a coupon rate of 7% were sold in a
transaction that was accounted for as a financing by the Company rather
than a sale. Of the $159.0 million in
D-22
<PAGE>
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 reached an agreement that called for the sale of seven
classes of subordinated CMBS and a related unrated bond, issued by Morgan
Stanley Capital I Inc. Series 1998-WF2 (the "Wells Fargo Bonds"). The
agreement was approved by the Bankruptcy Court on February 24, 2000. On
February 29, 2000, the Wells Fargo Bonds were sold. Of the approximately
$45.9 million in net sales proceeds, $37.5 million was used to pay off all
outstanding borrowings owed to Morgan Stanley and the remaining proceeds of
approximately $8.4 million will be used primarily to help fund CRIIMI MAE's
Plan.
(6) As discussed further below, under the Plan, the Company intends to sell
these CMBS pools and as such, impairment was recognized as of December 31,
1999 related to these CMBS. The impairment resulted in the cost basis being
written down to fair value as of December 31, 1999. As a result of this new
basis, these bonds have new yields effective the first quarter of 2000.
The aggregate investment by the underlying rating of the Subordinated CMBS is as
follows:
<TABLE>
<CAPTION>
Fair Value Range of Amortized Amortized
Face Weighted as of Discount Cost as Cost as
Amount as Average Weighted 12/31/99 Rates Used to of of
Security of 12/31/99 Pass-Through Average (in millions) Calculate Fair 12/31/99 12/31/98
Rating (in millions) Rate Life (1) (2) Value (2) (in millions) (in millions)
--------------- ------------ ----------- --------- ------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
A (3) $ 62.6 7.0% 6 years $ 54.5 9.8% $ 57.4 $ 57.0
BBB (3) 150.6 7.0% 12 years 116.1 10.5% 127.7 126.9
BBB-(3) 115.2 7.0% 12 years 82.6 11.4% 93.5 92.8
BB+ 394.6 7.0% 13 years 255.3 11.4%-13.2% 305.5 317.9
BB 279.0 6.9% 14 years 192.8 11.8%-13.9% 206.1 259.1
BB- 89.1 6.8% 14 years 51.2 13.2%-14.9% 58.6 72.6
B+ 128.7 6.7% 16 years 63.7 14.5%-15.9% 82.1 93.0
B 300.2 6.6% 16 years 141.3 15.5%-17.2% 178.2 208.9
B- 198.7 6.7% 17 years 84.9 16.0%-19.4% 98.1 106.7
CCC 92.0 6.8% 19 years 23.2 25.0%-30.0% 32.5 36.0
Unrated (4) 477.4 5.9% 20 years 113.7 26.0%-32.0% 134.4 159.0
------------ ----------- --------- ------------ ----------- -----------
Total (5)(6) $2,288.1 6.7% 15 years $1,179.3 $1,374.1(7) $1,529.9
============ =========== ========= ============ =========== ===========
</TABLE>
(1) Weighted average life represents the weighted average expected life of the
Subordinated CMBS prior to consideration of losses, extensions or
prepayments.
(2) 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 December
31, 1999. As a result, the Company calculated the estimated fair market
value of its Subordinated CMBS portfolio as of December 31, 1999. The
Company used a discounted cash flow methodology to estimate the fair value
of its Subordinated CMBS portfolio. The cash flows for each bond were
projected assuming no prepayments and no losses as is the market
convention. 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 institutionally available research reports and
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 December 31, 1999, it has disclosed in the table the range
of discount rates by rating category used in determining these fair market
values. See Note 4 for a discussion on the CMBS market.
(3) In connection with CBO-2, $62.6 million (A rated) and $60.0 million (BBB
rated) face amount of investment grade securities were sold with call
options and $345 million (A rated) face amount were sold without call
options. 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, both with call options, with the intention to sell
the securities at a later date. Such sale occurred March 5, 1999. See Note
17. 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.
(4) The unrated bond from CBO-1 experienced an approximately $1.6 million
principal write down in 1999 due to a loss on the foreclosure of two
underlying loans. Management believes that the current loss estimates used
to recognize income related to this bond remain adequate to cover losses.
D-23
<PAGE>
(5) Refer to Note 8 for additional information regarding the total face amount
and purchase price of Subordinated CMBS for tax purposes.
(6) 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 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
underlying loans contributed to CMO-IV are reflected in Investment in
Originated Loans on the balance sheet.
(7) Amortized cost reflects the $156.9 million impairment loss write-down
related to the CMBS subject to the CMBS Sale. See below for further
discussion.
As of December 31, 1999 and 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>
Property Type 1999(1) 1998(1) Geographic Location(2) 1999(1) 1998(1)
<S> <C> <C> <C> <C> <C>
Multifamily............... 32% 31% California.............. 17% 16%
Retail.................... 29% 28% Texas................... 13% 12%
Office.................... 13% 15% Florida................. 8% 7%
Hotel..................... 14% 13% New York................ 5% 6%
Other..................... 12% 13% Other(3)................ 57% 59%
------ ----- ---- ----
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 years ended December 31, 1999, 1998 and 1997, the amount of
income recognized (less than) or in excess of cash received due to the effective
interest rate method was approximately $1,123,600, $(200,000) and $1,014,000,
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
17 "Litigation-Bankruptcy Related Litigation". In addition, the Company has been
in discussions with certain other creditors not in litigation with the Company.
See Note 17 "Litigation-Arrangements with Other Creditors".
The Company agreed to cooperate on selling the CBO-2 BBB Bonds and
suspend litigation with Morgan Stanley with respect to these bonds. On March 5,
1999, Morgan Stanley sold the $205.8 million face amount of CMBS with a coupon
of 7%. The proceeds of $159.0 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 was accounted for as a financing and not a sale. This
resulted in CRIIMI MAE recognizing a fixed-rate liability for these bonds in the
amount of the gross proceeds of approximately $159.0 million.
D-24
<PAGE>
CRIIMI MAE and Morgan Stanley also reached an agreement that called for
the sale of seven classes of Subordinated CMBS, known as Morgan Stanley I, Inc.
Series 1998-WF2 (the "Wells Fargo Bonds"). The agreement was approved by the
Bankruptcy Court on February 24, 2000. On February 29, 2000, the Wells Fargo
Bonds were sold. Of the approximately $45.9 million in net sales proceeds, $37.5
million was used to pay off all outstanding borrowings owed to Morgan Stanley
and the remaining proceeds of approximately $8.4 million will be used primarily
to help fund CRIIMI MAE's Plan.
The Company's CMBS portfolio currently generates monthly cash flow. As
of December 31, 1999 and 1998, certain lenders have withheld payment to CRIIMI
MAE of approximately $31.3 million and $8.3 million, respectively, with respect
to its CMBS portfolio (excluding those securities that are match-funded). These
payments are currently reflected in receivables and other assets on the balance
sheet. (Refer to Note 6 for payments due the Company in connection with CMO-IV).
The realizability of these receivables is uncertain and is dependent upon
reaching successful agreements with the Company's lenders that does not result
in the loss of any collateral. A loss could occur if the lender fails to remit
interest payments to the Company.
As discussed in Note 1, under CRIIMI MAE's Plan a portion of the
Recapitalization Financing is expected to result from the CMBS Sale. The CMBS
subject to the CMBS Sale had a fair value and amortized cost of $385.1
million and $542.0 million, respectively, as of December 31, 1999. The
Company first filed a plan with the Bankruptcy Court in the fourth quarter of
1999 and during that same quarter CRIIMI MAE began marketing for sale the
CMBS subject to the CMBS Sale. CRIIMI MAE sold a portion of these bonds in
February 2000 and intends to enter into one or more additional agreements
during the first half of 2000 to sell the remaining CMBS subject to the CMBS
Sale, although there can be no assurance that such bonds will be sold.
GAAP states that when the fair market value of an investment declines
below its amortized cost for a significant period of time and the entity no
longer has the ability or intent to hold the investment for the period the
entity anticipates is required for the value to recover to amortized cost, other
than temporary impairment on the investment should be recognized. This other
than temporary impairment is recognized through the income statement as the
difference between amortized cost and fair value. Additional accounting guidance
states that other than temporary impairment should be recognized in the period
the decision to sell any investment is made if the entity does not expect the
fair value to recover before the sale date. As the Company decided in the fourth
quarter of 1999 to sell the CMBS subject to the CMBS Sale and it does not expect
the value of these bonds to significantly recover before the future sale dates,
the Company has recognized approximately $157 million of other than temporary
impairment related to these CMBS through earnings in the fourth quarter of 1999.
Unrealized losses related to these CMBS were previously recognized through other
comprehensive income in the equity section of the balance sheet. The other than
temporary impairment loss is a part of the reorganization items on the income
statement as the impairment was recognized as part of the reorganization.
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 continues 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. As part of CRIIMI
MAE's Plan, certain of the Company's non-resecuritized CMBS are intended to
be sold. As such, CMSLP will lose its special servicing rights related to
these CMBS. In 1999, CMSLP generated gross revenues of approximately $1.1
million in fees on these CMBS.
D-25
<PAGE>
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.
The Company viewed a securitization as a means of extracting the maximum value
from the mortgage loans originated. A portion of the mortgage loans originated
was financed through the creation and sale of investment grade CMBS to third
parties in connection with the securitization. The Company received net cash
flow on the CMBS not sold to third parties after payment of amounts due to
secured creditors who had provided acquisition financing. Additionally, the
Company received origination and servicing fees related to the mortgage loan
conduit programs.
A majority of the mortgage loans originated under the Company's loan
conduit programs were "No Lock" mortgage loans. Unlike most commercial mortgage
loans originated for the CMBS market which contain "lock-out" clauses (that is,
provisions which prohibit the prepayment of a loan for a specified period after
the loan is originated or impose costly yield maintenance provisions), the
Company's No Lock loans allowed borrowers the ability to prepay loans at any
time by paying a prepayment penalty.
Prior to the Petition Date, the Company had originated over $900
million in aggregate principal amount of loans. In June 1998, the Company
securitized approximately $496 million of the commercial mortgage loans
originated or acquired through a mortgage loan conduit program with Citicorp
Real Estate, Inc. ("Citibank"), and through CRIIMI MAE CMBS Corp., issued
Commercial Mortgage Loan Trust Certificates, Series 1998-1 ("CMO-IV"). A
majority of these mortgage loans were "No Lock" loans. In CMO-IV, CRIIMI MAE
sold $397 million face amount of fixed-rate, investment grade CMBS. CRIIMI MAE
has call rights on each of the issued securities and therefore has not
surrendered control of the bonds, thus requiring the transaction to be accounted
for as a financing of the mortgage loans collateralizing the investment grade
CMBS sold in the securitization. The Company originally intended to sell all of
the investment grade tranches of CMO-IV; however, two investment grade tranches
were not sold until 1999.
On April 5, 1999, the Company finalized an agreement by which Salomon
Smith Barney, in cooperation with CRIIMI MAE, agreed to sell the remaining 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 sold
these two classes of CMBS in May and October 1999. 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
has been accounted for as a financing and not a sale. Gross proceeds from the
sale were used to pay off $39.6 million of secured debt and certain costs, and
the remainder of approximately $315,000 was remitted to CRIIMI MAE. This
resulted in CRIIMI MAE recognizing fixed-rate debt for these bonds in the amount
of the gross proceeds received. In addition, CRIIMI MAE received past due CMBS
payments on these two classes.
As of December 31, 1999 and December 31, 1998, the originated loans
were secured by properties of the types and at the locations identified below:
<TABLE>
<CAPTION>
Property Type 1999(1) 1998(1) Geographic Location(2) 1999(1) 1998(1)
<S> <C> <C> <C> <C> <C>
Multifamily..................... 37% 38% Michigan........................ 20% 20%
Hotel........................... 26% 26% Texas........................... 7% 8%
Retail.......................... 20% 20% Illinois........................ 7% 7%
Office.......................... 11% 11% California...................... 6% 6%
Other........................... 6% 5% Maryland........................ 6% 6%
--------- ---------- Connecticut..................... 6% 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 related
loans.
(2) No significant concentration by region.
(3) No other individual state makes up more than 5% of the total.
D-26
<PAGE>
Descriptions of the originated loans categorized by unpaid principal
balances as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Face Effective Remaining
Unpaid Principal Balance (1) Loans(2)(3) Value(4)(5)(6) Interest Rate Term
--------------------------------------- ------------ --------------- ---------------- -------------
<S> <C> <C> <C> <C>
$ 0 - $4.99 million 92 $216,386,540 7.48% 8.6 years
$ 5 - $9.99 million 21 154,467,547 7.36% 8.9 years
$10- $14.99 million 6 75,822,080 7.15% 8.9 years
$15- $20 million 1 17,076,246 7.15% 9.9 years
------------ --------------- ---------------- -------------
120 $463,752,413 7.37% 9.1 years
============ =============== ================ =============
</TABLE>
(1) The carrying amount of the originated loans of $470,204,780 is comprised of
$463,752,413 face amount of loans, plus $6,452,367 of deferred loan costs.
(2) Several loans in CMO-IV are collateralized by multiple properties. The
table reflects the actual number of loans.
(3) During the year ended December 31, 1999, there were five prepayments and
one partial prepayment in CMO-IV. These prepayments generated net proceeds
of approximately $19.6 million and resulted in a net financial statement
gain of approximately $403,400, which is included in Gain on Originated
Loan Dispositions on the accompanying consolidated statements of income for
the year ended December 31, 1999. The partial prepayment represented one
property of a multiple property loan and therefore is not reflected as a
reduction in the loan count in the table above.
(4) All originated loans are collateralized by first or second liens on
multifamily, hotel, retail, office or other commercial properties.
Approximately 78% of the unpaid principal balance of the loans in the
securitization are "No-Lock" loans.
(5) The fair value of the originated loans at December 31, 1999 was
$422,643,902.
(6) Principal and interest on originated loans is payable at level amounts over
the term of the loan. Approximately 91% of the unpaid principal balance of
the loans in the portfolio have balloon payment structures. Total annual
debt service payable to CRIIMI MAE's financing subsidiaries for the
originated loans held as of December 31, 1999 is approximately $43.2
million.
Descriptions of the originated loans categorized by unpaid principal
balances as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Face Effective Remaining
Unpaid Principal Balance (1) Loans(2) Value(3)(4)(5) Interest Rate Term
--------------------------------------- ------------ --------------- ---------------- -------------
<S> <C> <C> <C> <C>
$ 0 - $4.99 million 96 $ 233,603,377 7.45% 9.6 years
$ 5 - $9.99 million 22 163,154,496 7.35% 9.9 years
$10- $14.99 million 6 77,291,024 7.15% 9.9 years
$15- $20 million 1 17,242,738 7.15% 10.9 years
------------ --------------- --------------- -------------
125 $491,291,635 7.38% 9.8 years
============ =============== ================ =============
</TABLE>
(1) The carrying amount of the originated loans of $499,076,030 is comprised of
$491,291,635 face amount of loans, plus $7,784,395 of deferred loan costs.
(2) Several loans in CMO-IV are collateralized by multiple properties. The
table reflects the actual number of loans.
(3) All originated loans are collateralized by first or second liens on
multifamily, hotel, retail, office or other commercial properties.
Approximately 79% of the unpaid principal balance of the loans originally
included in the securitization were No-Lock loans.
(4) The fair value of the originated loans at December 31, 1998 was
$480,485,570.
D-27
<PAGE>
(5) Principal and interest on originated loans is payable at level amounts over
the term of the loan. Approximately 92% of the loans in the portfolio have
balloon payment structures. Total annual debt service payable to CRIIMI
MAE's financing subsidiaries for the originated loans held as of December
31, 1998 is approximately $44.9 million.
A reconciliation of the carrying amount of CRIIMI MAE's originated
loans for the years ended December 31, 1999 and 1998, follows:
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998
---------------- ---------------------
<S> <C> <C>
Balance at beginning of year $ 499,076,030 $ -
Addition during the year:
Originated loans securitized - 504,357,929
Deductions during the year:
Principal payments (8,618,218) (4,526,939)
Mortgage dispositions, net of gain (19,214,239) -
Amortization of deferred loan costs (1,038,793) (754,960)
---------------- ---------------------
Balance at end of year $ 470,204,780 $ 499,076,030
================ =====================
</TABLE>
Although CMO-IV was accounted for as a financing, as described above,
economically, the Company currently generates monthly cash flows of
approximately $763,000 from the subordinated CMBS tranches created in the
transaction. As of December 31, 1999 and 1998, payments of approximately $7.1
million and $2.7 million, respectively, were withheld by certain lenders, with
respect to certain tranches of CMO-IV.
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 (collectively, "Prudential") (the
"Prudential Program").
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.
On April 5, 1999, the Bankruptcy Court entered a Stipulation and
Consent Order (the "Order"), negotiated by the Company and Citibank. The
negotiations were in response to a letter Citibank sent to the Company on
October 5, 1998 alleging that the Company was in default under the Citibank
Program and that it was terminating the Citibank Program. The Order provided
that Citibank would, 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 could be waived by
written agreement of the Company, the Unsecured Creditors' Committee and the
Equity Committee.
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. On September 16, 1999, the remaining three loans were sold for gross
proceeds of approximately $27.2 million. The loans sold had an aggregate
principal balance of $32.7 million. Prior to the actual sale of these loans, the
Company had recorded its unrealized losses based on pricing data received from
Citibank. In the case of each sale of the commercial loans, the minimum net
proceeds provision was waived by agreement of the Company, the Unsecured
Creditors' Committee and the Equity Committee. For GAAP purposes, the Company
realized $36.3 million of losses from the third quarter of 1998 through the
third quarter of 1999. For income tax purposes, the entire loss of $36.3 million
was recorded as a realized loss on the loan sale dates in the third quarter of
1999. See also Note 8 regarding the impact of this transaction on tax basis
income.
Under the Prudential Program, the Company had an option to pay to
Prudential the face value of the loan 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
D-28
<PAGE>
for securitization had been made. Under the Prudential Program, the Company was
required to fund a reserve account of approximately $2 million for the sole loan
originated under this Program. Since CRIIMI MAE was unable to exercise its
option under the Prudential Program, the Company forfeited the amount of the
reserve account. CRIIMI MAE intends to sell the loan originated under the
Prudential Program. There can be no assurance that an agreement will be reached
with Prudential or, if an agreement is reached, that such agreement would be
approved by the Bankruptcy Court.
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 Freddie Mac participation certificates which are
collateralized by GNMA Mortgage-Backed Securities, as discussed below. As of
December 31, 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 mortgage securities directly or
indirectly through its wholly owned subsidiaries:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
Weighted
Number of Average
Mortgage Effective Weighted Average
Securities Fair Value (1) Amortized Cost Interest Rate Remaining Term
---------------------------- ---------------- -------------------------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 1 $ 5,268,982 $ 5,429,746 8.00% 35 years
CRIIMI MAE Financial Corporation (2) 36 123,757,775 126,621,745 8.40% 29 years
CRIIMI MAE Financial Corporation II (2) 49 204,437,012 212,474,158 7.24% 27 years
CRIIMI MAE Financial Corporation III (2) 23 61,393,470 62,943,459 7.84% 29 years
----------- --------------- ---------------- -------------- ----------------
109 $394,857,239 $ 407,469,108 7.68% (3) 28 years (3)
=========== =============== ================ ============== ================
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
Weighted
Number of Average
Mortgage Effective Weighted Average
Securities Fair Value (1) Amortized 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 40 161,382,142 158,832,182 8.26% 30 years
CRIIMI MAE Financial Corporation II 55 232,560,966 231,973,794 7.18% 28 years
CRIIMI MAE Financial Corporation III 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) The fair value of the mortgage securities is based on quoted market prices.
As of December 31, 1999 and 1998, all mortgage securities are classified as
Available for Sale and carried at fair value on the balance sheet.
(2) During the year ended December 31, 1999, there were 14 prepayments of
mortgage securities held by CRIIMI MAE's financing subsidiaries. These
prepayments generated net proceeds of approximately $74.0 million and
resulted in net financial statement gains of approximately $2.1 million,
which are included in gains on mortgage securities dispositions on the
accompanying consolidated statement of income for the year ended December
31, 1999.
(3) Weighted averages were computed using total face value of the mortgage
securities.
D-29
<PAGE>
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 or losses on
those mortgage securities, which is reported as a separate component of
shareholders' equity as of December 31, 1999 and 1998.
Descriptions of the mortgage securities owned, directly or indirectly
by CRIIMI MAE, which exceed 3% of the total carrying value of the consolidated
mortgage securities as of December 31, 1999, summarized information regarding
other mortgage securities and mortgage securities income earned in 1999, 1998
and 1997, including interest earned on the disposed mortgage securities, are as
follows:
<TABLE>
<CAPTION>
Mortgage Securities as of December 31, 1999 Mortgage Income Earned
-------------------------------------------------------------- ---------------------------------
Effective Final
Face Value Fair Value Amortized Interest Maturity
(1) (3)(5) Cost (1)(4) Rate Date Range 1999 1998 1997
------------- ------------- -------------------------------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CRIIMI MAE
GNMA MORTGAGE-BACKED SECURITIES
Other (1 mortgage security) $ 5,429,746 $ 5,268,982 $ 5,429,746 8.00% 02/2035 $ 435,493 $ 577,393 $ 589,078
------------- ------------- -------------- ----------- ----------- -----------
CRIIMI MAE FINANCIAL CORPORATION
FHA-INSURED CERTIFICATES
7.35%- 02/2019-
Other (24 mortgage securities) 62,472,559 61,419,696 62,495,543 11.00% 04/2034 5,667,594 7,755,402 7,811,938
GNMA MORTGAGE-BACKED SECURITIES
Bellhaven Nursing Center 14,033,383 13,829,669 14,033,383 8.63% 12/2031 1,178,951 1,185,310 1,191,145
7.93%- 11/2017-
Other (14 mortgage securities) 49,745,795 48,508,410 50,092,819 8.78% 06/2034 3,984,758 4,418,677 4,456,035
------------- ------------- -------------- ----------- ----------- -----------
126,251,737 123,757,775 126,621,745 10,831,303 13,359,389 13,459,118
------------- ------------- -------------- ----------- ----------- -----------
CRIIMI MAE FINANCIAL CORPORATION II
GNMA MORTGAGE-BACKED SECURITIES
Oakwood Garden Apartments 12,882,258 12,511,025 13,143,103 7.51% 10/2023 930,496 943,526 955,617
San Jose South 28,004,906 27,197,877 28,226,846 7.66% 10/2023 2,037,043 2,064,876 2,090,665
Somerset Park 28,805,689 27,964,507 29,311,240 7.41% 07/2028 2,110,507 2,130,465 2,149,005
Yorkshire Apartments 14,622,267 14,193,080 14,689,190 7.21% 07/2031 1,026,277 1,033,985 1,041,158
7.14%- 05/2021-
Other (45 mortgage securities) 126,239,682 122,570,522 127,103,779 8.02% 04/2035 9,251,288 10,590,552 10,693,819
------------ ------------- -------------- ----------- ----------- -----------
210,554,802 204,437,011 212,474,158 15,355,611 16,763,404 16,930,264
------------ ------------- -------------- ----------- ----------- -----------
CRIIMI MAE FINANCIAL CORPORATION III
GNMA MORTGAGE-BACKED SECURITIES
7.11% 08/2015-
Other (23 mortgage securities) 62,806,388 61,393,471 62,943,459 10.94% 02/2035 4,962,823 7,024,665 7,075,555
------------- ------------- -------------- ----------- ----------- -----------
Total Mortgage Securities $405,042,673 $394,857,239 $ 407,469,108 $31,585,230 $37,724,851 $38,054,015
============= ============= ============== =========== =========== ===========
7.05%-
Mortgage Security Dispositions 10.49% 1,819,941 5,337,892 11,371,386
----------- ----------- -----------
Mortgage Securities $33,405,171 $43,062,743 $49,425,401
=========== =========== ===========
Investment in Limited Partnerships $ - $ - $ 42,976
=========== =========== ===========
</TABLE>
(1) Principal and interest on mortgage securities is payable at level amounts
over the life of the mortgage asset. Total annual debt service payable to
CRIIMI MAE and its financing subsidiaries for the mortgage securities held
as of December 31, 1999 is approximately $36 million.
(2) The fair value of the mortgage securities is based on quoted market prices.
(3) Reconciliations of the carrying amount of CRIIMI MAE's mortgage securities
for the years ended December 31, 1999 and 1998 follow:
D-30
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Balance at beginning of year $ 488,095,221 $605,113,741
Addition during the year:
Amortization of discount 19,226 28,082
Adjustment to net unrealized gains on mortgage securities - 4,016,052
Deductions during the year:
Principal payments (4,219,336) (4,743,972)
Mortgage dispositions (71,875,703) (116,218,027)
Adjustment to net unrealized (losses) on mortgage securities (17,069,422) -
Accretion of premium (92,747) (100,655)
---------------- ----------------
Balance at end of year $ 394,857,239 $ 488,095,221
================ ================
</TABLE>
(4) All mortgages are collateralized by first or second liens on residential
apartment, retirement home, nursing home or townhouse complexes which have
diverse geographic locations and are FHA-Insured Certificates or GNMA
Mortgage-Backed Securities. Payment of the principal and interest on
FHA-Insured Certificates is insured by HUD pursuant to Title 2 of the
National Housing Act. Payment of the principal and interest on GNMA
Mortgage-Backed Securities is guaranteed by GNMA pursuant to Title 3 of the
National Housing Act. The investment in limited partnerships is not
federally insured or guaranteed.
(5) None of these mortgage securities are delinquent as of December 31, 1999.
D-31
<PAGE>
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 years ended December 31, 1999, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Consolidated financial statement net (loss) income $ (126,528,813) $ 42,368,593 $ 54,187,616
Reamortization of Subordinated CMBS 56,126,645 41,291,138 6,496,641
Interest expense adjustments for collateralized bond obligations (35,429,224) (22,748,840) -
Equity in earnings from investments 2,820,657 5,413,761 492,355
Net gains on mortgage dispositions 458,345 549,180 165,284
Gain on originated loan dispositions 286,234 - -
Amortization and other interest expense adjustments (67,320) (2,842,613) (1,537,367)
Amortization of assets acquired in the Merger 2,877,576 2,877,576 2,877,564
Losses on warehouse purchase obligations (28,328,173) 30,378,173 -
Loss on impairment of Subordinated CMBS 156,896,831 - -
Reorganization costs 9,052,925 5,268,080 -
Loss on property foreclosure (620,926) - -
Gain on sale of collateralized bond obligation - (28,800,408) -
Adjustment due to accounting for subsidiary as a pooling for
financial statement purposes and a purchase for tax purposes - - (2,132,613)
Other - (52,902) (7,947)
----------------- ----------------- -----------------
Tax basis income 37,544,757 73,701,738 60,541,533
Dividends paid or accrued on preferred shares (5,840,152) (6,997,859) (6,472,540)
----------------- ----------------- -----------------
Tax basis income available to common shareholders $ 31,704,605 $ 66,703,879 $ 54,068,993
================= ================= =================
Tax basis income per share:
Income before gains from CRI Liquidating $ 0.57 $ 1.38 $ 1.24
Capital gain from CRI Liquidating - - 0.21
----------------- ----------------- -----------------
Total tax basis income per share $ 0.57 $ 1.38 $ 1.45
================= ================= =================
Tax basis shares outstanding 55,166,675 48,502,522 37,334,034
================= ================= =================
</TABLE>
Differences between financial statement net (loss) income and the tax
basis income available to common shareholders principally relate to differences
in the methods of accounting for the sale of securities and trustee servicing
rights in conjunction with the CBO-2 transaction, Subordinated CMBS (see also
Note 5), the impairment on CMBS (see Note 5), unrealized losses on warehouse
purchase obligations, a portion of reorganization costs not deductible for tax
purposes, amortization of certain deferred costs, merger of the CRI Mortgage
Businesses, and prior to 1998, the merger of the CRIIMI funds.
The entire CBO-2 transaction was accounted for as a financing for tax
purposes. As such, the Company recognized 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 received a
deduction for the interest expense on the outstanding debt.
D-32
<PAGE>
As a result of the foregoing, the nature of the dividends for income
tax purposes on a per share basis is as follows:
<TABLE>
<CAPTION>
1999 (1)(2) 1998 (1) 1997 (1)
-------------- ------------ -----------
<S> <C> <C> <C>
Ordinary income $ - $ 1.39 $ 1.21
Long-term capital gains - 0.08 0.21
------------ ------------ ------------
$ - $ 1.47 $ 1.42
============ ============ ============
</TABLE>
(1) Dividends related to 1999 taxable income were not paid in 1999, therefore
no excess inclusion was reported in 1999. In 1998 and 1997, CRIIMI MAE
generated $0.1456 and $0.0977, respectively, per common share of excess
inclusion income from CBO-1 and for 1998 from CBO-2. The excess inclusion
income is taxable at the shareholder level, as CRIIMI MAE intends to
distribute substantially all of its taxable income. Excess inclusion income
cannot be offset by a net operating loss and is considered unrelated
taxable business income under Section 511.
(2) Due to the Chapter 11 filing, dividends have not been declared or paid
related to 1999.
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. See Note
17 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 December 31,
1999 and 1998:
<TABLE>
<CAPTION>
Year ended December 31, 1999
-------------------------------------------------------------------------
Effective Average Stated
Rate at Effective Maturity
Ending Balance Year End Average Balance Rate Date (7)
----------------- ---------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Securitized mortgage obligations:
Subordinated CMBS (1) $ 278,165,968 8.9% $ 217,285,484 8.9% Nov 2006-
Nov 2011
Freddie Mac funding note (2) 201,784,575 7.4% 211,889,272 7.4% Sept 2031
Fannie Mae funding note (3) 60,853,118 7.4% 66,918,215 7.4% March 2035
CMO (4) 116,073,909 7.4% 129,616,228 7.4% Jan 2033
CMO-loan originations (5) 399,768,513 6.6% 388,431,011 6.5% Oct 2001-
May 2008
Variable-rate secured borrowings -
Subordinated CMBS 732,904,775 7.7% 794,212,980 6.2% Various
Bank term loans (6) 3,050,000 7.8% 3,050,000 7.1% Dec 1998
Working capital line of credit 40,000,000 8.2% 40,000,000 7.0% Dec 1998
Bridge loan 49,749,522 8.7% 49,749,522 7.5% Feb 1999
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002
-----------------
Total $ 1,982,350,380
=================
</TABLE>
D-33
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1998
------------------------------------------------------------
Effective Average
Rate at Average Effective
Ending Balance Year End Balance Rate
----------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Securitized mortgage obligations:
Subordinated CMBS (1) $ 117,831,435 7.7% $ 122,861,289 7.6%
Freddie Mac funding note (2) 220,822,380 7.4% 229,137,117 7.4%
Fannie Mae funding note (3) 84,750,764 7.3% 119,316,182 7.3%
CMO (4) 150,528,576 7.4% 166,408,357 7.4%
CMO-loan originations (5) 386,752,951 6.5% 222,114,163 6.5%
Variable-rate secured borrowings-
Subordinated CMBS 932,236,674 7.2% 802,562,377 6.8%
Bank term loans (6) 3,050,000 1.8% 3,000,238 3.9%
Working capital line of credit 40,000,000 7.2% 21,918,727 7.3%
Bridge loan 49,749,522 7.8% 19,765,489 7.7%
Senior unsecured notes 100,000,000 9.1% 99,902,312 9.1%
-----------------
Total $ 2,085,722,302
=================
</TABLE>
(1) As of December 31, 1999 and 1998, the face amount of the debt was
$328,446,000 and $122,612,000 with an unamortized discount of $50,280,032
and $4,780,565, respectively. During the year ended December 31, 1999 and
1998, discount amortization of $2,986,001 and $156,823 respectively, was
recorded as interest expense.
(2) As of December 31, 1999 and 1998, the face amount of the note was
$209,506,965 and $229,005,558, respectively, with unamortized discount of
$7,722,390 and $8,183,178, respectively. During the year ended December 31,
1999 and 1998, discount amortization of $460,788 and $473,122,
respectively, was recorded as interest expense.
(3) As of December 31, 1999 and 1998, the face amount of the note was
$62,359,630 and $86,620,792, respectively, with unamortized discount of
$1,506,512 and $1,870,028, respectively. During the year ended December 31,
1999 and 1998, discount amortization of $363,516 and $530,222,
respectively, was recorded as interest expense.
(4) As of December 31, 1999 and 1998, the face amount of the note was
$119,563,094 and $154,840,829, respectively, with unamortized discount of
$3,489,185 and $4,312,253, respectively. During the year ended December 31,
1999 and 1998, discount amortization of $823,068 and $474,210,
respectively, was recorded as interest expense.
(5) As of December 31, 1999 and 1998, the face amount of the debt was
$411,110,641 and $392,752,908 with unamortized discount of $11,342,128 and
$5,999,957, respectively. During the year ended December 31, 1999 discount
amortization of $1,404,887 and $591,817, respectively, was recorded as
interest expense.
(6) The effective interest rate as of December 31, 1999 and 1998 includes the
impact of a rate reduction agreement which was in place from July 1995
through December 31, 1999, providing for a reduction in the rate on a
portion of the loans based on balances maintained at the bank.
(7) Stated maturities per respective loan agreements. The maturities of CRIIMI
MAE's debt are as follows:
<TABLE>
<S> <C>
2000 $ 940,636,013
2001 14,179,989
2002 15,290,919
2003 17,692,401
2004 20,920,298
2005 - 2035 1,047,971,008
-----------------------
$ 2,056,690,628 (a)
=======================
</TABLE>
(a) Assumes all non-securitized mortgage obligations mature in 2000 due to
Chapter 11 proceedings and contemplated Plan. Payments of principal on the
securitized mortgage obligations are required to the extent mortgage
principal is received on the related collateral. The projected principal
paydown on the securitized mortgage obligations is based upon the stated
terms of the underlying mortgages. These amounts do not include the
associated unamortized discount.
D-34
<PAGE>
COLLATERALIZED 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. Of
the $468 million in investment grade securities, $345 million were non-callable
securities and $123 million were callable securities.
On March 5, 1999, $205.8 million face amount of callable CBO-2 BBB
Bonds with a coupon rate of 7% were sold. 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.
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 the May 1998 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. The March 5, 1999 transaction
was accounted for as a financing by the Company rather than a sale. This
resulted in CRIIMI MAE recognizing a fixed-rate liability for these bonds in the
amount of the gross proceeds.
COLLATERALIZED MORTGAGE OBLIGATIONS - INSURED MORTGAGE SECURITIES
During late 1995, CRIIMI MAE, through three wholly owned financing
subsidiaries, issued approximately $664 million (face amount) of long-term,
fixed-rate debt in order to refinance short-term, variable-rate debt. Changes in
interest rates will have no impact on the cost of funds or the collateral
requirements on this debt. Proceeds from the issuance of this long-term debt,
net of original issue discount, were originally applied as follows:
approximately $557 million was used to pay down short-term, variable-rate debt
facilities, approximately $8 million was used to pay transaction costs and
approximately $80 million was used to purchase Subordinated CMBS.
The refinancings were completed through three separate transactions.
GNMA Mortgage-Backed Securities with a fair value of approximately $233 million
as of December 31, 1998, were pledged as security for a funding note payable to
Freddie Mac (the "Freddie Mac Funding Note"). The Collateralized Mortgage
Obligations (CMOs) were collateralized by FHA-Insured Certificates and GNMA
Mortgage-Backed Securities with a fair value of approximately $161 million as of
December 31, 1998. GNMA Mortgage-Backed Securities with a fair value of
approximately $89 million as of December 31, 1998, were pledged as security for
a funding note payable to Fannie Mae (the "Fannie Mae Funding Note").
Each of the above-mentioned transactions has been accounted for as a
financing in accordance with FASB Technical Bulletin 85-2. The discount on the
CMOs and the Funding Notes is being amortized on a level yield basis.
COLLATERALIZED MORTGAGE OBLIGATIONS - ORIGINATED LOANS
In the June 1998 CMO-IV transaction, $496 million of originated or
acquired commercial mortgage loans were securitized, and 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
D-35
<PAGE>
mortgage loans remain on CRIIMI MAE's balance sheet as assets for accounting
purposes (along with these collateralized mortgage obligations) 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 with an aggregate fair value of
approximately $42.8 million and $92.9 million as of December 31, 1999 and 1998,
respectively.
On April 5, 1999, the Company finalized an agreement by which Salomon
Smith Barney, in cooperation with CRIIMI MAE, agreed to sell the remaining 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 sold
these two classes of CMBS in May and October 1999. 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
has been accounted for as a financing and not a sale. Gross proceeds from the
sale were used to pay off $39.6 million of secured debt and certain costs, and
the remainder of approximately $315,000 was remitted to CRIIMI MAE. This
resulted in CRIIMI MAE recognizing fixed-rate debt for these bonds in the amount
of the gross proceeds received.
VARIABLE-RATE SECURED BORROWINGS-CMBS
As previously discussed, when CRIIMI MAE purchased Subordinated CMBS,
it initially financed (generally through short-term, variable-rate 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 December
31, 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 expired in 1999.
As discussed above, on March 5, 1999, the CBO-2 BBB Bonds were sold in
a transaction that was accounted for as 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 previously discussed, in May and October 1999, a portion of the
CMO-IV CMBS was sold in a transaction that was accounted for as a financing
rather than a sale. Of the $39.9 million of net sale proceeds, $39.6 million was
used to repay variable-rate secured borrowings.
As discussed in Note 5, the Wells Fargo Bonds were sold in February
2000. Of the $45.9 million in net sale proceeds, $37.5 million was used to repay
variable-rate secured borrowings.
The secured borrowing agreements are secured by certain rated CMBS
security tranches with an aggregate fair value of approximately $784 million as
of December 31, 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 maximum loan-to-value ratio. If the
value of the collateral is perceived such that the maximum loan-to-value ratio
is exceeded, then the lender may require the Company to post cash or additional
collateral with sufficient value to cure the perceived value deficiency. At
December 31, 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 has 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 position of Citicorp and has filed a complaint contesting their
claims of ownership. If, however, Citicorp prevails, 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 and the corresponding obligations would also
decrease. See Note 17.
D-36
<PAGE>
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,
restricts the ability of the Company and its subsidiaries to incur additional
indebtedness, pay dividends, or make distributions in respect of the Company's
or such subsidiaries' capital stock, make other restricted payments, enter into
transactions with affiliates or related persons, or consolidate, merge or sell
all or substantially all of their assets. These covenants are subject to
exceptions and qualifications.
Under the terms of the Indenture, the Company can not incur additional
indebtedness (except for Permitted Debt, which included secured borrowings,
working capital lines of credit, 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.
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 requires quarterly principal
payments of $650,000 and matured on December 31, 1998. The amount outstanding as
of December 31, 1999 and 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, 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 December
31, 1999 and 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 would be used to pay
off the outstanding loan balance and the remaining proceeds are expected to be
retained by the Company.
WORKING CAPITAL LINE OF CREDIT
In 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 December 31, 1999 and 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 December 31, 1999
and 1998, approximately $50 million in borrowings was outstanding under this
loan.
D-37
<PAGE>
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 December 31, 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 December 31, 1999 and 1998, 94% and 79%,
respectively, of CRIIMI MAE's variable-rate debt is hedged.
For the year ended December 31, 1999, CRIIMI MAE's weighted average
cost of borrowing, including amortization of discounts and deferred financing
fees of approximately $8.7 million, was approximately 7.64%. As of December 31,
1999, CRIIMI MAE's debt-to-equity ratio was approximately 9 to 1 and CRIIMI
MAE's non-match-funded debt-to-equity ratio was approximately 4 to 1. 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.
See Note 1 "Organization-The Plan of Reorganization" for a discussion
of the New Debt contemplated by the Company's Plan.
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 currently qualify for hedge accounting
treatment. Therefore the related cost, as well as gains or losses on terminated
positions, have been deferred and recognized into income over the life of the
related debt. However, with the sale of certain CMBS under the Plan, the
Company's interest rate caps may no longer qualify for hedge accounting. The
portion of such caps will be marked-to-market with the adjustment flowing
through earnings. At December 31, 1999, the caps have a fair market value of
$1.5 million and a book basis of $1.1 million. At December 31, 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 (3)
-------------------- ------------------- -------------------- --------- ------------
<S> <C> <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 12, 2001 6.6875% 1M LIBOR
100,000,000 April 30, 1998 March 30, 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 one year.
(3) The one-month LIBOR rate was 5.8225% at December 31, 1999.
D-38
<PAGE>
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.
11. COMMON STOCK
CRIIMI MAE had 59,954,604 and 52,898,100, common shares issued and
outstanding as of December 31, 1999 and 1998, respectively. The following
material transactions occurred during the year.
- In September 1999, the Company declared a dividend to common
shareholders payable in shares of a new series of preferred stock
designated as Series F Redeemable Cumulative Dividend Preferred
Stock with a face value of $10 per share. The Series F Preferred
Stock was convertible into shares of common stock during two,
10-business day windows. During the first conversion period
(November 15 through November 30, 1999), 756,453 shares of Series
F Preferred Stock were converted, resulting in the issuance of
6,401,443 shares of common stock. During the second and final
conversion period for the Series F Preferred Stock (January 21
through February 3, 2000), 263,788 additional shares were
converted, resulting in the issuance of 2,396,566 shares of
common stock. See Note 12 for further discussion.
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 "Stock Plan"). Subsequently, in May 1998, the shareholders approved the
issuance of up to 4.7 million common shares in connection with the Stock Plan.
In October 1998, due to the Chapter 11 filing, the Company suspended the initial
cash investment and optional cash payment portion of the Stock Plan until
further notice. Subject to the suspension referenced above, the Stock 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. Subject to the suspension referenced above,
participants in the Stock Plan and interested investors can:
- Invest by making optional cash payments at any time up to a maximum of
$10,000 per month, regardless of whether the participants' dividends are
being reinvested.
- Make an initial cash investment up to a maximum of $10,000.
- Invest by making an initial cash investment in excess of $10,000 or
optional cash payment in excess of $10,000 per month, subject to permission
of the Company, regardless of whether the participants' dividends are being
reinvested.
- Automatically reinvest cash dividends on all or a portion of their Common
Shares.
To fulfill Stock Plan requirements, Common Shares were, at CRIIMI MAE's
option, purchased in the open market or in privately negotiated transactions or
from the Company. The price to participants of Common Shares purchased with
reinvested dividends or with optional cash payments that do not exceed $10,000
reflected a discount, initially, of 2% from the market price. Common shares
purchased with optional cash payments exceeding $10,000 (as approved by the
Company) would have reflected a discount ranging from 0% to 5%. No discount was
offered on Common Shares purchased under the Stock Plan with initial cash
investments. All costs of administering the Stock Plan were paid by CRIIMI MAE.
There were no brokerage fees, commissions or service charges associated with the
purchase of Common Shares through the Stock Plan.
D-39
<PAGE>
DIVIDENDS
The Company paid the following common share dividends:
<TABLE>
<CAPTION>
1999 Dividends 1998 Dividends 1997 Dividends
Quarter Ended per Share (1) per Share per Share
----------------- -------------- -------------- --------------
<S> <C> <C> <C>
March 31 $ -- $0.37 $0.35
June 30 -- 0.40 0.35
September 30 -- 0.40 0.35
December 31 -- 0.30 (2) 0.37
----- ----- -----
$ -- $1.47 $1.42
===== ===== =====
</TABLE>
---------------
(1) During the pendency of the bankruptcy proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy
Court approval. (See Note 1-Effect of Chapter 11 Filing on REIT Status and
other Tax Matters). The Plan provides that no cash dividends, other than a
maximum of $4.1 million to preferred shareholders, shall be paid to
existing shareholders. See BUSINESS - The Plan of Reorganization for
further discussion.
(2) On September 14, 1999, the Board of Directors (the "Board") of CRIIMI MAE
declared a dividend on its common stock, par value $0.01 per share, for
the purpose of distributing approximately $15.7 million in undistributed
1998 taxable income. The dividend was payable to shareholders of record on
October 20, 1999, provided that shareholders maintained ownership of their
common stock through the payment date, November 5, 1999. The dividend was
paid in shares of a new series of preferred stock of the Company with a
face value of $10.00 per share, designated as Series F Redeemable
Cumulative Dividend Preferred Stock. See Note 12 for further discussion.
TREASURY SHARES
In March 1998, approximately 540,000 treasury shares were retired.
12. PREFERRED STOCK
CRIIMI MAE's charter authorizes the issuance of up to 25,000,000
shares of preferred stock, of which 3,000,000 shares have been designated as
Series B Cumulative Convertible Preferred Stock, 300,000 shares have been
designated as Series C Cumulative Convertible Preferred Stock, 300,000 shares
have been designated as Series D Cumulative Convertible Preferred Stock and
1,610,000 shares have been designated as Series F Redeemable Cumulative Dividend
Preferred Stock as of December 31, 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 Stock, with a par value of
$0.01 per share (the "Series B Preferred Stock"), at an aggregate offering price
of $60,375,000. The Series B Preferred Stock pays 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 Stock is (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 share of Series B Preferred Stock
was convertible into 2.2844 shares of common stock, subject to adjustment upon
the occurrence of certain events. Due to certain adjustment provisions in the
Series B Preferred Stock Articles Supplementary, the payment of the Series F
Redeemable Cumulative Dividend Preferred Stock dividend resulted in an
adjustment to the conversion price such that one share of Series B Preferred
Stock is now convertible into 2.6379 shares of common stock. The liquidation
preference and the redemption price on the Series B Preferred Stock equals $25
per share, together with accrued but unpaid dividends. There were 1,593,982
shares of Series B Preferred Stock outstanding as of December 31, 1999.
Dividends accrued on Series B
D-40
<PAGE>
Preferred Stock totaled $5,419,539 as of December 31, 1999 (of which, $4,335,631
was accrued during 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 had the right to sell, and
such investor was obligated to purchase, up to 300,000 shares of Series C
Cumulative Convertible Preferred Stock, par value $.01 per share (the "Series C
Preferred Stock"), through June 1998 at a price of $100 per share. The Series C
Preferred Stock paid 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 Series C Preferred Stock was convertible into shares of common
stock at the option of the holders and were subject to redemption by CRIIMI MAE.
The outstanding Series C Preferred Stock was subject to mandatory conversion
into common shares on February 23, 2000. Each share of Series C Preferred Stock
was convertible into common shares based on a formula, the numerator of which is
$100 and the denominator of which is a closing trade price of the common stock
within the conversion period or the average of the closing trade prices of the
common stock over the applicable twenty-one (or such fewer number as is mutually
acceptable) day period immediately preceding the date of delivery. The
liquidation preference and redemption prices on the Series C Preferred Stock was
$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, another 150,000 shares of Series C Preferred Stock were
issued under this agreement, resulting in net proceeds of approximately $15
million. These proceeds were used to fund purchases of Subordinated CMBS. During
1999, 20,000 shares of Series C Preferred Stock were converted into 653,061
common shares, resulting in 103,000 shares of Series C Preferred Stock
outstanding at December 31, 1999. Dividends accrued on Series C Preferred Stock
as of December 31, 1999 totaled $956,311 (of which $697,172 was accrued for 1999
and $259,139 for the fourth quarter of 1998, but not paid to date as a result of
the Chapter 11 filing). Subsequent to December 31, 1999, the Series C Preferred
Stock was exchanged for Series E Cumulative Convertible Preferred Stock. See
below for further discussion.
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 (the "Series D Preferred
Stock") at price of $100 per share. The Series D 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 Series D Preferred Stock is
convertible into shares of common stock at the option of the holders and is
subject to redemption by CRIIMI MAE. The outstanding Series D Preferred Stock is
subject to mandatory conversion into common shares on July 31, 2000. Each share
of Series D Preferred Stock is convertible into common shares based on a
formula, the numerator of which is $100 and the denominator of which is a
closing trade price of the common stock within the conversion period or the
average of the closing trade prices of the common stock over the applicable
twenty-one (or such fewer number as is mutually acceptable ) day period
immediately preceding the date of delivery. The liquidation preference and
redemption prices on the Series D Preferred Stock are $100 and $106,
respectively, per share plus an amount equal to all dividends accrued and unpaid
thereon. On July 31, 1998, 100,000 shares of Series D Preferred Stock were
issued under this agreement, resulting in net proceeds of approximately $10
million. There was no Series D Preferred Stock converted to common shares during
1999, resulting in 100,000 shares outstanding at December 31, 1999. Dividends
accrued on Series D Preferred Stock totaled $800,753 as of December 31, 1999 (of
which, $645,822 was accrued for 1999 and $154,931 was accrued for the fourth
quarter of 1998, but not paid to date as a result of the Chapter 11 filing).
SERIES E CUMULATIVE CONVERTIBLE PREFERRED STOCK
On February 22, 2000, CRIIMI MAE and the holder of its Series C
Preferred Stock entered into a Preferred Stock Exchange Agreement (the "Exchange
Agreement") pursuant to which 103,000 shares of Series C Preferred Stock were
exchanged (the "Exchange") for 103,000 shares of a new series of preferred stock
designated as "Series E Cumulative Convertible Preferred Stock", par value $0.01
per share (the "Series E Preferred Stock"). The
D-41
<PAGE>
principal purpose of the Exchange was to effect an extension of the mandatory
conversion date, upon which the Series C Preferred Stock would have converted
into common stock.
Until the Company's Plan is effective, the principal terms of the
Series E Preferred Stock are as set forth below. The Series E 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 commencement of
the calendar quarter which includes such quarterly dividend payment.
Quarterly dividends payable with respect to calendar quarters and any partial
quarter shall be payable in common stock. The Series E Preferred Stock is not
convertible into shares of common stock at the option of the holder unless
the effective date of the Plan does not occur on or before December 31, 2000.
In such event, 5,000 shares of Series E Preferred Stock shall become
convertible at the option of the holder into common stock in January 2001 and
in each month thereafter until the effective date of the Plan. If the Series
E Preferred Stock becomes convertible into common stock, then each share of
Series E Preferred Stock shall be convertible into common stock based on a
formula, the numerator of which shall be $100 and the denominator of which
shall be the closing trade price of the common stock within the conversion
period or the average of the closing trade prices of the common stock over
the applicable twenty-one (or such fewer number as is mutually acceptable)
day period immediately preceding the date of delivery. The Series E Preferred
Stock is subject to redemption by CRIIMI MAE. The liquidation preference and
the redemption prices on the Series E Preferred Stock are $100 and $106,
respectively, per share plus an amount equal to all dividends accrued and
unpaid thereon.
Once the Company's Plan is effective, amendments to the Series E
Preferred Stock relative rights and preferences, relating principally to
conversion and dividend rights and terms, would be effected, including an
increase in the dividend rate, a new mandatory conversion date and the
provision of additional conversion rights. Reference is made to the Plan,
previously filed with the SEC as an exhibit to a Current Report on Form 8-K,
for a complete description of such amendments to the relative rights and
preferences of the Series E Preferred Stock, as contemplated by the Plan.
SERIES F REDEEMABLE CUMULATIVE DIVIDEND PREFERRED STOCK
On September 14, 1999, the Company declared a dividend on its common
stock for the purpose of distributing approximately $15.7 million in
undistributed 1998 taxable income. The dividend was payable to common
shareholders of record on October 20, 1999, provided that the shareholders
maintained ownership of their common stock through the payment date. The
dividend was paid on November 5, 1999 in shares of Series F Redeemable
Cumulative Preferred Dividend Preferred Stock ("Series F Preferred Stock"). The
1,606,595 Shares of Series F Preferred Stock issued were approved for listing on
the New York Stock Exchange and trade with the symbol CMM-PrF, with a par value
of $0.01 and a face value of $10.
Holders of record of each share of CRIIMI MAE common stock who
maintained ownership of their common stock through November 5, 1999, received
3/100ths of a share of the new Series F Preferred Stock (i.e., three shares of
Series F Preferred Stock for every 100 shares of common stock held). The Series
F Preferred Stock was convertible into shares of common stock during two
10-business day conversion periods. The first conversion period was from
November 15, 1999 through November 30, 1999, and the second conversion period
was from January 21, 2000 through February 3, 2000. Conversions were based on
the volume-weighted average of the sale prices of the common stock for the
10-trading days prior to the date converted, subject to a floor of 50% of the
volume-weighted average of the sale prices of the common stock on November 5,
1999. Holders of Series F Preferred Stock have no right to convert their Series
F Preferred Stock into common stock after February 3, 2000.
The Series F Preferred Stock provides for cash dividends at an
annual fixed rate of 12%. The first dividend will be paid no earlier than the
end of the calendar quarter in which a plan of reorganization for the Company
becomes effective, and no more than quarterly thereafter. Series F Preferred
Stock is redeemable at the Company's option after November 5, 2000 at a price of
$10.00 per share plus accrued but unpaid dividends. In addition, the liquidation
value of Series F Preferred Stock is $10.00 per share plus accrued but unpaid
dividends.
During the first conversion period 756,453 shares of Series F
Preferred Stock were converted, resulting in the issuance of 6,401,443 shares of
common stock. After giving effect to the shares converted during the first
conversion period, there were 850,142 shares of Series F Preferred Stock
outstanding as of December 31, 1999. During the second and final conversion
period (January 21 through February 3, 2000) for the Series F Preferred
D-42
<PAGE>
Stock 263,788 additional shares were converted, resulting in the issuance of
2,396,566 shares of common stock. Dividends accrued on Series F Preferred Stock
totaled $161,527 as of December 31, 1999.
13. EARNINGS PER SHARE
The following table reconciles basic and diluted (loss) earnings per
share under FAS 128 for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Per Share
(Loss) Income Shares Amount
------------- ---------- --------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Basis earnings per share:
(Loss) available to common shareholders $(132,368,965) 53,999,782 $(2.45)
Dilutive effect of securities:
Stock options --
Convertible preferred stock -- --
------------- ---------- -------
Diluted earnings per share (1):
(Loss) available to common shareholders and
assumed conversions $(132,368,965) 53,999,782 $(2.45)
============= ========== =======
YEAR ENDED DECEMBER 31, 1998
Basis earnings per share:
Income available to common shareholders $ 35,370,374 47,280,371 $0.75
Dilutive effect of securities:
Stock options -- 302,390
Convertible preferred stock 264,011 622,748
------------- ---------- -------
Diluted earnings per share (1):
Income available to common shareholders and
assumed conversions $ 35,634,385 48,205,509 $0.74
============= ========== =======
YEAR ENDED DECEMBER 31, 1997
Basis earnings per share:
Income available to common shareholders $ 47,715,076 36,993,130 $1.29
Dilutive effect of securities:
Stock options 1,024,400
Convertible preferred stock 320,379 334,110
------------- ---------- -------
Diluted earnings per share (1):
Income available to common shareholders and
assumed conversions $ 48,035,455 38,351,640 $1.25
============= ========== =======
</TABLE>
---------------------------
(1) 1,593,982, 1,593,982 and 1,679,376 shares of Series B Preferred Stock were
outstanding at the end of 1999, 1998 and 1997, respectively; 103,000
shares of Series C Preferred Stock, 100,000 shares of Series D Preferred
Stock and 850,142 shares of Series F Preferred Stock were outstanding at
December 31, 1999. The common stock equivalents for these shares were not
included in the calculation of diluted EPS because the effect would be
anti-dilutive.
D-43
<PAGE>
14. STOCK BASED COMPENSATION PLANS
CRIIMI MAE has two stock option plans, the Stock Option Plan for Key
Employees ("Key Employee Plan") and the 1996 Non-Employee Director Stock Plan
("Director Plan"). In addition, CRIIMI MAE has granted to each of Messrs.
Dockser and Willoughby options to purchase common stock under separate stock
option agreements (the "Agreements") resulting from the Merger. CRIIMI MAE
accounts for these Agreements and Plans under APB Opinion No. 25, under which no
compensation cost has been recognized. The value of option shares granted as
part of the Merger was capitalized as a component to goodwill. Accordingly, the
pro forma information below excludes option shares granted at the time of the
Merger. During 1996, FASB Statement No. 123 became effective. This Statement
requires pro forma disclosure of the impact on net income and earnings per share
as if the options were recorded at their estimated fair value at the issuance
date and amortized over the options' vesting period. Had compensation cost for
these Plans been determined consistent with FASB Statement No. 123, CRIIMI MAE's
net income and earnings per share would have been recorded at the following pro
forma amounts:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Net (loss) income available to common shareholders $ (132,368,965) $ 35,370,734 $ 47,715,076
================ ============== ==============
Pro forma net (loss) income available to common stockholders $ (133,490,853) $ 34,739,667 $ 47,553,237
================ ============== ==============
Basic earnings per share $ (2.45) $ 0.75 $ 1.29
================ ============== ==============
Pro forma basic earnings per share $ (2.47) $ 0.73 $ 1.29
================ ============== ==============
Diluted earnings per share $ (2.45) $ 0.74 $ 1.25
================ ============== ==============
Pro forma diluted earnings per share $ (2.47) $ 0.73 $ 1.25
================ ============== ==============
</TABLE>
The Key Employee Plan currently provides for grants of stock options
to purchase up to 2,092,903 shares of Company Common Stock (as adjusted from
2,000,000 shares, as a result of the junior preferred stock dividend paid to
common shareholders in November 1999 and consistent with a Bankruptcy Court
order which limits the full adjustment to 2,198,831 shares of Company common
stock, contemplated by the terms and provisions of the Key Employee Plan,
until such time as the Company emerges from Chapter 11). CRIIMI MAE has
granted options net of forfeitures on 1,943,826 shares through December 31,
1999. Under the Key Employee Plan, options granted prior to July 28, 1995,
have an option price of $9.77, and options granted after July 28, 1995 must
have an option price of not less than fair market value of a share of common
stock on the date of grant. Options vest in equal installments on either the
first three or four anniversaries of the date of grant and expire after eight
years.
CRIIMI MAE may grant options for up to 501,640 common shares under
the Director Plan (as adjusted from 500,000 shares as a result of the junior
preferred stock dividend paid to common shareholders in November 1999 and
consistent with a Bankruptcy Court order which limits the full adjustment to
501,312 shares of Company common stock, contemplated by the terms and
provisions of the Director Plan, until such time as the Company emerges from
Chapter 11). CRIIMI MAE has granted options on 8,000 common shares through
December 31, 1999. Under the Director Plan, the option exercise price is
equal to the market price of a share of common stock on the date of grant,
the options vest immediately, and the options expire after ten years.
Under the Agreements, each of the Principals received from CRIIMI
MAE options to purchase 1,000,000 common shares at an exercise price equal to
$1.50 per share more than the aggregate average of the high and low sales
prices of common shares on the New York Stock Exchange during the 10 trading
days preceding the closing date of the Merger, which average sales price was
calculated at $8.27 per share (the "Trading Price") and 400,000 common shares
at an exercise price equal to $4.00 per share more than the Trading Price.
These options vest in equal installments on the first four anniversaries of
the closing date. The Principals also received options to purchase 100,000
common shares exercisable at $5.00 more than the Trading Price that vest on
the fifth anniversary
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<PAGE>
of the closing date. The options expire on the sixth anniversary of the
closing date of the Merger. The aggregate 3,000,000 common shares issuable
upon exercise of the options granted under the Agreement have been adjusted
to an aggregate 3,165,929 common shares as a result of the junior preferred
stock dividend paid to common shareholders in November 1999.
A summary of CRIIMI MAE's two stock option plans, plus options granted
at the time of the Merger, at December 31, 1999, 1998 and 1997, and changes
during the years then ended is presented in the table below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- -------------------- ---------------------
Average Average Average
Shares Price Shares Price Shares Price
--------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 4,087,145 $ 12.15 3,487,676 $ 11.40 3,091,500 $ 10.62
Granted 745,590 2.53 776,000 15.75 514,500 15.58
Exercised -- -- (69,699) 9.94 (73,741) 9.79
Forfeited (255,017) 11.41 (106,832) 15.29 (44,583) 13.44
--------- ------ ---------- ------ ---------- ------
Outstanding at end of year 4,577,718 $ 10.62 4,087,145 $ 12.15 3,487,676 $ 11.34
========= ====== ========== ====== ========== ======
Exercisable at end of year 2,619,957 $ 11.41 1,752,982 $ 10.85 1,073,059 $ 10.93
========= ====== ========== ====== ========== ======
Weighted average fair value of options granted
during the year $ 2.03 $ 1.33 $ 1.55
====== ======= =======
</TABLE>
The 4,577,718 options outstanding at December 31, 1999 have exercise
prices between $1.125 and $15.9375, with a weighted average exercise price of
$10.6211 and a weighted average remaining contractual life of 3.4 years.
The fair value of the 1999, 1998 and 1997 option grants was estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1999, 1998 and 1997,
respectively: risk-free interest rate of 5.37%, 4.95% and 6.10%; expected life
of 6.23, 8.00 and 2.60 years; expected volatility of 95.2%, 26.6% and 25.2%;
dividend yield of approximately 0%, 9.4% and 9.0%.
15. EMPLOYEE RETENTION PLAN
To ensure the Company's continued retention of its executives and other
employees and to provide meaningful incentives for these employees to work
towards the Company's financial recovery and reorganization, the Company's
management and Board of Directors developed a comprehensive and integrated
program to retain its executives and other employees throughout the
reorganization. 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 also provides for retention payments aggregating up
to approximately $3.5 million, including payments to certain executives. The
Employee Retention Plan permitted the Company to approve ordinary course
employee salary increases beginning in March 1999, subject to certain
limitations, and to grant options to its employees after the Petition Date, up
to certain limits. Retention payments are payable semiannually over a two-year
period. The first retention payment of approximately $909,000 vested on April 5,
1999 and was paid on April 15, 1999. The second retention payment of
approximately $865,000 vested on October 5, 1999 and was paid on October 15,
1999. The third retention payment of approximately $653,000 vested on April 5,
2000 and will be paid on April 14, 2000. The entire unpaid portion of the
retention payments will become immediately due and payable (i) upon the
effective date of a plan of reorganization of the Company and, with respect to
certain key executives, court approval or (ii) upon termination without cause.
William B. Dockser, Chairman of the Board of Directors, and H. William
Willoughby, President, are not currently entitled to receive any retention
payments. Subject to the terms of their respective employment agreements,
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<PAGE>
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.
16. TRANSACTIONS WITH RELATED PARTIES
Below is a summary of the related party transactions that occurred
during the years ended December 31, 1999, 1998 and 1997. These items are
described further in the text which follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
AMOUNTS RECEIVED OR ACCRUED FROM RELATED PARTIES:
CRIIMI Inc.
Income (1) $ 972,180 $1,340,730 $1,624,666
Return of Capital (2) 5,278,811 3,774,817 2,643,029
---------- ---------- ----------
Total $6,250,991 $5,115,547 $4,267,695
========== ========== ==========
CRI/AIM Investment Limited Partnership (1) $ 444,393 $ 552,121 $ 666,921
========== ========== ==========
CRIIMI MAE Services Limited Partnership (3) $ -- $3,114,000 $ --
========== ========== ==========
EXPENSE REIMBURSEMENTS TO CRIIMI MANAGEMENT:
AIM Funds and CRI Liquidating (4)(5) $ 183,579 $ 211,793 $ 350,239
CMSLP (2)(4) 946,461 76,621 12,616
---------- ---------- ----------
Total $1,130,040 $ 288,414 $ 362,855
========== ========== ==========
PAYMENTS TO CRI:
Expense reimbursement - CRIIMI MAE (4)(6) $ 182,691 $ 352,471 $ 399,162
========== ========== ==========
PAYMENTS TO THE ADVISER:
Annual fee - CRI Liquidating (7)(8) $ -- $ -- $ 11,468
========== ========== ==========
PAYMENTS TO CAPITAL HOTEL GROUP:
Management fee (9) $ 61,077 $ 4,691 $ 36,180
========== ========== ==========
</TABLE>
-----------------
(1) Included as equity in earnings from investments on the accompanying
consolidated statements of income.
(2) Included as a reduction of equity investments on the accompanying
consolidated balance sheets.
(3) This is a distribution included on the balance sheet as a decrease in
equity investments.
(4) Included in general and administrative expenses on the accompanying
consolidated statements of income.
(5) 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.
(6) 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
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<PAGE>
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.
(7) Included in the accompanying consolidated statements of income as fees to
related party.
(8) The adviser under the CRI Liquidating Advisory Agreement received an annual
fee for managing CRI Liquidating's portfolio of mortgages. Due to the final
liquidation of CRI Liquidating in 1997, no annual fees were paid for 1998
and 1999.
(9) 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.
17. 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 confirm and consummate their plan of
reorganization 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) the Unsecured Creditors' Committee, (ii) the Official
Committee of Unsecured Creditors in the CM Management Chapter 11 Case (the "CMM
Creditors' Committee") and (iii) the Equity Committee (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
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<PAGE>
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.
The Debtors' initial exclusivity period to file a plan of
reorganization ended on February 2, 1999. The Bankruptcy Court extended this
period through August 2, 1999 and again through September 10, 1999. The Debtors
sought a third extension of exclusivity through November 10, 1999 and on
September 20, 1999, the Bankruptcy Court entered an order (i) extending the
Debtors' right to file a plan of reorganization through October 16, 1999, (ii)
providing the Unsecured Creditors' Committee and the Equity Committee the right
to jointly file a plan of reorganization through October 16, 1999 and (iii)
providing that any party in interest may file a plan of reorganization after
October 16, 1999. The Debtors filed (i) a Joint Plan of Reorganization on
September 22, 1999, (ii) an Amended Joint Plan of Reorganization and proposed
Joint Disclosure Statement on December 23, 1999, and (iii) a Second Amended
Joint Plan of Reorganization and proposed Amended Joint Disclosure Statement on
March 31, 2000. The filing of the Debtors' Plan and Proposed Disclosure
Statement on March 31, 2000 was filed with the support of the Equity Committee,
which is a co-proponent of the Plan. Subject to the completion of mutually
acceptable Unsecured Creditor Debt Documentation, the Unsecured Creditors'
Committee has agreed to support confirmation of the Debtors' Plan.
On December 20, 1999, the Unsecured Creditors' Committee filed its own
plan of reorganization and proposed disclosure statement with the Bankruptcy
Court. On January 11, 2000 and on February 11, 2000, the Unsecured Creditors'
Committee filed its first and second amended plans of reorganization,
respectively, with the Bankruptcy Court and its amended proposed disclosure
statements with respect thereto. However, as a result of the successful
negotiations between the Debtors and the Unsecured Creditors' Committee, the
Unsecured Creditors' Committee has agreed to the treatment of unsecured claims
under the Debtors' Plan, subject to completion of mutually acceptable Unsecured
Creditor Debt Documentation, and has asked the Bankruptcy Court to defer
consideration of its second amended plan of reorganization and second amended
proposed disclosure statement. Accordingly, the Debtors, the Equity Committee
and the Unsecured Creditors' Committee are together presenting the Debtors' Plan
for approval by all classes of impaired creditors and equity security holders.
The Bankruptcy Court has scheduled a hearing for April 25 and April 26,
2000 on the Proposed Disclosure Statement. Once the Proposed Disclosure
Statement has been approved by the Bankruptcy Court, it will be sent, together
with the Plan with respect thereto, to members of all classes of impaired
creditors and equity security holders for acceptance or rejection. Following
voting on the 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. No date has
yet been set by the Bankruptcy Court for a confirmation hearing.
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.
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<PAGE>
BANKRUPTCY RELATED LITIGATION
The following is a summary of material litigation matters between the
Company and certain of its secured creditors since the Petition Date. The
Company has reached agreement with certain of these creditors, as set forth in
greater specificity below.
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 "Company's Distribution Share"). 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.
On September 7, 1999, the Company filed a Motion to Approve Stipulation
and Consent Order Providing for Adequate Protection. On or about September 27,
1999, the Unsecured Creditors' Committee and the Equity Committee filed a joint
objection to the motion. On December 3, 1999, the Bankruptcy Court entered the
Stipulation and Consent Order Providing Adequate Protection (the "Adequate
Protection Order"), certain provisions of which were effective retroactively.
Pursuant to the Adequate Protection Order, having a retroactive effect, a
segregated interest bearing debtor-in-possession account was created (the "Cash
Collateral Account") into which the Company's Distribution Share was deposited
during the months of August through December 1999. An additional 50% of the
Company's Distribution Share was deposited between January and March 2000. The
Adequate Protection Order provides Merrill Lynch with a first priority lien on
the Cash Collateral Account. Subject to certain material adverse changes defined
in the Adequate Protection Order, Merrill Lynch agreed not to seek further
adequate protection or relief from the automatic stay before March 31, 2000.
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
were 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
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<PAGE>
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 reached an agreement to sell the Wells
Fargo Bonds (the "Morgan Stanley Agreement"). CRIIMI MAE filed a motion with the
Bankruptcy Court to approve the Morgan Stanley Agreement on February 1, 2000.
That motion was approved by the Bankruptcy Court on February 24, 2000. On
February 29, 2000, the Wells Fargo Bonds were sold. Of the approximately $45.9
million in net sales proceeds, $37.5 million was used to pay off all outstanding
borrowings owed to Morgan Stanley and the remaining proceeds of approximately
$8.4 million will be used primarily to help fund CRIIMI MAE's Plan. Pursuant to
the terms of the Morgan Stanley Agreement, the Company and Morgan Stanley
mutually released any claims that they may have against each other and filed a
stipulation of dismissal with prejudice of the October 20, 1998 adversary
proceeding.
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. The Bankruptcy Court agreed to a request by CRIIMI MAE,
Citibank, and the Unsecured Creditors' Committee to further postpone the pending
litigation on July 7, 1999 and again on September 10, 1999. The trial has not
been rescheduled.
The agreements reached by the Company with Citicorp and Citibank on
March 11, 1999 were approved by the Bankruptcy Court through stipulations and
consent orders entered on April 5, 1999. One of the agreements also provided
that Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to 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. On October 8, 1999, the remaining CMO-IV securities
held by Holdings II were sold. This sale reduced the amounts owed from Holdings
II to Citicorp by approximately $22 million and Holdings II received net
proceeds of approximately $315,000. In addition, Citibank, in cooperation with
CRIIMI MAE, agreed to sell commercial mortgages originated in 1998 under the
Citibank Program, provided that the sale resulted in CRIIMI MAE receiving
minimum net proceeds of $3.5 million, after satisfying certain amounts due to
Citibank, from the amount held in the reserve account. On August 5, 1999, all
but three of the commercial loans originated under the Citibank Program, with an
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<PAGE>
aggregate unpaid principal balance of approximately $339 million, were sold
for gross proceeds of approximately $308 million. On September 16, 1999,
Citibank sold the remaining three loans, with an aggregate unpaid principal
balance of approximately $32.7 million, for gross proceeds of approximately
$27.2 million. In the case of each sale of the commercial loans, the minimum
net proceeds provision was waived by agreement of the Company, the Unsecured
Creditors' Committee and the Equity Committee.
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.
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 Unsecured Creditors' Committee, the Equity
Committee or First Union shall seek modification of the
adequate protection arrangements set forth in the agreement
for a period commencing upon the date 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 Unsecured Creditors' Committee has consented to
the agreement 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. On July 1, 1999, CM Management filed a motion for approval of the
agreement resolving First Union's motion for relief from the automatic stay.
Based upon an objection filed by the CMM Creditors' Committee, the parties are
discussing a possible modification to the agreement and continue to negotiate
accordingly. On October 22, 1999, to provide the parties with more time to
negotiate a modification to the agreement, CM Management, with the consent of
First Union and the CMM Creditors' Committee, advised the Bankruptcy Court that
it would be withdrawing the motion for approval of the agreement, without
prejudice to CM Management's right to re-file once an agreement has been reached
with First Union and the CMM Creditors' Committee. The motion was subsequently
withdrawn.
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<PAGE>
On or about February 18, 2000, the Company, the Unsecured Creditors'
Committee and First Union entered into a Second Stipulation and Agreed Order:
(i) Authorizing Use of Cash Collateral and (ii) Granting Other Relief (the
"Second Stipulation"). The Second Stipulation provides for, among other things,
the following:
(i) the reaffirmation of all of the terms contained in the July 1,
1999 agreement except as expressly provided in the Second
Stipulation;
(ii) the extension from January 1, 2000 through March 31, 2000 of
the provisions in the July 1, 1999 agreement relating to use
of the assignment securities income;
(iii) the extension from December 31, 1999 to March 31, 2000 of the
provisions in the July 1, 1999 agreement relating to (i) First
Union's agreement not to seek relief from the automatic stay
to foreclose on the assignment securities or the assignment
securities income and (ii) the agreement by First Union, the
Company and the Unsecured Creditors' Committee not to seek
modification of the adequate protection arrangements contained
in the July 1, 1999 agreement; and
(iv) the consummation of the Stipulation and Consent Order Selling
the Wells Fargo Bonds to Morgan Stanley, which occurred in
February 2000. See "Bankruptcy Related Litigation-Morgan
Stanley" for further discussion.
On February 22, 2000, the Company filed a motion with the Bankruptcy
Court for approval of the Second Stipulation. CRIIMI MAE, First Union and
Lehman also reached an agreement that calls for the sale of seven classes of
Subordinated CMBS known as First Union Lehman Brothers Series 98 C-2. The
agreement was filed with the Bankruptcy Court on March 21, 2000 for approval.
On March 28, 2000, the Bankruptcy Court approved the Second Stipulation.
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 GACC. On February 3, 1999, the Bankruptcy Court approved an
Amended Consent Order between the Company and GACC that provides for the
following: (i) acknowledgement that GACC has a valid perfected security interest
in its collateral; (ii) authority for GACC to hedge its loan, subject to a hedge
cost cap; and (iii) as adequate protection, the 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 Bankruptcy Court on May 11, 1999. The Company and GAAC had negotiated a
further extension of the stipulation through September 10, 1999, which has now
expired. On September 9, 1999, GAAC contacted the Company and requested similar
provisions afforded to Merrill Lynch in its most recent stipulation. See
"Bankruptcy Related Litigation-Merrill Lynch" for further discussion.
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 this "In Re CRIIMI MAE Inc.
Securities Litigation" (see below regarding dismissal of this 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, H. William Willoughby as a member of the
Board of Directors and an officer of CRIIMI MAE, and Cynthia O. Azzara as an
D-52
<PAGE>
officer of CRIIMI MAE (collectively, the "Defendants"). Although CRIIMI MAE,
CM Management and Holdings II have not been named as defendants, each company
is 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.
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.
Plaintiffs filed their Opposition to Defendants' Motion to Dismiss on September
24, 1999.
On September 13, 1999, the Court denied Plaintiffs' motions for
appointment of lead plaintiffs and for approval of selection counsel. The Court
also ordered Plaintiffs' counsel to provide notice of the putative claims to
institutional investors identified by Defendants. Finally, the Court ordered
that Plaintiffs nominate no more than three persons to serve as lead plaintiffs,
and that any potential lead plaintiffs nominate only one attorney or law firm to
serve as lead counsel.
On October 19, 1999, the Court approved the form of the renewed notice
to potential class members that the Plaintiffs submitted to the Court. The Court
also ordered the Defendants to provide a list of certain institutional investors
who had invested in the Company to the Plaintiffs to whom the renewed notice is
to be sent.
On December 10, 1999, the Defendants filed their Reply Brief to the
Plaintiffs' Opposition to the Motion to Dismiss.
On December 20, 1999, the Plaintiffs sent a notice of the Consolidated
Amended Complaint to certain institutional investors of their right to move the
Court to serve as lead plaintiffs of the class within sixty (60) days of the
notice. On March 9, 2000, the Plaintiffs filed a motion to approve the
nomination of three plaintiffs and one law firm to serve as lead counsel.
On March 23, 2000, the Defendants filed a Response to the Plaintiffs'
Motion to Approve the Nomination of Lead Plaintiffs and Lead Counsel. Although
the Defendants did not oppose the Plaintiffs' Motion, the Defendants expressly
reserved their rights under Rule 23 of the Federal Rules of Civil Procedure to
challenge, among other things, whether the action could be maintained as a class
action.
On March 30, 2000, the Court granted the Defendants' Motion to Dismiss
the Consolidated and Amended Complaint and as a result entered an Order and
Memorandum Opinion dismissing the Consolidated and Amended Complaint. The Court
concluded that the Plaintiffs failed to state a claim for relief under Section
10(b) of the Exchange Act. The Court concluded that because the Plaintiffs
failed to state a claim for a "primary violation" of Section 10(b) of the
Exchange Act, they likewise failed to state a claim against the individual
Defendants as controlling persons under Section 20(a) of the Exchange Act. This
dismissal does not dispose of other pending
D-53
<PAGE>
shareholder lawsuits and/or claims in bankruptcy which may affect the
Company, as more fully described under other subheadings of this section.
EDGE PARTNERS SETTLEMENT
In February 1996, Edge Partners, L.P. ("Edge Partners"), on behalf of
CRIIMI MAE, filed a First Amended Class and Derivative Complaint (the
"Derivative Complaint") in the United States District Court for the District of
Maryland, Southern Division (the "District Court"). The Derivative Complaint
named as defendants each of the individuals who served on the CRIIMI MAE board
of directors at the time of the Merger and CRIIMI MAE as a nominal defendant.
The Company was subject to indemnity obligations to the directors under
provisions of its constituent documents. In addition, the Company had directors
and officers liability insurance policies with a combined coverage limit of $5
million.
Count I of the Derivative Complaint alleged violations of Section 14(a)
of the Exchange Act for issuing a materially false and misleading proxy in
connection with the Merger and alleged derivatively on behalf of CRIIMI MAE a
breach of fiduciary duty owed to CRIIMI MAE and its shareholders. Edge Partners
sought, among other relief, that unspecified damages be accounted to CRIIMI MAE,
that the shareholder vote in connection with the Merger be null and void and
that certain salaries and other remuneration paid to the directors be returned
to the Company.
On June 16, 1998, the District Court approved a settlement agreement
(the "Settlement Agreement"). Under the terms of the Settlement Agreement, the
Company agreed to make certain disclosures relating to alleged conflicts between
two directors and the Company in connection with the Merger transaction and
adopted a non-binding policy relating generally to the approval of certain
interested transactions. Among other things, the non-binding policy adopted by
the Company's board of directors imposes certain conditions on the board's
approval of transactions between the Company and any director, officer or
employee who owns greater than 1% of the outstanding common shares of the
Company. Such conditions generally include: (1) approval by written resolution
of any transaction involving an amount in excess of $5 million in any year
adopted by a majority of the members of the board having no personal stake in
the transaction; and (2) in the case of any such transaction in excess of $15
million in any year, consideration by the board as to the formation of a special
committee of the board, to be comprised of at least two directors having no
personal stake in such transaction.
OTHER LITIGATION
The Company is aware that an alleged shareholder, on behalf of himself
and all others similarly situated, who purchased common stock in a registered
common stock offering made by the Company in January 1998, filed a class action
lawsuit against Prudential Securities Incorporated ("Prudential") and the
Company's independent public accountants (the "Recupito Complaint") in the
United States District Court for the District of Maryland. Neither the Company
nor any officer or director of the Company was named as a defendant in this
lawsuit.
The Recupito Complaint alleges generally that the registration
statement dated October 21, 1997, including a prospectus dated January 20, 1998
and supplemented on January 23, 1998, contained materially false and misleading
statements about the Company and its condition.
The Company may be subject to potential exposure to Prudential under
contractual provisions and to both defendants under applicable law. Prudential
may assert that it is entitled to indemnification from the Company based upon an
indemnification provision contained in the underwriting agreement entered into
with the Company in connection with the common stock offering. Certain courts
have held and it is the position of the SEC that indemnification for liabilities
arising under the Securities Act of 1933 is against public policy and
unenforceable.
The Company cannot predict with any certainty the ultimate outcome of
such litigation or its potential exposure to one or both of the defendants.
D-54
<PAGE>
CLAIMS
Over 850 claims with a face amount of nearly $2.5 billion have been
filed in these Chapter 11 cases, including approximately $355 million in
unsecured claims and approximately $2.2 billion in secured claims. Many of
these claims are duplicate claims filed by the same creditor in each of the
three cases. This amount is far in excess of the approximately $1.18 billion
in liabilities identified by the Debtors in their schedules, which were filed
with the Bankruptcy Court on November 20, 1998. The Debtors have undertaken
extensive efforts to cleanse the claims pool. In addition to analyzing the
claims, the Debtors have opened discussions with various creditors regarding
the withdrawal of certain claims and in some cases, have objected to claims.
The Debtors' efforts have resulted in the reduction of approximately $1.25
billion from the claims pool through objections, negotiated settlements and
withdrawal of claims.
Three large disputed claims remain unresolved: (i) the claim of Andrew
N. Friedman on behalf of a class of shareholders in the amount of $100 million
(the "Claim Number 330"); (ii) the claim of the Capital Company of America, LLC
("CCA") for approximately $18 million (the "CCA Claim") and (iii) the claim of
GP Properties Group, Inc., for approximately $882,000 (the "GP Properties
Claim").
Claim Number 330 relates to shareholders litigation against CRIIMI
MAE's officers and directors, which has already been discussed in "Legal
Proceedings-Shareholder Litigation." On March 20, 2000, CRIIMI MAE moved to
withdraw reference to the litigation relating to Claim Number 330 to the United
States District Court for the District of Maryland Southern Division.
The CCA Claim relates to an August 14, 1998 letter of intent between
CRIIMI MAE and CCA for the purchase of subordinated CMBS. The letter of intent
included financing and due diligence contingencies. The Company's position is
that neither of these contingencies was fulfilled. After preliminary due
diligence, the Company expressed concern regarding the quality of the mortgage
loans underlying the CMBS. The Company's further due diligence confirmed this
preliminary view, and the Company exercised its right not to proceed with the
purchase because of its due diligence concerns. CCA refused to withdraw its
claim, and on August 31, 1999, CRIIMI MAE filed an objection to the CCA Claim.
The CCA Claim was filed for an amount in excess of $17,000,000 on February 11,
1999. On October 9, 1999, CCA responded to the objection. By letter dated
January 7, 2000, CCA indicated that the amount of its claim was $18.8 million.
On March 27, 2000, CCA filed a motion with the Bankruptcy Court revising the
amount of its claim to $18.2 million. Litigation is continuing with respect to
the CCA Claim and the Company's objection thereto.
The GP Properties Claim relates to the Company's loan origination
program. In August and September 1998, the Company and GP Properties were
involved in a preliminary loan application process. These preliminary processes
did not give rise to a loan commitment. On October 7, 1998, GP Properties
advised the Company that it closed on alternative lending. GP Properties refused
the Company's request that it withdraw its claim, and on October 26, 1999 CRIIMI
MAE objected to the GP Properties Claim. GP Properties did not respond to the
objection on or prior to the objection deadline. The Court has not taken final
action as to the allowance of the GP Properties Claim.
Of the $1.25 billion of remaining claims approximately $1.0 billion
is carried on the balance sheet. The Debtors believe they have substantial
defenses to each of the disputed claims and that the ultimate allowed amount
of these claims, if any, will be insignificant although there can be no
assurance.
D-55
<PAGE>
18. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income (principally interest income) $ 55,255,680 $ 56,463,980 $ 56,145,520 $ 56,238,554
Net income (loss) 13,416,949 (2,033,199) 8,100,173 (151,852,888)
Basic earnings (loss) per share 0.25 (0.04) 0.15 (2.72)
Diluted earnings (loss) per share 0.23 (0.04) 0.14 (2.72)
<CAPTION>
1998
----------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income (principally interest income) $ 44,970,292 $ 52,140,944 $ 59,415,552 $ 57,676,980
Net income (loss) 12,255,931 43,426,376 (8,651,379) (11,660,194)
Basic earnings (loss) per share 0.29 0.92 (0.18) (0.23)
Diluted earnings (loss) per share 0.28 0.85 (0.18) (0.23)
<CAPTION>
1997
----------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income (principally interest income) $ 31,159,707 $ 30,846,749 $ 34,247,402 $ 39,062,943
Net gain (loss) on mortgage
dispositions 17,138,949 95,000 (90,608) 200,141
Net income 19,099,541 10,412,185 11,417,024 13,258,868
Basic earnings (loss) per share 0.54 0.24 0.26 0.29
Diluted earnings per share 0.50 0.23 0.26 0.28
</TABLE>
19. 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 backed by pools of mortgage loans on multifamily,
retail and other commercial real estate and by pools of mortgage-backed
securities, backed, in turn, by loans on such properties ("Subordinated CMBS"),
(ii) originating and underwriting mortgage loans, (iii) securitizing pools of
mortgage loans and pools of commercial mortgage-backed securities ("CMBS") and
to a lesser degree, (iv) direct investments in government insured securities and
entities that own government insured securities. 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
D-56
<PAGE>
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. 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.
The following table details the Company's financial performance by
these two lines of business for the years ended December 31, 1999, 1998 and
1997. The basis of accounting used in the table is GAAP.
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------
PORTFOLIO MORTGAGE
INVESTMENT SERVICING ELIMINATION (1) CONSOLIDATED
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 154,205,383 $ 282,148 $ (282,148) $ 154,205,383
Insured mortgage securities 33,405,171 -- -- 33,405,171
Originated loans 34,712,674 -- -- 34,712,674
Other -- 3,384,533 (3,384,533) --
Servicing income -- 6,701,244 (6,701,244) --
Net gain on mortgage security dispositions 2,127,691 -- -- 2,127,691
Gain on originated loan dispositions 403,383 -- -- 403,383
Other income 4,038,061 4,359,320 (6,616,875) 1,780,506
--------------- --------------- --------------- ---------------
Total revenue 228,892,363 14,727,245 (16,984,800) 226,634,808
--------------- --------------- --------------- ---------------
General and administrative expenses (12,049,256) (13,016,747) 13,016,747 (12,049,256)
Interest expense (151,336,830) -- -- (151,336,830)
Losses on warehouse obligations (8,000,000) -- -- (8,000,000)
Reorganization items (178,899,959) -- -- (178,899,959)
Other expenses (2,877,576) (4,139,118) 4,139,118 (2,877,576)
--------------- --------------- --------------- ---------------
Total expenses (353,163,621) (17,155,865) 17,155,865 (353,163,621)
--------------- --------------- --------------- ---------------
Net (loss) income (124,271,258) (2,428,620) 171,065 (126,528,813)
Preferred dividends accrued (5,840,152) -- -- (5,840,152)
--------------- --------------- --------------- ---------------
Net (loss) income available to common
shareholders ($ 130,111,410) ($ 2,428,620) $ 171,065 ($ 132,368,965)
=============== =============== =============== ===============
Total assets $ 2,272,100,775 $ 23,697,635 $ (2,119,235) $ 2,293,661,246
=============== =============== =============== ===============
</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.
D-57
<PAGE>
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
PORTFOLIO MORTGAGE
INVESTMENT SERVICING ELIMINATION (1) CONSOLIDATED
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 143,656,307 $ -- $ -- $ 143,656,307
Insured mortgage securities 43,062,743 -- -- 43,062,743
Originated loans 20,588,112 -- -- 20,588,112
Other -- 4,058,108 (4,058,108) --
Servicing income -- 7,293,565 (7,293,565) --
Gain on sale of CMBS 28,800,408 -- -- 28,800,408
Gain on mortgage security dispositions 1,196,499 -- -- 1,196,499
Other income 5,695,194 5,712,017 (4,510,605) 6,896,606
--------------- --------------- --------------- ---------------
Total revenue 242,999,263 17,063,690 (15,862,278) 244,200,675
--------------- --------------- --------------- ---------------
General and administrative expenses (14,623,407) (10,518,183) 10,518,183 (14,623,407)
Interest expense (136,268,431) (451,938) 451,938 (136,268,431)
Realized loss on reverse repurchase obligation
and unrealized loss on warehouse obligations (34,881,350) -- -- (34,881,350)
Other expenses (16,058,894) (4,112,365) 4,112,365 (16,058,894)
--------------- --------------- --------------- ---------------
Total expenses (201,832,082) (15,082,486) 15,082,486 (201,832,082)
--------------- --------------- --------------- ---------------
Net income 41,167,181 1,981,204 (779,792) 42,368,593
Preferred dividends (6,997,859) -- -- (6,997,859)
--------------- --------------- --------------- ---------------
Net income available to common shareholders $ 34,169,322 $ 1,981,204 ($ 779,792) $ 35,370,734
=============== =============== =============== ===============
Total assets $ 2,414,099,927 $ 25,954,448 $ (2,136,422) $ 2,437,917,953
=============== =============== =============== ===============
</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.
D-58
<PAGE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
PORTFOLIO MORTGAGE
INVESTMENT SERVICING ELIMINATION (1) CONSOLIDATED
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 79,669,816 $ -- $ -- $ 79,669,816
Insured mortgage securities 49,425,401 -- -- 49,425,401
Other -- 744,039 (744,039) --
Servicing income -- 3,981,960 (3,981,960) --
Gain on mortgage security dispositions 17,343,481 -- -- 17,343,481
Other income 4,420,695 2,456,335 (655,446) 6,221,584
--------------- --------------- --------------- ---------------
Total revenue 150,859,393 7,182,334 (5,381,445) 152,660,282
--------------- --------------- --------------- ---------------
General and administrative expenses (9,610,579) (4,099,787) 4,099,787 (9,610,579)
Interest expense (77,919,414) (88,391) 88,391 (77,919,414)
Other expenses (10,942,673) (1,649,083) 1,649,083 (10,942,673)
--------------- --------------- --------------- ---------------
Total expenses (98,472,666) (5,837,261) 5,837,261 (98,472,666)
--------------- --------------- --------------- ---------------
Net income 52,386,727 1,345,073 455,816 54,187,616
Preferred dividends (6,472,540) -- -- (6,472,540)
--------------- --------------- --------------- ---------------
Net income available to common
shareholders $ 45,914,187 $ 1,345,073 $ 455,816 $ 47,715,076
=============== =============== =============== ===============
Total assets $ 1,850,360,445 $ 29,816,041 $ (6,870,998) $ 1,873,305,488
=============== =============== =============== ===============
</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.
D-59
<PAGE>
20. FINANCIAL STATEMENTS FOR THE DEBTOR ENTITIES
The following are the unconsolidated financial statements for CRIIMI
MAE, CM Management and Holdings II:
CRIIMI MAE INC.
BALANCE SHEETS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Assets:
Subordinated CMBS, at fair value $ 826,897,948 $ 1,071,872,143
Insured mortgage security, at fair value 5,268,982 5,511,707
Receivables and other assets 83,133,075 74,226,682
Restricted cash and cash equivalents 37,774,894 2,134,222
Cash and cash equivalents 52,114,880 20,580,606
Investment in subsidiaries 210,030,947 246,817,957
--------------- ---------------
Total assets $ 1,215,220,726 $ 1,421,143,317
=============== ===============
Liabilities:
Accounts payable and other accrued expenses $ 21,580,384 $ 7,374,281
Liabilities subject to Chapter 11 proceedings 974,291,756 1,105,892,131
--------------- ---------------
Total liabilities 995,872,140 1,113,266,412
--------------- ---------------
Shareholders' equity:
Convertible preferred stock 26,471 18,170
Common stock 599,546 528,981
Accumulated other comprehensive income (207,421,788) (251,255,309)
Accumulated deficit (148,434,915) --
Additional paid-in capital 574,579,272 558,585,063
--------------- ---------------
Total shareholders' equity 219,348,586 307,876,905
--------------- ---------------
Total liabilities and shareholders' equity $ 1,215,220,726 $ 1,421,143,317
=============== ===============
</TABLE>
The accompanying note is an integral part of these financial statements.
D-60
<PAGE>
CRIIMI MAE INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 (1)
------------- -------------
<S> <C> <C>
Interest income $ 110,690,836 $ 29,577,886
Interest expense 64,546,282 17,548,270
------------- -------------
Net interest margin 46,144,554 12,029,616
------------- -------------
Equity in earnings from investments 11,926,161 2,769,642
Other income 2,649,745 320,531
General and administrative expenses (794,237) (100,966)
Amortization of assets acquired in the Merger (2,877,576) (680,717)
Realized loss on reverse repurchase obligation -- (411,831)
Losses on warehouse obligations (8,000,000) (12,747,783)
Reorganization items:
Impairment on CMBS (156,896,831) --
Other (18,680,629) (8,500,753)
Write-off of capitalized loan origination costs -- (3,284,037)
------------- -------------
Subtotal (172,673,367) (22,635,914)
------------- -------------
Net (loss) income before dividends accrued or paid on preferred shares (126,528,813) (10,606,298)
Dividends accrued or paid on preferred shares (5,840,152) (1,497,978)
------------- -------------
Net (loss) income available to common shareholders ($132,368,965) ($ 12,104,276)
============= =============
Comprehensive (loss) income:
Net (loss) income before dividends paid or accrued on preferred shares $(126,528,813) (10,606,298)
Other comprehensive income (loss) 43,833,521 (141,543,673)
------------- -------------
Comprehensive (loss) income $ (82,695,292) $(152,149,971)
============= =============
</TABLE>
(1) The Debtor filed for relief under Chapter 11 on October 5, 1998. Amounts
for 1998 represent amounts from October 6, 1998 through December 31, 1998.
The accompanying note is an integral part of these financial statements.
D-61
<PAGE>
CRIIMI MAE INC.
NOTE TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(UNCONSOLIDATED)
1. BASIS OF PRESENTATION
Generally accepted accounting principles ("GAAP") require 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 Holding Inc. (currently inactive),
CRIIMI MAE Holding 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 balance is
increased or decreased for CRIIMI MAE's share of the investee's income or
losses, respectively, 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
accompanying statements of income.
In management's opinion, with the exception of those matters 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 December 31, 1999 and 1998, and the
unconsolidated results of its operations for the year ended December 31, 1999
and for the period from October 6, 1998 to December 31, 1998.
D-62
<PAGE>
CRIIMI MAE MANAGEMENT INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Note receivable $ 3,376,468 $ 3,376,468
Restricted cash and cash equivalents 261,729 219,338
Cash and cash equivalents 926,122 738,837
Other assets 2,969,939 3,332,116
Equity investments 12,794,963 19,209,778
----------- -----------
Total assets $20,329,221 $26,876,537
=========== ===========
Liabilities:
Accounts payable and other accrued expenses $ 2,585,812 $ 2,367,277
Liabilities subject to Chapter 11 proceedings 6,529,634 6,150,787
----------- -----------
Total liabilities 9,115,446 8,518,064
----------- -----------
Shareholders' equity 11,213,775 18,358,473
----------- -----------
Total liabilities and shareholders' equity $20,329,221 $26,876,537
=========== ===========
</TABLE>
The accompanying note is an integral part of these financial statements.
D-63
<PAGE>
CRIIMI MAE MANAGEMENT INC.
STATEMENTS OF NET LOSS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 (1)
------------- --------------
<S> <C> <C>
Interest income - note receivable and short-term interest income $ 335,536 $ 89,020
Equity in losses from investments (1,779,018) (121,359)
------------ ------------
Total revenue (1,443,482) (32,339)
------------ ------------
Interest expense 420,628 89,833
Depreciation and amortization 527,948 127,316
General and administrative expenses 9,775,772 2,996,531
Reorganization items 2,335,969 833,861
------------ ------------
Total expenses 13,060,317 4,047,541
------------ ------------
Net loss $(14,503,799) $ (4,079,880)
============ ============
</TABLE>
(1) The Debtor filed for relief under Chapter 11 on October 5, 1998. Amounts
for 1998 represent amounts from October 6, 1998 through December 31, 1998.
The accompanying note is an integral part of these financial statements.
D-64
<PAGE>
CRIIMI MAE MANAGEMENT, INC.
NOTE TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
1. BASIS OF PRESENTATION
In management's opinion, the accompanying 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 December 31, 1999 and 1998 and the results of its
operations for the year ended December 31, 1999 and for the period from October
6, 1998 to December 31, 1998, in accordance with generally accepted accounting
principles.
D-65
<PAGE>
CRIIMI MAE HOLDINGS II, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Subordinated CMBS, at fair value $ 38,211,075 $ 43,001,454
Interest receivable 377,936 1,064,071
Cash 100 100
------------ ------------
Total assets $ 38,589,111 $ 44,065,625
============ ============
Liabilities:
LIABILITIES NOT SUBJECT TO CHAPTER 11 PROCEEDINGS:
Collateralized mortgage obligations $ 39,256,952 $ --
Payables and accrued expenses 541,360 209,213
LIABILITIES SUBJECT TO CHAPTER 11 PROCEEDINGS:
Variable-rate secured borrowings -- 40,132,693
------------ ------------
Total liabilities 39,798,312 40,341,906
------------ ------------
Partners' equity:
Contributed capital 4,856,143 5,927,429
Accumulated other comprehensive income (6,065,344) (2,203,710)
------------ ------------
Total partners' (deficit) equity (1,209,201) 3,723,719
------------ ------------
Total liabilities and partners' equity $ 38,589,111 $ 44,065,625
============ ============
</TABLE>
The accompanying note is an integral part of these financial statements.
D-66
<PAGE>
CRIIMI MAE HOLDINGS II, L.P.
STATEMENTS OF NET LOSS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 (1)
----------- -----------
<S> <C> <C>
Interest income:
Subordinated CMBS $ 3,186,441 $ 753,860
Interest expense:
Collateralized bond obligations-CMBS 1,217,307 --
Variable-rate secured borrowings-CMBS 1,336,421 564,635
----------- -----------
Total interest expense 2,553,728 564,635
----------- -----------
Net interest margin 632,713 189,225
----------- -----------
Other investment income 165 --
General and administrative expenses (74,999) --
Reorganization costs (944,845) (209,213)
----------- -----------
Subtotal (1,019,679) (209,213)
----------- -----------
Net loss $ (386,966) $ (19,988)
=========== ===========
Other comprehensive loss (3,861,634) (1,118,369)
----------- -----------
Comprehensive loss $(4,248,600) $(1,138,357)
=========== ===========
</TABLE>
(1) The Debtor filed for relief under Chapter 11 on October 5, 1998. Amounts
for 1998 represent amounts from October 6, 1998 through December 31, 1998.
The accompanying note is an integral part of these financial statements.
D-67
<PAGE>
CRIIMI MAE HOLDINGS II, L.P.
NOTE TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
1. BASIS OF PRESENTATION
Holdings II's CMBS (2 tranches from CMM 98-1) are carried as
investments in loans at cost basis in CRIIMI MAE's consolidated financial
statements. (See Notes 3 and 6 for discussion of this accounting.) On a
stand-alone basis, generally accepted accounting principles require 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 December 31, 1999 and 1998 and the
results of its operations for the year ended December 31, 1999 and for the
period from October 6, 1998 to December 31, 1998.
D-68
<PAGE>
EXHIBIT E
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
CRIIMI MAE INC.
CRIIMI MAE INC., a Maryland corporation (the "Corporation"), having its
principal office in Rockville, Maryland, hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Charter (including all Articles Supplementary existing as of
the effective date of these Articles of Amendment and Restatement) of the
Corporation is hereby amended and as so amended is restated by striking out in
its entirety the existing Charter (including all Articles Supplementary existing
as of the effective date of these Articles of Amendment and Restatement) and
inserting in lieu thereof the following:
ARTICLE I
NAME
The corporation's name is CRIIMI MAE Inc. (the "Corporation").
ARTICLE II
PRINCIPAL OFFICE
The address of the Corporation's principal office in the State of
Maryland is 11200 Rockville Pike, Rockville, Maryland 20852.
ARTICLE III
RESIDENT AGENT
The name and address of the Corporation's resident agent is Corporation
Trust, Inc., a Maryland corporation, with its registered office at 11200
Rockville Pike, Rockville, Maryland 20852.
ARTICLE IV
PURPOSES
The purposes for which the Corporation is formed are to conduct any
business for which corporations may be organized under the laws of the State of
Maryland including, but not limited to, engaging in, promoting and carrying on
the business of acquiring, holding, managing and disposing of mortgage
investments and any lawful act and activity related thereto.
ARTICLE V
CAPITAL STOCK
(A) AGGREGATE NUMBER AND CLASSES. The aggregate number of shares of all
classes of stock that the Corporation shall have authority to issue is three
hundred seventy
<PAGE>
five million (375,000,000), consisting of: three hundred million
(300,000,000) shares of common stock, par value one cent ($0.01) per share
(together with any other class or series of common stock which may hereafter
be authorized, the "Common Stock") and seventy-five million (75,000,000)
shares of preferred stock, par value one cent ($0.01) per share (together
with any other class or series of preferred stock that may hereafter be
authorized, the "Preferred Stock"), of which three million (3,000,000) shares
are classified as Series B Cumulative Convertible Preferred Stock (the
"Series B Preferred Stock"), two hundred three thousand (203,000) shares are
classified as Series E Cumulative Convertible Preferred Stock (the "Series E
Preferred Stock"), and one million six hundred ten thousand (1,610,000)
shares are classified as Series F Redeemable Cumulative Dividend Preferred
Stock (convertible during the period of ten (10) Business Days after the
fifth Business Day after the Initial Issue Date and during the period of ten
(10) Business Days ending ninety (90) calendar days after the Initial Issue
Date or the first Business Day thereafter) (the "Series F Preferred Stock").
The Common Stock and the Preferred Stock, together with any other class or
classes of Capital Stock that may hereafter be authorized, are referred to
herein collectively as the "Capital Stock." The Board of Directors of the
Corporation (the "Board of Directors" or the "Board") may classify and
reclassify any unissued Capital Stock, whether now or hereafter authorized,
by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such stock.
(B) PREFERRED STOCK. Subject to the applicable provisions of Maryland
law, the Corporation's Charter and the express terms of any class or series of
Capital Stock, including the Articles Supplementary of any class or series of
Preferred Stock then outstanding, the Preferred Stock may be issued from time to
time, in one or more series as authorized by the Board of Directors. Prior to
the issuance of a series, the Board of Directors, by resolution, shall designate
that series to distinguish it from other series and classes of the Corporation's
Capital Stock, shall specify the number of shares to be included in the series,
and shall set preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of the shares of the series. In setting the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of a series of Preferred Stock, the Board of Directors may designate that any
amendment, waiver or repeal of any provision of the Articles Supplementary
classifying such series of Preferred Stock shall not require the approval of the
holders of the Common Stock. Subject to the applicable provisions of Maryland
law, the Corporation's Charter and the express terms of any class or series of
Capital Stock, including the Articles Supplementary of any class or series of
Preferred Stock then outstanding, the Board of Directors may increase or
decrease the number or alter the designation or classify or reclassify any
unissued shares of a particular series of Preferred Stock by setting or changing
in one or more respects, from time to time before issuing the shares, any
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of the shares of that series of Preferred Stock.
2
<PAGE>
1. The preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the shares of the Series B
Preferred Stock are set forth on EXHIBIT A attached hereto.
2. The preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of shares of the Series E Preferred
Stock are set forth on EXHIBIT B attached hereto.
3. The preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the shares of the Series F
Preferred Stock are set forth on EXHIBIT C attached hereto.
(C) COMMON STOCK. Each share of Common Stock shall entitle the holder
of record thereof to one (1) vote at all meetings of the Corporation's
stockholders, except meetings at which only holders of another specified class
or series of Capital Stock are entitled to vote. Subject to any preference
rights with respect to the payment of dividends of any series of Preferred Stock
then outstanding, the holders of Common Stock shall be entitled to receive, as
and when declared by the Board, dividends that may be paid in money or property
or by the issuance of fully paid Capital Stock, in the form of Preferred Stock,
Common Stock or any other class or series of Capital Stock now or hereafter
authorized by the Board. In the event of a liquidation, dissolution or winding
up of the Corporation or other distribution of the Corporation's assets among
stockholders for the purpose of winding up the Corporation's affairs, whether
voluntary or involuntary, and subject to the applicable provisions of Maryland
law, the Corporation's Charter and the rights, privileges, conditions and
restrictions of any series of Preferred Stock then outstanding, the Common Stock
shall entitle the holders thereof to receive the Corporation's remaining
property.
(D) FRACTIONAL SHARES. The Corporation may issue shares of Capital
Stock in fractional denominations to the same extent as its whole shares, and
shares in fractional denominations shall be shares of Capital Stock having
proportionately to the respective fractions represented thereby all the rights
of whole shares, including, without limitation, the right to vote, the right to
receive dividends and distributions, and the right to participate upon
liquidation of the Corporation, but excluding any right to receive a stock
certificate representing fractional shares.
ARTICLE VI
PREEMPTIVE RIGHTS
Except as may be expressly provided by the terms of any class or series
of Capital Stock, including the Articles Supplementary of any class or series of
Preferred Stock, by contract with the Corporation or otherwise by the Board of
Directors, no holder of shares
3
<PAGE>
of any class or series of the Corporation's Capital Stock, whether now or
hereafter authorized, shall have any preferential or preemptive right to
subscribe for, purchase or receive shares of any class or series of the Capital
Stock of the Corporation, or any options to purchase or warrants exercisable for
such Capital Stock or any rights to subscribe to or purchase such Capital Stock
or any securities convertible into or exchangeable for such Capital Stock that
may at any time or from time to time be issued, sold or offered for sale by the
Corporation.
ARTICLE VII
DIRECTORS
(A) NUMBER. On the effective date of the Corporation's plan of
reorganization, as amended as of such effective date (the "Effective Date"), the
number of directors of the Corporation shall be fixed at ______, which number
may be increased or decreased only by the Board of Directors by resolution
adopted by the vote of a majority of the entire Board of Directors, even though
less than a quorum, subject to the applicable provisions of Maryland law, this
Charter and the express terms of any class or series of Capital Stock, including
the Articles Supplementary of any class or series of Preferred Stock then
outstanding, but the number of directors shall not at any time be less than the
lesser of (a) three (3) or (b) the number of stockholders nor more than
________. On the Effective Date, [_____________________] shall serve as
directors of the Corporation and shall have and exercise any and all rights,
powers, privileges and discretionary authority granted or permitted by the
Corporation's Charter, the Corporation's Bylaws or the Maryland General
Corporation Law for the terms set forth in Paragraph (B) below and until their
respective successors are duly elected and qualified.
(B) UNAFFILIATED DIRECTORS; CLASSIFIED BOARD. A majority of the
directors shall be directors who do not perform any services for the
Corporation, other than as directors, and who are not directors, officers, or
employees of C.R.I., Inc., a Delaware corporation ("Unaffiliated Directors").
Subject to the applicable provisions of Maryland law, this Charter and the
express terms of any class or series of Capital Stock, including the Articles
Supplementary of any class or series of Preferred Stock then outstanding, the
directors shall be classified, with respect to the time for which they severally
hold office, into three (3) classes, as nearly equal in number as reasonably
possible, with the term of office of one class to expire initially at the 2001
annual meeting of stockholders, the term of office of another class to expire
initially at the 2002 annual meeting of stockholders and the term of office of
the remaining class to expire initially at the 2003 annual meeting of
stockholders, with the members of each class of directors to hold office until
their respective successors are duly elected and qualified, subject, however, to
prior death, resignation, retirement, disqualification or removal from office.
At each annual meeting of stockholders following such initial classification,
directors elected to succeed those directors whose terms then expire shall be
elected for a term of office to expire at the third succeeding annual meeting of
stockholders after their election and when their respective successors are duly
elected and qualified.
4
<PAGE>
(C) VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Except as otherwise
required by law or as may be expressly provided by the terms of any class or
series of Capital Stock, including the Articles Supplementary of any class of
series of Preferred Stock, any vacancy on the Board of Directors as a result of
any reason and any newly created directorship resulting by reason of any
increase in the number of directors shall be filled only by the Board of
Directors, by resolution adopted by the vote of a majority of the remaining
directors then in office, even though less than a quorum. Any director so
appointed shall hold office until the next meeting of stockholders at which
directors of the class for which such director has been chosen are to be elected
and until his or her successor is elected and qualified. Subject to the
provisions of this Charter, if the number of directors is changed, any increase
or decrease in directorships shall be apportioned among the classes of directors
so as to maintain the number of directors in each class as nearly equal as
possible, but in no case shall a decrease in the number of directors
constituting the Board of Directors shorten the term of any incumbent director.
(D) REMOVAL OF DIRECTORS. Except as may be expressly provided by the
terms of any class or series of Capital Stock, including the Articles
Supplementary of any class or series of Preferred Stock, any director may be
removed, but only for cause, and only upon the affirmative vote of least 66-2/3%
of the voting power of all of the then outstanding shares of Capital Stock
entitled to vote generally in the election of directors.
(E) INCREASE IN AUTHORIZED CAPITAL STOCK. Subject to the applicable
provisions of Maryland law, the Corporation's Charter and the express terms of
any class or series of Capital Stock, including the Articles Supplementary of
any class or series of Preferred Stock then outstanding, the Board of Directors,
with the approval of a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such amendment is presented to the Board for approval) and
without action by the stockholders, may amend the Charter to increase or
decrease the aggregate number of shares of Capital Stock the Corporation has
authority to issue.
(F) ISSUANCE OF CAPITAL STOCK. Subject to the applicable provisions of
Maryland law, the Corporation's Charter and the express terms of any class or
series of Capital Stock, including the Articles Supplementary of any class or
series of Preferred Stock then outstanding, the Board of Directors of the
Corporation is hereby empowered to authorize the issuance from time to time of
shares of Capital Stock of any class or series, whether now or hereafter
authorized, and securities convertible into shares of Capital Stock of any
series, class or classes, whether now or hereafter authorized, for such
consideration as the Board of Directors may deem advisable.
(G) INTERESTED DIRECTOR TRANSACTIONS. No contract or other transaction
between this Corporation and any other corporation, partnership, individual or
other entity and no act of this Corporation shall in any way be affected or
invalidated by the fact that any of the directors of this Corporation are
directors, principals, partners or officers of such other entity, or are
pecuniarily or otherwise interested in such contract, transaction or act;
provided that (i) the existence of such relationship or such interest shall be
disclosed or
5
<PAGE>
known to the Board of Directors or to a committee of the Board of Directors if
the matter involves a committee decision, and the contract, transaction or act
shall be authorized, approved or ratified by a majority of disinterested
directors on the Board or on such committee, as the case may be, even if the
number of disinterested directors constitutes less than a quorum or (ii) the
contract, transaction or act shall be authorized, ratified or approved in any
other manner permitted by the Maryland General Corporation Law.
ARTICLE VIII
AMENDMENTS TO THE BYLAWS
Subject to the applicable provisions of Maryland law, to the
Corporation's Charter and the express terms of any class or series of Capital
Stock, including, the Articles Supplementary of any series of Preferred Stock
then outstanding, the Bylaws of the Corporation may be added to, altered,
amended, repealed or suspended by a vote of a majority of the Board of Directors
at any regular or special meeting of the Board at which a quorum is present,
but, subject to the same proviso, the stockholders may make additional Bylaws
and may alter, repeal or suspend any Bylaws, whether adopted by them or
otherwise, upon the affirmative vote of the holders of at least 66-2/3% of the
voting power of all of the then outstanding shares of Capital Stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class; PROVIDED, HOWEVER, that no Bylaw so made shall serve
to invalidate any prior action of the Board which would have been valid if such
Bylaw had not been made.
ARTICLE IX
FACTORS TO CONSIDER PRIOR TO APPROVAL OF AN ACQUISITION OF
CONTROL OF THE CORPORATION
The Board, when evaluating any offer of another party to acquire
control of the Corporation, may consider the effect of the acquisition on
stockholders, employees, suppliers, customers and creditors of the Corporation
and communities in which offices or other establishments of the Corporation are
located.
ARTICLE X
AMENDMENTS TO THE CHARTER
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in the Charter in the manner prescribed by the laws of
the State of Maryland, subject to the applicable provisions of Maryland law, the
Corporation's Charter and the express terms of any class or series of Capital
Stock, including the Articles Supplementary of any class or series of Preferred
Stock then outstanding, except that no amendment which would change any rights
with respect to any outstanding class or series of Capital Stock of the
Corporation, by reducing the amounts payable thereon upon liquidation of the
Corporation, or by diminishing or eliminating any voting rights pertaining
thereto, may be made unless approved by the affirmative vote of the holders of
at least 66-2/3% of the then outstanding securities of such class or series of
Capital Stock of the Corporation, and all rights, powers, privileges and
discretionary authority granted
6
<PAGE>
or conferred upon stockholders or directors herein are granted subject to this
reservation; PROVIDED, HOWEVER, that, notwithstanding any other provision of the
Charter or any provision of law or otherwise which might otherwise permit a
lesser vote or no vote, but in addition to any vote of the holders of any class
or series of the Corporation's Capital Stock required by law, by the Charter or
by the terms of any such class or series of Capital Stock, the affirmative vote
of the holders of at least 66-2/3% of the voting power of all of the then
outstanding shares of Capital Stock entitled to vote generally in the election
of directors, voting together as a single class, shall be required to amend,
repeal, or adopt any provision inconsistent with this Article X or Article VII,
Article VIII, Article IX, Article XI , Article XII or Article XIII hereof.
ARTICLE XI
RESTRICTION ON TRANSFER,
ACQUISITION AND REDEMPTION OF CAPITAL STOCK
(A) DEFINITIONS. For the purposes of this Article XI, the following
terms shall have the following meanings:
1. "AFFILIATE" shall mean any corporation, partnership,
limited liability company, trust or other association, or any Person
which controls, is controlled by, or is under common control with, such
corporation, partnership, limited liability company, trust or other
association. As used in this definition "control" (including with its
correlative meanings, "controlled by" and "under common control with")
shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such
Person (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise).
2. "BENEFICIAL OWNERSHIP" shall mean ownership of Capital
Stock of the Corporation by a Person who would be treated as an owner
of such Capital Stock under Section 542(a)(2) of the Code either
directly or constructively through the application of Section 544 of
the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial Owner," "Beneficially Owns," and variants thereof shall
have the correlative meanings.
3. "BENEFICIARY" shall mean any organization that is exempt
from federal income taxation under Section 501(c)(3) of the Code and to
which contributions are deductible under Section 170(c) of the Code,
which organization shall be designated a beneficiary (as determined
pursuant to Paragraph (S) hereof) of an interest in the Special Trust
(created pursuant to Paragraph (O)) representing Excess Stock;
PROVIDED, HOWEVER, that the Excess Stock would not be considered Excess
Stock in the hands of such beneficiary. The term "Beneficiaries" shall
have the correlative meaning.
4. "CODE" shall mean the Internal Revenue Code of 1986, as
amended, or any successor statute, the regulations promulgated and
rulings issued thereunder
7
<PAGE>
and any successor regulations or rulings which may be promulgated or
issued thereunder.
5. "EXCESS STOCK" shall have the meaning ascribed to it in
Paragraph (C) hereof.
6. "EXISTING HOLDER" shall mean (a) any Person who, as of the
Restriction Commencement Date, is the Beneficial Owner of Capital Stock
of the Corporation in excess of the Ownership Limit, so long as, but
only so long as, such Person Beneficially Owns such Capital Stock in
excess of the Ownership Limit and (b) any Person to whom an Existing
Holder Transfers, subject to the limitations provided in this Article
XI, Beneficial Ownership of Capital Stock of the Corporation causing
such transferee to Beneficially Own Capital Stock in excess of the
Ownership Limit.
7. "EXISTING HOLDER LIMIT" shall mean (a) for any Existing
Holder who is an Existing Holder by virtue of clause (a) of the
definition thereof, initially, the percentage of the outstanding
Capital Stock of the Corporation Beneficially Owned by such Existing
Holder, as of the Restriction Commencement Date, and, after any
adjustment pursuant to Paragraph (I) hereof, shall mean such percentage
of such outstanding Capital Stock as so adjusted; and (b) for any
Existing Holder who becomes an Existing Holder by virtue of clause (b)
of the definition thereof, initially, the percentage of the outstanding
Capital Stock of the Corporation Beneficially Owned by such Existing
Holder at the time that such Existing Holder becomes an Existing
Holder, but in no event shall such percentage be greater than the
Existing Holder Limit for the Existing Holder who Transfers Beneficial
Ownership of Capital Stock of the Corporation to such transferee
Existing Holder or, in the case of more than one transferor, in no
event shall such percentage be greater than the smallest Existing
Holder Limit of any transferring Existing Holder, and, after any
adjustment pursuant to Paragraph (S) hereof, shall mean such percentage
of the outstanding Capital Stock of the Corporation as so adjusted.
Beginning with the Restriction Commencement Date and at all times
thereafter but prior to the Restriction Termination Date, the Secretary
of the Corporation shall maintain and, upon request shall make
available to each Existing Holder a schedule which sets forth the
then-current Existing Holder Limit for such Existing Holder.
8. "MARKET PRICE" shall mean, with respect to any class or
series of Capital Stock of the Corporation, the last reported sales
price reported on the New York Stock Exchange, Inc. (the "EXCHANGE") of
such class or series of Capital Stock on the trading day immediately
preceding the relevant date, or if not then traded on the Exchange, the
last reported sales price on the trading day immediately preceding the
relevant date as reported on any exchange or quotation system over
which such class or series of Capital Stock may be traded, or if not
then traded over any exchange or quotation system, then the market
price of such class or series of Capital Stock on the relevant date as
determined in good faith by the Board of Directors.
8
<PAGE>
9. "OWNERSHIP LIMIT" shall mean initially that number of
shares of Capital Stock of the Corporation which represents the lesser
of (a) 9.8% of the aggregate number of shares of Capital Stock of the
Corporation outstanding and (b) 9.8% of the aggregate value of the
outstanding Capital Stock, and after any adjustment as set forth in
Paragraph (J) hereof, shall mean such greater percentage of the
outstanding Capital Stock of the Corporation as so adjusted. The number
and value of outstanding shares of Capital Stock of the Corporation
shall be determined by the Board of Directors in good faith, which
determination shall be conclusive for all purposes hereof.
10. "PERSON" shall mean an individual, corporation,
partnership, estate, trust (including a corporation qualified under
Section 401(a) or 501(c)(17) of the Code), a portion of a corporation
permanently set aside for or to be used exclusively for the purposes
described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint
stock company or other entity and also includes a group as that term is
used for purposes of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended; but does not include an underwriter that participated
in a public offering of any Capital Stock of the Corporation for a
period of twenty-five (25) calendar days following the purchase by such
underwriter of such Capital Stock.
11. "PURPORTED BENEFICIAL HOLDER" shall mean, with respect to
any event, other than a purported Transfer which results in Excess
Stock, the Person for whom the Purported Record Holder of the Capital
Stock of the Corporation that, pursuant to Paragraph (C) hereof, was
automatically converted into Excess Stock upon the occurrence of such
event, held such Capital Stock.
12. "PURPORTED BENEFICIAL TRANSFEREE" shall mean, with respect
to any purported Transfer which results in Excess Stock, the purported
beneficial transferee for whom the Purported Record Transferee would
have acquired Capital Stock of the Corporation, if such Transfer had
been valid under Paragraph (B) hereof.
13. "PURPORTED OWNER" shall mean any Purported Beneficial
Holder, Purported Beneficial Transferee, Purported Record Holder or
Purported Record Transferee, as the case may be.
14. "PURPORTED OWNER LIMITATION" shall mean, as to a Purported
Owner, on a share-by-share basis, an amount not exceeding the lesser
of: (a) (i) if the Purported Owner gave value for the Capital Stock of
the Corporation converted into Excess Stock, the price per share that
such Purported Owner paid in the purported Transfer for the Capital
Stock that was converted into such Excess Stock, or (ii) if the
Purported Owner did not give value for the Capital Stock of the
Corporation converted into Excess Stock (through a gift, devise or
otherwise), a price per share equal to the Market Price for such
converted Capital Stock of the Corporation on the date of the purported
Transfer or such other event which results in Excess Stock; and
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(b) the price per share received by the Special Trust from the sale,
exchange or other disposition of the Excess Stock.
15. "PURPORTED RECORD HOLDER" shall mean with respect to any
event, other than a purported Transfer which results in Excess Stock,
the record holder of the Capital Stock of the Corporation that,
pursuant to Paragraph (C) hereof, was automatically converted into
Excess Stock upon the occurrence of such event.
16. "PURPORTED RECORD TRANSFEREE" shall mean, with respect to
any purported Transfer, which results in Excess Stock, the Person who
would have been the record holder of the Capital Stock, if such
Transfer had been valid under paragraph (B) hereof.
17. "REIT" means real estate investment trust within the
meaning and in accordance with the REIT Provisions.
18. "REIT PROVISIONS" means Part II and III of Subchapter M of
the Chapter I of Subtitle A of the Code, relating to REITs.
19. "RESTRICTION COMMENCEMENT DATE" shall mean the date upon
which the filing of these Articles of Amendment and Restatement of the
Corporation with the Maryland State Department of Assessments and
Taxation becomes effective.
20. "RESTRICTION TERMINATION DATE" shall mean the first day on
which the Board of Directors determines that it is no longer in the
best interests of the Corporation to attempt to, or to continue to,
qualify under the REIT Provisions of the Code.
21. "SPECIAL TRUST" shall mean any special trust created
pursuant to Paragraph (E) hereof.
22. "SPECIAL TRUSTEE" shall mean a trustee of any Special
Trust, designated by the Corporation and unaffiliated with the
Corporation or any prohibited transferee or Purported Owner of Excess
Stock.
23. "TRANSFER" shall mean any sale, transfer, gift,
assignment, devise or other disposition of Capital Stock of the
Corporation, including without limitation (a) the granting of any
option or entering into any agreement for the sale, transfer or other
disposition of such Capital Stock or (b) the sale, transfer, assignment
or other disposition of any securities or rights convertible into or
exchangeable for Capital Stock of the Corporation, whether voluntary or
involuntary, whether of record or beneficially and whether by operation
of law or otherwise.
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(B) OWNERSHIP LIMITATIONS.
1. Except as provided in this Paragraph (B), beginning on the
Restriction Commencement Date and at all times thereafter but prior to
the Restriction Termination Date, no Person other than an Existing
Holder shall Beneficially Own Capital Stock of the Corporation in
excess of the Ownership Limit, and no Existing Holder shall
Beneficially Own Capital Stock of the Corporation in excess of the
Existing Holder Limit for such Existing Holder.
2. Except as provided in this Paragraph (B), beginning on the
Restriction Commencement Date and at all times thereafter but prior to
the Restriction Termination Date, any Transfer that, if effective,
would result in any Person other than an Existing Holder Beneficially
Owning Capital Stock of the Corporation in excess of the Ownership
Limit shall be void AB INITIO as to the Transfer of such portion of the
Capital Stock of the Corporation as would be otherwise Beneficially
Owned by such Person in excess of the Ownership Limit, and the intended
transferee shall acquire no rights in or to such number of shares of
such Capital Stock.
3. Except as provided in Paragraphs (I) and (L) hereof,
beginning on the Restriction Commencement Date and at all times
thereafter but prior to the Restriction Termination Date, any Transfer
that, if effective, would result in any Existing Holder Beneficially
Owning Capital Stock of the Corporation in excess of the applicable
Existing Holder Limit shall be void AB INITIO as to the Transfer of
such portion of such Capital Stock as would be otherwise Beneficially
Owned by such Existing Holder in excess of the applicable Existing
Holder Limit, and such Existing Holder shall acquire no rights in or to
such number of shares of such Capital Stock.
4. Except as provided in Paragraph (L) hereof, beginning on
the Restriction Commencement Date and at all times thereafter but prior
to the Restriction Termination Date, any Transfer that, if effective,
would result in Capital Stock the Corporation being owned by fewer than
one hundred (100) stockholders (determined without reference to any
rules of attribution) shall be void AB INITIO and the intended
transferee shall acquire no rights in or to such Capital Stock.
5. Beginning on the Restriction Commencement Date and at all
times thereafter but prior to the Restriction Termination Date, any
Transfer that, if effective, would result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code shall
be void AB INITIO as to the Transfer of such portion of the Capital
Stock of the Corporation which would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code, and
the intended transferee shall acquire no rights in or to such number of
shares of such Capital Stock.
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(C) EXCESS STOCK.
1. If, notwithstanding the other provisions contained in this
Article XI, at any time beginning on the Restriction Commencement Date
and at all times thereafter but prior to the Restriction Termination
Date, there is a purported Transfer such that any Person would
Beneficially Own Capital Stock of the Corporation in excess of the
applicable Ownership Limit or Existing Holder Limit, then, except as
otherwise provided in Paragraphs (I) and (L) hereof, such portion of
the Capital Stock of the Corporation in excess of such Ownership Limit
or Existing Holder Limit (rounded up to the nearest whole share) shall
automatically be converted into "EXCESS STOCK" and be treated as
provided in this Article XI. Such conversion and treatment shall be
effective as of the close of business on the business day immediately
prior to the date of the purported Transfer giving rise thereto.
2. If, notwithstanding the other provisions contained in this
Article XI, at any time beginning on the Restriction Commencement Date
and at all times thereafter but prior to the Restriction Termination
Date, there is a purported Transfer which, if effective, would cause
the Corporation to become "closely held" within the meaning of Section
856(h) of the Code, then the Capital Stock of the Corporation being
Transferred which would cause the Corporation to be "closely held"
within the meaning of Section 856(h) of the Code (rounded up to the
nearest whole share) shall automatically be converted into Excess Stock
and be treated as provided in this Article XI. Such conversion and
treatment shall be effective as of the close of business on the
business day immediately prior to the date of the purported Transfer
giving rise thereto.
3. If, at any time beginning on the Restriction Commencement
Date and at all times thereafter but prior to the Restriction
Termination Date, an event other than a purported Transfer (an "EVENT")
occurs (including, without limitation, a change in the Corporation's
capital structure) which would cause any Person to Beneficially Own
Capital Stock of the Corporation in excess of the applicable Ownership
Limit or Existing Holder Limit, then, except as otherwise provided in
Paragraphs (I) and (L) hereof, Capital Stock of the Corporation
Beneficially Owned by such Person shall automatically be converted into
Excess Stock and be treated as provided in this Article XI to the
extent necessary to eliminate such excess ownership. Such conversion
and treatment shall be effective as of the close of business on the
business day immediately prior to the date of the Event giving rise
thereto. In determining which portion of the Capital Stock of the
Corporation is converted, Capital Stock directly held or Beneficially
Owned by any Person who caused the Event to occur shall be converted
before any Capital Stock not so held is converted. Where several such
Persons exist, the conversion shall be pro rata.
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(D) PREVENTION OF TRANSFER. If the Board of Directors or its designee
shall at any time determine in good faith that a Transfer has taken place in
violation of Paragraph (B) hereof or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership (determined without reference to any
rules of attribution) of any Capital Stock of the Corporation in violation of
Paragraph (B) hereof, the Board of Directors or its designee shall take such
action as it deems advisable to refuse to give effect to or to prevent such
Transfer including, but not limited to, refusing to give effect to such Transfer
on the books of the Corporation or instituting proceedings to enjoin such
Transfer; PROVIDED, HOWEVER, that any Transfers or attempted Transfers in
violation of Paragraphs (B)(2), (3) and (5) shall automatically result in the
designation and treatment described in Paragraph (C) hereof, irrespective of any
action (or non-action) by the Board of Directors or any designee thereof.
(E) NOTICE TO CORPORATION. Any Person who acquires or attempts to
acquire Capital Stock of the Corporation in violation of Paragraph (B) hereof,
or any Person who is a transferee such that Excess Stock results under Paragraph
(C) hereof, shall immediately give written notice or, in the event of a proposed
or attempted acquisition, give at least fifteen (15) calendar days prior written
notice, to the Corporation of such event, and shall provide to the Corporation
such other information as the Corporation may request in order to determine the
effect, if any, of such acquisition or attempted acquisition on the
Corporation's status as a REIT.
(F) INFORMATION FOR CORPORATION. Beginning with the Restriction
Commencement Date and at all times thereafter but prior to the Restriction
Termination Date:
1. Every Beneficial Owner of more than 5.0% (or such other
percentage, between 0.5% and 5.0%, as provided in the income tax
regulations promulgated under the Code) of the aggregate number or
value of outstanding shares of Capital Stock of the Corporation shall,
within thirty (30) days after January 1 of each year (or within such
shorter period as may reasonably be requested by the Corporation), give
written notice to the Corporation stating the name and address of such
Beneficial Owner, the number of shares of Capital Stock of the
Corporation Beneficially Owned and the class or series of which such
shares are a part, and a description of how such Capital Stock is held.
Each such Beneficial Owner shall provide to the Corporation such
additional information as the Corporation may reasonably request in
order to determine the effect, if any, of such Beneficial Ownership on
the Corporation's status as a REIT.
2. Each Person who is a Beneficial Owner of Capital Stock of
the Corporation and each Person (including the holder of record) who is
holding Capital Stock for a Beneficial Owner shall immediately provide
to the Corporation such information as the Corporation may reasonably
request in order to determine the Corporation's status as a REIT, to
comply with the requirements of any taxing authority or governmental
agency or to determine any such compliance.
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(G) OTHER ACTION BY BOARD. Nothing contained in this Article XI shall
limit the authority of the Board of Directors to take such other action as it
deems necessary or advisable to protect the Corporation and the interests of the
stockholders by preservation of the Corporation's status as a REIT.
(H) AMBIGUITIES. In the case of an ambiguity in the application of any
of the provisions of this Article XI, including any definition contained in
Paragraph (A) hereof and any ambiguity with respect to which Capital Stock is to
constitute Excess Stock in a given situation, the Board of Directors shall have
the power to determine the application of the provisions of this Article XI
based on the facts known to it, which determination shall be conclusive for all
purposes hereof.
(I) MODIFICATIONS OF EXISTING HOLDER LIMITS. The Existing Holder Limits
may be modified as follows:
1. Subject to the limitations provided in Paragraph (K)
hereof, the Board of Directors may grant stock options which result in
Beneficial Ownership of Capital Stock of the Corporation by an Existing
Holder pursuant to a stock option plan approved by the Board of
Directors and/or the stockholders. Any such grant shall be deemed to
increase, without any further action by the Board of Directors, the
Existing Holder Limit for the affected Existing Holder to the maximum
extent possible under Paragraph (K) hereof to permit the Beneficial
Ownership of the Capital Stock issuable or issued upon the exercise of
such stock option.
2. Subject to the limitations provided in Paragraph (K)
hereof, an Existing Holder may elect to participate in a dividend
reinvestment plan or direct stock purchase plan approved by the Board
of Directors which results in Beneficial Ownership of Capital Stock of
the Corporation by such participating Existing Holder. Any such
participation shall increase the Existing Holder Limit for the affected
Existing Holder to the maximum extent possible under Paragraph (K)
hereof to permit Beneficial Ownership of the Capital Stock of the
Corporation acquired or which can be acquired as a result of such
participation.
3. The Board of Directors will reduce the Existing Holder
Limit for any Existing Holder following a Transfer permitted by this
Article XI by the percentage of the total outstanding shares of Capital
Stock of the Corporation so Transferred by such Existing Holder, or
after the lapse (without exercise) of a stock option described in
Paragraph (K)(1) hereof, by the percentage of the total outstanding
shares of Capital Stock that would have been issuable upon exercise of
the stock option.
(J) Increases in Ownership Limit and Existing Holder Limits. Subject to
the limitations provided in Paragraph (K) hereof, the Board of Directors may
from time to time increase the Ownership Limit or any Existing Holder Limit.
(K) LIMITATIONS ON CHANGES IN EXISTING HOLDER AND OWNERSHIP LIMITS.
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1. Neither the Ownership Limit nor any Existing Holder Limit
may be increased if, after giving effect to such increase, five (5) or
fewer Beneficial Owners of Capital Stock of the Corporation (including
all of the then Existing Holders) could Beneficially Own, in the
aggregate, more than 50.0% in number or value (determined as provided
in the definition of "Ownership Limit" in Paragraph (A) hereof) of the
outstanding Capital Stock of the Corporation.
2. Prior to the modification of any Existing Holder Limit or
Ownership Limit pursuant to Paragraphs (I) and (J) hereof, the Board of
Directors may require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary or advisable in
order to determine or ensure the Corporation's status as a REIT.
3. No Existing Holder Limit shall be reduced to a percentage
which is less than the Ownership Limit.
(L) EXEMPTIONS. The Board of Directors may exempt a Person from the
Ownership Limit or the Existing Holder Limit, as the case may be, in its sole
and absolute discretion, upon receipt of evidence satisfactory to the Board of
Directors to the effect that such exemption will not result in the Corporation
being "closely held" within Section 856(h) of the Code, and upon such other
conditions as the Board of Directors may direct (including, without limitation,
representations, warranties and undertakings by the intended Transferee).
(M) LEGEND.
Each certificate for Capital Stock of the Corporation shall bear
substantially the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER FOR, AMONG OTHER THINGS, THE PURPOSE OF THE
CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT
TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, OR ANY SUCCESSOR
STATUTE. EXCEPT AS OTHERWISE PROVIDED PURSUANT TO THE CHARTER OF THE
CORPORATION, NO PERSON (UNLESS SUCH PERSON IS AN EXISTING HOLDER) MAY
BENEFICIALLY OWN CAPITAL STOCK OF THE CORPORATION (WHICH INCLUDES
OWNERSHIP BY ATTRIBUTION AS WELL AS DIRECT OWNERSHIP) IN EXCESS OF THAT
NUMBER OF SHARES OF CAPITAL STOCK OF THE CORPORATION WHICH EQUALS 9.8%
(OR SUCH GREATER PERCENTAGE AS MAY BE DETERMINED BY THE BOARD OF
DIRECTORS OF THE CORPORATION) OF THE LESSER OF (A) THE NUMBER OF
OUTSTANDING SHARES OF CAPITAL STOCK OF THE CORPORATION AND (B) THE
VALUE OF OUTSTANDING SHARES OF CAPITAL STOCK OF THE CORPORATION. ANY
PERSON WHO ATTEMPTS OR PROPOSES TO BENEFICIALLY OWN CAPITAL STOCK OF
THE
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CORPORATION IN EXCESS OF THE ABOVE LIMITATIONS MUST NOTIFY THE
CORPORATION IN WRITING AT LEAST FIFTEEN (15) CALENDAR DAYS PRIOR TO
SUCH PROPOSED OR ATTEMPTED TRANSFER. ALL ITALICIZED TERMS IN THIS
LEGEND HAVE THE MEANINGS SET FORTH IN THE CHARTER OF THE CORPORATION, A
COPY OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER, WILL BE SENT
WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS. IF THE RESTRICTIONS
ON TRANSFER ARE VIOLATED, THE TRANSFER WILL BE VOID AB INITIO AND THE
SECURITIES REPRESENTED HEREBY WILL BE DESIGNATED AND TREATED AS EXCESS
STOCK WHICH WILL BE HELD IN A SPECIAL TRUST.
(N) SEVERABILITY. If any provision of this Article XI or any
application of any such provision is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the validity and
enforceability of the remaining provisions shall not be affected and other
applications of such provision shall be affected only to the extent necessary to
comply with the determination of such court.
(O) SPECIAL TRUST FOR EXCESS STOCK. Upon any purported Transfer or
Event that results in Excess Stock pursuant to Paragraph (M) hereof, such Excess
Stock shall be deemed to have been transferred to the Special Trustee of a
Special Trust for the benefit of such Beneficiary or Beneficiaries to whom an
interest in such Special Trust may later be transferred pursuant to Paragraph
(S) hereof. Excess Stock so held in trust shall be issued and outstanding
Capital Stock of the Corporation. The Purported Record Transferee or Purported
Record Holder of such Capital Stock shall have no rights in or to such Excess
Stock except as specifically provided herein. The Purported Beneficial
Transferee or Purported Beneficial Holder of such Capital Stock shall have no
rights in or to such Excess Stock except as specifically provided herein.
(P) DIVIDENDS FOR EXCESS STOCK. The Purported Owner of Excess Stock
shall not be entitled to any dividends or other distributions with respect to
such Excess Stock. Any dividend or other distribution paid to a Purported Owner
prior to the discovery by the Corporation that Capital Stock of the Corporation
has become Excess Stock pursuant to this Article XI shall be repaid to the
Corporation by the Purported Owner immediately upon notification by the
Corporation that such dividend or other distribution was paid with respect to
Excess Stock, and such dividend or other distribution shall then be remitted by
the Corporation to the Special Trust. All dividends and other distributions
(other than those distributions of Corporation assets described in Paragraph (Q)
hereof) with respect to Excess Stock shall inure to the benefit of the
Beneficiaries.
(Q) SALES, EXCHANGES AND LIQUIDATING DISTRIBUTIONS WITH RESPECT TO
EXCESS STOCK. Upon (a) the sale or exchange of Excess Stock by the Special
Trustee, (b) the voluntary or involuntary liquidation, dissolution or winding up
of, or any other distribution of all or substantially all of the assets of, the
Corporation, or (c) the purchase of Excess Stock by the Corporation pursuant to
Paragraph (T) hereof, the Special Trustee, as holder of the Excess Stock in
trust, shall, subject to the Purported Owner Limitation, distribute ratably
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to the Purported Owner(s), (i) in the case of any liquidation, dissolution or
winding up of, or any distribution of the assets of, the Corporation, any such
assets received in respect of the Excess Stock, (ii) in the case of a sale or
exchange of Excess Stock by the Special Trustee, the amounts received from such
sale or exchange, or (iii) in the case of any purchase of Excess Stock by the
Corporation pursuant to Paragraph (T) hereof, the net amounts received from such
purchase. Any assets or amounts received upon the sale, exchange or purchase by
the Corporation of Excess Stock, in excess of the Purported Owner Limitation,
shall be distributed to the Beneficiaries.
If, notwithstanding the foregoing, a Purported Owner receives an amount
from (i) the liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, (ii) the sale or exchange of Excess Stock or
(iii) the purchase of Excess Stock by the Corporation pursuant to Paragraph (T)
hereof, that exceeds the Purported Owner Limitation, such Purported Owner shall
pay such excess immediately to the Corporation, which shall remit such amount to
the Special Trustee.
(R) VOTING RIGHTS FOR EXCESS STOCK. A Purported Owner of Excess Stock
shall not be entitled to vote on any matter and shall be deemed to have given to
the Special Trustee an irrevocable proxy, coupled with an interest, to vote the
Excess Stock. If a Purported Owner shall vote such Excess Stock before it is
discovered that such Capital Stock is Excess Stock, then the vote by such
Purported Owner shall be void AB INITIO.
(S) NON-TRANSFERABILITY OF EXCESS STOCK. Excess Stock shall not be
transferable by a Purported Owner. Subject to Paragraph (T) hereof, the Special
Trustee of any Excess Stock placed in a Special Trust may freely designate a
Beneficiary of an interest in the Special Trust representing such Excess Stock.
(T) CALL BY CORPORATION ON EXCESS STOCK. Excess Stock shall be deemed
to have been offered for sale to the Corporation or its designee(s) at a price
per share equal to: (A) in the case of Excess Stock resulting from a purported
Transfer, the lesser of (i) the price per share in such purported Transfer of
the Capital Stock of the Corporation that was converted into such Excess Stock
(or, in the case of a devise or gift, the Market Price at the time of such
devise or gift) and (ii) the Market Price on the date the Corporation or its
designee accepts such offer and (B) in the case of Excess Stock created by any
other Event, the lesser of (i) the Market Price of the Capital Stock that was
converted into such Excess Stock on the date of such conversion and (ii) the
Market Price of such Capital Stock of the Corporation on the date the
Corporation or its designee accepts such offer. The Corporation shall have the
right to accept such offer for a period of ninety (90) calendar days after the
later of (i) the date of the purported Transfer or other Event which resulted in
an exchange of Capital Stock for such Excess Stock and (ii) the date the Board
of Directors determines in good faith that a purported Transfer or other Event
resulting in an exchange of Capital Stock of the Corporation for such Excess
Stock has occurred, if the Corporation does not receive a notice of any such
Transfer pursuant to Paragraph (E) hereof.
(U) NYSE SETTLEMENTS. Nothing in this Article XI shall preclude the
settlement of any transactions entered into through the facilities of the New
York Stock Exchange or
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any other national securities exchange or automated interdealer quotation
system; provided, that the fact that the settlement of any transaction takes
place shall not negate the effect of any other provision of this Article XI and
any transferee in such a transaction shall be subject to all of the provisions
and limitations set forth in this Article XI.
ARTICLE XII
INDEMNIFICATION AND LIMITATION OF LIABILITY
(A) MANDATORY INDEMNIFICATION. The Corporation shall indemnify each
person who is or was, or has agreed to become, a director or officer of the
Corporation and each person who, while a director of the Corporation and, at the
request of the Corporation, is or was serving, or has agreed to serve, as a
director, officer, partner, joint venturer, trustee, employee or agent of
another corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan against any and all liabilities and expenses incurred in
connection with each such person's services in such capacities to the maximum
extent permitted by the Maryland General Corporation Law, as from time to time
amended.
(B) DISCRETIONARY INDEMNIFICATION. If approved by the Board of
Directors, the Corporation may indemnify any of its employees or agents against
any or all liabilities and expenses incurred in connection with each such
person's services in such capacities and any of its employees, agents or other
persons who are or were serving, or who have agreed to serve, at the request of
the Corporation, as a director, officer, partner, joint venturer, trustee,
employee or agent of another corporation, partnership, joint venture, other
enterprise or employee benefit plan, to the extent and on such terms and subject
to such conditions and limitations, as determined to be appropriate by the Board
of Directors.
(C) ADVANCING EXPENSES PRIOR TO A DECISION. The Corporation shall
advance expenses to its directors and officers entitled to mandatory
indemnification to the maximum extent permitted by the Maryland General
Corporation Law and may, in the discretion of the Board of Directors, advance
expenses to employees, agents and others who may be granted indemnification.
(D) OTHER PROVISIONS FOR INDEMNIFICATION. The Board of Directors may,
by Bylaw, resolution or agreement, make further provision for indemnification of
directors, officers, employees and agents and the advancement of expenses
thereto.
(E) LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS. To the maximum
extent that limitations on the liability of directors and officers are permitted
by the Maryland General Corporation Law, as from time to time amended, no
director or officer of the Corporation shall have liability to the Corporation
or its stockholders for money damages. This limitation on liability applies to
events occurring at the time a person serves as a director or officer of the
Corporation whether or not such person is a director or officer at the time of
any proceeding in which liability is asserted.
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(F) EFFECT OF AMENDMENT OR REPEAL. No amendment or repeal of any
section of this Article XII, or the adoption of any provision of the
Corporation's Charter inconsistent with this Article XII, shall apply to or
affect in any respect the rights to indemnification or limitation of liability
of any director or officer of the Corporation with respect to any alleged act or
omission which occurred prior to such amendment, repeal or adoption.
ARTICLE XIII
CONFLICT WITH TERMS OF ANY CLASS OR
SERIES OF PREFERRED STOCK
In the event of a conflict between the terms of (1) the Corporation's
Charter as in effect from time to time, other than the terms of any class or
series of Preferred Stock, including the terms of the Series B, E and F
Preferred Stock set forth in Exhibits A, B and C, respectively, to this Charter,
and the terms of any Articles Supplementary of any class or series of Preferred
Stock then outstanding, and (2) any such class or series of Preferred Stock,
including the terms of the Series B, E and F Preferred Stock set forth in
Exhibits A, B and C, respectively, to this Charter, and the terms of any
Articles Supplementary, unless otherwise required by the applicable provisions
of Maryland law, this Charter or the express terms of such class or series of
Preferred Stock, including the terms of the Series B, E and F Preferred Stock
set forth in Exhibits A, B and C, respectively, to this Charter, and the terms
of any Articles Supplementary, the terms of such class or series of Preferred
Stock, including the terms of the Series B, E and F Preferred Stock set forth in
Exhibits A, B and C, respectively, to this Charter, and the terms of any
Articles Supplementary shall govern and control.
SECOND: The Corporation desires to amend and restate its Charter as
currently in effect. The provisions set forth in the above Articles of Amendment
and Restatement are all of the provisions of the Corporation's Charter currently
in effect as hereby amended.
THIRD: The amendment and restatement of the Charter of the Corporation
herein made was carried out pursuant to Section 3-301 of the Maryland General
Corporation Law. The amendment and restatement of the Charter of the Corporation
was (i) approved by the Board of Directors on __________, 2000, and (ii) carried
out pursuant to that certain Debtors' Third Amended Joint Plan of Reorganization
dated ________, 2000, and confirmed by order of the United States Bankruptcy
Court of the District of Maryland, Greenbelt Division, and entered on _______,
2000 in the Chapter 11 reorganization proceedings of the Corporation pending as
IN RE CRIIMI MAE INC., ET. AL (CASE NOS. 98-23115 THROUGH 98-23117 (JOINTLY
ADMINISTERED).
FOURTH: The current address of the principal office of the Corporation
is 11200 Rockville Pike, Rockville, Maryland 20852, and the Corporation's
current resident agent is Corporation Trust, Inc., whose address is 11200
Rockville Pike, Rockville, Maryland 20852.
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FIFTH: The Corporation currently has ___ (__) directors. The directors
currently in office are _____________________________________________________.
SIXTH: These Articles of Amendment and Restatement increase the
authorized stock of the Corporation and the aggregate par value of such
authorized stock. Immediately before the amendment and restatement, the total
number of shares of all classes of stock of the Corporation heretofore
authorized, and the number and par value of the shares of each class were one
hundred forty five million (145,000,000) shares, of the par value of one cent
($0.01) each, of which one hundred twenty million (120,000,000) shares were
classified as Common Stock and twenty-five million (25,000,000) shares were
classified as Preferred Stock, of which three million (3,000,000) shares were
classified as Series B Preferred Stock, two hundred three thousand (203,000)
shares were classified as Series E Preferred Stock, and one million six hundred
ten thousand (1,610,000) shares were classified as Series F Preferred Stock. The
aggregate par value of all authorized shares having par value was one million
four hundred fifty thousand dollars ($1,450,000). As amended and restated, the
total number of shares of all classes of stock of the Corporation and the par
value of such shares, are three hundred seventy five million (375,000,000)
shares, of the par value of one cent ($0.01) each, of which three hundred
million (300,000,000) shares are classified as Common Stock and seventy five
million (75,000,000) shares are classified as Preferred Stock of which three
million (3,000,000) shares are classified as Series B Preferred Stock, two
hundred three thousand (203,000) shares are classified as Series E Preferred
Stock, and one million six hundred ten thousand (1,610,000) shares are
classified as Series F Preferred Stock. The aggregate par value of all
authorized shares having par value is three million seven hundred fifty
thousand dollars ($3,750,000).
20
<PAGE>
IN WITNESS WHEREOF, CRIIMI MAE Inc. has caused the Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
Senior Vice-President/General Counsel and attested by its Secretary on
___________, 2000.
CRIIMI MAE INC.
By: /s/
-------------------------------------
David B. Iannarone
Senior Vice-President/General Counsel
ATTEST:
/s/
-------------------------
Secretary
H. William Willoughby
THE UNDERSIGNED, Senior Vice-President/General Counsel of CRIIMI MAE
Inc., who executed on behalf of said Corporation the foregoing Articles of
Amendment and Restatement, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles of Amendment and Restatement to be the corporate act of said
Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/
-----------------------------------
David B. Iannarone
Senior Vice-President/General Counsel
21
<PAGE>
EXHIBIT A TO ARTICLES OF AMENDMENT AND RESTATEMENT
(THE "SERIES B PREFERRED STOCK ARTICLES")(1)
The Series B Cumulative Convertible Preferred Stock shall be subject to
all of the provisions of the Articles of Amendment and Restatement of the
Corporation relating to the Capital Stock of the Corporation generally and
shall, as set by the Board of Directors, have the following preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption:
1. DEFINITIONS. For the purposes of these Series B Preferred Stock
Articles the following terms shall have the meanings indicated:
"Base Common Dividend Rate" shall mean $.30 per shares of Common Stock,
subject to adjustment as described in Section 4(d).
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the State of New York or Maryland are
authorized or obligated by law or executive order to close.
"Common Stock" shall mean the common stock of the Corporation, par
value $.01 per share. "Conversion Ratio" shall equal 2.2844, subject to
adjustment as described in Section 4 (d).
"Conversion Premium" shall equal three percent (3%).
"Conversion Price" shall mean $10.94 per share of Common Stock, subject
to adjustment as described in Section 10(f).
"Dividend Average Price" shall mean the Volume Weighted Average Price
of the Common Stock traded during the ten Trading Days beginning one Trading Day
after the Dividend Declaration Date (a "Dividend Pricing Period"), utilizing the
Bloomberg (Equity) VAP function, or, (x) if that information is not available,
the average of the sum of the average daily high and low sale prices for the
Common Stock for each day during a Dividend Pricing Period, as reported on the
stock exchange composite tape, weighted by the number of shares of Common Stock
traded for that day or, (y) if the Common Stock is traded over-the-counter, the
average of the sum of the daily averages of the last reported high bid and low
asked quotations for the Common Stock for each day during a Dividend Pricing
Period, weighted by the number of shares of Common Stock traded for that day.
"Dividend Declaration Date" shall mean, with respect to any quarterly
dividend, a date
------------------------------
(1) This EXHIBIT A represents the relative rights and preferences of the
Corporation's Series B Preferred Stock, as amended by the Plan, which amendments
relate principally to the payment of dividends, consistent with the Plan, and
will be effected only if Holders of Series B Preferred Stock vote to accept the
Plan.
<PAGE>
on which the Board of Directors declares such dividend.
"Effective Date" shall mean the first day, other than a Saturday,
Sunday, or a "legal holiday" (as defined in Rule 9005(a) of the Federal Rules of
Bankruptcy Procedure), that is not less than eleven (11) days after the date on
which the clerk of the U.S. Bankruptcy Court for the District of Maryland,
Greenbelt Division, or such other court that exercises jurisdiction over the
Corporation's bankruptcy case, enters the Order confirming the Corporation's
plan of reorganization as such may be amended, modified or supplemented from
time to time, and on which day, as determined by the Corporation (i) all
conditions to the Effective Date as set forth in the Corporation's plan of
reorganization have been satisfied or waived by the Corporation, and (ii) no
stay of the Order confirming the Corporation's plan of reorganization is in
effect.
"Liquidation Value" with respect to a share of Series B Preferred Stock
shall mean $25.00.
"Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
"Redemption Price" with respect to a share of Series B Preferred Stock
shall mean $25.00.
"Series E Preferred Stock" shall mean the Corporation's Series E
Cumulative Convertible Preferred Stock, par value $0.01 per share.
"Series F Preferred Stock" shall mean the Corporation's Series F
Redeemable Cumulative Dividend Preferred Stock (convertible during the period of
ten (10) Business Days after the fifth Business Day after the Initial Issue Date
and during the period of ten (10) Business Days ending ninety (90) calendar days
after the Initial Issue Date or the First Business Day thereafter), par value
$0.01 per share.
"Subsidiary" of any Person means any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.
"Trading Day" shall mean any day on which the principal national
securities exchange on which the Common Stock is listed or admitted to trading
is open for the transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, a Business Day.
"Volume Weighted Average Price of the Common Stock" for a given period
shall mean the quotient of (i) the aggregate dollar value obtained by
multiplying (a) the number of shares of Common Stock traded at each given price
during such period, by (b) such price, divided by (ii) the total number of
shares of Common Stock traded during such period.
2. DESIGNATION AND NUMBER. The shares of such series of Preferred Stock
shall be designated as "Series B Cumulative Convertible Preferred Stock" (the
"SERIES B PREFERRED STOCK"). The number of shares initially constituting the
Series B Preferred Stock shall be
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<PAGE>
3,000,000, which number may be decreased (but not increased) by the Board of
Directors without a vote of the holders of Series B Preferred Stock; PROVIDED,
HOWEVER, that such number may not be decreased below the number of then
outstanding shares of Series B Preferred Stock.
3. RANK. The Series B Preferred Stock shall, with respect to dividend
rights and rights upon liquidation, dissolution or winding up, rank (i) senior
to (w) the Series E Preferred Stock, (x) the Series F Preferred Stock, (y) the
Common Stock, and (z) to all other Capital Stock of the Corporation the terms of
which specifically provide that such Capital Stock ranks junior to the Series B
Preferred Stock with respect to dividend rights or rights upon liquidation,
dissolution or winding up of the Corporation, (ii) on parity with all Capital
Stock of the Corporation the terms of which specifically provide that such
Capital Stock ranks on a parity with the Series B Preferred Stock with respect
to dividend rights or rights upon liquidation, dissolution or winding up of the
Corporation and (iii) junior to all Capital Stock of the Corporation the terms
of which specifically provide that such Capital Stock ranks senior to the Series
B Preferred Stock with respect to dividend rights or rights upon liquidation,
dissolution or winding up of the Corporation.
4. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of Series B
Preferred Stock, in preference to the holders of shares of Common Stock and of
any other shares of Capital Stock of the Corporation ranking junior to the
Series B Preferred Stock as to payment of dividends, shall be entitled to
receive, when, as and if declared by the Board of Directors, out of the assets
of the Corporation legally available therefor, cumulative dividends, payable in
quarterly installments on the last Business Day of each calendar quarter in each
year (each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT
DATE") commencing on September 30, 1996. Each such quarterly dividend shall be
fully cumulative, to the extent not paid, and shall accrue (whether or not
earned or declared), without interest, from the date of issuance of the Series B
Preferred Stock, and thereafter from the first day of the quarterly period in
which such dividend may be payable as herein provided. Dividends payable for
each quarterly dividend period (including the period corresponding to the
initial Quarterly Dividend Payment Date on September 30, 1996) shall be computed
by dividing the annual dividend by four. Dividends payable with respect to any
partial dividend period (other than the initial Quarterly Dividend Payment Date)
shall be computed on the basis of a 360-day year of twelve 30-day months.
Dividends shall be payable in cash or in Common Stock (or a combination
thereof), at the Corporation's option, including without limitation, all accrued
and unpaid dividends as of the Effective Date. If dividends are paid in cash,
the cash dividend rate on shares of the Series B Preferred Stock shall equal the
sum of (i) $0.68 per share per quarter (equivalent to $2.72 per share per annum)
plus (ii) the product of (x) the excess over the Base Common Dividend Rate, if
any, of the quarterly cash dividend declared or paid in respect of each share of
Common Stock for the applicable quarter, (y) the Conversion Ratio and (z) one
plus the Conversion Premium. If the dividends are paid in Common Stock, the
number of shares of Common Stock issuable by the Corporation shall be determined
by dividing the cash amount which would be payable if cash dividends were to be
paid on the Quarterly Dividend Payment Date by the Dividend Average Price. No
fractional shares of Common Stock shall be issued. Instead of any fractional
share of Common Stock, the Corporation shall pay a cash adjustment in respect to
such fraction.
(b) Dividends paid on the shares of the Series B Preferred
Stock in an amount
3
<PAGE>
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated among all such shares of Series B Preferred Stock
and all other shares of Capital Stock of the Corporation ranking on a parity as
to dividends with the Series B Preferred Stock ("DIVIDEND PARITY STOCK"), at the
time outstanding pro rata so that the amount of dividends declared per share of
Series B Preferred Stock and the Dividend Parity Stock shall in all cases bear
to each other the same ratio that accrued dividends per share on the Series B
Preferred Stock and the Dividend Parity Stock bear to each other. The Board of
Directors may fix a record date for the determination of holders of shares of
the Series B Preferred Stock entitled to receive payment of a dividend declared
thereon, which record date shall be no more than sixty (60) days nor less than
ten (10) days prior to the date fixed for the payment thereof.
(c) Any dividend payment made on shares of the Series B
Preferred Stock shall first be credited against the earliest accrued but unpaid
dividend due with respect to shares of the Series B Preferred Stock which
remains payable.
(d) In case the Corporation shall (A) pay a dividend or make a
distribution on shares of its Common Stock in Common Stock, (B) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares or (C) combine or reclassify its outstanding shares of Common Stock into
a smaller number of shares:
(i) the Base Common Dividend Rate in effect
immediately prior thereto shall be adjusted retroactively as provided
below so that the Base Common Dividend Rate thereafter shall be
determined by multiplying the Base Common Dividend Rate by a fraction
of which the denominator shall be the number of shares of Common Stock
outstanding immediately following such action and of which the
numerator shall be the number of shares of Common Stock outstanding
immediately prior thereto; and
(ii) the Conversion Ratio in effect immediately prior
thereto shall be adjusted retroactively as provided below so that the
Conversion Ratio thereafter shall be determined by multiplying the
Conversion Ratio by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding immediately following such
action and of which the denominator shall be the number of shares of
Common Stock outstanding immediately prior thereto.
Such adjustments shall be made whenever any event listed in the first sentence
of this Section 4(d) shall occur and shall become effective retroactively
immediately after the record date in the case of a dividend (pursuant to Section
4 (d)(A)) and immediately after the effective date in the case of a subdivision,
combination or reclassification (pursuant to Section 4 (d)(B) or 4(d)(C)). No
adjustment in the Base Common Dividend Rate or the Conversion Ratio shall be
required unless the adjustment would require an increase or decrease of at least
1% of each of the Base Common Dividend Rate and the Conversion Ratio then in
effect; PROVIDED, HOWEVER, that any adjustment that by reason of this Section
4(d) is not required to be made shall be carried forward and taken into account
in any subsequent adjustment. Notwithstanding anything to the contrary in this
Section 4(d), Common Stock issued pursuant to the Corporation's dividend
reinvestment plan shall not result in any adjustment to the Base Common Dividend
Rate or the Conversion Ratio.
4
<PAGE>
(e) The holders of shares of Series B Preferred Stock shall
not be entitled to receive any dividends or other distributions except as
expressly provided herein.
5. VOTING RIGHTS. So long as the Series B Preferred Stock remains
outstanding, the holders of shares of the Series B Preferred Stock shall have
the following voting rights:
(a) The holders of shares of Series B Preferred Stock shall
have no voting rights except as set forth below or as otherwise from time to
time required by law.
(b) The affirmative vote or consent, in person or by proxy, in
writing or at a special or annual meeting of stockholders called for the
purpose, of the holders of at least:
(i) two-thirds of the outstanding shares of Series B
Preferred Stock, voting separately as a class, shall be necessary to
authorize, create or increase the authorized or issued amount of, any
class or series of the Corporation's Capital Stock ranking prior to the
Series B Preferred Stock with respect to payment of dividends or
distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized Capital Stock of the Corporation into any
such Capital Stock, or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such
Capital Stock;
(ii) a majority of the outstanding shares of Series B
Preferred Stock, voting separately as a class, shall be necessary to
authorize, create or increase the authorized or issued amount of, any
class or series of the Corporation's Capital Stock ranking on a parity
with the Series B Preferred Stock with respect to payment of dividends
or distribution of assets upon liquidation, dissolution or winding up
or reclassify any authorized Capital Stock of the Corporation into any
such Capital Stock, or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such
Capital Stock; or
(iii) two-thirds of the outstanding shares of Series
B Preferred Stock, voting separately as a class, shall be necessary to
amend, alter or repeal any of the provisions of the Articles of
Amendment and Restatement of the Corporation, including these Series B
Preferred Stock Articles, whether by merger, consolidation or otherwise
(an "EVENT"), so as to materially and adversely affect any right,
preference, privilege or voting power of the Series B Preferred Stock
or the holders thereof;
PROVIDED, HOWEVER, with respect to the occurrence of any of the Events set forth
in Section 5 (b) (iii), so long as the Series B Preferred Stock remains
outstanding with the terms thereof materially unchanged, the occurrence of any
such Event shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of holders of the Series B Preferred
Stock; and PROVIDED, FURTHER, that (x) any increase in the amount of authorized
Common Stock or the authorization, creation or issuance of any other class or
series of Capital Stock or (y) any increase in the amount of authorized shares
of any other class or series of Capital Stock, in each case ranking on a parity
with or junior to the Series B Preferred Stock with respect to the payment of
dividends or the distribution of assets upon liquidation, dissolution or winding
up, shall not be deemed to materially and adversely affect such rights,
preferences,
5
<PAGE>
privileges or voting powers.
(c) During any period in which dividends on the Series B
Preferred Stock are cumulatively in arrears for not less than six quarterly
dividend payments (whether or not consecutive), then the number of directors
constituting the Board of Directors shall, without further action, be increased
by two and the holders of shares of the Series B Preferred Stock shall have, in
addition to the other voting rights set forth herein, the exclusive right,
voting separately as a single class, to elect the directors of the Corporation
to fill such newly created directorships, the remaining directors to be elected
by the other classes of Capital Stock entitled to vote therefor at each meeting
of stockholders held for the purpose of electing directors. Such additional
voting rights shall continue until such time as all dividends accumulated on the
Series B Preferred Stock shall have been paid in full, at which time such
additional directors shall cease to be directors and such additional voting
right of the holders of Series B Preferred Stock shall terminate subject to
revesting in the event of each and every subsequent event of the character
indicated above. In no event shall the holders of Series B Preferred Stock
voting separately as a class be entitled to elect a total of more than two
directors to the Board of Directors pursuant to this Section 5 (c).
So long as such right to vote pursuant to this Section 5(c) continues
(and unless such right has been exercised by written consent of the minimum
number of shares required to take such action), the Chairman of the Board of
Directors may call, and upon the written request of holders of record of 20% of
the outstanding shares of Series B Preferred Stock addressed to the Secretary of
the Corporation at the principal office of the Corporation, shall call, a
special meeting of the holders of shares entitled to vote as provided herein.
Such meeting shall be held within sixty (60) days after delivery of such request
to the Secretary, at the place and upon the notice provided by law and in the
by-laws of the Corporation for the holding of meetings of stockholders.
Each director elected by the holders of shares of Series B Preferred
Stock as provided in this Section 5 (c) shall, unless his or her term shall
expire earlier upon payment in full by the Corporation of all accumulated
dividends on the Series B Preferred Stock, hold office until the annual meeting
of stockholders next succeeding his election or until his successor, if any, is
elected and qualified.
In case any vacancy shall occur among the directors elected by the
holders of shares of Series B Preferred Stock as provided in this Section 5 (c),
such vacancy may be filled for the unexpired portion of the term by vote of the
remaining director theretofore elected by such holders (if there is a remaining
director), or such director's successor in office. If any such vacancy is not so
filled within twenty (20) days after the creation thereof or if both directors
so elected by the holders of Series B Preferred Stock shall cease to serve as
directors before their terms shall expire, the holders of the Series B Preferred
Stock then outstanding and entitled to vote for such directors may, by written
consent as herein provided, or at a special meeting of such holders called as
provided herein, elect successors to hold office for the unexpired terms of such
directors whose places shall be vacant.
Any director elected by the holders of shares of Series B Preferred
Stock voting separately as a single class may be removed from office with or
without cause by the affirmative vote or written consent of the holders of at
least a majority of the outstanding shares of Series B
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<PAGE>
Preferred Stock. A special meeting of the holders of shares of Series B
Preferred Stock may be called in accordance with the procedures set forth in
this Section 5 (c).
(d)(i) The foregoing rights of holders of shares of Series B
Preferred Stock to take any actions as provided in this Section 5 may be
exercised at any annual meeting of stockholders or at a special meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the
Corporation, of the holders of the minimum number of shares of Series B
Preferred Stock required to take such action.
(ii) At each meeting of stockholders at which the holders of
shares of Series B Preferred Stock shall have the right, voting separately as a
single class to elect directors of the Corporation as provided in this Section 5
or to take any action, the presence in person or by proxy of the holders of
record of a majority of the total number of shares of Series B Preferred Stock
then outstanding and entitled to vote on the matter shall be necessary and
sufficient to constitute a quorum. At any such meeting or at any adjournment
thereof:
(A) the absence of a quorum of the holders of shares
of Series B Preferred Stock shall not prevent the election of directors
other than those to be elected by the holders of shares of Series B
Preferred Stock and the absence of a quorum of the holders of shares of
any other class or series of Capital Stock shall not prevent the
election of directors to be elected by the holders of shares of Series
B Preferred Stock or the taking of any action as provided in this
Section 5; and
(B) in the absence of a quorum of the holders of
shares of Series B Preferred Stock, a majority of the holders of such
shares present in person or by proxy shall have the power to adjourn
the meeting as to the actions to be taken by the holders of shares of
Series B Preferred Stock from time to time and place to place without
notice other than announcement at the meeting until a quorum shall be
present.
For the taking of any action as provided in Sections 5 (b) and 5 (c) by
the holders of Series B Preferred Stock, each such holder shall have one vote
for each share of such stock standing in such holder's name on the transfer
books of the Corporation as of any record date fixed for such purpose or, if no
such date be fixed, at the close of business on the Business Day next preceding
the day on which notice is given, or if notice is waived, at the close of
business on the Business Day next preceding the day on which the meeting is
held.
6. CERTAIN RESTRICTIONS. (a) If shares of Series B Preferred Stock are
outstanding, unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient (in cash and/or Common Stock,
as applicable) for the payment thereof set apart for such payment on the Series
B Preferred Stock for all past dividend periods and the then current dividend
period, other than pursuant to Section 4(b), the Corporation will not declare,
make, pay or set apart for payment or distribution any dividends or other
distributions (other than in Common Stock or other Capital Stock ranking junior
to the Series B Preferred Stock as to dividends and upon liquidation,
dissolution or winding up) on the Common Stock or any other series or class of
Capital Stock ranking, as to dividends, junior to the Series B Preferred Stock
for any period. No full dividends shall be paid or declared and set apart for
7
<PAGE>
payment on any Dividend Parity Stock for any period unless full cumulative
dividends have been, or contemporaneously are, paid or declared and set apart
for payment on the Series B Preferred Stock for all dividend payment periods
terminating on or prior to the date of payment of such full cumulative
dividends. No full dividends shall be paid or declared and set apart for payment
on the Series B Preferred Stock for any period unless full cumulative dividends
have been, or contemporaneously are, paid or declared and set apart for payment
on any Dividend Parity Stock for all dividend payment periods terminating on or
prior to the date of payment of such full cumulative dividends.
(b) If shares of Series B Preferred Stock are outstanding,
unless full cumulative dividends have been or contemporaneously are declared and
paid or declared and a sum sufficient (in cash and/or Common Stock, as
applicable) for the payment thereof set apart for such payment on the Series B
Preferred Stock for all past dividend periods and the then current dividend
period, the Corporation shall not redeem, purchase or otherwise acquire for any
consideration (or pay or make available money for a sinking fund for the
redemption of) any Common Stock or any other series or class of Capital Stock
ranking, as to dividends or upon liquidation, dissolution or winding up, on a
parity with or junior to the Series B Preferred Stock (except by conversion into
or exchange for Common Stock or other Capital Stock of the Corporation ranking
junior to the Series B Preferred Stock as to dividends and upon liquidation,
dissolution or winding up); PROVIDED, HOWEVER, the foregoing shall not prevent
the purchase or acquisition of any shares of Capital Stock of the Corporation by
the Corporation (i) in order to preserve the status of the Corporation as a real
estate investment trust ("REIT") or (ii) pursuant to a purchase or exchange
offer made on comparable terms to all holders of outstanding shares of Capital
Stock of the Corporation.
(c) The Corporation shall not permit any Subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
Capital Stock of the Corporation unless the Corporation could, pursuant to
Section 6 (b), purchase or otherwise acquire such shares at such time and in
such manner.
7. REDEMPTION. (a) The Series B Preferred Stock shall not be redeemable
in whole or in part prior to the tenth yearly anniversary of the date of
issuance of the Series B Preferred Stock. On or after the tenth yearly
anniversary of the date of issuance of the Series B Preferred Stock, to the
extent the Corporation shall have funds legally available therefor, the Series B
Preferred Stock shall be subject to redemption in whole or in part, in cash, at
the option of the Corporation on any Quarterly Dividend Payment Date, at the
Redemption Price, together in each case with an amount (in cash and/or Common
Stock, as applicable) equal to accrued and unpaid dividends to (and including)
the date fixed for redemption. On and after the date fixed for redemption,
provided that the Redemption Price (including any accrued and unpaid dividends
to (and including) the date fixed for redemption) has been duly paid or
deposited in trust for the benefit of the holders of the Series B Preferred
Stock, dividends shall cease to accrue on the Series B Preferred Stock called
for redemption, such shares shall no longer be deemed to be outstanding and all
rights of the holders of such shares as stockholders of the Corporation shall
cease, except the right to receive the moneys (and Common Stock, if applicable)
payable upon such redemption, without interest thereon, upon surrender of the
certificates evidencing such shares. Any moneys (and Common Stock, if
applicable) deposited in trust by the Corporation
8
<PAGE>
which shall not be required for redemption because of the exercise of any right
of conversion by the holders of the Series B Preferred Stock, shall be repaid to
the Corporation forthwith. Any moneys (and Common Stock, if applicable)
deposited in trust by the Corporation and unclaimed at the end of two years from
the date fixed for such redemption shall be repaid to the Corporation upon its
written request, after which repayment the holders of the shares of Series B
Preferred Stock so called for redemption shall look only to the Corporation for
the payment thereof.
(b) Notice of any redemption pursuant to Section 7 (a) shall
be given to the holders of shares of Series B Preferred Stock once not less than
thirty (30) or more than sixty (60) days prior to the date fixed for redemption.
Notice of redemption shall be given by first class mail to each such holder's
address as shown on the stock books of the Corporation and will specify (i) the
date filed for redemption, (ii) the number of shares of Series B Preferred Stock
to be redeemed, (iii) the Redemption Price, (iv) the place or places where
certificates for shares of Series B Preferred Stock are to be surrendered for
payment of the Redemption Price, (v) that dividends on the shares of Series B
Preferred Stock to be redeemed will cease to accrue on the date fixed for
redemption, and (vi) the date upon which the holders' conversion rights will
terminate. If less than all shares of Series B Preferred Stock then outstanding
are to be redeemed, the shares of Series B Preferred stock will be redeemed pro
rata from among the holders of shares of Series B Preferred Stock then
outstanding.
(c) If a notice of redemption has been given pursuant to this
Section 7, and any holder of shares of the Series B Preferred Stock shall, prior
to the close of business on the fifth day preceding the date fixed for
redemption, give written notice to the Corporation pursuant to Section 10 below
of the conversion of any or all of the shares to be redeemed held by the holder
(accompanied by a certificate or certificates for such shares, duly endorsed, or
assigned to the Corporation, and any necessary transfer tax payment, as required
by Section 10 below), then such redemption shall not become effective as to such
shares to be converted and such redemption shall become effective as provided in
Section 10 below, whereupon any funds (and Common Stock, if applicable)
deposited by the Corporation for the redemption of such shares shall (subject to
any right of the holder of such shares to receive the dividend payable thereon
as provided in Section 10 below) immediately upon such conversion be returned to
the Corporation or, if then held in trust by the Corporation, shall be
discharged from the trust.
8. REACQUIRED SHARES. Any shares of Series B Preferred Stock converted,
redeemed, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares of Series B Preferred Stock shall upon their cancellation, and
upon the filing of an appropriate certificate with the Maryland State Department
of Assessments and Taxation, become authorized but unissued shares of Preferred
Stock and may be reissued as part of another series of Preferred Stock subject
to the conditions or restrictions on issuance set forth herein, to the extent
any Series B Preferred Stock remains outstanding.
9. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation then, before any distribution or payment shall be made to the
holders of any shares of Common Stock or any other class or series of Capital
Stock of the Corporation ranking junior to the Series B Preferred
9
<PAGE>
Stock in the distribution of assets upon any liquidation, dissolution or winding
up of the Corporation, the holders of Series B Preferred Stock shall be entitled
to receive out of assets of the Corporation legally available for distribution
to stockholders, liquidating distributions in the amount of the Liquidation
Value per share, plus an amount equal to all dividends accrued and unpaid
thereon as of the date of liquidation, dissolution or winding up. After payment
of the full amount of the liquidating distributions to which they are entitled,
the holders of Series B Preferred Stock will have no right or claim to any of
the remaining assets of the Corporation. In the event that, upon any such
voluntary or involuntary liquidation, dissolution or winding up, the available
assets of the Corporation are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of Series B Preferred Stock and the
corresponding amounts payable on all shares of other classes or series of
Capital Stock of the Corporation ranking on a parity with the Series B Preferred
Stock in the distribution of assets upon liquidation, dissolution or winding up,
then the holders of the Series B Preferred Stock and all other such classes or
series of Capital Stock shall share ratably in any such distribution of assets
in proportion to the full liquidating distributions to which they would
otherwise be respectively entitled.
(b) Neither the consolidation, merger or other business
combination of the Corporation with or into any other Person, nor the sale,
lease or conveyance of all or substantially all of the property or business of
the Corporation shall be deemed to constitute a liquidation, dissolution or
winding up of the Corporation for purposes of this Section 9.
10. CONVERSION. (a) Holders of shares of Series B Preferred Stock shall
have the right, exercisable at any time, except in the case of shares of Series
B Preferred Stock called for redemption (as described in Section 7 above), to
convert shares of Series B Preferred Stock into fully paid and nonassessable
shares of Common Stock (calculated as to each conversion to the nearest 1/100th
of a share) at the Conversion Price. The number of shares of Common Stock into
which a share of Series B Preferred Stock shall be convertible shall be
determined by dividing the Liquidation Value by the Conversion Price. In the
case of shares of the Series B Preferred Stock called for redemption, conversion
rights shall expire at the close of business on the fifth Business Day
immediately preceding the date fixed for redemption. No payment or adjustment
for accrued dividends on the shares of Series B Preferred Stock is to be made on
conversion, but holders of record of shares of Series B Preferred Stock on a
record date applicable to a Quarterly Dividend Payment Date shall be entitled to
receive such quarterly dividend payment notwithstanding the conversion of such
shares prior to such Quarterly Dividend Payment Date.
(b) Holders of Series B Preferred Stock may convert such
Series B Preferred Stock into Common Stock by surrendering to the Corporation's
transfer agent, Registrar and Transfer Company (the "TRANSFER AGENT"), at its
offices in the City of New York, New York or New Jersey, the certificate of such
Series B Preferred Stock to be converted, properly endorsed and medallion
certified and accompanied by a written notice stating that such holder elects to
convert all or a specified whole number of such shares in accordance with the
provisions of this Section 10 and specifying the name or names in which such
holder wishes the certificate or certificates for shares of Common Stock to be
issued (a "CONVERSION NOTICE"). In case a Conversion Notice shall specify a name
or names other than that of such holder, such Conversion Notice shall be
accompanied by payment of all transfer taxes, if any, payable upon the issuance
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of shares of Common Stock in such name or names. Other than such taxes, the
Corporation will pay any and all issue and other taxes (other than taxes based
on income) that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series B Preferred Stock pursuant hereto.
(c) As promptly as practicable, and in any event within five
Business Days after the date of delivery of the shares of Series B Preferred
Stock to be converted (and the Conversion Notice), the Corporation shall deliver
or cause to be delivered (i) certificates representing the number of validly
issued, fully paid and nonassessable full shares of Common Stock to which the
holder of shares of Series B Preferred Stock being converted shall be entitled
and (ii) if less than the full number of shares of Series B Preferred Stock
evidenced by the surrendered certificate or certificates is being converted, a
new certificate or certificates, of like tenor, for the number of shares
evidenced by such surrendered certificate or certificates less the number of
shares being converted. All conversions shall be deemed to have been made at the
close of business on the date of delivery of the Conversion Notice, so that the
rights of the holder thereof as to the shares being converted shall cease except
for the right to receive shares of Common Stock in accordance herewith, and the
Person entitled to receive the shares of Common Stock shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
such time. The Corporation shall not be required to convert, and no surrender of
shares of Series B Preferred Stock shall be effective for that purpose, while
the transfer books of the Corporation for the Common Stock are closed for any
purpose (but not for any period in excess of ten (10) calendar days); but the
surrender of shares of Series B Preferred Stock for conversion during any period
while such books are so closed shall become effective for conversion immediately
upon the reopening of such books, as if the conversion had been made on the date
such shares of Series B Preferred Stock were surrendered, and at a rate of
conversion which assumes the conversion took place during the period immediately
prior to the closing of such books.
(d) No fractional shares of Common Stock or scrip representing
fractional shares shall be issued upon conversion of shares of the Series B
Preferred Stock. If more than one share of the Series B Preferred Stock shall be
surrendered for conversion at one time by the same holder, the number of full
shares of Common Stock issuable upon conversion thereof shall be computed on the
basis of the aggregate number of shares of the Series B Preferred Stock so
surrendered. Instead of any fractional share of Common Stock otherwise issuable
upon conversion of any shares of the Series B Preferred Stock, the Corporation
shall pay a cash adjustment in respect to such fraction in an amount equal to
the same fraction of Sale Price (as defined below) of the Common Stock at the
close of business on the day of conversion. In the absence of a Sale Price, the
Board of Directors shall in good faith determine the current market price on the
basis of such quotation as it considers appropriate. As used herein, "SALE
PRICE" means the closing sales price of the Common Stock (or if no sale price is
reported, the average of the high and low bid prices) as reported by the
principal national or regional stock exchange on which the Common Stock is
listed or, if the Common Stock is not listed on a national or regional stock
exchange, as reported by the Nasdaq Stock Market and if not so reported, then as
reported by the National Quotation Bureau Incorporated.
(e) The Corporation shall reserve out of its authorized but
unissued Common
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Stock or its Common Stock held in treasury enough shares of Common Stock to
permit the conversion of all of the then-outstanding shares of the Series B
Preferred Stock. For the purposes of this Section 10 (e), the full number of
shares of Common Stock, then issuable upon the conversion of all
then-outstanding shares of the Series B Preferred Stock shall be computed as if
at the time of computation, all outstanding shares of the Series B Preferred
Stock were held by a single holder. The Corporation shall from time to time, in
accordance with the laws of the State of Maryland, increase the authorized
amount of its Common Stock if at any time the authorized amount of its Common
Stock remaining unissued shall not be sufficient to permit the conversion of all
shares of the Series B Preferred Stock (as provided herein) at the time
outstanding. If any shares of Common Stock required to be reserved for issuance
upon conversion of shares of the Series B Preferred Stock hereunder require
registration with or approval of any governmental authority under any federal or
state law before the shares may be issued upon conversion, the Corporation will
in good faith and as expeditiously as possible endeavor to cause the shares to
be so registered or approved. All shares of Common Stock issued upon conversion
of the shares of the Series B Preferred Stock shall be validly issued, fully
paid and nonassessable.
(f) The Conversion Price shall be subject to adjustment
as follows:
(i) In case the Corporation shall (A) pay a dividend
or make a distribution on any class of its Capital Stock in shares of
its Common Stock, other than on shares of Series B Preferred Stock, (B)
subdivide or reclassify its outstanding shares of Common Stock into a
greater number of shares or (C) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Conversion
Price in effect immediately prior thereto shall be adjusted
retroactively as provided below so that the Conversion Price thereafter
shall be determined by multiplying the Conversion Price at which the
shares of the Series B Preferred Stock were theretofore convertible by
a fraction of which the denominator shall be the number of shares of
Common Stock outstanding immediately following such action and of which
the numerator shall be the number of shares of Common Stock outstanding
immediately prior thereto. Such adjustment shall be made whenever any
event listed above shall occur and shall become effective retroactively
immediately after the record date in the case of a dividend and
immediately after the effective date in the case of a subdivision,
combination or reclassification. Notwithstanding anything to the
contrary in this Section 10 (f) (i), Common Stock issued pursuant to
the Corporation's dividend reinvestment plan shall not result in any
adjustment to the Conversion Price.
(ii) In case the Corporation shall issue rights or
warrants to all holders of its Common Stock entitling them (for a
Period expiring within forty-five (45) days after the record date
therefor) to subscribe for or purchase shares of Common Stock at a
price per share less than the current market price per share of Common
Stock (as determined in accordance with the provisions of Section 10(f)
(iv) below) at the record date therefor (the "CURRENT MARKET PRICE"),
or in case the Corporation shall issue other securities convertible
into or exchangeable for Common Stock for a consideration per share of
Common Stock deliverable upon conversion or exchange thereof less than
the Current Market Price, then the Conversion Price in effect
immediately prior thereto shall be adjusted retroactively as provided
below so that the Conversion Price thereafter shall
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be determined by multiplying (A) the Conversion Price at which shares
of the Series B Preferred Stock were theretofore convertible by (B) a
fraction of which the denominator shall be the sum of (1) the number of
shares of Common Stock outstanding on the date of issuance of the
convertible or exchangeable securities, rights or warrants and (2) the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the sum of (l) the number
of shares of Common Stock outstanding on the date of issuance of such
convertible or exchangeable securities, rights or warrants and (2) the
number of additional shares of Common Stock which the aggregate
offering price of the number of shares of Common Stock so offered would
purchase at the Current Market Price per share of Common Stock (as
determined in accordance with the provisions of Section 10 (f) (iv)
below). Such adjustment shall be made whenever such convertible or
exchangeable securities, rights or warrants are issued, and shall
become effective retroactively immediately after the record date for
the determination of stockholders entitled to receive such securities.
However, upon the expiration of any right or warrant to purchase Common
Stock, the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this Section 10 (f) (ii), if any such
right or warrant shall expire and shall not have been exercised, the
Conversion Price shall be recomputed immediately upon such expiration
and effective immediately upon such expiration shall be increased to
the price it would have been (but reflecting any other adjustments to
the Conversion Price made pursuant to the provisions of Section 10 (f)
after the issuance of such rights or warrants) had the adjustment of
the Conversion Price made upon the issuance of such rights or warrants
been made on the basis of offering for subscription or purchase only
that number of shares of Common Stock actually purchased upon the
exercise of such rights or warrants actually exercised.
(iii) In case the Corporation shall pay a dividend or
make a distribution to all holders of its Common Stock (including any
such distribution made in connection with a consolidation or merger in
which the Corporation is the continuing corporation) of any shares of
capital stock of the Corporation or its subsidiaries (other than Common
Stock) or evidences of its indebtedness or assets (excluding cash
dividends payable solely in cash that may from time to time be fixed by
the Board of Directors, or dividends or distributions in connection
with the liquidation, dissolution or winding up of the Corporation) or
rights to subscribe for or purchase any of its securities or those of
its Subsidiaries (excluding those referred to in Sections 10 (f) (i)
and 10 (f) (ii) above), then in each such case the number of shares of
Common Stock into which each share of the Series B Preferred Stock
shall thereafter be convertible shall be determined by multiplying (A)
the Conversion Price in effect on the record date mentioned below by
(B) a fraction, the numerator of which shall be the Current Market
price per share of Common Stock on the record date mentioned below less
the then fair market value (as determined by the Board of Directors,
whose good faith determination shall be conclusive) as of such record
date of the portion of the Capital Stock or assets or evidences of
indebtedness so distributed or of such rights or warrants applicable to
one share of Common Stock, and the denominator of which shall be the
Current Market Price per share of Common Stock on such record date;
PROVIDED, HOWEVER, that in the event the then fair market value (as so
determined) of the portion of securities so distributed applicable to
one share of Common Stock is equal to or greater than the Current
Market
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Price per share of Common Stock on the record date mentioned above, in
lieu of the foregoing adjustment, adequate provision shall be made so
that each holder of shares of the Series B Preferred Stock shall have
the right to receive the amount and kind of securities such holder
would have received had such holder converted each such share of the
Series B Preferred Stock immediately prior to the record date for the
distribution of the securities. Such adjustment shall be made whenever
any such payment or distribution is made, and shall become effective
retroactively immediately after the record date for the determination
of stockholders entitled to receive the distribution.
(iv) For the purpose of any computation under
Sections 10 (f) (ii) and 10 (f) (iii) above, the Current Market Price
per share of Common Stock at any date shall be deemed to be the average
Sale Price for the thirty (30) consecutive trading days commencing
forty-five (45) trading days before the day in question.
(v) No adjustment in the Conversion Price shall be
required unless the adjustment would require an increase or decrease of
at least 1% of the Conversion Price then in effect; PROVIDED, HOWEVER,
that any adjustment that by reason of this Section 10 (f) is not
required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 10 (f)
shall be made to the nearest cent.
(vi) In the event that, at any time as a result of an
adjustment made pursuant to Section 10 (f) (i) or 10 (f) (iii) above,
the holder of any share of the Series B Preferred Stock thereafter
surrendered for conversion shall become entitled to receive any shares
of the Corporation other than shares of the Common Stock, thereafter
the number of such other shares so receivable upon conversion of any
share of the Series B Preferred Stock shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in Section 10 (f) (i) through 10 (f) (v) above, and the other
provisions of this Section 10 with respect to the Common Stock shall
apply on like terms to any such other shares.
(vii) In the event of a distribution of evidence of
indebtedness or other assets (as described in Section 10 (f) (iii)) or
a dividend to all holders of Common Stock of rights to subscribe for
additional shares of Capital Stock (other than those referred to in
Section 10 (f) (ii)), the Corporation may, instead of making an
adjustment of the Conversion Price, make prior provision so that each
holder who converts such shares of Series B Preferred Stock will be
entitled to receive upon such conversion, in addition to shares of
Common Stock, an appropriate number of such rights, warrants, evidences
of indebtedness or other assets.
(viii) Whenever the Conversion Price is adjusted, as
herein provided, the Corporation shall promptly file with the transfer
agent for the Series B Preferred Stock a certificate of an officer of
the Corporation setting forth the Conversion Price after the adjustment
and setting forth a brief statement of the facts requiring such
adjustment and a computation thereof. The certificate shall be
conclusive evidence of the correctness of the adjustment. The
Corporation shall promptly cause a notice of the adjusted Conversion
Price to be mailed to each registered holder of shares of the Series B
Preferred Stock.
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(ix) In case of any reclassification of the Common
Stock, any consolidation of the Corporation with, or merger of the
Corporation into, any other entity, any merger of another entity into
the Corporation (other than a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock of the Corporation), any sale or transfer of all
or substantially all of the assets of the Corporation or any compulsory
share exchange, pursuant to which share exchange the Common Stock is
converted into other securities, cash or other property, then lawful
provision shall be made as part of the terms of such transaction
whereby the holder of each share of the Series B Preferred Stock then
outstanding shall have the right thereafter, during the period such
share shall be convertible, to convert such share only into the kind
and amount of securities, cash and other property receivable upon the
reclassification, consolidation, merger, sale, transfer or share
exchange by a holder of the number of shares of Common Stock of the
Corporation into which a share of the Series B Preferred Stock would
have been convertible immediately prior to the reclassification,
consolidation, merger, sale, transfer or share exchange. The
Corporation, the Person formed by the consolidation or resulting from
the merger or which acquires such assets or which acquires the
Corporation's shares, as the case may be, shall make provisions in its
certificate or articles of incorporation or other constituent document
to establish such rights. The certificate or articles of incorporation
or other constituent document shall provide for adjustments, which, for
events subsequent to the effective date of the certificate or articles
of incorporation or other constituent document, shall be as nearly
equivalent as may be practicable to the adjustments provided for in
this Section 10. The provisions of this Section 10(f) (ix) shall
similarly apply to successive reclassification, consolidations,
mergers, sales, transfers or share exchanges.
(g) The Corporation from time to time may reduce the Conversion Price
by any amount for any period of time if the period is at least twenty (20) days
and if the reduction is irrevocable during the period. Whenever the Conversion
Price is so reduced, the Corporation shall mail to holders of record of the
Series B Preferred Stock a notice of the reduction at least fifteen (15) days
before the date the reduced Conversion Price takes effect, stating the reduced
Conversion Price and the period it will be in effect. A voluntary reduction of
the Conversion Price does not change or adjust the Conversion Price otherwise in
effect for purposes of Section 10(f) above.
11. MANDATORY REDEMPTION. The shares of the Series B Preferred Stock
are not subject to mandatory redemption or sinking fund requirements.
12. REIT STATUS. Nothing contained in the Articles of Amendment and
Restatement of the Corporation, including these Series B Preferred Stock
Articles shall limit the authority of the Board of Directors to take such other
action as it deems necessary or advisable to protect the Corporation and the
interests of the stockholders by preservation of the Corporation's qualification
as a REIT under the REIT Provisions (as defined in the Articles of Amendment and
Restatement of the Corporation), including, without limitation, the enforcement
of the provisions of Article XI of the Articles of Amendment and Restatement of
the Corporation.
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EXHIBIT B TO ARTICLES OF AMENDMENT AND RESTATEMENT
(THE "SERIES E PREFERRED STOCK ARTICLES")(1)
The Series E Cumulative Convertible Preferred Stock shall be subject
to all of the provisions of the Articles of Amendment and Restatement of the
Corporation relating to the Capital Stock of the Corporation generally and
shall, as set by the Board of Directors, have the following preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption:
1. DEFINITIONS. For the purposes of these Series E Preferred Stock
Articles, the following terms shall have the meanings indicated:
"Applicable Rate" shall mean (a) for the period commencing on the date
of issuance of the Series E Preferred Stock and ending on the Effective Date,
for each Quarterly Dividend Period the sum of (i) 75 basis points plus (ii)
LIBOR as of the second LIBOR Market Day preceding the commencement of such
Quarterly Dividend Period, and (b) for the period commencing on the Effective
Date, such rate as shall be provided in the Corporation's plan of reorganization
as in effect on the Effective Date, and these Series E Preferred Stock Articles
shall be deemed so amended and supplemented to so provide.
"Average Closing Trade Price" shall mean the quotient of (a) the sum of
the Closing Trade Prices for all of the Valid Trading Days during the applicable
Conversion Pricing Period divided by (b) the number of Valid Trading Days in
such Conversion Pricing Period.
"Business Day" shall mean any day other than a Saturday, Sunday or the
Friday after Thanksgiving or a day on which banking institutions in the State of
New York or Maryland are authorized or obligated by law or executive order to
close.
"Closing Trade Price" for a given Trading Day shall mean (a) the last
traded price for the Common Stock or the Survivor Common Stock, as the case may
be, for such Trading Day as reported on the stock exchange composite tape or (b)
if the Common Stock is traded over-the-counter, the last reported bid quotation
for the Common Stock or the Survivor Common Stock, as the case may be, for such
Trading Day.
"Common Stock" shall mean the common stock, par value $.01 per share,
of the Corporation.
"Conversion Pricing Period" shall mean a period of twenty-one (or such
fewer number as shall be mutually agreed upon in writing by the Corporation and
the holder of the Series E Preferred Stock being converted) consecutive Trading
Days immediately preceding the date of delivery of a Holder Conversion Notice or
the Mandatory Conversion Date, as the case may be.
--------------------------------
(1) These Series E Preferred Stock Articles shall be amended and modified
on the Effective Date consistent with the terms and conditions set forth in
Exhibit 3 to the Plan relating to the Series E Preferred Stock.
<PAGE>
"Dividend Parity Stock" shall have the meaning ascribed thereto in
Section 3(b) hereof.
"Effective Date" shall mean the first day, other than a Saturday,
Sunday, or a "legal holiday" (as defined in Rule 9005(a) of the Federal Rules of
Bankruptcy Procedure), that is not less than eleven (11) days after the date on
which the clerk of the U.S. Bankruptcy Court for the District of Maryland,
Greenbelt Division, or such other court that exercises jurisdiction over the
Corporation's bankruptcy case, enters the Order confirming the Corporation's
plan of reorganization as such may be amended, modified or supplemented from
time to time, and on which day, as determined by the Corporation (i) all
conditions to the Effective Date as set forth in the Corporation's plan of
reorganization have been satisfied or waived by the Corporation, and (ii) no
stay of the Order confirming the Corporation's plan of reorganization is in
effect.
"Event" shall have the meaning ascribed thereto in Section 4(b) hereof.
"Holder Conversion Notice" shall have the meaning ascribed thereto in
Section 9(d) hereof.
"LIBOR" shall mean the arithmetic mean of the offered rates for 3 month
deposits in United States dollars which appear on the display designated as
"Page 3750" on the Telerate Service (or such other page as may replace Page 3750
on that service for the purpose of displaying London interbank offered rates of
major banks) (the "Telerate Screen Page 3750") as of 11:00 A.M., London time, on
the specified LIBOR Market Day; PROVIDED, HOWEVER, if at the specified time on
the specified LIBOR Market Day fewer than two such offered rates so appear on
the Telerate Screen Page 3750, LIBOR shall mean the arithmetic mean of three
offered rates to prime banks for 3 month deposits in United States dollars by
three major banks in the London interbank market, as selected by the
Corporation, at approximately 11:00 A.M., London time, on the specified LIBOR
Market Day; PROVIDED, FURTHER, if fewer than three major banks in the London
interbank market are quoting rates to prime banks for 3 month deposits in United
States dollars, LIBOR shall be the LIBOR in effect for the previous Quarterly
Dividend Period.
"LIBOR Market Day" shall mean any day on which commercial banks are
open for business (including dealings in foreign exchange and foreign currency
deposits) in London, England.
"Liquidation Value" with respect to a share of Series E Preferred Stock
shall mean $100.
"Mandatory Conversion Date" shall have the meaning ascribed thereto in
the Corporation's plan of reorganization as in effect on the Effective Date, and
these Series E Preferred Stock Articles shall be deemed so amended and
supplemented to so provide.
"Minimum Daily Price" shall mean either (a) 75% of the Closing Trade
Price for the Trading Day immediately preceding either the date of delivery of
the Holder Conversion Notice to the Corporation or the Mandatory Conversion
Date, as the case may be, or (b) such price as shall be mutually agreed in
writing by the Corporation and the holder of the Series E Preferred Stock that
has requested conversion thereof.
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"Person" shall mean any individual, firm, corporation, or other entity,
and shall include any successor (by merger or otherwise) of such entity.
"Qualified Person" shall mean any Person that, immediately after giving
effect to the applicable Transaction, (i) is a solvent corporation or other
entity organized under the laws of any State of the United States of America
having its common stock or, in the case of an entity other than a corporation,
equivalent equity securities, listed on the New York Stock Exchange or the
American Stock Exchange or quoted by the NASDAQ National Market System or any
successor thereto, and such common stock or equivalent equity security continues
to meet the requirements for such listing or quotation and (ii) is required to
file, and in each of the three fiscal years immediately preceding the
consummation of the applicable Transaction (or, if shorter, since its inception)
has filed, reports with the Securities and Exchange Commission pursuant to
Section 13 or 15(d) of the United States Securities Exchange Act of 1934, as
amended.
"Quarterly Dividend Payment Date" shall have the meaning ascribed
thereto in Section 3(a) hereof.
"Quarterly Dividend Period" shall mean with respect to any Quarterly
Dividend Payment Date, the period commencing on the day succeeding the prior
Quarterly Dividend Payment Date (or, with respect to the first Quarterly
Dividend Payment Date for a share of Series E Preferred Stock, the date of
issuance of such share of Series E Preferred Stock) to and including such
Quarterly Dividend Payment Date.
"Redemption Price" shall have the meaning ascribed thereto in Section
6(a) hereof.
"Series B Preferred Stock" shall mean the Corporation's Series B
Cumulative Convertible Preferred Stock.
"Series F Preferred Stock" shall mean the Corporation's Series F
Redeemable Cumulative Dividend Preferred Stock (convertible during the period of
ten (10) business days after the fifth business day after the initial issue date
and during the period of ten (10) business days ending ninety (90) calendar days
after the initial issue date or the first business day thereafter).
"Subsidiary" of any Person means any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.
"Surviving Person" shall mean the continuing or surviving Person of a
merger, consolidation or other corporate combination, the Person receiving a
transfer of all or substantially all of the properties and assets of the
Corporation, or the Person consolidating with or merging into the Corporation in
a merger, consolidation or other corporate combination in which the Corporation
is the continuing or surviving Person, but in connection with which the Series E
Preferred Stock or Common Stock of the Corporation is exchanged, converted or
reinstated into the securities of any other Person or cash or any other
property; provided,
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however, if such Surviving Person is a direct or indirect Subsidiary of a
Qualified Person, the parent entity that is a Qualified Person shall be the
Surviving Person.
"Survivor Common Stock" with respect to any Person shall mean any
shares of such Person of any class or series which has no preference or priority
in the payment of dividends or in the distribution of assets upon any voluntary
or involuntary liquidation, dissolution or winding up of such Person and which
is not subject to redemption by such Person; provided, however, that if at any
time there shall be more than one such class or series, the shares of each such
class and series issuable upon conversion of the Series E Preferred Stock then
being converted shall be substantially in the proportion to the total number of
shares of each such class and series.
"Trading Day" shall mean any day on which the principal national
securities exchange on which the Common Stock or Survivor Common Stock, as the
case may be, is listed or admitted to trading is open for the transaction of
business or, if the Common Stock or Survivor Common Stock, as the case may be,
is not listed or admitted to trading on any national securities exchange, a
Business Day.
"Transaction" shall have the meaning ascribed thereto in Section 9(b)
hereof.
"Transfer Agent" shall have the meaning ascribed thereto in Section
9(d) hereof.
"Valid Trading Day" shall mean any Trading Day during a Conversion
Pricing Period in which either (a) the Closing Trade Price for such Trading Day
exceeds the Minimum Daily Price or (b) the Closing Trade Price for such Trading
Day does not exceed the Minimum Daily Price and the Corporation and the holder
of the Series E Preferred Stock that has requested conversion thereof agree in
writing to include such day as a Valid Trading Day in such Conversion Pricing
Period.
2. DESIGNATION AND NUMBER, RANK. (a) The shares of such series of
preferred stock shall be designated as "Series E Cumulative Convertible
Preferred Stock" (the "SERIES E PREFERRED STOCK"). The number of shares
initially constituting the Series E Preferred Stock shall be 203,000 which
number may be decreased (but not increased) by the Board of Directors without a
vote of the holders of Series E Preferred Stock; PROVIDED, HOWEVER, that such
number may not be decreased below the number of then outstanding shares of
Series E Preferred Stock.
(b) The Series E Preferred Stock shall, with respect to dividend rights
and rights upon liquidation, dissolution or winding up, rank (i) senior to the
common stock, par value $.01 per share of the Corporation (the "COMMON STOCK"),
the Series F Preferred Stock and to all other Capital Stock of the Corporation
the terms of which specifically provide that such Capital Stock ranks junior to
the Series E Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Corporation, (ii) on a parity with
all Capital Stock of the Corporation the terms of which specifically provide
that such Capital Stock ranks on a parity with the Series E Preferred Stock with
respect to dividend rights or rights upon liquidation, dissolution or winding up
of the Corporation and (iii) junior to the Corporation's Series B Preferred
Stock and all other Capital Stock of the Corporation the terms of which
specifically
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provide that such Capital Stock ranks senior to the Series E Preferred Stock
with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the Corporation.
3. DIVIDENDS AND DISTRIBUTION. (a) The holders of shares of Series E
Preferred Stock, in preference to the holders of shares of Common Stock, Series
F Preferred Stock and of any other shares of Capital Stock of the Corporation
ranking junior to the Series E Preferred Stock as to payment of dividends, shall
be entitled to receive, when, as and if declared by the Board of Directors, out
of the assets of the Corporation legally available therefor, cumulative
dividends at the Applicable Rate, payable in quarterly installments on the last
Business Day of each calendar quarter (March 31, June 30, September 30, December
31) in each year (each such date being referred to herein as a "QUARTERLY
DIVIDEND PAYMENT DATE"). Each such quarterly dividend shall be fully cumulative,
to the extent not paid, and, with respect to each share of Series E Preferred
Stock, shall accrue (whether or not earned or declared) on a daily basis with
additional cumulative dividends on any accrued but unpaid dividends accruing
daily (whether or not earned or declared) and compounding quarterly at the
Applicable Rate, from the date of issuance of such share of Series E Preferred
Stock, and thereafter from the first day of the quarterly period in which such
dividend may be payable as herein provided. Quarterly dividends payable with
respect to calendar quarters and any partial quarter in the period commenced on
the date of issuance of the Series E Preferred Stock and ending with the
Effective Date shall be payable in Common Stock. No quarterly dividends payable
prior to the Effective Date shall be paid until the Effective Date. After the
Effective Date, quarterly dividends shall be payable as provided in the
Corporation's plan of reorganization as in effect on the Effective Date, and
these Series E Preferred Stock Articles shall be deemed so amended and
supplemented to so provide.
(b) With respect to dividends payable in Common Stock, pursuant to
Section 3(a) above, the calculation of the number of shares of Common Stock
issuable by the Corporation shall be based on (i) the cash amount which would be
payable if cash dividends were to be paid on the Quarterly Dividend Payment Date
divided by (ii) the average of the Closing Trade Prices for the five (5) Trading
Days prior to the Quarterly Dividend Payment Date. No fractional shares shall be
issued.
(c) Dividends paid on the shares of the Series E Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated among all such shares of Series E
Preferred Stock and all other shares of Capital Stock of the Corporation ranking
on a parity as to dividends with the Series E Preferred Stock "DIVIDEND PARITY
STOCK") at the time outstanding pro rata so that the amount of dividends
declared per share of Series E Preferred Stock and the Dividend Parity Stock
shall in all cases bear to each other the same ratio that accrued dividends per
share on the Series E Preferred Stock and the Dividend Parity Stock bear to each
other. The Board of Directors may fix a record date for the determination of
holders of shares of the Series E Preferred Stock entitled to receive payment of
a dividend declared thereon, which record date shall be no more than sixty days
nor less than ten days prior to the date fixed for the payment thereof.
(d) Any dividend payment made on shares of the Series E Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of the Series E Preferred Stock which remains payable.
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(e) The holders of shares of the Series E Preferred Stock shall not be
entitled to receive any dividends or other distributions except as expressly
provided herein.
4. VOTING RIGHTS. So long as the Series E Preferred Stock remains
outstanding, the holders of shares of the Series E Preferred Stock shall have
the following voting rights:
(a) The holders of shares of Series E Preferred Stock shall have no
voting rights except as set forth below or as otherwise from time to time
required by law.
(b) The affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series E Preferred Stock, voting separately as a class,
shall be necessary to (i) authorize, create or increase the authorized or issued
amount of any class or series of the Corporation's Capital Stock ranking prior
to the Series E Preferred Stock with respect to payment of dividends or
distribution of assets upon liquidation, dissolution or winding up or reclassify
any authorized Capital Stock of the Corporation into any such Capital Stock, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such Capital Stock or (ii) amend, alter or
repeal any of the provisions of the Articles of Amendment and Restatement of the
Corporation, including these Series E Preferred Stock Articles, whether by
merger, consolidation or otherwise (an "EVENT"), so as to materially and
adversely affect any right, preference, privilege or voting power of the Series
E Preferred Stock or the holders thereof; PROVIDED, HOWEVER, with respect to any
amendment, alteration, waiver or repeal of any provision of the Series E
Preferred Stock Articles no consent, approval or vote of the holders of Common
Stock or any other Capital Stock of the Corporation shall be necessary or
required; PROVIDED, FURTHER with respect to the occurrence of any of the Events
set forth in (ii) above, so long as the Series E Preferred Stock remains
outstanding with the terms thereof materially unchanged, taking into account
that upon the occurrence of an Event, the Corporation may not be the surviving
entity, the occurrence of any such Event shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting power of holders
of the Series E Preferred Stock; and PROVIDED, FURTHER, that (x) any increase in
the amount of authorized Common Stock or Series E Preferred Stock or the
authorization, creation or issuance of any other class or series of Capital
Stock or (y) any increase in the amount of authorized shares of any other class
or series of Capital Stock, in each case ranking on a parity with or junior to
the Series E Preferred Stock with respect to the payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
(c) During any period in which dividends on the Series E Preferred
Stock are cumulatively in arrears for six or more quarterly dividend payments
(whether or not consecutive), then the number of directors constituting the
Board of Directors shall, without further action, be increased by two and the
holders of shares of the Series E Preferred Stock, voting separately as a single
class (together with any other series of Preferred Stock as provided in Section
4(d)(iii)), shall have, in addition to the other voting rights expressly set
forth herein, the right to elect the directors of the Corporation to fill such
newly created directorships, the remaining directors to be elected by the other
classes of Capital Stock entitled to vote therefor at each meeting of
stockholders held for the purpose of electing such remaining directors. Such
additional voting rights shall continue until such time as all dividends
accumulated on the Series
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E Preferred Stock shall have been paid in full, at which time such additional
directors shall cease to be directors, subject to the rights of any other series
of Preferred Stock to vote for the election of such additional directors (as
described in Section 4(d)(iii)), and such additional voting right of the holders
of Series E Preferred Stock shall terminate, subject to revesting in the event
of each and every subsequent event of the character indicated above. In no event
shall the holders of Series E Preferred Stock voting separately as a class be
entitled to elect a total of more than two directors to the Board of Directors
pursuant to this Section 4.
(d)(i) The foregoing rights of holders of shares of Series E Preferred
Stock to take any actions as provided in this Section 4 may be exercised at any
annual meeting of stockholders or at a special meeting of stockholders held for
such purpose as hereinafter provided or at any adjournment thereof, or by the
written consent, delivered to the Secretary of the Corporation, of all of the
holders of the Series E Preferred Stock. So long as such right to vote continues
(and unless such right has been exercised by written consent of all of the
holders of the Series E Preferred Stock), the Chairman of the Board of Directors
may call, and upon the written request of holders of record of twenty (20)% of
the outstanding shares of Series E Preferred Stock addressed to the Secretary of
the Corporation at the principal office of the Corporation, shall call, a
special meeting of the holders of shares entitled to vote as provided herein.
Such meeting shall be held within sixty (60) days after delivery of such request
to the Secretary, at the place and upon the notice provided by law and in the
by-laws of the Corporation for the holding of meetings of stockholders.
(ii) Except as provided in paragraph (d)(iii) of this Section 4, at
each meeting of stockholders at which the holders of shares of Series E
Preferred Stock shall have the right, voting separately as a single class, to
elect directors of the Corporation as provided in this Section 4 or to take any
action, the presence in person or by proxy of the holders of record of a
majority of the total number of shares of Series E Preferred Stock then
outstanding and entitled to vote on the matter shall be necessary and sufficient
to constitute a quorum. At any such meeting or at any adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series
E Preferred Stock shall not prevent the election of directors other
than those to be elected by the holders of shares of Series E Preferred
Stock and the absence of a quorum of the holders of shares of any other
class or series of Capital Stock shall not prevent the election of
directors to be elected by the holders of shares of Series E Preferred
Stock or the taking of any action as provided in this Section 4; and
(B) in the absence of a quorum of the holders of shares of
Series E Preferred Stock, a majority of the holders of such shares
present in person or by proxy shall have the power to adjourn the
meeting as to the actions to be taken by the holders of shares of
Series E Preferred Stock from time to time and place to place without
notice other than announcement at the meeting until a quorum shall be
present.
(iii) If, at any time when the holders of Series E Preferred Stock are
entitled to elect directors pursuant to the provisions of Section 4(c), the
holders of any one or more other series of Preferred Stock are entitled to elect
directors by reason of any default or event specified in the
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Corporation's Articles of Amendment and Restatement of the Corporation (or any
articles supplementary thereto), as in effect at the time, or the articles
supplementary for such series, and if the terms for such other additional series
so permit, then the voting rights of the two or more series then entitled to
vote shall be combined (with each series having a number of votes proportional
to the aggregate liquidation preference of its outstanding shares). In such
case, the holders of Series E Preferred Stock and of all such other series then
entitled so to vote, voting together as one class, shall elect such directors.
At each meeting of stockholders at which the holders of shares of Series E
Preferred Stock shall have the right, voting together with such other series as
a single class, to elect directors of the Corporation as provided in this
Section 4 or to take any action, the presence in person or by proxy of the
holders of record of a majority of the total number of shares of such two or
more series then outstanding and entitled to vote on the matter shall be
necessary and sufficient to constitute a quorum. At any such meeting or at any
adjournment thereof:
(A) the absence of a quorum of the holders of shares of such
two or more series shall not prevent the election of directors other
than those to be elected by the holders of shares of such two or more
series and the absence of a quorum of the holders of shares of any
other class or series of Capital Stock shall not prevent the election
of directors to be elected by the holders of shares of such two or more
series or the taking of any action as provided in this Section 4; and
(B) in the absence of a quorum of the holders of shares of
such two or more series a majority of the holders of such shares
present in person or by proxy shall have the power to adjourn the
meeting as to the actions to be taken by the holders of shares of such
two or more series from time to time and place to place without notice
other than announcement at the meeting until a quorum shall be present.
If the holders of any such other series have elected such directors
prior to the happening of the default or event permitting the holders of Series
E Preferred Stock to elect directors, or prior to a written request for the
holding of a special meeting being received by the Secretary of the Corporation
as elsewhere required in Section 4(d) above, then a new election shall be held
with all such other series of Preferred Stock and the Series E Preferred Stock
voting together as a single class for such directors, resulting in the election
of such new directors. If the holders of any such other series are entitled to
elect in excess of two directors, the Series E Preferred Stock shall not
participate in the election of more than such directors, and those directors
whose terms first expire shall be deemed to be the directors elected by the
holders of Series E Preferred Stock; provided that, if at the expiration of such
terms, the holders of Series E Preferred Stock are entitled to vote in the
election of directors pursuant to the provisions of this Section 4, then the
Secretary of the Corporation shall call a meeting (which meeting may be the
annual meeting or special meeting of stockholders) of holders of Series E
Preferred Stock for the purpose of electing replacement directors (in accordance
with the provisions of this Section 4) to be held on or prior to the time of
expiration of the expiring terms referred to above.
(iv) Except as otherwise specifically provided in paragraph (d)(iii) of
this Section 4:
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(A) for the taking of any action as provided in paragraphs (b)
and (c) of this Section 4 by the holders of Series E Preferred Stock,
each such holder shall have one vote for each share of such stock
standing in such holder's name on the transfer books of the Corporation
as of any record date fixed for such purpose or, if no such date be
fixed, at the close of business on the Business Day next preceding the
day on which notice is given, or if notice is waived, at the close of
business on the Business Day next preceding the day on which the
meeting is held; and
(B) each director elected by the holders of shares of Series E
Preferred Stock as provided in this Section 4 shall, unless his or her
term shall expire earlier upon payment in full by the Corporation of
all accumulated dividends on the Series E Preferred Stock, hold office
until the annual meeting of stockholders next succeeding his election
and until his successor, if any, is elected and qualified.
(v) In case any vacancy shall occur among the directors elected by the
holders of shares of Series E Preferred Stock (and any other series of Preferred
Stock, if any) as provided in this Section 4, such vacancy may be filled for the
unexpired portion of the term by vote of the remaining director theretofore
elected by such holders (if there is a remaining director), or such director's
successor in office. If any such vacancy is not so filled within 20 days after
the creation thereof or if both directors so elected by the holders of Series E
Preferred Stock (and any other series of Preferred Stock, if any, as provided in
Section 4(d)(iii)) shall cease to serve as directors before their terms shall
expire, the holders of the Series E Preferred Stock (and any other series of
Preferred Stock, if any, as provided in Section 4(d)(iii)) then outstanding and
entitled to vote for such directors may, by written consent of all of the
holders of Series E Preferred Stock, or at a special meeting of such holders
called in accordance with the provisions of Section 4(d)(i), elect successors to
hold office for the unexpired terms of such directors whose places shall be
vacant.
(vi) Any director elected by the holders of shares of Series E
Preferred Stock voting separately as a single class (together with any other
series of Preferred Stock, if any, as provided in Section 4(d)(iii)) may be
removed from office with or without cause by the affirmative vote of the holders
of at least a majority of the outstanding shares of Series E Preferred Stock or
written consent of all of the holders of Series E Preferred Stock (together with
any other series of Preferred Stock, if any, as provided in Section 4(d)(iii)).
A special meeting of the holders of Series E Preferred Stock (together with
holders of any other series of Preferred Stock, if any, as provided in Section
4(d)(iii) may be called in accordance with the provisions of Section 4(d)(i).
5. CERTAIN RESTRICTIONS. (a) If shares of Series E Preferred Stock are
outstanding unless, full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the Series E Preferred Stock for past dividend periods
and the then current dividend period, other than pursuant to Section 3(c), the
Corporation will not declare, make, pay or set apart for payment or distribution
any dividends or other distributions (other than in Common Stock or other
Capital Stock ranking junior to the Series E Preferred Stock as to dividends and
upon liquidation, dissolution or winding up) on the Common Stock, Series F
Preferred Stock or any other series or class of
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Capital Stock ranking as to dividends, on a parity with or junior to the Series
E Preferred Stock for any period.
(b) If shares of Series E Preferred Stock are outstanding, unless full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such payment
on the Series E Preferred Stock for all past dividend periods and the then
current dividend period, the Corporation shall not redeem, purchase or otherwise
acquire for any consideration (or pay or make available money for a sinking fund
for the redemption of) any Common Stock, Series F Preferred Stock or any other
series or class of Capital Stock ranking, as to dividends or upon liquidation,
dissolution or winding up, on a parity with or junior to the Series E Preferred
Stock (except by conversion into or exchange for Common Stock or other Capital
Stock of the Corporation ranking junior to the Series E Preferred Stock as to
dividends and upon liquidation, dissolution or winding up); PROVIDED, HOWEVER,
the foregoing shall not prevent the purchase or acquisition of any shares of
Capital Stock of the Corporation by the Corporation (i) in order to preserve the
status of the Corporation as a real estate investment trust ("REIT") or (ii)
pursuant to a purchase or exchange offer made on comparable terms to all holders
of outstanding shares of Capital Stock of the Corporation.
(c) The Corporation shall not permit any Subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of Capital Stock
of the Corporation unless the Corporation could, pursuant to paragraph (b) of
this Section 5, purchase or otherwise acquire such shares at such time and in
such manner.
6. REDEMPTION. (a) The Series E Preferred Stock shall be redeemable in
whole or in part, at the option of the Company, at any time and from time to
time after the date of issuance of the Series E Preferred Stock, to the extent
the Corporation shall have funds legally available therefore, in cash, at $106
per share (the "REDEMPTION PRICE"), together in each case with an amount equal
to accrued and unpaid dividends to (and including) the date fixed for
redemption. On and after the date fixed for redemption, provided that the
Redemption Price (including any accrued and unpaid dividends to (and including)
the date fixed for redemption) has been duly paid or deposited in trust for the
benefit of the holders of the Series E Preferred Stock, dividends shall cease to
accrue on the Series E Preferred Stock called for redemption, such shares shall
no longer be deemed to be outstanding and all rights of the holders of such
shares as stockholders of the Corporation shall cease, except the right to
receive the moneys payable upon such redemption, without interest thereon, upon
surrender of the certificates evidencing such shares. Any moneys deposited in
trust by the Corporation, which shall not be required for redemption because of
the exercise of any right of conversion by the holders of the Series E Preferred
Stock, shall be repaid to the Corporation forthwith. Any moneys deposited in
trust by the Corporation and unclaimed at the end of two years from the date
fixed for such redemption shall be repaid to the Corporation upon its written
request, after which repayment the holders of the shares of Series E Preferred
Stock so called for redemption shall look only to the Corporation for the
payment thereof.
(b) Notice of any redemption pursuant to Section 6(a) shall be given to
the holders of shares of Series E Preferred Stock once not less than forty-five
(45) or more than sixty (60) days
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prior to the date fixed for redemption. Notice of redemption shall be given by
first class mail to each such holder's address as shown on the stock books of
the Corporation and will specify (i) the date fixed for redemption, (ii) the
number of shares of Series E Preferred Stock to be redeemed, (iii) the
Redemption Price, (iv) the place or places where certificates for shares of
Series E Preferred Stock are to be surrendered for payment of the Redemption
Price, (v) that dividends on the shares of Series E Preferred Stock to be
redeemed will cease to accrue on the dated fixed for redemption, (vi) the date
upon which the holders' conversion rights will terminate (which date shall be
determined in accordance with Section 9(g)). If less than all shares of Series E
Preferred Stock then outstanding are to be redeemed, the shares of Series E
Preferred Stock will be redeemed PRO RATA from among the holders of shares of
Series E Preferred Stock then outstanding.
7. REACQUIRED SHARES. Any shares of Series E Preferred Stock converted,
redeemed, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares of Series E Preferred Stock shall upon their cancellation, and
upon the filing of an appropriate certificate with the Maryland State Department
of Assessments and Taxation, become authorized but unissued shares of Preferred
Stock and may be reissued as part of another series of Preferred Stock subject
to the conditions or restrictions on issuance set forth herein, to the extent
any Series E Preferred Stock remains outstanding.
8. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation then, before any distribution or payment shall be made to the
holders of any shares of Common Stock or any other class or series of Capital
Stock of the Corporation ranking junior to the Series E Preferred Stock in the
distribution of assets upon any liquidation, dissolution or winding up of the
Corporation, the holders of Series E Preferred Stock shall be entitled to
receive out of assets of the Corporation legally available for distribution to
stockholders, liquidating distributions in the amount of the Liquidation Value
per share, plus an amount equal to all dividends accrued and unpaid thereon as
of the date of liquidation dissolution or winding up. After payment of the full
amount of the liquidating distributions to which they are entitled, the holders
of Series E Preferred Stock will have no right or claim to any of the remaining
assets of the Corporation. In the event that, upon any such voluntary or
involuntary liquidation, dissolution or winding up, the available assets of the
Corporation are insufficient to pay the amount of the liquidation distributions
on all outstanding shares of Series E Preferred Stock and the corresponding
amounts payable on all shares of other classes or series of Capital Stock of the
Corporation ranking on a parity with the Series E Preferred Stock in the
distribution of assets upon liquidation, dissolution or winding up, then the
holders of the Series E Preferred Stock and all other such classes or series of
capital stock shall share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
(b) Neither the consolidation, merger or other business combination of
the Corporation with or into any other Person, nor the sale, lease or conveyance
of all or substantially all of the property or business of the Corporation shall
be deemed to constitute a liquidation, dissolution or winding up of the
Corporation for purposes of this Section 8.
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9. CONVERSION. (a)(i) Shares of Series E Preferred Stock shall become
convertible at the option of the holder thereof into fully paid and
non-assessable shares of Common Stock beginning after the Effective Date in
accordance with the terms and conditions to be provided in the Corporation's
plan of reorganization as in effect on the Effective Date, and these Series E
Preferred Stock Articles shall be deemed so amended and supplemented to so
provide. Notwithstanding the preceding, if the Effective Date has not occurred
by December 31, 2000, then the shares of Series E Preferred Stock shall become
convertible at the option of the holder thereof into fully paid and
non-assessable shares of Common Stock in increments of 10,000 shares of Series E
Preferred Stock per calendar month commencing with January 2001.
(ii) Notwithstanding anything in this Section 9(a) to the contrary, the
holders of the Series E Preferred Stock shall not be permitted to convert (i)
more than 10,000 shares (or less than 1,000 shares at any one time) of Series E
Preferred Stock during any calendar month or (ii) any shares of Series E
Preferred Stock into shares of Common Stock if such conversion would result in
the holder of Series E Preferred Stock requesting such conversion owning 5% or
more of the Corporation's then outstanding Common Stock.
Determination of which holders shall be entitled to convert during any
applicable period shall be based upon the holders which first deliver to the
Corporation the conversion notice and certificates of Series E Preferred Stock
specified in paragraph (d) below, with any allocation between holders delivering
the required conversion notice and certificates of Series E Preferred Stock on
the same day to be made PRO RATA based upon the number of shares of Series E
Preferred Stock submitted for conversion.
In the event a holder of Series E Preferred Stock cannot effect a
requested conversion of such holder's Series E Preferred Stock at the time
requested, the Corporation shall, without further action on the part of such
holder, convert such shares of Series E Preferred Stock into Common Stock on the
earliest date that such conversion is possible under the terms of these Series E
Preferred Stock Articles.
(b) On the Mandatory Conversion Date for each share of Series E
Preferred Stock, such share of Series E Preferred Stock shall be automatically
converted into fully paid and nonassessable shares of Common Stock.
(c) The number of shares of Common Stock deliverable upon conversion of
a share of Series E Preferred Stock shall be equal to a fraction (i) the
numerator of which is the Liquidation Value of the Series E Preferred Stock and
(ii) the denominator of which is a Closing Trade Price for a Trading Day
occurring within the Conversion Pricing Period mutually acceptable to the
Corporation and the holder, PROVIDED, HOWEVER, that if no Closing Trade Price is
mutually acceptable to the Corporation and the holder, then the denominator
shall be the Average Closing Trade Price for the applicable Conversion Pricing
Period.
(d) Prior to the Mandatory Conversion Date, the holders of Series E
Preferred Stock may convert such Series E Preferred Stock into Common Stock by
surrendering to the Corporation at the principal office of the Corporation in
the State of Maryland (the "TRANSFER AGENT"), or at the office of any agent or
agents of the Corporation, as may be designated by the Board of Directors, the
certificate of such Series E Preferred Stock to be converted accompanied
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by a written notice stating that such holder elects to convert all or a
specified whole number of such shares in accordance with the provisions of this
Section 9 and specifying the name or names in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued (a "HOLDER
CONVERSION NOTICE"). In case a Holder Conversion Notice shall specify a name or
names other than that of such holder, such Holder Conversion Notice shall be
accompanied by payment of all transfer taxes, if any, payable upon the issuance
of shares of Common Stock in such name or names. Other than such taxes, the
Corporation will pay any and all issue and other taxes (other than taxes based
on income) that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series E Preferred Stock pursuant hereto.
(e) After the Mandatory Conversion Date, the holders of Series E
Preferred Stock may exchange certificates representing Series E Preferred Stock
for certificates representing Common Stock by surrendering to the Transfer Agent
such certificates representing Series E Preferred Stock. In case the holder of
Series E Preferred Stock requests the Common Stock to be registered in a name or
names other than that of such holder, the Series E Preferred Stock submitted for
conversion shall be accompanied by payment of all transfer taxes, if any,
payable upon the issuance of shares of Common Stock in such name or names. Other
than such taxes, the Corporation will pay any and all issue and other taxes
(other than taxes based on income) that may be payable in respect of any issue
or delivery of shares of Common Stock on conversion of Series E Preferred Stock
pursuant hereto.
(f) As promptly as practicable, and in any event within five Business
Days after the date of delivery of the shares of Series E Preferred Stock to be
converted (and, if prior to the Mandatory Conversion Date, the Holder Conversion
Notice), the Corporation shall deliver or cause to be delivered (i) certificates
representing the number of validly issued, fully paid and nonassessable full
shares of Common Stock to which the holder of shares of Series E Preferred Stock
being converted shall be entitled and (ii) if less than the full number of
shares of Series E Preferred Stock evidenced by the surrendered certificate or
certificates is being converted, a new certificate or certificates, of like
tenor, for the number of shares of Series E Preferred Stock evidenced by such
surrendered certificate or certificates less the number of shares being
converted. All conversions shall be deemed to have been made at the close of
business on the date of delivery of the Holder Conversion Notice or the
Mandatory Conversion Date, as the case may be, so that the rights of the holder
thereof as to the shares being converted shall cease except for the right to
receive shares of Common Stock in accordance herewith, and the Person entitled
to receive the shares of Common Stock shall be treated for all purposes as
having become the record holder of such shares of Common Stock at such time. The
Corporation shall not be required to convert, and no surrender of shares of
Series E Preferred Stock shall be effective for that purpose, while the transfer
books of the Corporation for the Common Stock are closed for any purpose (but
not for any period in excess of 10 calendar days); but the surrender of shares
of Series E Preferred Stock for conversion during any period while such books
are so closed shall become effective for conversion immediately upon the
reopening of such books, as if the conversion had been made on the date such
shares of Series E Preferred Stock were surrendered, and at a rate of conversion
which assumes the Conversion Pricing Period took place during the period
immediately prior to the closing of such books.
(g) In case any shares of Series E Preferred Stock are to be redeemed
pursuant to Section 6, the right of conversion set forth in this Section 9 shall
cease and terminate as to the
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shares of Series E Preferred Stock to be redeemed at the close of business,
Washington, D.C. time, on the date of delivery to the holders of Series E
Preferred Stock of notice of redemption in accordance with Section 6(b), unless
(i) the Corporation shall have received a Holder Conversion Notice in respect of
such shares of Series E Preferred Stock prior to such time or (ii) the
Corporation shall default in the payment of the amount payable upon such
redemption.
(h) Upon conversion of any shares of the Series E Preferred Stock, all
accrued and unpaid dividends up to (and including) the date of receipt by the
Corporation of the Holder Conversion Notice or the Mandatory Conversion Date, as
the case may be, whether or not declared, on each share of Series E Preferred
Stock being converted shall become immediately due and payable on the date of
the issuance and delivery by the Corporation of the certificate representing the
shares of Common Stock to which such holder of shares of the Series E Preferred
Stock being converted is entitled. In the event that the Corporation is legally
prohibited from paying such dividends on such date, the Corporation shall pay
such unpaid dividends to the holder of such shares as soon thereafter as it is
legally able to do so.
(i) In connection with the conversion of any shares of Series E
Preferred Stock, no fractions of shares of Common Stock shall be issued, but in
lieu thereof the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied by
the Average Closing Trade Price for the applicable Conversion Pricing Period. If
more than one share of Series E Preferred Stock shall be surrendered for
conversion by the same holder at the same time, the number of full shares of
Common Stock issuable on conversion thereof shall be computed on the basis of
the total number of shares of Series E Preferred Stock so surrendered.
(j) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of the Series E Preferred Stock, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the conversion of all outstanding shares of Series E
Preferred Stock, and shall take all action required to increase the authorized
number of shares of Common Stock if necessary to permit the conversion of all
outstanding shares of Series E Preferred Stock.
(k) In case of any capital reorganization or reclassification of
outstanding shares of Common Stock, or in the case of any consolidation or
merger of the Corporation with or into another Person or in the case of any sale
or conveyance to another Person of the property of the Corporation as an
entirety or substantially as an entirety (each of the foregoing being referred
to as a "TRANSACTION"), at the option of the holder of any shares of Series E
Preferred Stock, (i) each share of Series E Preferred Stock then outstanding
shall thereafter be convertible into, in lieu of the Common Stock issuable upon
such conversion prior to consummation of such Transaction, the kind and amount
of shares of stock and other securities and property receivable (including cash)
upon the consummation of such Transaction by a holder of that number of shares
of Common Stock into which one share of Series E Preferred Stock was
convertible, assuming that the Conversion Pricing Period related thereto ended
on the day immediately preceding the consummation of such Transaction
(including, on a PRO RATA basis, in the case of securities or property received
by holders of Common Stock in any tender or exchange offer that is a step in
such Transaction, insofar as receipt of such cash, securities or property in
connection with any step in such Transaction does not result in the holders of
Series E Preferred Stock receiving in
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the aggregate more than such holders would otherwise be entitled to receive
pursuant to this clause (i)) or (ii) each share of Series E Preferred Stock
shall entitle the holder thereof to receive, upon presentation of the
certificate therefor to the Surviving Person subsequent to the consummation of
such Transaction (A) if the Surviving Person is a Qualified Person, that number
of shares of Survivor Common Stock of the Surviving Person determined by
multiplying the number of shares of Common Stock into which such share of Series
E Preferred Stock was convertible, assuming that the Conversion Pricing Period
related thereto ended on the day immediately preceding the consummation of such
Transaction by a fraction, the numerator of which is the Average Closing Trade
Price for the Common Stock for twenty-one Trading Days preceding the date of
consummation of such Transaction and the denominator of which is the Average
Closing Trade Price for the Survivor Common Stock for the twenty-one Trading
Days preceding the consummation of the transaction giving rise to the adjustment
in this paragraph (k) or (B) if the Surviving Person is not a Qualified Person,
$106 in cash per share of Series E Preferred Stock, payable in immediately
available funds. In any such case, if necessary, appropriate adjustment (as
determined by the Board of Directors) shall be made in the application of the
provisions set forth in this Section 9 with respect to the rights and interests
thereafter of the holders of shares of Series E Preferred Stock to the end that
the provisions set forth herein for the protection of the conversion rights of
the Series E Preferred Stock shall thereafter be applicable, as nearly as
reasonably may be, to any such other shares of stock and other securities and
property deliverable upon conversion of the shares of Series E Preferred Stock
remaining outstanding (with such adjustments in the conversion price and number
of shares issuable upon conversion and such other adjustments in the provisions
hereof as the Board of Directors shall determine to be appropriate). In case
securities or property other than Common Stock shall be issuable or deliverable
upon conversion as aforesaid, then all references to this Section 9 shall be
deemed to apply, so far as appropriate and as nearly as may be, to such other
securities or property.
10. REIT STATUS. Nothing contained in the Articles of Amendment and
Restatement of the Corporation, including these Series E Preferred Stock
Articles shall limit the authority of the Board of Directors to take such other
action as it deems necessary or advisable to protect the Corporation and the
interests of the stockholders by preservation of the Corporation's qualification
as a REIT under the REIT Provisions (as defined in the Articles of Amendment and
Restatement of the Corporation), including, without limitation, the enforcement
of the provisions of Article XI of the Articles of Amendment and Restatement of
the Corporation.
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EXHIBIT C TO ARTICLES OF AMENDMENT AND RESTATEMENT
(THE "SERIES F PREFERRED STOCK ARTICLES")(1)
The Series F Redeemable Cumulative Dividend Preferred Stock
(convertible during the period of ten (10) Business Days after the fifth
Business Day after the Initial Issue Date and during the period of ten (10)
Business Days ending ninety (90) calendar days after the Initial Issue Date or
the first Business Day thereafter) shall be subject to all of the provisions of
the Articles of Amendment and Restatement of the Corporation relating to the
Capital Stock of the Corporation generally and shall, as set by the Board of
Directors, have the following preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption:
1. DEFINITIONS. For the purposes of these Series F Preferred Stock
Articles, the following terms have the meanings indicated:
"Articles of Amendment and Restatement" means the Articles of Amendment
and Restatement of the Corporation as in effect from time to time (including any
and all amendments and supplements thereto and restatements thereof).
"Average Price" for a given Pricing Period means (a) the Volume
Weighted Average Price of the Common Stock traded during such Pricing Period
utilizing the Bloomberg (Equity) HP function, or, if that information is not
available, (b) the average of the sum of the average daily high and low sale
prices for the Common Stock for each Trading Day during such Pricing Period, as
reported on the stock exchange composite tape, weighted by the number of shares
traded for that day or, (c) if the Common Stock is traded over-the-counter, the
average of the sum of the daily averages of the last reported high bid and low
asked quotations for the Common Stock for each Trading Day during such Pricing
Period.
"Board" and "Board of Directors" means the Board of Directors of the
Corporation.
"Business Day" means any day other than a Saturday, Sunday or the
Friday after Thanksgiving, or a day on which banking institutions in the State
of New York or Maryland are authorized or obligated by law or executive order to
close.
"Common Stock" means the common stock, par value $0.01 per share, of
the Corporation.
"Conversion Period" has the meaning ascribed thereto in Section 9(a).
---------------------------------
(1) This Exhibit C represents the relative rights and preferences of the
Corporation's Series F Preferred Stock, as amended by the Plan, which amendments
relate principally to the payment of dividends, consistent with the Plan, and
will be effected only if Holders of Series F Preferred Stock vote to accept the
Plan.
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"Corporation" means CRIIMI MAE Inc., a Maryland corporation.
"Dividend Average Price" means the Volume Weighted Average Price of the
Common Stock traded during the ten Trading Days beginning one Trading Day after
the Dividend Declaration Date (a "DIVIDEND PRICING PERIOD"), utilizing the
Bloomberg (Equity) VAP function, or, (x) if that information is not available,
the average of the sum of the average daily high and low sale prices for the
Common Stock for each day during a Dividend Pricing Period, as reported on the
stock exchange composite tape, weighted by the number of shares of Common Stock
traded for that day or, (y) if the Common Stock is traded over-the-counter, the
average of the sum of the daily averages of the last reported high bid and low
asked quotations for the Common Stock for each day during a Dividend Pricing
Period, weighted by the number of shares of Common Stock traded for that day.
"Dividend Declaration Date" means, with respect to any quarterly
dividend, the date on which the Board of Directors declares such dividend.
"Dividend Parity Stock" has the meaning ascribed thereto in Section
3(a)(ii).
"Dividend Payment Date" has the meaning ascribed thereto in Section
3(a)(i)
"Dividend Period" has the meaning ascribed thereto in Section 3(a)(i).
"Dividend Rate" means 12%.
"Effective Date" means the first day, other than a Saturday, Sunday, or
a "legal holiday" (as defined in Rule 9005(a) of the Federal Rules of Bankruptcy
Procedure), that is not less than eleven (11) days after the date on which the
clerk of the U.S. Bankruptcy Court for the District of Maryland, Greenbelt
Division, or such other court that exercises jurisdiction over the Corporation's
bankruptcy case, enters the Order confirming the Corporation's plan of
reorganization as such may be amended, modified or supplemented from time to
time, and on which day, as determined by the Corporation (i) all conditions to
the Effective Date as set forth in the Corporation's plan of reorganization have
been satisfied or waived by the Corporation, and (ii) no stay of the Order
confirming the Corporation's plan of reorganization is in effect.
"Holder Conversion Notice" has the meaning ascribed thereto in Section
9(d)(i).
"Initial Issue Date" has the meaning ascribed thereto in Section
3(a)(i).
"Junior Capital Stock" has the meaning ascribed thereto in Section
2(b).
"Liquidation Parity Stock" has the meaning ascribed thereto in Section
8(a).
"Liquidation Value" means, with respect to a share of Series F
Preferred Stock, $10.00.
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"MGCL" means the Maryland General Corporation Law, as amended, as the
same may be in effect from time to time.
"Parity Capital Stock" has the meaning ascribed thereto in Section
2(b).
"Person" means any individual, firm, corporation or other entity, and
includes any successor (by merger or otherwise) of such entity.
"Preferred Stock" means the preferred stock, par value $0.01 per share,
of the Corporation.
"Pricing Period" means the ten (10) Trading Days ending one day prior
to the date a holder of the Series F Dividend Preferred converts his or her
shares during a Conversion Period.
"Redemption Date" has the meaning ascribed thereto in Section 6(a).
"Redemption Price" means, with respect to a share of Series F Preferred
Stock, $10.00.
"REIT" means a real estate investment trust for federal income tax
purposes.
"Sale Price" has the meaning ascribed thereto in Section 9(d)(iii).
"Senior Capital Stock" has the meaning ascribed thereto in Section
2(b).
"Series B Preferred Stock" means the Corporation's Series B Cumulative
Convertible Preferred Stock par value $0.01 per share.
"Series E Preferred Stock" means the Corporation's Series E Cumulative
Convertible Preferred Stock, par value $0.01 per share.
"Series F Preferred Stock" has the meaning ascribed thereto in Section
2(a).
"Subsidiary" of any Person means any corporation or other entity of
which a majority of the voting power of the voting equity securities, or equity
interest, is owned, directly or indirectly, by such Person.
"Trading Day" means any day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, a Business Day.
"Volume Weighted Average Price of the Common Stock" for a given period
means the quotient of (i) the aggregate dollar value obtained by multiplying (a)
the
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number of shares of Common Stock traded at each given price during such period,
by (b) such price, divided by (ii) the total number of shares of Common Stock
traded during such period.
2. DESIGNATION AND NUMBER; RANK. (a) The shares of the series of
Preferred Stock designated pursuant hereto shall be designated as "Series F
Redeemable Cumulative Dividend Preferred Stock (convertible during the period of
ten (10) Business Days after the fifth Business Day after the Initial Issue Date
and during the period of ten (10) Business Days ending ninety (90) calendar days
after the Initial Issue Date or the first Business Day thereafter)" (the "SERIES
F PREFERRED STOCK"). The number of shares initially constituting the Series F
Preferred Stock shall be 1,610,000 which number may be decreased (but not
increased) by the Board of Directors without a vote of the holders of Series F
Preferred Stock; PROVIDED, HOWEVER, that such number may not be decreased below
the number of shares of Series F Preferred Stock outstanding at the effective
time of such reduction.
(b) The Series F Preferred Stock shall, with respect to dividend rights
and rights upon liquidation, dissolution or winding up, rank (i) senior to the
Common Stock and to all other Capital Stock of the Corporation the terms of
which specifically provide that such Capital Stock ranks junior to the Series F
Preferred Stock with respect to dividend rights and/or rights upon liquidation,
dissolution or winding up of the Corporation (collectively, such other Capital
Stock being referred to as the "JUNIOR CAPITAL STOCK"); (ii) PARI PASSU with all
Capital Stock of the Corporation the terms of which specifically provide that
such Capital Stock ranks PARI PASSU with the Series F Preferred Stock with
respect to dividend rights and/or rights upon liquidation, dissolution or
winding up of the Corporation (collectively, such Capital Stock being referred
to as the "PARITY CAPITAL STOCK"); and (iii) junior to (x) the Series B
Preferred Stock, (y) the Series E Preferred Stock, and (z) all other Capital
Stock of the Corporation the terms of which specifically provide that such
Capital Stock ranks senior to the Series F Preferred Stock with respect to
dividend rights and/or rights upon liquidation, dissolution or winding up of the
Corporation (collectively, such Capital Stock being referred to as the "SENIOR
CAPITAL STOCK").
(c) SAVINGS CLAUSE. Notwithstanding anything otherwise provided in
these Series F Preferred Stock Articles, none of the rights pertaining to
dividends and distributions, and rights upon liquidation, dissolution and
winding up attributable to the Series F Preferred Stock, may be exercised,
enjoyed or received unless the corresponding rights of the Senior Capital Stock
have been fully exercised, enjoyed or received.
3. DIVIDENDS AND DISTRIBUTIONS. (a)(i) The holders of shares of Series
F Preferred Stock, in preference to the holders of shares of Common Stock and of
shares of any Junior Capital Stock that ranks junior to the Series F Preferred
Stock as to the payment of dividends shall be entitled to receive, when, as and
if declared by the Board of Directors, out of the assets of the Corporation
legally available therefor, cumulative dividends at the Dividend Rate, payable
no more than sixty (60) calendar days following the Dividend Declaration Date.
Such dividends shall be declared at such intervals as the
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<PAGE>
Board of Directors, in its discretion, shall determine; PROVIDED, HOWEVER, that
payment of the first dividend on shares of Series F Preferred Stock shall be
paid no earlier than the end of the calendar quarter (March 31, June 30,
September 30, December 31) in which the Effective Date occurs and thereafter not
more than quarterly, as determined by the Board of Directors (each such period
being referred to as a "DIVIDEND PERIOD"). Notwithstanding the preceding, all or
any portion of the accrued and unpaid dividends as of the Effective Date may be
paid, at the Corporation's option, as early as the Effective Date. Dividends
shall be fully cumulative from the date of first issuance of any shares of
Series F Preferred Stock (the "INITIAL ISSUE DATE") and, after the payment of
the first dividend, payable not more than quarterly in arrears. Accrued
dividends will not be paid (a) to holders who exercise their conversion
privilege during a Conversion Period on shares so converted or (b) in respect of
shares called for redemption pursuant to Section 6(a) hereof from and after the
Dividend Declaration Date next preceding the Redemption Date with respect to
such shares. Dividends will be payable to holders of record as they appear in
the stock records of the Corporation at the close of business on the applicable
record date set by the Board of Directors. No interest shall be payable with
respect to any dividend payment on Series F Preferred Stock that may be in
arrears. Dividends shall be payable in cash or in Common Stock (or a combination
thereof), at the Corporation's option, including without limitation, all accrued
and unpaid dividends as of the Effective Date. If the dividends are paid in
Common Stock, the number of shares of Common Stock issuable by the Corporation
shall be determined by dividing the cash amount which would be payable if cash
dividends were to be paid on the payment date for the applicable Dividend Period
(the "DIVIDEND PAYMENT DATE") by the Dividend Average Price. No fractional
shares of Common Stock shall be issued. Instead of any fractional share of
Common Stock, the Corporation shall pay a cash adjustment in respect to such
fraction.
(ii) Dividends paid on shares of Series F Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated among all such shares of Series F Preferred Stock
and all other shares of Capital Stock of the Corporation ranking on parity as to
dividends with the Series F Preferred Stock ("DIVIDEND PARITY STOCK") at the
time outstanding PRO RATA, so that the dollar amount of the dividend declared
per share of Series F Preferred Stock and the Dividend Parity Stock shall in all
cases bear to each other the same ratio that accrued dividends per share on the
Series F Preferred Stock and the Dividend Parity Stock bear to each other.
(iii) The Board of Directors may fix a record date for the
determination of holders of shares of the Series F Preferred Stock entitled to
receive payment of a dividend declared thereon, which record date shall be no
more than sixty (60) calendar days nor less than ten (10) calendar days prior to
the date fixed for the payment thereof.
(iv) Any dividend payment made on shares of the Series F Preferred
Stock first shall be credited against the earliest accrued but unpaid dividend
due with respect to shares of the Series F Preferred Stock which remains
payable.
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(b) Holders of shares of the Series F Preferred Stock shall not be
entitled to receive any dividends or other distributions except as expressly
provided herein.
4. VOTING RIGHTS. So long as the Series F Preferred Stock remains
outstanding, the holders of shares of the Series F Preferred Stock shall have
the following voting rights:
(a) Holders of shares of Series F Preferred Stock shall have no voting
rights except as set forth below or as otherwise required by law.
(b) During any period in which dividends on the Series F Preferred
Stock are cumulatively in arrears for not less than six quarterly dividend
payments (whether or not consecutive), then the number of directors constituting
the Board of Directors shall, without further action, be increased by two and
the holders of shares of the Series F Preferred Stock shall have, in addition to
the other voting rights set forth herein, the exclusive right, voting separately
as a single class, to elect the directors of the Corporation to fill such newly
created directorships, the remaining directors to be elected by the other
classes of Capital Stock entitled to vote therefor at each meeting of
stockholders held for the purpose of electing directors. Such additional voting
rights shall continue until such time as all dividends accumulated on the Series
F Preferred Stock shall have been paid in full or non-cumulative dividends paid
regularly for one year, at which time such additional directors shall cease to
be directors and such additional voting right of the holders of Series F
Preferred Stock shall terminate subject to revesting in the event of each and
every subsequent cumulative arrearage for not less than six (6) quarterly
periods as contemplated by the first sentence of this Section. In no event shall
the holders of Series F Preferred Stock voting separately as a class be entitled
to elect a total of more than two directors to the Board of Directors pursuant
to this Section 4(b).
(c)(i) The voting rights of holders of shares of Series F Preferred
Stock set forth in Section 4(b) above may be exercised at any annual meeting of
stockholders or at a special meeting of stockholders held for such purpose as
hereinafter provided or at any adjournment thereof, or by the unanimous written
consent, delivered to the Secretary of the Corporation, of the holders of the
outstanding shares of Series F Preferred Stock. Unless such right has been
exercised by the unanimous written consent of the holders of Series F Preferred
Stock, the Chairman of the Board of Directors may call, and upon the written
request of holders of record of at least twenty percent (20%) of the outstanding
shares of Series F Preferred Stock, addressed to the Secretary of the
Corporation at the principal office of the Corporation, shall call, a special
meeting of the holders of shares entitled to vote as provided herein. Such
meeting shall be held not more than sixty (60) calendar days after delivery of
such request to the Secretary, at the place and upon the notice provided by law
and in the Bylaws of the Corporation for the holding of special meetings of
stockholders.
(ii) At each meeting of stockholders at which the holders of shares of
Series F Preferred Stock shall have the right, as provided in this Section 4, to
take any action, the
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presence in person or by proxy of the holders of record of a majority of the
total number of shares of Series F Preferred Stock then outstanding and entitled
to vote on the matter shall be necessary and sufficient to constitute a quorum.
At any such meeting or at any adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series
F Preferred Stock shall not prevent the election of directors or the taking of
any other action by the holders of any other class(es) or series of the
Corporation's Capital Stock, and the absence of a quorum of the holders of
shares of any other class or series of the Corporation's Capital Stock shall not
prevent the taking of any action by the holders of Series F Preferred Stock as
provided in this Section 4; and
(B) in the absence of a quorum of the holders of shares of
Series F Preferred Stock, a majority of the holders of shares of Series F
Preferred Stock, present in person or by proxy, shall have the power to adjourn
the meeting as to the actions to be taken by the holders of shares of Series F
Preferred Stock from time to time and place to place without notice other than
announcement at the meeting until a quorum shall be present.
(iii) For the taking of any action as provided in this Section 4 by the
holders of Series F Preferred Stock, each such holder shall have one (1) vote
for each share of Series F Preferred Stock in such holder's name on the stock
transfer books of the Corporation as of any record date fixed for such purpose
or, if no such date be fixed, at the close of business on the Business Day next
preceding the day on which notice is given, or if notice is waived, at the close
of business on the Business Day next preceding the day on which the meeting is
held.
5. CERTAIN RESTRICTIONS. (a) If any shares of Series F Preferred Stock
are outstanding, then the Corporation shall not, other than pursuant to Section
3(a)(ii), declare, make, pay or set apart for payment or distribution any
dividends or other distributions for any period (other than in Common Stock,
Dividend Parity Stock or Junior Capital Stock) on the Common Stock, any series
or class of Dividend Parity Stock or any series or class of Junior Capital Stock
that ranks junior to the Series F Preferred Stock with respect to dividend
rights, unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient (in cash and/or Common Stock,
as applicable) for the payment thereof set apart for such payment on all shares
of Series F Preferred Stock entitled thereto.
(b) If any shares of Series F Preferred Stock are outstanding, the
Corporation shall not redeem, purchase or otherwise acquire for any
consideration (or pay or make available money for a sinking fund for the
redemption of) any Common Stock or any Junior Capital Stock (except by
conversion into or exchange for Common Stock or Junior Capital Stock) unless
full cumulative dividends have been or contemporaneously are declared and paid,
or declared and a sum sufficient (in cash and/or Common Stock, as applicable)
for the payment thereof set apart for such payment on the Series F Preferred
Stock for all past dividend periods through and including the date fixed for
redemption, purchase or acquisition, PROVIDED, HOWEVER, that the foregoing shall
not prevent the
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purchase or acquisition of any shares of Capital Stock of the Corporation by the
Corporation (i) to the extent necessary, in the reasonable judgment of the Board
of Directors, in order to preserve the status of the Corporation as a REIT or
(ii) pursuant to a purchase or exchange offer made on comparable terms to all
holders of outstanding shares of Capital Stock of the Corporation. For purposes
of this Section 5(b), the date to be fixed for redemption, purchase or
acquisition shall be set by resolution of the Board of Directors.
(c) The Corporation shall not permit any Subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of Capital Stock
of the Corporation unless the Corporation could, pursuant to this Section 5(b),
purchase or otherwise acquire such shares at such time and in such manner.
6. REDEMPTION. (a) Shares of Series F Preferred Stock shall not be
redeemable in whole or in part prior to the first (1st) annual anniversary of
the Initial Issue Date. On or after such first (1st) annual anniversary, to the
extent the Corporation shall have funds legally available therefor, the Series F
Preferred Stock shall be subject to redemption in whole or in part, in cash or
shares of Parity Capital Stock, at the election of the Corporation in its sole
discretion, at any time or from time to time, at the Redemption Price, together,
in each case with an amount (in cash and/or Common Stock, as applicable) equal
to any accrued and unpaid dividends to (and including) the date fixed for
redemption (the "REDEMPTION DATE"). Notwithstanding the preceding, no dividends
shall be due and payable in respect of shares of Series F Preferred Stock called
for redemption pursuant to this Section 6(a) from and after the Dividend
Declaration Date next preceding the Redemption Date with respect to such shares.
On and after the Redemption Date, provided that the aggregate Redemption Price
(including any accrued and unpaid dividends to (and including) the date fixed
for redemption) for all shares of Series F Preferred Stock called for redemption
has been duly paid or deposited in trust for the benefit of the holders of the
Series F Preferred Stock, dividends shall cease to accrue on the Series F
Preferred Stock called for redemption, such shares shall no longer be deemed to
be outstanding and all rights of the holders of such shares shall cease, except
only the right to receive the monies (and Common Stock, if applicable) payable
upon such redemption, without interest thereon, upon surrender of the
certificates evidencing such shares. Any monies (and Common Stock, if
applicable) deposited in trust by the Corporation and unclaimed at the end of
two (2) years from the Redemption Date shall be repaid to the Corporation upon
its written request, after which repayment the holders of shares of Series F
Preferred Stock so called for redemption shall look only to the Corporation for
the payment thereof.
(b) Notice of any redemption pursuant to Section 6(a) shall be given to
the holders of shares of Series F Preferred Stock not less than thirty (30) or
more than forty-five (45) calendar days prior to the Redemption Date. Notice of
redemption shall be given by first class mail to each such holder's address as
shown on the stock transfer books of the Corporation and shall specify (i) the
Redemption Date; (ii) the total number of shares of Series F Preferred Stock to
be redeemed; (iii) the number of shares of Series F Preferred Stock to be
redeemed from such holder; (iv) the per share Redemption Price
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<PAGE>
and the aggregate Redemption Price for all shares to be redeemed from such
holder; (v) the place or places where certificates for shares of Series F
Preferred Stock are to be surrendered for payment of the Redemption Price; and
(vi) that dividends on the shares of Series F Preferred Stock to be redeemed
will cease to accrue on the Redemption Date. If less than all shares of Series F
Preferred Stock then outstanding are to be redeemed, shares of Series F
Preferred Stock will be redeemed PRO RATA from among the holders of shares of
Series F Preferred Stock then outstanding.
7. REACQUIRED SHARES. Any shares of Series F Preferred Stock converted,
redeemed, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares of Series F Preferred Stock shall, upon their cancellation, and
upon the filing of appropriate articles supplementary with the Maryland State
Department of Assessments and Taxation, become authorized but unissued shares of
Preferred Stock and may be reissued as part of any series of Preferred Stock
subject to the conditions or restrictions on issuance set forth herein, to the
extent any Series F Preferred Stock remains outstanding.
8. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, before any distribution or payment shall be made to the holders of
any shares of Common Stock or any class or series of Junior Capital Stock that
ranks junior to the Series F Preferred Stock as to distribution of assets upon
any liquidation, dissolution or winding up of the Corporation, the holders of
Series F Preferred Stock shall be entitled to receive, out of assets of the
Corporation legally available for distribution to stockholders, liquidating
distributions in the amount of the Liquidation Value, plus an amount equal to
any dividends accrued and unpaid thereon as of the date of liquidation,
dissolution or winding up. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series F Preferred
Stock will have no right or claim to any of the remaining assets of the
Corporation. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of the Corporation
are insufficient to pay the amount of the liquidating distributions on all
outstanding shares of Series F Preferred Stock and the corresponding amounts
payable on all shares of Parity Capital Stock that ranks PARI PASSU with the
Series F Preferred Stock as to the distribution of assets upon liquidation,
dissolution or winding up ("LIQUIDATION PARITY STOCK"), then the holders of
Series F Preferred Stock and all other such classes or series of Liquidation
Parity Stock shall share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
(b) Neither the consolidation, merger or other business combination of
the Corporation with or into any other Person, nor the sale, lease or conveyance
of all or substantially all of the property or business of the Corporation shall
be deemed to constitute a liquidation, dissolution or winding up of the
Corporation for purposes of this Section 8.
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9. CONVERSION. (a) During the period of ten (10) Business Days after
the fifth Business Day after the Initial Issue Date and during the period of ten
(10) Business Days ending ninety (90) calendar days after the Initial Issue Date
or the first Business Day thereafter (each, a "CONVERSION PERIOD"), each
outstanding share of Series F Preferred Stock shall be convertible, at the sole
option of the holder thereof, into fully paid and nonassessable shares of Common
Stock; PROVIDED, HOWEVER, that in no event may a holder of Series F Preferred
Stock convert a share of Series F Preferred Stock into Common Stock if such
conversion would result in violation of Article XI of the Articles of Amendment
and Restatement of the Corporation.
(b) The number of shares of Common Stock deliverable upon conversion of
a share of Series F Preferred Stock during a Conversion Period shall be equal to
a fraction (i) the numerator of which is the Liquidation Value of the Series F
Preferred Stock and (ii) the denominator of which, subject to Section 9(c), is
the Average Price for the Pricing Period.
(c) Anything to the contrary contained in Section 9(b) or Section
9(d)(v) notwithstanding, in no event shall the Average Price used to compute the
number of shares of Common Stock issuable upon conversion be less than fifty
percent (50%) of the Volume Weighted Average Price of the Common Stock on the
Initial Issue Date. In the event that the Average Price is less than the floor
set forth in the preceding sentence, then the number of shares of Common Stock
issuable upon conversion shall be computed by reference to such floor.
(d)(i) During either Conversion Period, holders of Series F Preferred
Stock may convert their shares of Series F Preferred Stock into Common Stock by
surrendering to the Corporation's transfer agent, Registrar and Transfer Company
(the "TRANSFER AGENT"), at its offices in Cranford, New Jersey, the
certificate(s) of such Series F Preferred Stock to be converted, properly
endorsed and medallion certified, and accompanied by a written notice stating
that such holder elects to convert all or a specified whole number of such
shares in accordance with the provisions of this Section 9 and specifying the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued (a "HOLDER CONVERSION NOTICE"). In case a
Holder Conversion Notice shall specify a name or names other than that of such
holder, such Holder Conversion Notice shall be accompanied by payment of all
transfer taxes, if any, payable upon the issuance of shares of Common Stock in
such name or names. Other than fees to the Transfer Agent, the Corporation will
not pay any issue or other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of Series F Preferred Stock
pursuant hereto.
(ii) As promptly as practicable, and in any event within five (5)
Business Days after the date of delivery of the certificate(s) representing
shares of Series F Preferred Stock to be converted, together with a Holder
Conversion Notice (or, if the share certificate(s) and Holder Conversion Notice
are delivered separately, then within five (5) Business Days after the date of
delivery of the later document(s) to be so delivered), the Corporation shall
deliver or cause to be delivered (i) one or more certificates representing
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the number of validly issued, fully paid and nonassessable full shares of Common
Stock to which the holder of shares of Series F Preferred Stock being converted
shall be entitled and (ii) if less than the full number of shares of Series F
Preferred Stock evidenced by the surrendered certificate(s) is being converted,
a new certificate or certificates, of like tenor, for the number of shares of
Series F Preferred Stock evidenced by such surrendered certificate(s), less the
number of shares being converted. All conversions shall be deemed to have been
made at the close of business on the later of the date of delivery of the Holder
Conversion Notice or the date of delivery of the certificate(s) representing the
shares being converted (if different), or if such date is not a Business Day, as
of the close of business on the next succeeding Business Day, so that the rights
of the holder thereof as to the shares being converted shall cease, except only
the right to receive shares of Common Stock in accordance herewith, and the
Person entitled to receive the shares of Common Stock shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
the close of business on such date. The Corporation shall not be required to
convert, and no surrender of shares of Series F Preferred Stock shall be
effective for that purpose, while the stock transfer books of the Corporation
for the Common Stock are closed for any purpose (but not for any period in
excess of ten (10) calendar days); PROVIDED that the surrender of shares of
Series F Preferred Stock for conversion during any period while such books are
so closed shall become effective for conversion immediately upon the reopening
of such books, as if the conversion had been made on the date such shares of
Series F Preferred Stock were surrendered, or if such date is not a Business
Day, as of the close of business on the next succeeding Business Day.
(iii) No fractions of shares of Common Stock shall be issued in
connection with the conversion of any shares of Series F Preferred Stock, but in
lieu thereof the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to the same fraction of Sale Price (as
defined below) of the Common Stock at the close of business on the day of
conversion. In the absence of a Sale Price, the Board of Directors shall in good
faith determine the current market price on the basis of such quotation as it
considers appropriate. As used herein, "SALE PRICE" means the closing sales
price of the Common Stock (or if no sales price is reported, the average of the
high bid and low asked prices) as reported by the principal national or regional
stock exchange on which the Common Stock is listed or, if the Common Stock is
not listed on a national or regional stock exchange, as reported by the Nasdaq
Stock Market and if not so reported, then as reported by the National Quotation
Bureau Incorporated. If more than one share of Series F Preferred Stock shall be
surrendered for conversion by the same holder during the same Conversion Period,
the number of full shares of Common Stock issuable on conversion thereof shall
be computed on the basis of the total number of shares of Series F Preferred
Stock so surrendered.
(iv) The Corporation shall at all times endeavor to reserve and keep
available for issuance upon the conversion of the Series F Preferred Stock such
number of its authorized but unissued shares of Common Stock as will from time
to time be sufficient to permit the conversion of all outstanding shares of
Series F Preferred Stock, and to take
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all action required to increase the authorized number of shares of Common Stock
if necessary to permit the conversion of all outstanding shares of Series F
Preferred Stock.
(v) In case of any reclassification of the Common Stock, any
consolidation of the Corporation with, or merger of the Corporation into, any
other entity, any merger of another entity into the Corporation (other than a
merger that does not result in any reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock), any sale or transfer of all
or substantially all of the assets of the Corporation or any compulsory share
exchange, pursuant to which the Common Stock is converted into other securities,
cash or other property, then the Corporation (or successor entity), at its
election and in its sole discretion, may (i) notwithstanding Section 6(a),
redeem each share of the Series F Preferred Stock then outstanding at the
Redemption Price, together, in each case with an amount equal to any accrued and
unpaid dividends to (and including) the last Dividend Declaration Date preceding
the date fixed for redemption; or (ii) convert each share of the Series F
Preferred Stock then outstanding into the kind and amount of securities, cash
and other property receivable upon the reclassification, consolidation, merger,
sale, transfer or share exchange by a holder of the number of shares of Common
Stock into which such share of the Series F Preferred Stock would have been
convertible, which shall be a fraction (x) the numerator of which is the
Liquidation Value of the Series F Preferred Stock and (y) the denominator of
which, subject to Section 9(c), is the Volume Weighted Average Price of the
Common Stock on the Business Day immediately prior to the effectiveness of the
reclassification, consolidation, merger, sale, transfer or share exchange; or
(iii) notwithstanding Section 9(a) or anything to the contrary herein, permit
each share of the Series F Preferred Stock then outstanding to remain
outstanding with modified conversion rights, so that such shares may be
converted into the kind and amount of securities, cash and other property
receivable upon the reclassification, consolidation, merger, sale, transfer or
share exchange by a holder of the number of shares of Common Stock into which
such share of the Series F Preferred Stock would have been convertible had such
share been converted pursuant to this Section 9(d)(v)(ii). The Person formed by
the consolidation or resulting from the merger or which acquires such assets or
which acquires the Corporation's shares, as the case may be, shall make
provisions in its certificate or articles of incorporation or other constituent
document to establish such rights. The certificate or articles of incorporation
or other constituent document shall provide for adjustments, which, for events
subsequent to the effective date of the certificate or articles of incorporation
or other constituent document, shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The provisions of
this Section 9(d)(v) shall similarly apply to successive reclassification,
consolidations, mergers, sales, transfers or share exchanges.
10. REIT STATUS. Nothing contained in the Articles of Amendment and
Restatement of the Corporation, including these Series F Preferred Stock
Articles, shall limit the authority of the Board of Directors to take such other
action as it deems necessary or advisable to protect the Corporation and the
interests of the stockholders by preservation of the Corporation's qualification
as a REIT under the REIT Provisions (as defined in the Articles of Amendment and
Restatement of the Corporation), including,
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without limitation, the enforcement of the provisions of Article XI of the
Articles of Amendment and Restatement of the Corporation and payment of
dividends in the form of Parity Capital Stock or Junior Capital Stock.
11. AMENDMENT. These Series F Preferred Stock Articles may be amended,
revised or otherwise altered by the consent, at a meeting or otherwise, of a
majority of the shares of the Series F Preferred Stock issued and outstanding at
the time of any such amendment, revision or alteration.
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EXHIBIT F
AMENDED AND RESTATED
BYLAWS
OF
CRIIMI MAE INC.
(the "Corporation")
ARTICLE I
OFFICES
The Corporation may have such office(s) at such place(s), both within and
outside the State of Maryland, as the Board of Directors (the "Board") from time
to time determines or as the business of the Corporation from time to time
requires.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section l. Annual Meetings. Annual meetings of the stockholders of the
Corporation (the "Stockholders") shall be held at such time and place (within or
outside the State of Maryland) as shall be designated from time to time by the
Board and stated in the notice of the meeting. Subject to the Charter, at each
annual meeting Stockholders shall elect directors to succeed those whose terms
then expire and shall transact such other business as may properly be brought
before the meeting.
Section 2. Special Meetings. Except as otherwise prescribed by law, the
Charter or these Bylaws, special meetings of Stockholders for any purpose or
purposes may be called only by the Chairman of the Board, if there be one, the
President or the Board of Directors, and must be called by the Secretary upon
the written request of a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time of any such written request) or of Stockholders entitled to cast at
least 25 percent of all the votes entitled to be cast at the meeting. Requests
for special meetings shall state the purpose or purposes of the proposed meeting
and shall state that no other business shall be conducted. Special meetings of
Stockholders shall be held at such time and place (within or outside the State
of Maryland) as shall be designated by the Board.
Section 3. Notices of Annual and Special Meetings. Except as otherwise
prescribed by law, the Charter or these Bylaws, written notice of any annual or
special meeting of Stockholders shall state the place, date and time thereof
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, and shall be given to each Stockholder of record entitled to
vote at such meeting and to each other Stockholder entitled to notice of such
meeting not less than ten (10) nor more than ninety (90) days prior to the
meeting. Business transacted at a special meeting shall be confined to the
purpose or purposes stated in the notice of such meeting.
Section 4. Presiding Officers; Order of Business. At all meetings of
Stockholders, any Stockholder present and entitled to vote in person or by proxy
shall be
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entitled to require, by written request to the chairman of the meeting, that the
order of business shall be as follows:
(1) Organization.
(2) Proof of service of notice of meeting or of waivers thereof.
(The certificate of the Secretary of the Corporation, or the
affidavit of any other person who mailed or published the
notice or caused the same to be mailed or published, shall be
proof of service of such notice.)
(3) Submission by the Secretary of the Corporation of a list of
the Stockholders of record entitled to vote, present in person
or by proxy.
(4) Reading of unapproved minutes of preceding meetings of the
Stockholders and action thereon; provided that such reading
and action may be waived with respect to any or all such
unapproved minutes in the discretion of the chairman of the
meeting.
(5) Reports, if any, of officers.
(6) Election of directors to succeed those whose terms expired or
to fill vacancies otherwise existing on the Board of
Directors, if the meeting is an annual meeting or a special
meeting called for such purpose.
(7) Old business, if any.
(8) New business, if any.
(9) Adjournment.
Section 5. Quorum. At any meeting of Stockholders, the presence in person
or by proxy of Stockholders entitled to cast a majority of the votes thereat
shall constitute a quorum, except with respect to any matter which, under
applicable law or the Charter, requires approval by a separate vote of one or
more classes or series of stock, in which case the presence, in person or by
proxy, of Stockholders entitled to cast a majority of the votes of each class or
series required to vote as a class on the matter shall constitute a quorum. In
the absence of a quorum, the chairman of the meeting or the Stockholders present
in person or by proxy, by majority vote and without notice other than by
announcement at the meeting, may adjourn the meeting from time to time, but not
for a period exceeding one hundred twenty (120) days after the original record
date, until a quorum shall be present.
Section 6. Adjourned Meetings. A meeting of Stockholders convened on the
date for which it was called (including one adjourned to achieve a quorum as
above provided in Section 5 of this Article) may be adjourned from time to time
without further
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notice other than by announcement at the meeting to a date not more than one
hundred twenty (120) days after the original record date, and any business may
be transacted at any adjourned meeting which could have been transacted at the
meeting as originally called.
Section 7. Voting. When a quorum is present at any meeting of the
Stockholders, the affirmative vote of a majority of the votes cast or, with
respect to any matter requiring a class vote, the affirmative vote of a majority
of the votes cast by each class or series entitled to vote as a class on the
matter, shall decide any question brought before such meeting (except that
directors may be elected by the affirmative vote of a plurality of the votes
cast or the affirmative vote of a majority of the votes cast of each class or
series entitled to vote as a class with respect to a director, as the case may
be), unless the matter is one upon which by express provision of the Charter, a
different vote is required, in which case such express provision shall govern
and control the decision on such matter.
The Board of Directors may fix the record date for the determination of
Stockholders entitled to vote in the manner provided in Article VIII, Section 4
of these Bylaws.
Section 8. Advance Notice of Matters to be Presented at an Annual Meeting
of Stockholders. Subject to the express terms of the Articles Supplementary of
any class or series of preferred stock then outstanding, at an annual meeting of
the Stockholders, only such business shall be conducted as shall have been
properly brought before the annual meeting as set forth below. To be properly
brought before an annual meeting, such business must be (1) specified in the
notice of the annual meeting (or any supplement thereto) given by the
Corporation pursuant to Section 3 of Article II of these Bylaws, (2) brought
before the annual meeting by, on behalf of or under the direction of the Board
of Directors, the Chairman of the Board, if there be one, or the President, or
(3) properly brought before the annual meeting by a Stockholder entitled to vote
at the annual meeting.
In addition to any other applicable requirements including, without
limitation, any requirements imposed by the Securities Exchange Act of 1934, as
amended, the rules and regulations thereunder or any successor statute, rules or
regulations, for business properly to be brought before an annual meeting by a
Stockholder, the Stockholder must have given timely notice thereof in writing to
the Secretary. To be timely, such Stockholder's notice must be delivered or
mailed to and received by the Secretary at the principal executive offices of
the Corporation not earlier than the close of business on the 100th day and not
later than the close of business on the 90th day prior to the first anniversary
of the date of the notice of the annual meeting given by the Corporation
pursuant to Section 3 of Article II of these Bylaws and released to Stockholders
in connection with the prior year's annual meeting; provided, however, that in
the event that, during the prior year, the Corporation did not hold an annual
meeting, or if the date of the current year's annual meeting is more than thirty
(30) days from the first anniversary of the date of the prior year's annual
meeting (other than as a
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result of adjournment), then such Stockholder's notice must be delivered or
mailed to and received by the Secretary at the principal executive offices of
the Corporation not later than the later of the close of business on the 90th
day prior to such current year's annual meeting date or the 10th day following
the day on which public announcement of the date of the current year's annual
meeting is first made.
For purposes of this Section 8 and Section 9 of Article II of these
Bylaws, "public announcement" shall mean disclosure in a press release reported
by the Dow Jones News Service, Associated Press or comparable national news
service or in a document publicly filed by the Corporation with the Securities
and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities
Exchange Act of 1934, as amended or any successor statute thereto.
A Stockholder's notice to the Secretary shall set forth as to each
matter the Stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the records of the Corporation, of the
Stockholder proposing such business, (iii) the class (and series, if there be
one) and number of shares of the Corporation that are beneficially owned by the
Stockholder, (iv) proof of ownership of such shares and (v) any material direct
or indirect interest, financial or otherwise, of the Stockholder, its affiliates
or associates, in such business.
Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this Section 8 (and in accordance with any applicable
provisions of the securities laws of the United States or any other applicable
jurisdiction or the rules and regulations of any stock exchange or automated
quotation system on or in which the securities of the Corporation are traded or
listed for trading). The chairman of the annual meeting shall have the
authority, if the facts warrant, to determine that business was not properly
brought before the annual meeting in accordance with the provisions of this
Section 8, and if he should so determine, he shall so declare to the annual
meeting and any such business not properly brought before the annual meeting
shall not be transacted. Any such determination by the chairman of the annual
meeting shall be final, conclusive and binding.
Section 9. Advance Notice of Nominees for Director. Subject to the express
terms of the Articles Supplementary of any class or series of preferred stock
then outstanding, only persons who are nominated in accordance with the
following procedures shall be eligible for election as directors at any meeting
of Stockholders. Nominations of persons for election to the Board of Directors
of the Corporation at an annual meeting of Stockholders or at a special meeting
of Stockholders as to which the notice of meeting provides for election of
directors may be made, (i) by or under the direction of the Board of Directors,
(ii) by any nominating committee or person appointed by the Board of Directors,
or (iii) by any Stockholder of the Corporation entitled to vote for the election
of directors at the meeting who complies with the notice procedures set
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forth in this Section 9. In addition to any other applicable requirements
including, without limitation, any requirements imposed by the Securities
Exchange Act of 1934, as amended, the rules and regulations thereunder or any
successor statute, rules or regulations, such nominations, other than those made
by or under the direction of the Board of Directors or by any nominating
committee or person appointed by the Board of Directors or those relating to the
rights of the holders of any class or series of preferred stock to nominate and
separately elect directors, must be made pursuant to timely notice in writing to
the Secretary.
In the event that such Stockholder notice pertains to an annual
meeting of Stockholders, to be timely, such notice must be delivered or mailed
to and received by the Secretary at the principal executive offices of the
Corporation not earlier than the close of business on the 100th day and not
later than the close of business on the 90th day prior to the first anniversary
of the date of the notice of the annual meeting given by the Corporation
pursuant to Section 4 of Article II of these Bylaws and released to Stockholders
in connection with the prior year's annual meeting; provided, however, that in
the event that, during the prior year, the Corporation did not hold an annual
meeting, or if the date of the current year's annual meeting is more than thirty
(30) days from the first anniversary of the date of the prior year's annual
meeting (other than as a result of adjournment), then such Stockholder's notice
must be delivered or mailed to and received by the Secretary at the principal
executive offices of the Corporation not later than the later of the close of
business on the 90th day prior to such current year's annual meeting or the 10th
day following the day on which public announcement of the date of such annual
meeting is first made.
In the event that such Stockholder's notice pertains to a special
meeting of Stockholders as to which the notice of meeting provides for election
of directors, to be timely, such Stockholder's notice must be delivered or
mailed to and received by the Secretary at the principal executive offices of
the Corporation not later than the 10th day following the day on which public
announcement of the date of such special meeting is first made.
Such Stockholder's notice shall set forth: (a) as to each person
whom the Stockholder proposes to nominate for election as a director, (i) the
name, age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the class (and series,
if there be one) and number of shares of stock of the Corporation that are
beneficially owned by the person, and (iv) any other information relating to the
person that is required to be disclosed in or other documents required in
connection with solicitations of proxies for election of directors pursuant to
the Securities Exchange Act of 1934, as amended, the rules and regulations
thereunder or any successor statute, rules or regulations; and (b) as to the
Stockholder giving the notice, (i) the name and address of the Stockholder, as
they appear on the records of the Corporation, (ii) the class (and series, if
there be one) and number of shares of the Corporation that are beneficially
owned by the Stockholder and (iii) proof of ownership of such shares. The
Corporation may require any proposed nominee to furnish such other information
or documentation as may reasonably be required by the Corporation to determine
the
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eligibility of such proposed nominee to serve as a director of the Corporation
or to permit the Corporation to comply with applicable law.
Subject to the express terms of the Articles Supplementary of any
class or series of preferred stock then outstanding, no person shall be eligible
for election as a director of the Corporation unless nominated in accordance
with the procedures set forth herein. The chairman of the meeting at which the
election is taking place shall have the authority, in his sole discretion, if
the facts warrant, to determine that a nomination was not made in accordance
with the foregoing procedure, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded. Any such
determination by the chairman of such meeting shall be final, conclusive and
binding.
Section 10. Informal Action by Stockholders. Any action required or
permitted to be taken at any meeting of the Stockholders may be taken without a
meeting if a consent in writing setting forth such action is signed by all the
Stockholders entitled to vote thereon, a written waiver of any right to dissent
is signed by each Stockholder entitled to notice of, but not the right to vote
on, such action, and each such consent and waiver is filed with the records of
the Stockholders' meetings.
Section 11. Proxies. A Stockholder may vote its shares owned of record
either in person or by proxy. The proxy shall be in writing and shall be signed
by the Stockholder or by the Stockholder's duly authorized attorney-in-fact or
be in such other form as may be permitted by the Maryland General Corporation
Law, including documents conveyed by electronic transmission. A copy, facsimile
transmission or other reproduction of the writing or transmission may be
substituted for the original writing or transmission for any purpose for which
the original transmission could be used. Every proxy shall be dated, but need
not be sealed, witnessed or acknowledged. No proxy shall be valid after eleven
(11) months from its date, unless otherwise provided in the proxy. In the case
of stock held of record by more than one person, any co-owner or co-fiduciary
may execute the proxy without the joinder of the co-owner(s) or co-fiduciary
(ies), unless the Secretary of the Corporation is notified in writing by any
co-owner or co-fiduciary that the joinder of more than one is to be required. At
all meetings of Stockholders, the proxies shall be filed with and verified by
the Secretary of the Corporation, or, if the chairman of the meeting shall so
direct, by the secretary of the meeting.
ARTICLE III
DIRECTORS
Section 1. General Powers; Number; Tenure. The business and affairs of the
Corporation shall be managed under the direction of the Board, which may
exercise all powers of the Corporation and perform or authorize the performance
of all lawful acts and things which are not by law, the Charter or these Bylaws
directed or required to be exercised or performed by the Stockholders. Subject
to the express terms of the Articles Supplementary of any class or series of
preferred stock then outstanding, the number of directors of the Corporation
shall be in fixed accordance with the terms and provisions set
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forth in the Charter. The directors shall be divided into three (3) classes, as
nearly equal in number as reasonably possible, with the term of office of one
class to expire at the 2001 annual meeting of Stockholders, the term of office
of another class to expire at the 2002 annual meeting of Stockholders and the
term of office of the remaining class to expire at the 2003 annual meeting of
Stockholders. At each annual meeting of Stockholders following such initial
classification, directors elected to succeed those directors whose terms then
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of Stockholders after their election and when their respective
successors are elected and qualified. Directors need not be Stockholders of the
Corporation or residents of the State of Maryland.
Section 2. Unaffiliated Directors. Except when one or more vacancies
exist, at least a majority of the entire Board and a majority of every committee
of the Board shall be Unaffiliated Directors. Unaffiliated Directors are those
directors who do not perform any services for the Corporation, other than as
directors, and who are not directors, officers or employees of C.R.I., Inc., a
Delaware corporation.
Section 3. Vacancies and Newly Created Directorships. Subject to the
express terms of the Articles Supplementary of any class or series of preferred
stock then outstanding, any vacancy in the Board of Directors as a result of any
reason and any newly created directorship resulting by any increase in the
number of directors shall be filled in accordance with the terms and provisions
set forth in the Charter.
Section 4. Removal; Resignation. (a) Any director or directors may be
removed in accordance with the terms and provisions set forth in the Charter.
(b) Any director may resign at any time by giving written notice to
the Board, the Chairman of the Board (if there be one), the President, or the
Secretary of the Corporation. Unless otherwise specified in such written notice,
a resignation shall take effect upon delivery thereof to the Board or the
designated officer. A resignation need not be accepted in order for it to be
effective.
Section 5. Place of Meetings. The Board of Directors may hold both regular
and special meetings either within or outside the State of Maryland, at such
time and place as the Board from time to time determines or, in the absence of
such determination, as the party calling the meeting may fix.
Section 6. Annual Meeting; Regular Meetings. The annual meeting of each
newly elected Board shall be held as soon as is practicable following the annual
meeting of the Stockholders, and no notice to the newly elected directors of
such meeting shall be necessary for such meeting to be lawful, provided a quorum
is present thereat. Additional regular meetings of the Board may be held, at
such time and place as from time to time may be determined by the Board and upon
such notice as may be required by these Bylaws.
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Section 7. Special Meetings. Special meetings of the Board may be called
by the Chairman of the Board (if there be one), by the President or by any three
(3) directors, subject to the express terms of the Articles Supplementary of any
class or series of preferred stock then outstanding.
Section 8. Quorum; Adjournments. A majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time of any such meeting) shall constitute a
quorum for the transaction of business at each and every meeting of the Board,
and subject to the express terms of the Articles Supplementary of any class or
series of preferred stock then outstanding, the act of a majority of the
directors present at any meeting at which a quorum is present shall be the act
of the Board of Directors, except as may otherwise specifically be provided by
law, the Charter or these Bylaws. If a quorum is not present at any meeting of
the Board, the directors present may adjourn the meeting, from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
Section 9. Notice of Meetings. To the extent practicable, at least
twenty-four (24) hours notice shall be given of all meetings of the Board,
except as provided in Section 6 of this Article III and except that any meeting
of the Board held pursuant to a prior resolution of the Board shall require no
additional notice. The purpose of any regular meeting of the Board of Directors
need not be stated in the notice thereof. All annual and regular meetings of the
Board of Directors shall be general meetings, and any and all business may be
transacted thereat whether or not stated in the notice thereof. Unless otherwise
indicated in the notice thereof, all special meetings of the Board of Directors
shall be general meetings, and any and all business may be transacted thereat
whether or not stated in the notice thereof.
Section 10. Compensation. Directors shall be entitled to such compensation
for their services as directors as from time to time may be fixed by the Board
including, without limitation, for their services as members of committees of
the Board, and in any event shall be entitled to reimbursement of all reasonable
expenses incurred by them in attending meetings of the Board of Directors or any
committee(s) of which they are members. Any director may waive any retainer for
service as a director or compensation for any meeting. No director who receives
compensation as a director shall be barred from serving the Corporation in any
other capacity or from receiving compensation and reimbursement of reasonable
expenses for service in such other capacities.
Section 11. Informal Action by Directors. Any action required or permitted
to be taken at any meeting of the Board may be taken without a meeting if a
written consent to such action is signed by all members of the Board, and each
such consent is filed with the minutes of the Board.
Section 12. Meetings by Telephone or Similar Communications. The directors
may participate in meetings by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other
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at the same time. Participation in any such meeting shall constitute presence in
person by such director at such meeting.
ARTICLE IV
COMMITTEES
Section 1. Formation of Committees; Quorum. Subject to the express terms
of the Articles Supplementary of any class or series of preferred stock then
outstanding, the Board of Directors may appoint from among its members an
executive committee and other committees of the Board of Directors, each
committee to be composed of one (1) or more of the directors of the Corporation.
Except when one or more vacancies exist, at least a majority of the directors of
each committee shall be Unaffiliated Directors; provided, however, that subject
to the express terms of the Articles Supplementary of any class or series of
preferred stock then outstanding, any pricing committee or any transactional
committee formed from time to time may be comprised of any directors designated
by the Board. The Board of Directors, subject to the express terms of the
Articles Supplementary of any class or series of preferred stock then
outstanding, may delegate to such committees any of the powers of the Board of
Directors except those which may not by law be delegated to a committee. Such
committee or committees shall have the name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Unless the Board
of Directors designates one or more directors as alternate members of any
committee to replace an absent or disqualified member of a committee at any
meeting of that committee, subject to the express terms of the Articles
Supplementary of any class or series of preferred stock then outstanding, the
members of any such committee present at any meeting and not disqualified from
voting may, whether or not they constitute a quorum, appoint another member of
the Board of Directors to act at the meeting in the place of any absent or
disqualified member of such committee. At meetings of any such committee, a
majority of members, including any alternate members of such committee to the
extent provided by the Board or selected by the other members of the committee
as provided above, shall constitute a quorum for the transaction of business,
and the act of the majority of such members and alternate members present at any
meeting at which a quorum is present shall be the act of the committee.
Section 2. Minutes of Committee Meetings. Each committee shall keep
regular minutes of its proceedings, which shall be filed with the minutes of the
Board.
Section 3. Compensation; Informal Action by Committees; Meetings by
Telephone or Similar Communications. Unless otherwise prohibited by law, the
provisions of Article III Sections 11 (Compensation), 12 (Informal Action by
Directors) and 13 (Meetings by Telephone or Similar Communications) shall apply
to any committees from time to time created by the Board.
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ARTICLE V
OFFICERS
Section 1. Positions. The Board of Directors may elect a Chairman of the
Board from among the directors. The Board of Directors shall elect a President,
a Treasurer and Secretary, and may elect one or more Vice Presidents, Assistant
Secretaries, Assistant Treasurers and other officers, employees and /or agents
of the Corporation, and with such powers and duties, as the Board from time to
time deems necessary or appropriate. The Board may delegate to the Chairman of
the Board, if there be one, or the President of the Corporation, the authority
to appoint any officer or agent of the Corporation and to fill any vacancy in
the office of any officer, other than those of the Chairman of the Board,
President, Treasurer and Secretary; provided, however, that the Board shall at
all times retain the right to fill any vacancy or to remove any officer
appointed pursuant to such delegated authority, in each case by resolution of
the Board. Any two offices, except those of President and Vice President, may be
held by the same person, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity when such instrument is required to be
executed, acknowledged or verified by any two or more officers. In its
discretion, the Board of Directors may leave unfilled any offices except those
of President, Treasurer and Secretary. All officers shall hold office at the
pleasure of the Board and for such terms as the Board or the officer appointing
a subordinate officer, as the case may be, determines, which terms may exceed
the term of the Board or the officer making such appointment, or until their
respective successors are chosen and qualify.
Section 2. Chairman of the Board. The Chairman of the Board, if one is
elected, shall have the responsibility for the implementation of the policies
determined by the Board of Directors and for the administration of the business
affairs of the Corporation. The Chairman, if there be one, shall preside over
the meetings of the Board and of the Stockholders if present at the meeting. The
Chairman, if there be one, shall be the Chief Executive Officer of the
Corporation.
Section 3. President. The President shall be the Chief Executive Officer
of the Corporation unless there is a Chairman of the Board elected by the Board,
in which case the President shall be the Chief Operating Officer. The President
shall have the responsibility for the active management of the business and
general supervision and direction of all of the affairs of the Corporation. In
the absence of the Chairman of the Board (or if none shall be elected), the
President shall preside over the meetings of the Board and of the Stockholders
if present at the meeting, and shall perform such other duties as may be
assigned by the Board of Directors or any executive committee. The President
shall have the authority, on the Corporation's behalf, to endorse securities
owned by the Corporation and to execute any documents requiring the signature of
an executive officer. The President shall perform such other duties as the Board
of Directors may direct.
Section 4. Vice Presidents. The Vice Presidents, in the order of priority
designated by the Board of Directors (or if not designated, in order of their
seniority as
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vice presidents), shall be vested with all the power and may perform all the
duties of the President in the latter's absence. They may perform such other
duties as may be prescribed by the Board of Directors, any executive committee,
the President or the Chairman of the Board, if there be one.
Section 5. Treasurer. Unless the Board designates another officer, the
Treasurer shall be the Chief Financial Officer of the Corporation. The Treasurer
shall have general supervision over the Corporation's finances, and shall
perform such other duties as may be assigned by the Board of Directors, the
President or the Chairman of the Board, if there be one. If required by
resolution of the Board, the Treasurer shall furnish a bond (which may be a
blanket bond) with such surety and in such penalty for the faithful performance
of duty as the Board of Directors may from time to time require, the cost of
such bond to be paid by the Corporation.
Section 6. Secretary. The Secretary shall keep the minutes of the meetings
of the Stockholders and of the Board of Directors and shall attend to the giving
and serving of all notices of the Corporation required by law, the Charter or
these Bylaws. The Secretary shall maintain at all times in the principal office
of the Corporation at least one copy of the Bylaws with all amendments to date,
and shall make the same, together with the minutes of meetings of the
Stockholders, the annual statement of affairs of the Corporation and any voting
trust or other Stockholders agreement on file at the office of the Corporation,
available for inspection by any officer, director or Stockholder during
reasonable business hours. The Secretary shall perform such other duties as may
be assigned by the Board of Directors, the President or the Chairman of the
Board, if there be one.
Section 8. Assistant Treasurer(s) and Secretary/ies. The Board of
Directors may designate, or may delegate to the Chairman of the Board, if there
be one, or the President of the Corporation the authority to designate, from
time to time Assistant Treasurers and Assistant Secretaries, who shall perform
such duties as may from time to time be assigned to them by the Board of
Directors, the President or the Chairman of the Board, if there be one.
Section 9. Compensation; Removal; Vacancies. The Board of Directors shall
have power to fix the compensation of all officers of the Corporation. It may
authorize any committee or officer upon whom the power to appoint subordinate
officers may have been conferred to fix the compensation of such subordinate
officers. The Board of Directors shall have the power, at any regular or special
meeting, to remove any officer if, in the judgment of the Board, the best
interests of the Corporation will be served by such removal. The Board of
Directors may authorize any officer to remove subordinate officers. The removal
of any officer shall not prejudice any contract rights thereof. The Board of
Directors, at any regular or special meeting, shall have power to fill a vacancy
occurring in any office.
Section 10. Substitutes. The Board of Directors may, from time to time in
the absence of any one of its officers or at any other time, designate any other
person or
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persons on behalf of the Corporation to sign any contracts, deeds, notes or
other instruments in the place or stead of any of such officers, and may
designate any person to fill any of said offices, temporarily or for any
particular purpose; and any instrument so signed in accordance with a resolution
of the Board shall be the valid act of the Corporation as fully as if executed
by any regular officer.
ARTICLE VI
NOTICES
Section 1. Notice to Stockholders. Whenever by law, the Charter or these
Bylaws notice is required to be given to any Stockholder, such notice shall be
in writing and may be given to each Stockholder by personal delivery to the
Stockholder at the Stockholder's residence or usual place of business, by
leaving the notice at such residence or usual place of business, by electronic
mail to any electronic mail address of the Stockholder or any other electronic
means, or by mailing it, postage prepaid, and addressed to the Stockholder at
the address appearing on the books of the Corporation or its transfer agent.
Such delivery, leaving, electronic transmission or mailing of notice shall be
deemed the time of giving such notice.
Section 2. Notice to Directors. Whenever by law, the Charter or these
Bylaws notice is required to be given to any director, such notice may be given
in any one of the following ways: by personal delivery, by personal voice
telephone communication or by telephone facsimile transmission, by telegram,
cablegram, telex, first class mail, electronic mail or by delivery service
providing confirmation of delivery, addressed to such director at the address
therefor appearing on the books of the Corporation. The time when such notice
shall be consigned to a communication company for delivery or when it shall be
transmitted by telephone, telephone facsimile, telegram, cablegram, telex or
electronic mail shall be deemed to be the time of the giving of such notice; if
given by delivery service, such notice shall be deemed given the business day
following the date of consignment to such delivery service; and, if mailed, such
notice shall be deemed given forty-eight (48) hours after the time it is
deposited in the mail, postage prepaid.
Section 3. Waiver of Notice. Notice to any Stockholder or director of the
time, place and/or purpose of any meeting of Stockholders or directors or of any
committee of the Board required by law or by these Bylaws may be dispensed with
if such Stockholder shall attend in person or by proxy, or if such director
shall attend in person, as the case may be, or if such absent Stockholder or
director shall, in writing filed with the records of the meeting either before
or after the holding thereof, waive such notice.
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ARTICLE VII
INDEMNIFICATION AND LIMITATION OF LIABILITY
(A) Mandatory Indemnification. The Corporation shall indemnify each person
who is or was, or has agreed to become, a director or officer of the Corporation
and each person who, while a director of the Corporation and, at the request of
the Corporation, is or was serving, or has agreed to serve, as a director,
officer, partner, joint venturer, trustee, employee or agent of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan against any and all liabilities and expenses incurred in connection
with each such person's services in such capacities to the maximum extent
permitted by the Maryland General Corporation Law, as from time to time amended.
(B) Discretionary Indemnification. If approved by the Board of Directors,
the Corporation may indemnify any of its employees or agents against any or all
liabilities and expenses incurred in connection with each such person's services
in such capacities and any of its employees, agents or other persons who are or
were serving, or who have agreed to serve, at the request of the Corporation, as
a director, officer, partner, joint venturer, trustee, employee or agent of
another corporation, partnership, joint venture, other enterprise or employee
benefit plan, to the extent and on such terms and subject to such conditions and
limitations, as determined to be appropriate by the Board of Directors.
(C) Advancing Expenses Prior to a Decision. The Corporation shall advance
expenses to its directors and officers entitled to mandatory indemnification to
the maximum extent permitted by the Maryland General Corporation Law and may, in
the discretion of the Board of Directors, advance expenses to employees, agents
and others who may be granted indemnification.
(D) Other Provisions for Indemnification. The Board of Directors may, by
Bylaw, resolution or agreement, make further provision for indemnification of
directors, officers, employees and agents and the advancement of expenses
thereto.
(E) Limitation of Liability of Directors and Officers. To the maximum
extent that limitations on the liability of directors and officers are permitted
by the Maryland General Corporation Law, as from time to time amended, no
director or officer of the Corporation shall have liability to the Corporation
or its stockholders for money damages. This limitation on liability applies to
events occurring at the time a person serves as a director or officer of the
Corporation whether or not such person is a director or officer at the time of
any proceeding in which liability is asserted.
(F) Insurance. The Corporation shall maintain insurance to the extent
reasonably available, at its expense, to protect itself and any director,
officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Maryland
General Corporation Law.
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(F) Effect of Amendment or Repeal. No amendment or repeal of any section
of this Article VII, whether by action of the Board of Directors or the
Stockholders, shall apply to or affect in any respect the rights to
indemnification or limitation of liability of any director or officer of the
Corporation with respect to any alleged act or omission which occurred prior to
such amendment, repeal or adoption.
ARTICLE VIII
STOCK
Section 1. Issue. Each Stockholder shall be entitled to a certificate or
certificates which shall represent and certify the number and class of shares of
stock owned in the Corporation. Each certificate shall be signed by the Chairman
of the Board, the President or any Vice President and be countersigned by the
Secretary or any Assistant Secretary or the Treasurer or any Assistant
Treasurer. The signatures of the Corporation's officers and its corporate seal
appearing on stock certificates may be facsimiles if each such certificate is
authenticated by the manual signature of an officer of a duly authorized
transfer agent. Stock certificates shall be in such form, not inconsistent with
law and the Charter, as shall be approved by the Board of Directors. In case any
officer of the Corporation who has signed any certificate ceases to be an
officer of the Corporation, whether by reason of death, resignation or
otherwise, before such certificate is issued, then the certificate may
nevertheless be issued by the Corporation with the same effect as if the officer
had not ceased to be such officer as of the date of such issuance.
Section 2. Transfers. The Board of Directors shall have power and
authority to make all such rules and regulations as the Board may deem expedient
concerning the issue, transfer and registration of stock certificates. The Board
of Directors may appoint one or more transfer agents and/or registrars for its
outstanding stock, and their duties may be combined. No transfer of stock shall
be recognized or binding upon the Corporation until recorded on the books of the
Corporation, or, as the case may be, of its transfer agent and/or of its
registrar, upon surrender and cancellation of a certificate or certificates for
a like number of
Section 3. Record Dates for Dividends and Stockholders' Meeting. The Board
of Directors may fix a date not exceeding ninety (90) days preceding the date of
any meeting of Stockholders, any dividend payment date or any date for the
allotment of rights, as a record date for the determination of the Stockholders
entitled to notice of and to vote at such meeting, or entitled to receive such
dividends or rights, as the case may be, and only Stockholders of record on such
date shall be entitled to notice of and to vote at such meeting or to receive
such dividends or rights, as the case may be. In the case of
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a meeting of Stockholders, the record date shall be fixed not less than ten (10)
days prior to the date of the meeting.
Section 4. Lost, Stolen or Destroyed Certificate. The Board may direct a
new certificate to be issued in place of any certificate theretofore issued by
the Corporation which is claimed to have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming the certificate
to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Board, in its discretion, may require as a condition precedent
to issuance that the owner of such lost, stolen or destroyed certificate, or his
or her legal representative, advertise the same in such manner as the Board
shall require and/or to give the Corporation a bond in such sum, or other
security in such form, as the Board may direct, as indemnity against any claim
that may be made against the Corporation with respect to the certificate claimed
to have been lost, stolen or destroyed.
ARTICLE IX
GENERAL PROVISIONS
Section 1. Fiscal Year. The fiscal year of the Corporation shall be as
determined from time to time by the Board.
Section 2. Seal. The corporate seal shall have inscribed thereon the name
of the Corporation, the year of its incorporation and the words "Corporate Seal"
and "Maryland."
Section 3. Action with Respect to Securities of Other Entities. Unless
otherwise directed by the Board, the President or the Chairman of the Board, if
there be one, or any officer of the Corporation authorized by the President or
the Chairman of the Board shall have power to vote and otherwise act on behalf
of the Corporation, in person or by proxy, at any meeting of stockholders or
other security holders of or with respect to any action of stockholders or other
security holders of any other corporation or other entity in which this
Corporation may hold securities and otherwise to exercise any and all rights and
powers which this Corporation may possess by reason of its ownership of
securities in such other corporation.
Section 4. Amendment of the Bylaws. Subject to the express terms of
the Articles Supplementary of any class or series of preferred stock then
outstanding, these Bylaws may be added to, altered, amended, repealed or
suspended by a vote of a majority of the Board of Directors at any regular or
special meeting of the Board at which a quorum is present, but the Stockholders
may make additional Bylaws and may alter, repeal or suspend any Bylaws, whether
adopted by them or otherwise, upon the affirmative vote of the holders of at
least 66-2/3% of the voting power of all the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
the directors, voting together as a single class; provided, however, that no
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Bylaws so made shall serve to invalidate any prior action of the Board which
would have been valid if such Bylaw had not been made.
Section 5. Control Share Law. Any acquisition of any shares of stock of
the Corporation, including any acquisition of voting rights or other interests
in any such stock, shall be exempt from the provisions of Title 3, Subtitle 7 of
the Maryland General Corporation Law (Voting Rights of Certain Control Shares).
Accordingly, the provisions of Title 3, Subtitle 7 of the Maryland General
Corporation Law shall not apply to this Corporation.
Section 6. Conflict with Articles Supplementary. In the event of a
conflict between the terms of these Bylaws and of the Articles Supplementary of
any class or series of preferred stock then outstanding, unless otherwise
required by law or provided by the express terms of such Articles Supplementary,
the terms of such Articles Supplementary shall govern and control.
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EXHIBIT G
SECOND AMENDED AND RESTATED CRIIMI MAE INC.
STOCK OPTION PLAN FOR KEY EMPLOYEES
1. PURPOSE. This Amended and Restated Stock Option Plan for Key Employees
(this "Plan") for CRIIMI MAE Inc. (the "Company") and its subsidiaries, is
intended to provide opportunities to purchase shares (each, an "Option") of the
Company's common stock (the "Common Stock") to (a) persons holding the executive
position of vice president or more senior of the Company and its subsidiaries
and (b) other employees of the Company and its subsidiaries who are otherwise
designated by the Stock Option Committee (the "Committee") as key employees
(each of (a) and (b), an "Eligible Employee"). This Plan as originally adopted
became effective on June 30, 1995. This Plan was amended and restated effective
as of July 28, 1995, was further amended effective May 12, 1998 and is further
amended and restated to be effective as of the effective date of the Company's
Third Amended Joint Plan of Reorganization (the "Plan of Reorganization");
provided that the holders of Common Stock have voted to accept the Plan of
Reorganization.
2. GENERAL ADMINISTRATION.
A. Committee Members. This Plan shall be administered by a committee
(the "Committee") consisting of not fewer than two members of the Board of
Directors (the "Board") of the Company who are appointed by the Board to
administer the Plan and to perform the functions set forth herein and who are
"non-employee directors" within the meaning of Rule 16b-3 as promulgated under
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and who are also "outside directors" within the meaning of Section 162(m)
of the Code.
B. Authority of Committee. The Committee shall have the authority
(i) to exercise all of the powers granted to it under this Plan; (ii) to
construe, interpret and implement this Plan and any Option Agreements executed
pursuant to Section 7 below; (iii) to prescribe, amend and rescind rules and
regulations relating to this Plan, including rules governing the Committee's own
operations; (iv) to make all determinations necessary or advisable in
administering this Plan; (v) to correct any defect, supply any omission and
reconcile any inconsistency in this Plan; and (vi) to amend this Plan to reflect
changes in applicable law. Further, the Committee may delegate to officers or
employees of the Company or any subsidiary, and to service providers, the
authority, subject to such terms as the Committee shall determine, to perform
administrative functions with respect to the Plan and Option Agreements.
C. Majority Vote. Actions of the Committee shall be taken by the
affirmative vote of a majority of the Committee members. Any action may be taken
by an instrument signed by a majority of the Committee members, and action so
taken shall be fully as effective as if such action had been taken by a vote at
a Committee meeting.
D. Binding Determination. The determination of the Committee on all
matters relating to this Plan or any Option Agreement shall be final, binding
and conclusive.
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E. No Liability. No Committee member shall be liable for any action
or determination made in good faith with respect to this Plan, including any
Option, and each Committee member shall, to the extent permitted by law, be
fully indemnified by the Company with respect to any such action or
determination.
F. Definitions. As used in this Plan, the following words and
phrases shall have the meanings indicated:
(1) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(2) "Fair Market Value" per share as of a particular date
shall mean the closing sales price per share of Common Stock on the principal
national securities exchange on which the shares of Common Stock shall then be
listed for the last preceding date on which there was a sale of such Common
Stock on such exchange.
(3) "Incentive Stock Option" means one or more options to
purchase Common Stock which, at the time such options are granted under this
Plan or any other such plan of the Company, qualify as incentive stock options
under Section 422 of the Code.
3. ELIGIBILITY. Only Eligible Employees may receive Options. The Committee
has discretion to select from the Eligible Employees those who will be granted
Options.
4. OPTIONS. Options may be granted at any time prior to June 30, 2002 to
each Eligible Employee selected by the Committee (upon the grant of such Option,
each an "Optionee"), in such numbers of shares as may be determined by the
Committee. At the time of the grant of each Option under the Plan, the Committee
shall determine whether such Option is to be designated an Incentive Stock
Option.
5. COMMON STOCK.
A. Type of Stock. The stock subject to the Options shall be Common
Stock.
B. Number of Shares. The total number of shares of Common Stock with
respect to which Options may be granted shall not exceed 4,500,000. Subject to
adjustment in accordance with the provisions of this Section 5, no Eligible
Employee shall be granted, during any calendar year, Options to purchase more
than 1,000,000 shares of Common Stock. Common Stock issued pursuant to this Plan
may be authorized but unissued Common Stock or authorized and issued Common
Stock held in the Company's treasury or acquired by the Company for the purposes
of this Plan. The Committee may direct that any certificate evidencing Common
Stock issued pursuant to this Plan shall bear a legend setting forth such
restrictions on transferability as may apply to such shares.
C. Change in Number of Shares. If there is any change in the number
of outstanding shares of Common Stock through the declaration of stock
dividends, recapitalization resulting in stock splits, or combinations or
exchanges of such shares, then the number of shares
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of Common Stock available for each outstanding Option and the number of such
shares covered by each outstanding Option, and the "Option Price" (as such term
is defined below) per share under each outstanding Option, shall be
proportionately adjusted to reflect any increase or decrease in the number of
issued shares of Common Stock; provided however, that any fractional shares
resulting from any such adjustment shall be eliminated.
D. Dissolution or Liquidation. In the event of a proposed
dissolution or liquidation of the Company, each outstanding Option granted under
this Plan shall terminate as of a date to be fixed by the Committee; provided
however, that the Optionee shall have the right, immediately prior to such
termination, to exercise such outstanding Options as to all or any part of the
shares of Common Stock covered thereby, including shares as to which such
outstanding Options would not otherwise be exercisable.
E. Corporate Reorganization. If there is any change in the number of
outstanding shares of Common Stock by reason of merger, consolidation, spinoff
or other corporate reorganization in which the Company is the surviving
corporation, the number of shares of Common Stock available for issuance both in
the aggregate and with respect to each outstanding Option, and the Option Price
per share under each outstanding Option, shall be equitably adjusted by the
Committee, whose determination shall be final, binding and conclusive. In the
event of any merger, consolidation or combination of the Company with or into
another corporation (other than a merger, consolidation or combination in which
the Company is the surviving corporation and which does not result in any
reclassification or other change in the number of outstanding shares of Common
Stock), the Optionee shall have the right thereafter and during the term of each
such Option to receive, after such Option is duly exercised in accordance with
the terms of the related Option Agreement and this Plan for each share of Common
Stock as to which the Option shall be exercised, the kind and amount of shares
of the surviving or new corporation, cash, securities, evidence of indebtedness,
other property or any combination thereof which would have been received upon
such merger, consolidation or combination by the holder of one share of Common
Stock immediately prior to such merger, consolidation or combination.
F. Change in Common Stock. In the event of a change in the Common
Stock as presently constituted, which is limited to a change of all of its
authorized shares with par value into the same number of shares with a different
par value or without par value, the shares resulting from any such change shall
be deemed to be Common Stock within the meaning of this Plan.
G. Adjustments by Committee. To the extent that the foregoing
adjustments relate to stock or securities of the Company, such adjustments shall
be made by the Committee, whose determination in that respect shall be final,
binding and conclusive; provided however, that each Option granted under this
Plan and designated an Incentive Stock Option shall not be adjusted in a manner
that causes the Option to fail to continue to qualify as an Incentive Stock
Option within the meaning of Section 422 of the Code.
H. No Other Rights. Except as expressly provided in this Section 5,
the Optionee shall have no rights by reason of any subdivision or consolidation
of shares of stock of
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any class or the payment of any stock dividend or any other increase or decrease
in the number of shares of stock of any class or by reason of any dissolution,
liquidation, merger, or consolidation, and any issue by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall not affect, and no adjustment by reason thereof shall be made with respect
to, the number of shares of Common Stock subject to an Option. The grant of
Options under this Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of or
in its capital or business structure, to merge or consolidate, to dissolve or
liquidate or to sell or transfer all or any part of its business or assets.
6. RIGHTS AS A SHAREHOLDER. The Optionee or a permitted transferee of an
Option shall have no rights as a shareholder with respect to any shares covered
by the Option until the date of the issuance of a stock certificate to the
Optionee or permitted transferee for such shares. No adjustments shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Section 5
above.
7. TERMS AND CONDITIONS OF OPTIONS. Each Option granted shall be evidenced
by an Option Agreement in such form as the Committee may from time to time
approve. By executing an Option Agreement, an Optionee thereby agrees that the
Option shall be subject to the provisions of such Option Agreement and this
Plan. Options shall comply with and be subject to the following terms and
conditions:
A. Option Price. The purchase price (the "Option Price") shall be
stated in the Option Agreement and shall be (i) $9.77 for Options granted under
this Plan prior to July 28, 1995 and (ii) not less than the Fair Market Value of
the Common Stock on the date of grant of the Option for all Options granted
under this Plan on or after July 28, 1995.
B. Incentive Stock Options - Value of Common Stock. Options may be
granted to any Eligible Employee; provided however, that the aggregate fair
market value (determined at the time the Option is granted) of the Common Stock
with respect to which Options that qualify as Incentive Stock Options are
exercisable by the Optionee for the first time during any calendar year (under
all the plans of the Company and its parent, if any, and subsidiaries) may not
exceed One Hundred Thousand Dollars ($100,000).
C. Medium and Time of Payment. The Option Price shall be paid in
full, at the time of exercise, in cash or, with the prior approval of the
Company, in Common Stock held by the Optionee having a Fair Market Value in the
aggregate equal to such Option Price or in a combination of cash and shares of
Common Stock.
D. Number of Option Shares. The number of shares of Common Stock
covered by an Option and available to be purchased by an Optionee ("Option
Shares") shall be as set forth in such Optionee's Option Agreement. No Option
may be exercised at any one (1) time for less than one hundred (100) shares of
Common Stock, unless the number of Option Shares remaining to be purchased is
fewer than one hundred (100), in which case the last Option shall be to purchase
all of the remaining Option Shares.
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E. Term and Exercise of Options. Each Option shall become vested and
exercisable in accordance with the terms set forth in the Optionee's Option
Agreement. Once exercisable, an Option may thereafter be exercised at any time
or from time to time prior to the close of business on the day before the eighth
anniversary after the Option is granted.
8. TERMINATION OF EMPLOYMENT. The effect of the termination of an
Optionee's employment shall be as set forth in such Optionee's Option Agreement
with the Company.
9. NO GRANT OF OTHER RIGHTS. Nothing in this Plan shall confer upon the
Optionee any right to continue in the employ of CRIIMI MAE Management, Inc.
("CRIIMI Management"), the Company or any of its other subsidiaries, or
interfere in any way with the right of CRIIMI Management, the Company or any of
its other subsidiaries to terminate such employment at any time.
10. RESTRICTIONS.
A. Non-Transferability of Options. The Options shall not be
transferable other than by will or by the laws of descent and distribution, and,
during an Optionee's lifetime, each Option may be exercised only by the
Optionee, or upon adjudication of the Optionee's mental incapacity, by the
Optionee's legally appointed representative.
B. Consent to Plan Action. If the Committee shall at any time
determine that any "Consent" (as such term is defined below) is necessary or
desirable as a condition of, or in connection with, the granting of any Option,
the issuance or purchase of Common Stock or other rights thereunder, or the
taking of any other action thereunder (each such action being a "Plan Action"),
then such Plan Action shall not be taken, in whole or in part, unless and until
such Consent shall have been effected or obtained to the Committee's full
satisfaction.
C. Definition of Consent. The term "Consent" as used in this Plan
with respect to any Plan Action means (i) any and all listings, registrations or
qualifications in respect thereof upon any inter-dealer quotation system of a
registered national securities association or any national securities exchange
or under any federal, state or local law, rule or regulation, (ii) any and all
written agreements and representations by the Optionee with respect to the
disposition of Common Stock, or with respect to any other matter, which the
Committee shall deem necessary or desirable to comply with the terms of any such
listing, registration or qualification, or to obtain an exemption from the
requirement that any such listing, qualification or registration be made, and
(iii) any and all consents, clearances and approvals in respect of a Plan Action
by any governmental or other regulatory bodies.
D. Additional Requirements Regarding Intent. In furtherance of the
foregoing, at the time of any exercise of an Option, the Committee may, if it
shall determine it is required by law, require the Optionee as a condition to
the exercise thereof, to deliver to the Committee a written representation of
the Optionee's present intention to purchase the Common Stock for investment and
not for distribution or resale. If such representation is required to be
5
<PAGE>
delivered, an appropriate legend may be placed upon each certificate delivered
to the Optionee upon the Optionee's exercise of part or all of an Option and a
stop transfer order may be placed with the transfer agent. Each such Option
shall also be subject to the requirement that, if at any time the Committee
determines, in its discretion, that either (i) the listing, registration or
qualification of Common Stock subject to an Option upon any securities exchange
or under any state, federal or foreign law, or (ii) the consent or approval of
any governmental regulatory body is necessary or desirable as a condition of, or
in connection with, the issue or purchase of Common Stock thereunder, the Option
may not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. The Committee shall not have the
power to require or oblige the Company to register any Common Stock subject to
an Option and any requirement imposed by the Committee relating to the
registration of Common Stock shall not bind the Company to cause the
registration of such Common Stock.
11. NATURE OF PAYMENTS. All Options granted shall be in consideration of
services performed for the Company or subsidiary thereof by the Optionee.
12. NON-UNIFORM DETERMINATIONS. The Committee's determinations under this
Plan need not be uniform and may be made by it selectively among Eligible
Employees (whether or not such Eligible Employees are similarly situated).
Without limiting the generality of the foregoing, the Committee shall be
entitled, among other things, to make non-uniform and selective determinations
which may, inter alia, reflect the specific terms of individual employment
agreements, and to enter into non-uniform and selective Option Agreements, as to
(a) the persons to receive Options and (b) the terms and conditions of Options.
13. OTHER PAYMENTS OR OPTIONS. Nothing contained in this Plan shall be
deemed in any way to limit or restrict the Company from granting any option to
purchase Common Stock or payment to any person under any other plan, arrangement
or understanding, whether now existing or hereafter in effect.
14. AMENDMENT AND TERMINATION.
A. Amendment of Plan. The Board may from time to time suspend,
discontinue, revise or amend this Plan in any respect whatsoever provided that
no amendment shall be made without shareholder approval if such approval is
necessary to comply with any applicable law, regulation or stock exchange rule.
In addition, no such amendment shall materially impair any rights or materially
increase any obligations under any outstanding Option without the consent of the
Optionee (or, upon the Optionee's death or adjudication of mental incapacity,
the Optionee's legally appointed representative).
B. Cancellation and Issuance of New Options. The Committee may
cancel any outstanding Option and issue a new Option in substitution therefor.
The Committee also may amend any outstanding Option Agreement, including any
amendment which would: (i) accelerate the time or times at which the Option
becomes vested or may be exercised; (ii) waive or amend any goals, restrictions
or conditions set forth in the Option Agreement; or (iii) waive or amend the
operation of the provisions of an Optionee's Option Agreement governing the
6
<PAGE>
treatment of Options upon termination of employment. However, any such
cancellation or amendment that materially impairs the rights or materially
increases the obligations of an Optionee under an outstanding Option shall be
made only with the consent of the Optionee (or, upon the Optionee's death or
mental incapacity, the person having the right to exercise the Option).
15. SAVINGS CLAUSE. Notwithstanding any other provision hereof, this Plan
is intended to qualify as a plan pursuant to which Incentive Stock Options may
be granted under Section 422 of the Code. If this Plan or any provision of this
Plan shall be held to be invalid or to fail to meet the requirements of Section
422 of the Code or the regulations promulgated thereunder, such invalidity or
failure shall not affect the remaining parts of this Plan, but rather it shall
be construed and enforced as if the Plan or the affected provision thereof, as
the case may be, complied in all respects with the requirements of Section 422
of the Code.
16. SECTION HEADINGS. The section headings contained in this Plan are for
the purpose of convenience only and are not intended to define or limit the
contents of such sections.
Adopted as amended and restated by the Board of Directors of the Company to be
effective as of the effective date of the Plan of Reorganization.
Attest:
_____________________________
Corporate Secretary
Date: , 2000
7
<PAGE>
Exhibit H
--------------------------------------------------------------------------------
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, 2000 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:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
------------------- -----------------------------
<S> <C>
Common Stock New York Stock Exchange, Inc.
Series B Cumulative Convertible New York Stock Exchange, Inc.
Preferred Stock
Series F Redeemable Cumulative Dividend
Preferred Stock New York Stock Exchange, Inc.
</TABLE>
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.
<TABLE>
<CAPTION>
Class Outstanding as of August 10, 2000
----- ----------------------------------
<S> <C>
Common Stock, $0.01 par value 62,353,170
</TABLE>
<PAGE>
CRIIMI MAE INC.
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - as of June 30, 2000
(unaudited) and December 31, 1999............................................................... 3
Consolidated Statements of Income and Comprehensive Income - for the three
and six months ended June 30, 2000 and 1999 (unaudited)......................................... 4
Consolidated Statements of Changes in Shareholders' Equity - for the six
months ended June 30, 2000 (unaudited).......................................................... 5
Consolidated Statements of Cash Flows - for the six months ended
June 30, 2000 and 1999 (unaudited).............................................................. 6
Notes to Consolidated Financial Statements (unaudited)............................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................. 65
Item 2A. Quantitative and Qualitative Disclosures about Market Risk........................................ 79
PART II. Other Information
Item 1. Legal Proceedings................................................................................. 80
Item 2. Changes in Securities............................................................................. 80
Item 3. Defaults Upon Senior Securities................................................................... 80
Item 4. Submission of Matters to a Vote of
Security Holders................................................................................ 80
Item 5. Other Information................................................................................. 80
Item 6. Exhibits and Reports on Form 8-K.................................................................. 80
Signature ................................................................................................. 82
</TABLE>
2
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Assets:
Mortgage assets:
Subordinated CMBS, at fair value $ 1,018,145,199 $ 1,179,270,306
Insured mortgage securities, at fair value 381,201,135 394,857,239
Investment in originated loans, at amortized cost 464,478,082 470,204,780
Equity investments 33,785,169 34,929,523
Receivables 44,632,445 69,483,337
Other assets 46,227,668 53,276,333
Short term investments, at fair value 2,408,878 92,793
Restricted cash and cash equivalents 73,625,223 38,036,624
Other cash and cash equivalents 69,042,538 53,510,311
---------------- ----------------
Total assets $ 2,133,546,337 $ 2,293,661,246
================ ================
Liabilities:
LIABILITIES NOT SUBJECT TO CHAPTER 11 PROCEEDINGS:
SECURITIZED MORTGAGE OBLIGATIONS:
Collateralized bond obligations-CMBS 279,348,933 $ 278,165,968
Collateralized mortgage obligations-
insured mortgage securities 369,023,933 378,711,602
Collateralized mortgage obligations-
originated loans 395,261,869 399,768,513
Payables and accrued expenses 32,929,586 29,886,888
LIABILITIES SUBJECT TO CHAPTER 11 PROCEEDINGS:
SECURED:
Variable-rate secured borrowings-CMBS 566,429,031 732,904,775
Other financing facilities 3,050,000 3,050,000
Payables and accrued expenses 2,480,168 26,455,952
UNSECURED:
Senior unsecured notes 100,000,000 100,000,000
Other financing facilities 89,749,522 89,749,522
Payables and accrued expenses 45,234,652 35,619,440
---------------- ----------------
Total liabilities 1,883,507,694 2,074,312,660
---------------- ----------------
Shareholders' equity:
Convertible preferred stock, $0.01 par; 25,000,000
shares authorized; 2,383,336 and 2,647,124 shares
issued and outstanding, respectively 23,833 26,471
Common stock, $0.01 par; 120,000,000 shares
authorized; 62,353,170 and 59,954,604 shares
issued and outstanding, respectively 623,532 599,546
Accumulated other comprehensive income (184,516,951) (207,421,788)
Accumulated deficit (140,656,820) (148,434,915)
Additional paid-in capital 574,565,049 574,579,272
---------------- ----------------
Total shareholders' equity 250,038,643 219,348,586
---------------- ----------------
Total liabilities and shareholders' equity $ 2,133,546,337 $ 2,293,661,246
================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $35,392,863 $38,418,611 $ 74,562,634 $ 76,903,756
Insured mortgage securities 7,670,728 8,489,030 15,467,929 17,389,338
Originated loans 8,210,791 8,647,815 16,698,417 17,488,642
------------ ------------ ------------ ------------
Total interest income 51,274,382 55,555,456 106,728,980 111,781,736
------------ ------------ ------------ ------------
Interest and related expenses:
Fixed-rate collateralized bond obligations-CMBS 6,192,363 5,948,766 12,678,575 9,449,286
Fixed-rate collateralized mortgage obligations-
insured securities 9,308,798 8,304,889 16,355,730 16,709,161
Fixed-rate collateralized mortgage obligations-
originated loans 6,783,741 6,687,220 13,541,862 13,250,128
Fixed-rate senior unsecured notes 2,281,251 2,281,251 4,562,502 4,562,502
Variable-rate secured borrowings-CMBS 11,294,515 12,397,081 24,015,610 26,367,454
Other financing facilities 2,031,259 1,689,082 3,952,600 3,398,688
------------ ------------ ------------ ------------
Total interest expense 37,891,927 37,308,289 75,106,879 73,737,219
------------ ------------ ------------ ------------
Net interest margin 13,382,455 18,247,167 31,622,101 38,044,517
------------ ------------ ------------ ------------
Equity in (losses from) investments (26,270) 121,016 (38,186) (1,485,616)
Other income 981,861 787,508 1,318,546 1,423,540
Net gains on mortgage security dispositions 225,835 778,608 241,312 1,585,812
Gain on originated loan dispositions 37,885 58,810 37,885 160,210
General and administrative expenses (2,665,231) (3,617,040) (5,803,988) (6,251,154)
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
Other (2,723,109) (5,438,943) (6,971,564) (10,946,781)
Impairment on CMBS (1,809,062) - (5,252,821) -
Impairment on REO (924,283) - (924,283) -
Loss on Sale of CMBS (357,188) - (1,711,214) -
------------ ------------ ------------ ------------
(7,978,956) (18,901,405) (20,543,101) (23,878,272)
------------ ------------ ------------ ------------
Net income (loss) before dividends accrued on
preferred shares 5,403,499 (654,238) 11,079,000 14,166,245
Dividends accrued on preferred shares (1,661,015) (1,378,961) (3,300,905) (2,782,495)
------------ ------------ ------------ ------------
Net income (loss) available to common shareholders $3,742,484 ($2,033,199) $7,778,095 $11,383,750
============ ============ ============ ============
Net income (loss) available to common shareholders
per common share:
Basic $0.06 ($0.04) $0.13 $0.21
============ ============ ============ ============
Diluted $0.05 ($0.04) $0.11 $0.20
============ ============ ============ ============
Shares used in computing basic earnings per share 62,353,170 53,553,161 61,934,051 53,282,424
Comprehensive Income:
Net income (loss) before dividends accrued on
preferred shares $5,403,499 ($654,238) $11,079,000 $14,166,245
Other comprehensive income (loss) (383,304) (29,613,575) 22,904,837 (38,285,985)
------------ ------------ ------------ ------------
Comprehensive Income (loss) $5,020,195 ($30,267,813) $33,983,837 ($24,119,740)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Preferred Common Other Total
Stock Par Stock Par Comprehensive Additional Paid- Accumulated Shareholders'
Value Value Income in Capital Deficit Equity
---------- --------- ------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $26,471 $599,546 $(207,421,788) $574,579,272 $(148,434,915) $219,348,586
Net income - - - - 11,079,000 11,079,000
Dividends accrued on preferred
shares - - - - (3,300,905) (3,300,905)
Conversion of preferred shares
into common shares (2,638) 23,966 - (21,328) - -
Common shares issued - 20 - 7,105 - 7,125
Adjustment to unrealized losses
on investments - - 22,904,837 - - 22,904,837
-------- -------- ------------- ------------ ------------- ------------
Balance on June 30, 2000 $ 23,833 $623,532 $(184,516,951) $574,565,049 $(140,656,820) $250,038,643
======== ======== ============= ============ ============= ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,079,000 $ 14,166,245
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discount and deferred financing
costs on debt 5,749,610 3,960,987
Amortization of assets acquired in the Merger 1,438,788 1,438,788
Depreciation and other amortization 967,515 739,313
Discount amortization on mortgage assets (6,820,239) (307,185)
Net gains on mortgage security dispositions (37,885) (1,585,812)
Gain on originated loan dispositions (241,312) (160,210)
Equity in losses from investments 38,186 1,485,616
Unrealized loss on warehouse obligation - 6,925,154
Change in reorganization items accrual 1,853,557 10,305,282
Impairment on CMBS 5,252,821 -
Impairment on REO 924,283 -
Loss on sale of CMBS 1,711,214 -
Changes in assets and liabilities:
(Increase) decrease in restricted cash and cash equivalents (35,588,599) 2,353,560
Increase in receivables and other assets (6,077,888) (25,336,567)
Increase in payables and accrued expenses 16,937,560 8,310,998
------------ -------------
Net cash (used in) provided by operating activities (2,813,389) 22,296,169
------------ -------------
Cash flows from investing activities:
Proceeds from mortgage securities dispositions 9,826,537 58,428,715
Proceeds from the sale of CMBS, net 35,693,577 -
Distributions received from AIM Investments 927,936 3,682,444
Receipt of principal payments 6,490,474 6,497,298
Purchase of short-term investments, net (2,304,278) -
Proceeds from originated loan dispositions 927,102 7,747,205
------------ -------------
Net cash provided by investing activities 51,561,348 76,355,662
------------ -------------
Cash flows from financing activities:
Proceeds from debt issuances - 158,509,207
Principal payments on debt obligations, net (33,215,732) (211,550,173)
------------ -------------
Net cash used in financing activities (33,215,732) (53,040,966)
------------ -------------
Net increase in other cash and cash equivalents 15,532,227 45,610,865
Other cash and cash equivalents, beginning of period 53,510,311 21,826,512
------------ -------------
Other cash and cash equivalents, end of period $ 69,042,538 $ 67,437,377
============ =============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE>
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"). Prior to the filing
by CRIIMI MAE Inc. (unconsolidated) and two of its 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"), 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) backed by pools of commercial 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 of mortgage loans.
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) risks related to the Recapitalization Financing (defined
below) under the Company's Third Amended Joint Plan of Reorganization; (3)
risk of loss of REIT status; (4) taxable mortgage pool risk; (5) risk of
phantom income resulting in additional tax liability; (6) the effect of rate
compression on the market price of the Company's stock; (7) substantial
leverage; (8) inherent risks in owning Subordinated CMBS; (9) the limited
protection provided by hedging transactions; (10) risk of foreclosure on CMBS
assets; (11) the limited liquidity of the CMBS market; (12) pending
litigation; (13) risk of becoming subject to the requirements of the
Investment Company Act of 1940; (14) possible effects of an economic
recession on losses and defaults; (15) borrowing risks; (16) the effect of
the yield curve on income; and (17) risks associated with the trader election
including those referenced in "2000 Taxable Income (Loss)/ Taxable
Distribution Requirements" below.
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 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.
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.
7
<PAGE>
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, creating a
value deficiency as measured by the 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, 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 Chapter 11, CRIIMI MAE has streamlined its operations.
The Company has significantly reduced the number of employees in its
origination and underwriting operations. In connection with these reductions,
the Company closed its five regional loan origination offices.
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.
The Company's independent public accountants have issued a report
on the Company's 1999 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
Company's plan of reorganization 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, 2000, the auditors' report on those financial
statements will continue to be modified to express substantial doubt about
the Company's ability to continue as a going concern.
CRIIMI MAE is working diligently toward emerging from bankruptcy as
a successfully reorganized company. In furtherance of such effort, the
Debtors filed their Third Amended Joint Plan of Reorganization (as amended
and supplemented by praecipes filed with the Bankruptcy Court on July 13, 14
and 21, 2000, the "Plan") and proposed Second Amended Joint Disclosure
Statement (as amended and supplemented by praecipes filed with the Bankruptcy
Court on July 13 and 21, 2000, the "Proposed Disclosure Statement") on April
25, 2000. The Plan was filed with the support of the Official Committee of
Equity Security Holders of CRIIMI MAE (the "CMI Equity Committee"), which is
a co-proponent of the Plan. Subject to the completion of mutually acceptable
documentation, evidencing the secured financing to be provided by the
unsecured creditors (the "Unsecured Creditor Debt Documentation"), the
Official Committee of Unsecured Creditors of CRIIMI MAE (the "Unsecured
Creditors' Committee") has agreed to support confirmation of the Plan. The
Company, the CMI Equity Committee and the Unsecured Creditors' Committee are
now all proceeding toward confirmation of the Plan. Under the Plan, Merrill
Lynch and German American Capital Corporation ("GACC"), two of the Company's
largest secured creditors, would provide a significant portion of the
recapitalization financing contemplated by the Plan.
The Bankruptcy Court held a hearing on April 25, 2000 on approval
of the Proposed Disclosure Statement. During that hearing, the Bankruptcy
Court requested the filing of additional legal briefs by May 9, 2000 on two
issues raised at the hearing. The issues raised related to an objection to
the Company's Proposed Disclosure
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Statement filed by Salomon Smith Barney Inc./Citicorp Securities, Inc. and
Citicorp Real Estate, Inc. (together "Citigroup"). On July 12, 2000, the
Bankruptcy Court entered an order overruling the objections raised by
Citigroup as set forth in the Memorandum Opinion and Order filed and entered
on that date by the Bankruptcy Court. On July 21, 2000, the Company and
Citigroup reached a settlement regarding the treatment of Citigroup's claims
under the Plan. The settlement resolved Citigroup's objections to the
Proposed Disclosure Statement. The Citigroup objections were the only
objections to the Proposed Disclosure Statement pending before the Bankruptcy
Court. See Note 16 for a summary of certain material terms of the settlement
between the Company and Citigroup.
The Bankruptcy Court has scheduled a hearing on August 23, 2000
with respect to the proposed ballots submitted to the Bankruptcy Court to be
sent to members of all classes of impaired creditors and equity security
holders in connection with the Plan. Once the Proposed Disclosure Statement
has been approved by the Bankruptcy Court, the Plan will be sent, together
with the approved Disclosure Statement, to members of all classes of impaired
creditors and all equity security holders for acceptance or rejection.
The Unsecured Creditors' Committee filed its own plan of
reorganization and proposed disclosure statement, and various amendments to
each of the foregoing, with the Bankruptcy Court which, in general, provided
for the liquidation of the assets of the Debtors. However, as a result of
successful negotiations between the Debtors and the Unsecured Creditors'
Committee, the Unsecured Creditors' Committee has agreed to the treatment of
unsecured claims under the Plan, subject to completion of mutually acceptable
Unsecured Creditor Debt Documentation, and has asked the Bankruptcy Court to
defer consideration of its plan of reorganization and proposed disclosure
statement.
THE PLAN OF REORGANIZATION
The Plan contemplates the payment in full of all of the allowed
claims of the Debtors primarily through recapitalization financing (including
proceeds from certain asset sales) aggregating at least $857 million (the
"Recapitalization Financing"). Approximately $275 million of the
Recapitalization Financing would be provided by Merrill Lynch and GACC
through a secured financing facility, and approximately $155 million would be
provided through new secured notes issued to the Company's major unsecured
creditors (collectively , the "New Debt"). The sale of select CMBS (the "CMBS
Sale") and the Company's interest in CMO-IV (as defined in Note 6) (the
"CMO-IV Sale"), the proceeds of which are expected to be used to pay down
existing debt, is contemplated to provide the balance of the Recapitalization
Financing. The Company may seek new equity capital from one or more investors
to partially fund the Plan, although new equity is not required to fund the
Plan.
In connection with the Plan, substantially all cash flows are
expected to be used to satisfy principal, interest and fee obligations under
the New Debt. The $275 million secured financing would provide for (i)
interest at a rate of one month LIBOR plus 3.25%, (ii) principal
prepayment/amortization obligations, (iii) extension fees after two years and
(iv) maturity on the fourth anniversary of the effective date of the Plan.
The approximate $155 million secured financing would be effected through the
issuance of two series of secured notes under two separate indentures. The
first series of secured notes, representing an aggregate principal amount of
approximately $105 million, would provide for (i) interest at a rate of
11.75% per annum, (ii) principal prepayment/amortization obligations, (iii)
extension fees after four years and (iv) maturity on the fifth anniversary of
the effective date of the Plan. The second series of secured notes,
representing an aggregate principal amount of approximately $50 million,
would provide for (i) interest at a rate of 13% per annum with additional
interest at the rate of 7% per annum accreting over the debt term, (ii)
extension fees after four years and (iii) maturity on the sixth anniversary
of the effective date of the Plan. The New Debt described above will be
secured by substantially all of the assets of the Company. It is contemplated
that there will be restrictive covenants, including financial covenants, in
connection with the New Debt.
The Plan also contemplates that the holders of the Company's
common stock will retain their stock. Under the Plan, no cash dividends,
other than a maximum of $4.1 million to preferred shareholders, can be paid
to existing shareholders. Subject to the respective acceptances of the Plan
by the holders of the Company's Series B Cumulative Convertible Preferred
Stock (the "Series B Preferred Stock") and the Series F Redeemable Cumulative
Dividend Preferred Stock (the "Series F Preferred Stock" or "junior preferred
stock"), the Plan contemplates an amendment to their respective relative
rights and preferences to permit the payment of accrued and unpaid dividends
in cash or common stock (or a combination thereof), at the Company's
election. The Plan further contemplates amendments to the relative rights and
preferences of the Series E Cumulative Convertible Preferred Stock (the
"Series E Preferred Stock"), relating principally to dividend and conversion
rights.
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Reference is made to the Plan and Proposed Disclosure Statement,
previously filed with the Bankruptcy Court (and with the Securities and
Exchange Commission (the "SEC") under cover of two Current Reports on Form
8-K filed on May 18, 2000 and August 11, 2000, respectively), for a more
detailed description of the financing contemplated to be obtained under the
Plan from the respective existing creditors including, without limitation,
payment terms, restrictive covenants and collateral, and a more detailed
description of the treatment of preferred stockholders. Although the Company
has commitments for substantially all of the New Debt and has sold certain of
the CMBS contemplated to be sold in connection with the CMBS Sale, there can
be no assurance that the Company will obtain the Recapitalization Financing,
that the Plan will be confirmed by the Bankruptcy Court, or that the Plan, if
confirmed, will be consummated. The Plan also contemplates certain amendments
to the Company's articles of incorporation, including an increase in
authorized shares from 120 million to 375 million (consisting of 300 million
of common shares and 75 million of preferred shares).
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
believes that it 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. Depending on the
amount of any such federal and state income tax, the Company may have
insufficient funds to pay such tax and also may be unable to comply with its
obligations under the New Debt.
2000 TAXABLE INCOME (LOSS)/TAXABLE DISTRIBUTION REQUIREMENTS
Internal Revenue Service Revenue procedure 99-17 provides
securities and commodities traders with the ability to elect mark-to-market
treatment for the 2000 tax year and for all future tax years, unless the
election is revoked with the consent of the Internal Revenue Service. On
March 15, 2000, CRIIMI MAE elected for tax purposes to be classified as a
trader in securities effective January 1, 2000. Such trading activity is, or
is expected to be, in certain types of mortgage-backed securities, including
Subordinated CMBS (the "Trading Assets").
As a result of its trader election, CRIIMI MAE recognized a
mark-to market tax loss on its Trading Assets on January 1, 2000 of
approximately $478 million (the "January 2000 Loss"). Such loss is expected
to be recognized evenly over four years beginning with the year 2000. The
Company expects such loss to be ordinary.
Additionally, as a result of its trader election, the Company will
be required to mark-to-market its Trading Assets at the end of each tax year,
including the year 2000. Any increase or decrease in the value of the Trading
Assets as a result of the year-end mark-to-market requirement will generally
result in either a tax gain (if an increase in value) or a tax loss (if a
decrease in value). Such tax gain or loss, as well as any realized gains or
losses from the disposition of Trading Assets during each year, are also
expected to be ordinary gains or losses.
Since gains and losses associated with trading activities are
expected to be ordinary, any gains will generally increase taxable income and
any losses will generally decrease taxable income. Since the Company is a
REIT which is generally required to distribute 95% of its taxable income to
shareholders, any increases in taxable income from trading activities will
generally result in an increase in REIT distribution requirements and any
decreases in taxable income from trading activities will generally result in
a decrease in REIT distribution requirements (or, if the taxable income is
reduced to zero, eliminate REIT distribution requirements).
Gains and losses from the mark-to-market requirement (including
the January 2000 Loss) are unrealized. This creates a mismatch between REIT
distribution requirements and cash flow since the REIT distribution
requirements will generally fluctuate due to the mark-to-market adjustments,
but the cash flow from the Company's Trading Assets will not fluctuate as a
result of the mark-to-market adjustments.
Any accumulated and unused net operating losses, subject to
certain limitations, generally may be carried forward for up to 20 years to
offset taxable income until fully utilized. Accumulated and unused net
operating losses can not be carried back. If a security is marked down
because of an increase in interest rates, rather than from
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<PAGE>
credit losses, such mark-to-market losses may be recovered over time. Any
recovered mark-to-market losses will generally be recognized as taxable
income, although there is expected to be no corresponding increase in cash
flow.
There is no assurance that the Company's position with respect to
its election as a trader in securities will not be challenged by the IRS,
and, if challenged, will be defended successfully by the Company. As such,
there is a risk that the January 2000 Loss will be limited or disallowed,
resulting in higher tax basis income and a corresponding increase in REIT
distribution requirements.
As a REIT, CRIIMI MAE is generally required to distribute at least
95% of its "REIT taxable income" to its shareholders each year. If CRIIMI MAE
is required to make taxable income distributions to its shareholders to
satisfy required REIT distributions, all or a substantial portion of these
distributions are expected to be in the form of non-cash dividends. There is
no assurance that such non-cash dividends would satisfy the REIT distribution
requirements.
It is possible that the Company could experience an "ownership
change" within the meaning of Section 382 of the Tax Code. Consequently, its
use of net operating losses generated before the ownership change to reduce
taxable income after the ownership change may be subject to limitation under
Section 382. Generally, the use of net operating losses in any year is
limited to the value of the Company's stock on the date of the ownership
change multiplied by the long-term tax exempt rate (published by the IRS)
with respect to that date.
See Note 8 for a discussion of differences between financial
statement net income (loss) and taxable income (loss).
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.
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 year ended December 31, 1999. The
Company anticipates distributing all of its 1999 taxable income in the form
of non-cash taxable dividends. There can be no assurance that the Company
will be able to make such distributions with respect to its 1999 taxable
income. While the Company has not finalized its tax return for 1999, should
CRIIMI MAE terminate or fail to maintain its REIT status during the year
ended December 31, 1999, taxable income for the year ended December 31, 1999
is estimated to be $37.5 million which would generate a tax liability of up
to $15.0 million.
THE COMPANY'S 1998 TAXABLE INCOME. On September 14, 1999, the
Company declared a dividend payable to common shareholders of approximately
1.61 million shares of a new series of junior preferred stock with a face
value of $10 per share. The purpose of the dividend was to distribute
approximately $15.7 million in undistributed 1998 taxable income. To the
extent that it is determined that such amount was not distributed, the
Company would bear a corporate level income tax on the undistributed amount.
There can be no assurance that all of the Company's tax liability was
eliminated by payment of such junior preferred stock dividend. The Company
paid the junior preferred stock dividend on November 5, 1999. The junior
preferred stock dividend was taxable to common shareholder recipients. Junior
preferred shareholders were permitted to convert their shares of junior
preferred stock into common shares during two separate conversion periods.
During these conversion periods, an aggregate 1,020,241 shares of junior
preferred stock were converted into 8,798,009 shares of common stock.
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
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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. See
also Note 6 regarding the anticipated CMO-IV sale as part of the Company's
Plan. 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. Although it is
possible that the election by the TMPs to be treated as taxable REIT
subsidiaries could prevent the loss of CRIIMI MAE's REIT status, there can be
no assurance that a valid election could be made given the timing of a
seizure or sale of the Pledged Bonds.
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 the 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, 2000, 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
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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.
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, 2000 and December 31, 1999, the consolidated
results of its operations for the three and six months ended June 30, 2000
and 1999 and its cash flows for the six months ended June 30, 2000 and 1999.
These 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, 1999
(audited).
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
year ended December 31, 1999 and the three and six months ended June 30, 1999
have been reclassified to conform to the 2000 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
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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. In 1998, the Company wrote-off all $2.8 million of
debt discounts and deferred debt costs related to liabilities subject to
Chapter 11 proceedings which resulted in these liabilities being carried at
their face amount.
REORGANIZATION ITEMS
Reorganization items are items of income and expense that are
realized or incurred by CRIIMI MAE because it is in reorganization. These
include, but are not limited to the following:
- Short-term interest income that would not have been earned but for the
Bankruptcy.
- Professional fees and similar types of expenditures directly relating to
the Chapter 11 proceeding.
- Employee Retention Program costs and severance payments.
- Loss accruals or realized gains or losses resulting from activities of the
reorganization process such as the sale of certain assets, rejection of
certain executory contracts and the write-off of debt issuance costs and
debt discounts. See Note 5 for further discussion of other than temporary
impairment and losses recognized on sales of CMBS.
During the three and six months ended June 30, 2000 and 1999, the
Company recorded reorganization items, as summarized below, due to the Chapter
11 filings of CRIIMI MAE, CM Management and Holdings II.
<TABLE>
<CAPTION>
REORGANIZATION ITEMS THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Short-term interest income ($ 1,434,012) ($ 237,000) ($ 2,438,672) ($ 469,400)
Professional fees 3,055,316 4,974,155 7,428,584 10,114,155
Employee Retention Program accrued costs 256,701 202,605 536,050 745,502
Other 845,104 499,183 1,445,602 556,524
------------ ------------ ------------ ------------
Subtotal 2,723,109 5,438,943 6,971,564 10,946,781
Impairment on CMBS 1,809,062 -- 5,252,821 --
Impairment on REO(1) 924,283 -- 924,283 --
Loss on sale of CMBS(2) 357,188 -- 1,711,214 --
------------ ------------ ------------ ------------
Total $ 5,813,642 $ 5,438,943 $ 14,859,882 $ 10,946,781
============ ============ ============ ============
</TABLE>
(1) The Company recognized impairment on its investment in REO as of June
30, 2000. This asset was sold in July 2000 as discussed in Note 3 and
Note 9.
(2) The Company recognized a loss of approximately $1.35 million on the
sale of the Morgan Bonds in February 2000 and a loss of approximately
$360,000 on the sale of the First Union Bonds in April 2000.
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, 2000. (See
Note 18).
OTHER 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.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consist of cash, certificates
of deposit and interest bearing securities maturing within three months from
the date of purchase that have been legally restricted pursuant to various
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stipulation and consent orders providing for adequate protection with certain
of the Company's creditors or due to agreements that require certain CMBS
interest income and/or CMBS sales proceeds to be held in segregated accounts.
In addition, restricted cash and cash equivalents include balances held in
separate trusts controlled by a trustee for the benefit of employees. See
Note 16 "Litigation-Bankruptcy Related Litigation" for further discussion of
these arrangements.
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. These transfers of financial
assets are accounted for in accordance with SFAS 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("FAS 125"). 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
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
calculated 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. When other than temporary impairment is
recognized, a new yield is calculated on the CMBS based on its new cost basis
and expected future cash flows. This revised yield is employed prospectively.
See Note 5 for a discussion of a revision in yields during the second quarter
of 2000.
On May 8, 1998, CRIIMI MAE consummated CBO-2 which resulted in the
sale of a portion of its Subordinated CMBS portfolio. See Note 5. As a result
of this 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 this time, such securities were carried at their amortized cost basis as
the Company had the ability and intent to hold these securities to maturity.
INSURED MORTGAGE SECURITIES
Mortgage income consists of amortization of the discount or
premiums plus the stated mortgage interest payments received or accrued. 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. Changes in anticipated yields are generally calculated due
to revisions in estimates of future prepayments and actual payments received.
As discussed in Note 7, as a result of the CBO-2 transaction
involving the sale of a portion of its Subordinated CMBS portfolio, 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.
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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.
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. Changes in anticipated yields are
generally calculated due to revisions in estimates of future prepayments and
actual prepayments received. See Note 6 for subsequent event related to the
carrying basis and intended sale of the Company's interest in CMO-IV.
SHORT TERM INVESTMENTS
Short term investment income consists of amortization of the
discount or premiums on primarily investment-grade securities, plus the
stated investment interest payments received or accrued on such securities.
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 investment using the effective interest
method. The effective interest method provides a constant yield of income
over the term of the investment.
The Company's short term investments are classified as Available
for Sale. As a result, the Company carries its short term investments at fair
value where changes in fair value are recorded as a component of
shareholders' equity. Upon the sale of such short term investments, any gain
or loss is recognized in the income statement.
During late 1999, the Company began to trade mortgage-backed
securities which are reflected in Short Term Investments on the balance
sheet. In general, the Company trades in FNMA and FHLMC issued CMO tranches,
as well as AAA rated CMBS. The Company seeks maximum total return through
short term trading, consistent with prudent investment management. Returns
from such activities consist primarily of capital appreciation/depreciation
resulting from changes in interest rates and spreads, if any, discount
amortization, and other arbitrage opportunities as well as coupon interest
income. For the six months ended June 30, 2000, trading gains and losses were
immaterial; and, as of June 30, 2000, trading securities approximated $2.4
million.
EQUITY INVESTMENTS
CRIIMI, Inc., a wholly owned subsidiary of CRIIMI MAE, owns all of
the general partnership interests in American Insured Mortgage Investors,
American Insured Mortgage Investors - Series 85, L.P., American Insured
Mortgage Investors L.P. Series 86 and American Insured Mortgage Investors
L.P. - Series 88 (collectively, the "AIM Funds"). The AIM Funds own mortgage
assets which are substantially similar to the 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 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, 2000, Services Inc.
holds a 27% general partner interest in CMSLP.
16
<PAGE>
As of June 30, 2000, 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.
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 or intent 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. See Note 5 for a discussion of impairment losses recognized in 2000
and 1999.
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 amortized cost basis,
the difference is recognized as a loss in the income statement. The Company
did not recognize any impairment on its insured mortgage securities for the
three and six months ended June 30, 2000 and 1999.
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. The Company did not recognize
impairment losses on its originated loans for the three and six months ended
June 30, 2000 and 1999.
SHORT TERM INVESTMENTS
CRIIMI MAE assesses each short term investment for other than
temporary impairment when the fair market value of the asset declines below
amortized cost 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 the short term investment to its
current cost basis, the difference is recognized as a loss in the income
statement. The Company did not recognize any impairment on its short term
investments for the three and six months ended June 30, 2000 and 1999.
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. The Company
17
<PAGE>
did not recognize impairment losses on its equity investments for the three
and six months ended June 30, 2000 and 1999.
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, if any, that have not yet been received by
CRIIMI MAE are included.
OTHER ASSETS
Other assets primarily include Merger assets and related costs,
deferred financing costs, deferred costs and investment in mezzanine loans,
as further discussed below. Additionally included in other assets is Real
Estate Owned ("REO") property acquired through foreclosure that is held for
sale. In June 1997, CRIIMI MAE acquired this real estate property in a
foreclosure sale from a CMBS trust which it subsequently sold to a third
party in July 2000. Prior to the sale, CRIIMI MAE's investment in REO
property totaled approximately $3.4 million. A loss of approximately $900,000
was recorded as of June 30, 2000 related to the sale. REO property acquired
through foreclosure is recorded at fair value on the date of foreclosure. REO
property held for sale is accounted for at the lower of its cost basis or
fair value less costs to sell. REO property held for the long term 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 through 2005. 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 through 2005.
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 in December 1998, CRIIMI MAE 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 wrote off
all capitalized costs in connection with its warehouse programs in December
1998. As of June 30, 2000, there were no reserve account balances with
respect to either the Citibank or Prudential Programs. (See Note 6 for
further discussion including the contemplated CMO-IV Sale.)
18
<PAGE>
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.
PER SHARE AMOUNTS
Basic earnings per share amounts for the three and six months
ended June 30, 2000 and 1999 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, 2000 and 1999 represent basic earnings per share adjusted for
dilutive common stock equivalents, which for CRIIMI MAE could 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,
2000 and 1999, were $81,200,828, and $56,800,796, respectively.
COMPREHENSIVE INCOME
Comprehensive income includes net earnings as currently reported
by the Company adjusted for other comprehensive income. Other comprehensive
income for the Company is changes in unrealized gains and losses related to
the Company's CMBS and mortgages accounted for as available for sale.
NEW ACCOUNTING STATEMENTS
During 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133 "Accounting for Derivative Instruments and for Hedging
Activities" ("FAS 133"). In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133". In June 2000, the FASB issued
Statement 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", an amendment of FASB Statement No. 133. FAS 133, as
amended, 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 believes the
effect of adopting FAS 133 will not be material.
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
19
<PAGE>
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, 2000 As of December 31, 1999
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Subordinated CMBS $1,188,109,252 $1,018,145,199 $1,374,080,226 $1,179,270,306
Insured Mortgage Securities 395,742,226 381,201,135 407,469,108 394,857,239
Investment in originated loans 464,478,082 419,296,783 470,204,780 422,643,902
Restricted cash and cash equivalents 73,625,223 73,625,223 38,036,624 38,036,624
Other cash and cash equivalents 69,042,538 69,042,538 53,510,311 53,510,311
Short term investments 2,420,685 2,408,878 92,793 92,793
Accrued interest and principal receivable 44,632,445 44,632,445 69,483,337 69,483,337
Interest rate protection agreements 575,556 1,204,196 1,119,280 1,465,496
LIABILITIES:
Liabilities not Subject to Chapter 11 proceedings:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS 279,348,933 261,958,337 278,165,968 253,084,864
Collateralized insured mortgage securities obligations 369,023,933 368,909,578 378,711,602 381,129,836
Collateralized mortgage obligations-
originated loans 395,261,869 370,100,820 399,768,513 373,634,008
Liabilities Subject to Chapter 11 proceedings:
Variable rate secured borrowings-CMBS 566,429,031 N/A 732,904,775 N/A
Senior unsecured notes 100,000,000 84,880,000 100,000,000 86,000,000
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:
SUBORDINATED CMBS
Prior to 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, 2000 and December 31, 1999. As a
result, the Company calculated the estimated fair market value of its
Subordinated CMBS portfolio as of June 30, 2000 and December 31, 1999. 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 for additional
discussion. 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; institutionally available research reports, a relative
comparison of dealer provided discount rates from the previous quarter to
those disclosed in recent research reports and 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, 2000 and December 31, 1999, it
has disclosed the range of discount rates by rating category used in
determining these fair market values in Note 5.
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 and continued
throughout 1999 with the issuance of newly created CMBS totaling
approximately $58.3 billion for 1999. The market for Subordinated CMBS has,
however, been slower to recover. It is difficult, if not impossible, to
predict when or if the CMBS market and, in particular, the Subordinated CMBS
market, will recover. Even if the market for Subordinated CMBS recovers, the
liquidity of such market has historically been limited.
20
<PAGE>
Additionally, during adverse market conditions, the liquidity of such market
has been severely limited. Therefore, management's estimate of the value of
the Company's CMBS 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.
INSURED MORTGAGE SECURITIES
The fair market value of the Company's portfolio of insured
mortgage securities as of December 31, 1999 was based upon quotes obtained
from an investment banking institution, which trades these investments on a
daily basis. Due to the Chapter 11 filing and a change in staff at the
investment banking institution, the Company was unable to find an investment
banking institution willing to provide fair value quotes for the insured
mortgage securities portfolio as of June 30, 2000. As a result, the Company
calculated the estimated fair market value of its insured mortgage securities
portfolio as of June 30, 2000. The Company used a discounted cash flow
methodology to estimate the fair value of its insured mortgage securities
portfolio. The cash flows were 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, (ii) a relative
comparison of dealer provided quotes from the previous year to those
disclosed in recent research reports and incorporating adjustments to reflect
changes in the market, and (iii) communications with dealers and active
insured mortgage security investors regarding the valuation of comparable
securities.
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 as of June 30, 2000 and December 31, 1999. 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 9.1% and 9.1% for both June 30, 2000 and December 31, 1999,
which the Company believes was commensurate with the market's perception of
risk and value.
SHORT TERM INVESTMENTS
The fair value of the short term investments is an estimate based
on the indicative market price from publicly available pricing services. The
Company normally applies a slight discount to such prices as the Company
believes it better reflects fair value between willing buyers and sellers due
to the relatively smaller sizes of investments the Company purchases.
RESTRICTED AND OTHER 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 as of June
30, 2000 and December 31, 1999 is calculated using a discounted cash flow
methodology similar to the discussion on Subordinated CMBS above. The fair
value of the senior 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. Also 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, 2000 and
December 31, 1999, 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.
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<PAGE>
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. In CBO-2, the Company
sold in a private placement, securities with a face amount of $468 million
and 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.
The CBO-2 transaction requires reclassification of CRIIMI MAE's
entire portfolio of mortgage securities (consisting of mortgage security
collateral and CMBS) from Held to Maturity to Available for Sale. Therefore,
CRIIMI MAE's securities, effective the second quarter of 1998, are reflected
on the balance sheet at fair market value. At June 30, 2000, the amortized
cost of the CMBS exceeded the fair market value by approximately $170 million
(after taking into account the impairment write down of certain CMBS subject
to the CMBS Sale, which resulted in amortized cost being written down to fair
value) as compared to $194.8 million as of December 31, 1999 and is reflected
as a decrease in shareholders' equity.
At June 30, 2000, CRIIMI MAE held the following securities with respect to
its CMBS portfolio:
<TABLE>
<CAPTION>
Original 3/31/00 6/30/00
Anticipated Anticipated Anticipated
Yield to Yield to Yield to
Pool (1)(6) Maturity (2) Maturity (2) Maturity (2)
----------- ------------ ------------ ------------
<S> <C> <C> <C>
Retained Securities from
CRIIMI 1996 C1 (CBO-1) 19.5% 20.7%(4) 22.3%(3)
DLJ Mortgage Acceptance Corp.
Series 1997 CF2 Tranche B-30C 8.2% 11.9%(5) 12.0%(3)
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 12.0% 12.0% 14.2%(3)
Retained Securities from
CRIIMI 1998 C1 (CBO-2) 10.3% 10.2%(4) 10.5%(3)(4)
Mortgage Capital Funding, Inc.
Series 1998-MC1 8.9% 13.5%(5) 13.8%(3)
Chase Commercial Mortgage Securities
Series 1998-1 (7) 8.8% 12.9%(5) 13.2%(3)
22
<PAGE>
<CAPTION>
Original 3/31/00 6/30/00
Anticipated Anticipated Anticipated
Yield to Yield to Yield to
Pool (1)(6) Maturity (2) Maturity (2) Maturity (2)
----------- ------------ ------------ ------------
<S> <C> <C> <C>
Mortgage Capital Funding, Inc.
Series 1998-MC2 8.7% 13.7%(5) 13.9%(3)
Weighted Average 10.1% 11.2% 11.5%(3)
</TABLE>
------------------------
(1) CRIIMI MAE, through CMSLP, performs servicing functions on a total CMBS
pool of approximately $24.4 billion as of June 30, 2000. Of the $24.4
billion of mortgage loans, approximately $369.6 million are being
specially serviced, of which approximately $261.4 million are being
specially serviced due to payment default (including $29.6 million of real
estate owned by the underlying trusts) and the remainder is being
specially serviced due to non-financial covenant default. Through June 30,
2000, CMSLP has resolved and transferred out of special servicing
approximately $506.5 million of the approximately $876.1 million that has
been transferred into special servicing from inception as discussed below.
As discussed below, through June 30, 2000, actual losses on mortgage loans
underlying the CMBS transactions are lower than the Company's original
loss estimates.
(2) Represents the anticipated weighted average yield over the expected
average life of the Company's Subordinated CMBS portfolio as of the date
of acquisition, March 31, 2000 and June 30, 2000, respectively, based on
management's estimate of the timing and amount of future credit losses and
prepayments. (See also (3) below, for additional discussion.)
(3) The increases in anticipated yields to maturity for June 30, 2000, as
compared to March 31, 2000, are primarily due to a change in the
allocation and timing of the estimated future credit losses related to the
mortgage loans underlying the CMBS. Due to better than anticipated
performance of the mortgage loans underlying the CMBS, which has resulted
in lower credit losses than originally estimated, the Company has revised
its estimated credit losses to occur later in the weighted average life of
the CMBS than originally projected. However, the Company has not lowered
the total amount of estimated future credit losses related to the mortgage
loans underlying the CMBS. The change in allocation and timing of
estimated future credit losses to reflect a later occurrence of such
losses results in increases in projected cash flow (primarily in the form
of interest income) as of June 30, 2000, which in turn results in
increases in anticipated yields to maturity as of June 30, 2000. As a
result of the present value benefit of a revised later projected
occurrence of credit losses, the yields used to determine CMBS income have
increased. As of June 30, 2000, the overall impact of this allocation and
timing revision resulted in a 29 basis point increase in total CMBS
anticipated yields to maturity (24 basis point increase related to the
remaining CMBS subject to the CMBS Sale and 30 basis point increase
related to the Company's retained portfolio). These yield increases have
resulted in approximately $700,000 in additional CMBS income during the
second quarter compared to income that would have been recognized using
prior unrevised yields. The Company estimates that total CMBS income
related to the Company's retained portfolio will be higher by
approximately $2 million for the period April 1 through December 31, 2000
than if the prior unrevised yields were used. As it is not certain when
the remaining CMBS subject to the CMBS Sale will be sold, the Company has
not estimated the dollar impact for the year. These CMBS yield increases
have been applied prospectively as of April 1, 2000, the first day of the
second quarter.
(4) The increase in the anticipated yield resulted from the reallocation of
CBO-1 asset basis in conjunction with the CBO-2 resecuritization. While it
had no impact on the anticipated yield, the unrated bond from CBO-1
experienced an approximate $738,000 principal write-down in 1999 and an
approximate $2.2 million principal write-down in 2000 due to losses on the
foreclosure of two underlying loans. Further, the unrated bond from CBO-2
experienced an approximate $879,000 principal write-down in 1999 and an
approximate $374,000 principal write-down in 2000 due to losses on the
foreclosure of two underlying loans.
(5) As discussed further below, under the Plan, the Company intends to sell
these CMBS pools and as such, impairment was recognized as of December 31,
1999, March 31, 2000, and/or June 30, 2000 related to these CMBS. The
impairment losses resulted in the cost basis being written down to fair
value as of December 31, 1999, March 31, 2000, and June 30, 2000. The
increase in yields between those originally projected and those projected
as of March 31, 2000 is primarily a result of this new lower basis.
(6) The following table summarizes CMBS sales for the six months ended June 30,
2000:
<TABLE>
<CAPTION>
SALE NET PROCEEDS TO
SALE DATE CMBS PORTFOLIO CLASSES FACE AMOUNT PROCEEDS DEBT PAYDOWN CRIIMI MAE LOSS (a)
--------- -------------- ------- ----------- -------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
02/29/00 Morgan Stanley Capital 7 classes $87 million $45.9 million $37.5 $8.4 million ($1.35 million)
I, Series 1998-WF2 million
("Wells Fargo Bonds")
04/24/00 First Union-Lehman 7 classes $290 million $140 million $113 million $27 million ($0.36 million)
Brothers-Bank of America
Commercial Mortgage
Trust Series 1998-C2
("First Union Bonds")
</TABLE>
(a) Represents actual loss recognized when sold. Losses had been recognized
through impairment in previous periods.
(7) The sale of these bonds occurred in August 2000, as discussed below.
23
<PAGE>
The aggregate investment by the underlying rating of the Subordinated CMBS is as
follows:
<TABLE>
<CAPTION>
Range of Discount Amortized Cost Amortized Cost
Face Amount Weighted Average Weighted Fair Value Rates Used to as of as of
as of 6/30/00 Pass- Average As of 6/30/00 Calculate Fair 6/30/00 12/31/99
Security Rating (in millions) Through Rate Life (1) (in millions)(2) Value (2) (in millions) (in millions)
--------------- ------------- ------------ -------- ---------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
A (3) $62.6 7% 6 years $55.3 9.6% $57.7 $57.4
BBB (3) 150.6 7% 11 years 121.2 10.0% 129.0 127.7
BBB-(3) 115.2 7% 12 years 85.5 11.0% 93.9 93.5
BB+ 373.4 7.1% 11 years 251.1 11.1%-12.8% 292.9 305.5
BB 255.9 6.7% 11 years 116.7 11.4%-13.5% 125.5 206.1
BB- 81.2 6.7% 12 years 38.9 12.7%-14.5% 44.8 58.6
B+ 122.7 7% 14 years 45.6 15.7% 63.4 82.1
B 294.2 6.5% 14 years 120.8 14.9%-16.7% 154.0 178.2
B- 186.7 6.7% 14 years 66.7 15.7%-19.2% 78.8 98.1
CCC 87.9 7% 17 years 17.0 31% 27.3 32.5
Unrated (4) 471.4 5.8% 17 years 99.3 29%-33% 120.8 134.4
-------- ------- ----------- -------- -------- --------
Total (5)(6) $2,201.9 6.8% 12 years $1,018.1 $1,188.1(7)(8) $1,374.1
======== ======= =========== ======== ======== ========
</TABLE>
-----------------------------------
(1) Weighted average life represents the weighted average expected life of the
Subordinated CMBS prior to consideration of losses, extensions or
prepayments.
(2) 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, 2000 and December 31, 1999. As a result, the Company calculated the
estimated fair market value of its Subordinated CMBS portfolio as of June
30, 2000 and December 31, 1999. The Company used a discounted cash flow
methodology to estimate the fair value of its Subordinated CMBS portfolio.
The cash flows for each bond were projected assuming no prepayments and no
losses as is the market convention. 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 institutionally available
research reports and 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, 2000 and December 31, 1999, it has disclosed
in the table the range of discount rates by rating category used in
determining these fair market values. See Note 4 for a discussion on the
CMBS market.
(3) In connection with CBO-2, $62.6 million (A rated) and $60.0 million (BBB
rated) face amount of investment grade securities were sold with call
options and $345 million (A rated) face amount were sold without call
options. 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, both with call options, with the intention to sell
the securities at a later date. Such sale occurred March 5, 1999. See also
Note 16. Since the Company retained call options on certain sold bonds,
the Company did not surrender control of these 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.
(4) The unrated bond from CBO-1 experienced an approximate $738,000 principal
write-down in 1999 and an approximate $2.2 million principal write-down in
2000 due to losses on the foreclosure of two underlying loans. Further,
the unrated bond from CBO-2 experienced an approximate $879,000 principal
write-down in 1999 and an approximate $374,000 principal write-down in
2000 due to losses on the foreclosure of two underlying loans.
(5) Refer to Note 8 for additional information regarding the Subordinated CMBS
for tax purposes.
(6) Similar to the Company's other sponsored CMOs, CMO-IV resulted in the
creation of CMBS, in 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 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
underlying loans contributed to CMO-IV are reflected in Investment in
Originated Loans on the balance sheet. See Note 6.
(7) Amortized cost reflects the cumulative $75 million impairment loss
write-down as of June 30, 2000, related to the remaining CMBS subject to
the CMBS Sale. See below for further discussion.
24
<PAGE>
(8) As previously discussed, in February 2000, the Wells Fargo Bonds were sold
for proceeds of approximately $45.9 million. Additionally, in April 2000,
the First Union Bonds were sold for proceeds of $140 million.
As of June 30, 2000 and December 31, 1999, 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>
6/30/00 12/31/99 6/30/00 12/31/99
Property Type Percentage(1) Percentage(1) Geographic Location(2) Percentage(1) Percentage(1)
------------- ------------- ------------- ---------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Multifamily................... 31% 32% California................ 16% 17%
Retail........................ 29% 29% Texas..................... 13% 13%
Office........................ 14% 13% Florida................... 7% 8%
Hotel......................... 14% 14% NewYork................... 6% 5%
Other......................... 12% 12% Other(3).................. 58% 57%
---- ---- ---- ----
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, 2000, the
amount of income recognized in excess of cash received due to the effective
interest rate method was approximately $4.2 million and $6.9 million,
respectively. 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 $336,000, 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.
As discussed in Note 1, under CRIIMI MAE's Plan, a portion of the
Recapitalization Financing is expected to result from the CMBS Sale. The
remaining CMBS subject to the CMBS Sale had a fair value and amortized cost
of $204 million and $198 million, respectively, as of June 30, 2000. The
Company first filed a plan with the Bankruptcy Court in the fourth quarter of
1999 and during that same quarter CRIIMI MAE began marketing for sale the
CMBS subject to the CMBS Sale. CRIIMI MAE sold a portion of these bonds in
February 2000 and April 2000 and intends to enter into additional agreements
during 2000 to sell the remaining CMBS subject to the CMBS Sale, although
there can be no assurance that such bonds will be sold. The Company also
intends to sell its interest in CMO-IV as part of the Plan, although there
can be no assurance that the CMO-IV Sale will be completed.
GAAP states that when the fair market value of an investment
declines below its amortized cost for a significant period of time and the
entity no longer has the ability or intent to hold the investment for the
period the entity anticipates is required for the value to recover to
amortized cost, other than temporary impairment on the investment should be
recognized. This other than temporary impairment is recognized through the
income statement as the difference between amortized cost and fair value.
Additional accounting guidance states that other than temporary impairment
should be recognized in the period the decision to sell any investment is
made if the entity does not expect the fair value to recover before the sale
date. As the Company decided in the fourth quarter of
25
<PAGE>
1999 to sell the CMBS subject to the CMBS Sale and it did not expect the
value of these bonds to significantly recover before the future sale dates,
the Company recognized approximately $157 million of other than temporary
impairment related to these CMBS through earnings in the fourth quarter of
1999. The Company recognized an additional $5.3 million of other than
temporary impairment during the first half of 2000 related to these same
bonds. Unrealized losses related to these CMBS were previously recognized
through other comprehensive income in the equity section of the balance
sheet. The other than temporary impairment loss is a part of the
reorganization items on the income statement as the impairment was recognized
as part of the reorganization.
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 continues 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. As part of
the Plan, certain of the Company's non-resecuritized CMBS and its interest in
CMO-IV are intended to be sold. If such sales are completed, CMSLP will most
likely lose its special servicing duties related to these securities. In
1999, CMSLP generated gross revenues of approximately $1.1 million in fees on
these CMBS.
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. The Company viewed a securitization as a means of extracting
the maximum value from the mortgage loans originated. A portion of the
mortgage loans originated was financed through the creation and sale of
investment grade CMBS to third parties in connection with the securitization.
The Company received net cash flow on the CMBS not sold to third parties
after payment of amounts due to secured creditors who had provided
acquisition financing. Additionally, the Company received origination and
servicing fees related to the mortgage loan conduit programs.
A majority of the mortgage loans originated under the Company's
loan conduit programs were "No Lock" mortgage loans. Unlike most commercial
mortgage loans originated for the CMBS market which contain "lock-out"
clauses (that is, provisions which prohibit the prepayment of a loan for a
specified period after the loan is originated or impose costly yield
maintenance provisions), the Company's No Lock loans allowed borrowers the
ability to prepay loans at any time by paying a prepayment penalty.
Prior to the Petition Date, the Company had originated over $900
million in aggregate principal amount of loans. In June 1998, the Company
securitized approximately $496 million of the commercial mortgage loans
originated or acquired through a mortgage loan conduit program with Citicorp
Real Estate, Inc. ("Citibank") and, through CRIIMI MAE CMBS Corp., issued
Commercial Mortgage Loan Trust Certificates, Series 1998-1 ("CMO-IV"). A
majority of these mortgage loans were "No Lock" loans. In CMO-IV, CRIIMI MAE
sold $397 million face amount of fixed-rate, investment grade CMBS. CRIIMI
MAE has call rights on each of the issued securities and therefore has not
surrendered control of the bonds, thus requiring the transaction to be
accounted for as a financing of the mortgage loans collateralizing the
investment grade CMBS sold in the securitization. Therefore, the mortgage
loans remained on the Company's balance sheet. The Company originally
intended to sell all of the investment grade tranches of CMO-IV; however, two
investment grade tranches were not sold until 1999. As discussed further
below, as part of the Plan, the Company will sell its remaining interest in
CMO-IV. Accordingly, upon such sale, the mortgage loans, and related other
assets and liabilities will be removed from the balance sheet
On April 5, 1999, the Company finalized an agreement by which
Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell the
remaining two classes of investment grade CMBS from CMO-IV with a face
26
<PAGE>
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 sold these two classes of CMBS in May and October 1999.
CRIIMI MAE retained 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 has been accounted for as a
financing and not a sale. Gross proceeds from the sale were used to pay off
$39.6 million of secured debt and certain costs, and the remainder of
approximately $315,000 was remitted to CRIIMI MAE. This resulted in CRIIMI
MAE recognizing fixed-rate debt for these bonds in the amount of the gross
proceeds received. In addition, CRIIMI MAE received past due CMBS payments on
these two classes.
In July 2000, the Company decided that, as part of the Plan, it
would sell the remaining $53 million face amount of assets from CMO-IV that
it currently owns. The proceeds would be used to pay down the variable rate
debt secured by certain assets from CMO-IV with any remaining proceeds
retained by the Company. Upon the sale of these assets, CRIIMI MAE will no
longer have any economic interest in CMO-IV. The Company, as the owner of the
issuer's equity of CMO-IV, holds the call options related to the $442.5
million (original face amount) of previously issued securities that are
currently classified as securitized debt on the Company's balance sheet. Upon
the sale of the issuer's equity, CRIIMI MAE will no longer own these call
options and, as a result, the securitization will no longer qualify as a
financing under SFAS 125. As a result, all assets (Investment in Originated
Loans and related deferred financing costs) and liabilities (Collateralized
mortgage obligations -Originated Loans and a portion of variable rate secured
borrowings - CMBS) related to the securitization will be removed from CRIIMI
MAE's balance sheet upon the sale of the issuer's equity. If the sale of
CRIIMI MAE's economic interest in CMO-IV took place as of June 30, 2000,
based on the June 30, 2000 balance sheet and estimated fair values, the
Company would recognize an approximate $24 million loss for financial
statement purposes, and an approximate $23 million loss for tax purposes.
As of June 30, 2000 and December 31, 1999, the originated loans
were secured by properties of the types and at the locations identified below:
<TABLE>
<CAPTION>
June 30, December 31, June 30, December 31,
Property Type 2000(1) 1999(1) Geographic Location(2) 2000(1) 1999 (1)
------------- ------- ------------ ---------------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Multifamily........................... 38% 37% Michigan.............................. 21% 20%
Hotel................................. 26% 26% Texas................................. 7% 7%
Retail................................ 20% 20% Illinois.............................. 7% 7%
Office................................ 11% 11% California............................ 6% 6%
Other................................. 5% 6% Maryland.............................. 6% 6%
---- ---- Connecticut........................... 6% 6%
Total............................. 100% 100% Florida............................... 5% 5%
==== ==== Other(3).............................. 42% 43%
--- ---
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, 2000, are as follows:
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------
Weighted
Average
Number of Face Effective Weighted Average
Unpaid Principal Balance (1) Loans(2) Value(3)(4) Interest Rate Remaining Term
---------------------------- -------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$0 - $ 4.99 million 91 $213,304,109 7.48% 8.1 years
$5 - $ 9.99 million 21 153,143,809 8.31% 9.6 years
$10- $14.99 million 6 75,040,519 7.15% 8.4 years
$15- $20 million 1 16,986,770 7.15% 9.4 years
--- ------------ ----- ---------
119 $458,475,207 7.52% 8.9 years
=== ============ ===== =========
</TABLE>
27
<PAGE>
(1) The carrying amount of the originated loans of $464,478,082 is comprised
of $458,475,207 face amount of loans plus $6,002,875 of deferred loan
costs.
(2) Several loans in CMO-IV are collateralized by multiple properties. The
table reflects the actual number of loans.
(3) During the six months ended June 30, 2000, there was one loan prepayment
in CMO-IV. This prepayment generated net proceeds of approximately
$927,100 and resulted in a financial statement gain of $37,885, which is
included in Gain on Originated Loan Dispositions on the accompanying
consolidated statement of income for the six months ended June 30, 2000.
(4) All originated loans are collateralized by first or second liens on
multifamily, hotel, retail, office or other commercial properties.
Approximately 78% of the unpaid principal balance of the loans in the
securitization are No-Lock loans.
(5) The fair value of the originated loans at June 30, 2000 was $419,296,783.
Descriptions of the originated loans categorized by unpaid principal
balances as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------
Weighted
Average
Number of Face Effective Weighted Average
Unpaid Principal Balance Loans Value(1) Interest Rate Remaining Term
------------------------ ----- -------- ------------- --------------
<S> <C> <C> <C> <C>
$0 - $ 4.99 million 92 $216,386,540 7.48% 8.6 years
$5 - $ 9.99 million 21 154,467,547 7.36% 8.9 years
$10- $14.99 million 6 75,822,080 7.15% 8.9 years
$15- $20 million 1 17,076,246 7.15% 9.9 years
--- ------------ ------- ---------
120 $463,752,413 7.37% 9.1 years
=== ============ ======= =========
</TABLE>
--------------------------------
(1) The fair value of the originated loans at December 31, 1999 was
$422,643,902.
Although CMO-IV was accounted for as a financing, as described
above, economically, the Subordinated CMBS tranches created in this
transaction which CRIIMI MAE owns, currently generate monthly cash flows of
approximately $700,000. As of June 30, 2000, interest payments of
approximately $13.4 million were withheld with respect to certain tranches of
CMO-IV.
At the time it filed for protection under Chapter 11, 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
(collectively, "Prudential") (the "Prudential Program").
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.
On April 5, 1999, the Bankruptcy Court entered a Stipulation and
Consent Order (the "Order"), negotiated by the Company and Citibank. The
negotiations were in response to a letter Citibank sent to the Company on
October 5, 1998 alleging that the Company was in default under the Citibank
Program and that it was terminating the Citibank Program. The Order provided
that Citibank would, with CRIIMI MAE's cooperation, sell the loans originated
under the Citibank Program provided that the sale resulted 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
could be waived by written agreement of the Company, the Unsecured Creditors'
Committee and the Equity Committee.
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. On September 16, 1999, the remaining three loans
were sold for gross proceeds of approximately $27.2 million. The loans sold
had an aggregate principal balance of $32.7 million. Prior to the actual sale
of these loans, the Company had recorded its unrealized losses based on
pricing data received from Citibank. In
28
<PAGE>
the case of each sale of the commercial loans, the minimum net proceeds
provision was waived by agreement of the Company, the Unsecured Creditors'
Committee and the CMI Equity Committee. For GAAP purposes, the Company
realized $36.3 million of losses from the third quarter of 1998 through the
third quarter of 1999. For income tax purposes, the entire loss of $36.3
million was recorded as a realized loss on the loan sale dates in the third
quarter of 1999.
Under the Prudential Program, the Company had an option to pay to
Prudential the face value of the loan 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 had been made. Under the Prudential Program, the
Company was required to fund a reserve account of approximately $2 million
for the sole loan originated under this Program. Since CRIIMI MAE was unable
to exercise its option under the Prudential Program, the Company forfeited
the amount of the reserve account.
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, 2000,
approximately 16% of CRIIMI MAE's investment in mortgage securities were
FHA-Insured Certificates and 84% were GNMA Mortgage-Backed Securities
(including certificates which collateralized Freddie Mac participation
certificates). FHA-Insured Certificates and GNMA Mortgage-Backed Securities
are collectively referred to herein as "mortgage securities."
29
<PAGE>
CRIIMI MAE owns the following mortgages directly or indirectly through its
wholly-owned subsidiaries:
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------
Weighted
Number of Average
Mortgage Effective Weighted Average
Securities Fair Value (1) Amortized Cost Interest Rate Remaining Term
------------- ------------------ ------------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 1 $ 5,232,527 $ 5,416,259 8.00% 35 years
CRIIMI MAE Financial Corporation (2) 35 121,450,651 125,378,096 8.39% 29 years
CRIIMI MAE Financial Corporation II (2) 46 196,269,500 204,917,710 7.20% 27 years
CRIIMI MAE Financial Corporation III (2) 22 58,248,457 60,030,161 7.83% 29 years
------------- ------------------ ------------------ ------------- ----------------
104 $381,201,135 $395,742,226 7.68% (3) 28 years (3)
============= ================== ================== =========== ==============
<CAPTION>
As of December 31, 1999
-----------------------
Weighted
Number of Average
Mortgage Effective Weighted Average
Securities Fair Value (1) Amortized Cost Interest Rate Remaining Term
------------- ------------------ ------------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 1 $ 5,268,982 $ 5,429,746 8.00% 35 years
CRIIMI MAE Financial Corporation 36 123,757,775 126,621,745 8.40% 29 years
CRIIMI MAE Financial Corporation II 49 204,437,012 212,474,158 7.24% 27 years
CRIIMI MAE Financial Corporation III 23 61,393,470 62,943,459 7.84% 29 years
------------- ------------------ ------------------ ------------- ----------------
109 $394,857,239 $407,469,108 7.68% (3) 28 years (3)
============= ================== ================== =========== ==============
</TABLE>
---------------------------
(1) The fair value of the mortgage securities was based on the estimated
discounted future cash flows. As of June 30, 2000 and December 31, 1999,
all mortgage securities were classified as Available for Sale and carried
at fair value on the balance sheet. See fair market value discussion in
Note 4.
(2) During the six months ended June 30, 2000, there were five prepayments of
mortgage loans underlying mortgage securities held by CRIIMI MAE's
financing subsidiaries. These prepayments generated net proceeds of
approximately $9.8 million and resulted in net financial statement gains
of approximately $241,300, which are included in gains on mortgage
securities dispositions on the accompanying consolidated statement of
income for the six months ended June 30, 2000.
(3) Weighted averages were computed using total face value 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 or
losses on those mortgage securities, which is reported as a separate
component of shareholders' equity as of June 30, 2000 and December 31, 1999.
8. DIFFERENCES BETWEEN FINANCIAL STATEMENT NET INCOME (LOSS) AND TAXABLE
INCOME (LOSS)
The differences between financial statement (GAAP) net income
(loss) and taxable income (loss) are principally attributable to differing
treatment of unrealized/realized gains and losses associated with certain
assets; the impairment of certain assets; the bases, income, and/or credit
loss recognition related to certain assets; a portion of reorganization costs
not deductible for tax purposes; and amortization of certain costs.
As previously discussed in Note 1, as a result of its trader
election in early 2000, CRIIMI MAE recognized a mark-to-market tax loss of
approximately $478 million on certain Trading Assets on January 1, 2000 (the
"January 2000 Loss"). The January 2000 Loss is expected to be recognized
evenly over four years for tax purposes (i.e., approximately $120 million per
year) beginning with the year 2000. The Company recognized one-fourth (i.e.,
approximately $30 million) of this year's portion of the January 2000
30
<PAGE>
Loss during each of the first two quarters of 2000. The Company expects to
continue to recognize approximately $30 million of loss related to the
January 2000 Loss in each quarter for the fiscal years 2000-2003. (See Note 1
"2000 Taxable Income (Loss)/ Taxable Distribution Requirements" for a more
complete discussion).
A summary of the estimated first half 2000 net operating loss is as
follows:
<TABLE>
<S> <C>
January 2000 Loss $478 million
LESS: Portion recognized in First Quarter 2000 (30) million
LESS: Portion recognized in Second Quarter 2000 (30) million
-------------
Balance Remaining of January 2000 Loss to be Recognized $418 million
=============
Taxable Income for the six months ended June 30, 2000 Before Recognition of
January 2000 Loss $27 million
LESS: January 2000 Loss Recognized in First Quarter 2000 (30) million
LESS: January 2000 Loss Recognized in Second Quarter 2000 (30) million
-------------
Net Operating Loss for the six months ended June 30, 2000 ($33) million
Net Operating Loss through June 30, 2000 ($33) million
Net Operating Loss Utilization 0.0 million
-------------
Net Operating Loss Carried Forward for Use in Future Periods ($33) million
</TABLE>
The distinction between taxable income (loss) and GAAP income
(loss) is important to the Company's shareholders because dividends or
distributions are declared and paid on the basis of taxable income. The
Company does not pay taxes so long as it satisfies the requirements for
exemption from taxation pursuant to the REIT requirements of the Code. The
Company calculates its taxable income as if the Company were a regular
domestic corporation. This taxable income level determines the amount of
dividends the Company is required to pay out over time in order to eliminate
its tax liability.
9. OBLIGATIONS UNDER FINANCING FACILITIES
DEFAULT DECLARATIONS
As a result of the Chapter 11 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. See
Note 16 for a discussion of material litigation between the Company and
various creditors and agreements the Company has reached with certain of
these creditors. See Note 1 "Organization - The Plan of Reorganization" for a
discussion of the New Debt contemplated by the Company's Plan.
31
<PAGE>
The following table summarizes CRIIMI MAE's debt outstanding as of June 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
Six months ended June 30, 2000
----------------------------------------------------------------------------------------------
Effective Average
Rate at Effective
Ending Balance Quarter End Average Balance Rate Stated Maturity Date
--------------------- ------------ ------------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
Securitized mortgage obligations:
Subordinated CMBS (1) $279,348,933 8.9% $279,126,655 8.9% Nov 2006-Nov 2011
Freddie Mac Funding Note (2) 195,830,884 7.4% 198,089,838 7.4% Sept 2031
Fannie Mae Funding Note (3) 58,022,397 7.5% 60,082,063 7.5% March 2035
CMO (4) 115,170,652 7.5% 115,391,409 7.5% Jan 2033
CMO-loan originations (5) 395,261,869 6.6% 397,748,035 6.6% Oct 2001-May 2008
Variable-rate secured borrowings -
Subordinated CMBS (a) 566,429,031 7.7% 658,252,233 7.5% Various
Bank term loans 3,050,000 8.0% 3,050,000 7.7% Dec 1998
Working capital line of credit 40,000,000 8.4% 40,000,000 8.1% Dec 1998
Bridge loan 49,749,522 8.9% 49,749,522 8.5% Feb 1999
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002
---------------------
Total $1,802,863,288
=====================
</TABLE>
(a) Certain debt balances have been reduced to reflect application of net cash
flow received during Chapter 11 pursuant to agreements with certain
creditors. See also Note 5 for a summary of year to date sales of CMBS
subject to the CMBS Sale and the related debt paid off.
<TABLE>
<CAPTION>
Year ended December 31, 1999
---------------------------------------------------------------------------------------------
Effective Average
Rate at Effective
Ending Balance Year End Average Balance Rate Stated Maturity Date
-------------------- ------------ ------------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Securitized mortgage obligations:
Subordinated CMBS (1) $278,165,968 8.9% $217,285,484 8.9% Nov 2006-Nov 2011
Freddie Mac Funding Note (2) 201,784,575 7.4% 211,889,272 7.4% Sept 2031
Fannie Mae Funding Note (3) 60,853,118 7.4% 66,918,215 7.4% March 2035
CMO (4) 116,073,909 7.4% 129,616,228 7.4% Jan 2033
CMO-loan originations (5) 399,768,513 6.6% 388,431,011 6.5% Oct 2001-May 2008
Variable-rate secured borrowings -
Subordinated CMBS 732,904,775 7.7% 794,212,980 6.2% Various
Bank term loans 3,050,000 7.8% 3,050,000 7.1% Dec 1998
Working capital line of credit 40,000,000 8.2% 40,000,000 7.0% Dec 1998
Bridge loan 49,749,522 8.7% 49,749,522 7.5% Feb 1999
32
<PAGE>
<CAPTION>
Year ended December 31, 1999
---------------------------------------------------------------------------------------------
Effective Average
Rate at Effective
Ending Balance Year End Average Balance Rate Stated Maturity Date
-------------------- ------------ ------------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002
--------------------
Total $1,982,350,380
====================
</TABLE>
(1) As of June 30, 2000 and December 31, 1999, the face amount of the debt was
$328,446,000 and $328,446,000 with unamortized discount of $49,097,067 and
$50,280,032, respectively. During the six months ended June 30, 2000 and
1999, discount amortization of $1,182,695 and $715,283, respectively, was
recorded as interest expense.
(2) As of June 30, 2000 and December 31, 1999, the face amount of the note was
$201,994,118 and $209,506,965, respectively, with unamortized discount of
$6,163,234 and $7,722,390, respectively. During the six months ended June
30, 2000 and 1999, discount amortization of $1,559,156 and $205,672,
respectively, was recorded as interest expense.
(3) As of June 30, 2000 and December 31, 1999, the face amount of the note was
$59,420,879 and $62,359,630, respectively, with unamortized discount of
$1,398,482 and $1,506,512, respectively. During the six months ended June
30, 2000 and 1999, discount amortization of $108,030 and $153,185,
respectively, was recorded as interest expense.
(4) As of June 30, 2000 and December 31, 1999, the face amount of the note was
$118,302,509 and $119,563,094, respectively, with unamortized discount of
$3,131,856 and $3,489,185, respectively. During the six months ended June
30, 2000 and 1999, discount amortization of $357,329 and $367,567,
respectively, was recorded as interest expense.
(5) As of June 30, 2000 and December 31, 1999, the face amount of the debt was
$405,933,679 and $411,110,641 with unamortized discount of $10,671,810 and
$11,342,128, respectively. During the six months ended June 30, 2000 and
1999, discount amortization of $670,319 and $727,018, respectively, was
recorded as interest expense.
COLLATERALIZED BOND OBLIGATIONS - CMBS
In the May 1998 CBO-2 transaction, 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. Of the $468 million in investment grade
securities, $345 million were non-callable securities and $123 million were
callable securities.
On March 5, 1999, $205.8 million face amount of callable CBO-2 BBB
Bonds with a coupon rate of 7% were sold. 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.
FAS 125 provides guidance as to whether a transfer of financial
assets, such as in a securitization, will qualify for sale treatment or
secured borrowing treatment. This distinction is made by determining whether
a transferor relinquishes control over the transferred assets. If the
transferor is considered to no longer control the assets, the securities
receive sale 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 CBO-2, 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. The March 5, 1999 transaction was
accounted for as a financing by the Company rather than a sale. This resulted
in CRIIMI MAE recognizing a fixed-rate liability for these bonds in the
amount of gross proceeds.
33
<PAGE>
COLLATERALIZED MORTGAGE OBLIGATIONS - INSURED MORTGAGE SECURITIES
During late 1995, CRIIMI MAE, through three wholly owned financing
subsidiaries, issued approximately $664 million (face amount) of long-term,
fixed-rate debt in order to refinance short-term, variable-rate debt. Changes
in interest rates will have no impact on the cost of funds or the collateral
requirements on this debt. Proceeds from the issuance of this long-term debt,
net of original issue discount, were originally applied as follows:
approximately $557 million was used to pay down short-term, variable-rate
debt facilities, approximately $8 million was used to pay transaction costs
and approximately $80 million was used to purchase Subordinated CMBS.
The refinancings were completed through three separate
transactions. GNMA Mortgage-Backed Securities with a fair value of
approximately $233 million as of December 31, 1998, were pledged as security
for a funding note payable to Freddie Mac (the "Freddie Mac Funding Note").
The Collateralized Mortgage Obligations (CMOs) were collateralized by
FHA-Insured Certificates and GNMA Mortgage-Backed Securities with a fair
value of approximately $161 million as of December 31, 1998. GNMA
Mortgage-Backed Securities with a fair value of approximately $89 million as
of December 31, 1998, were pledged as security for a funding note payable to
Fannie Mae (the "Fannie Mae Funding Note").
Each of the above-mentioned transactions has been accounted for as
a financing in accordance with FASB Technical Bulletin 85-2. The discount on
the CMOs and the Funding Notes is being amortized on a level yield basis.
In the second quarter of 2000, the Company increased the estimate
of future prepayment speeds used to recognize interest expense related to
these obligations. This increase in the estimate of future prepayment speeds
is a result of these obligations paying down faster than originally
projected. This resulted in an additional $1.5 million of discount
amortization in the second quarter of 2000 which is reflected in interest
expense.
COLLATERALIZED MORTGAGE OBLIGATIONS - ORIGINATED LOANS
In the June 1998 CMO-IV transaction, $496 million of originated or
acquired commercial mortgage loans were securitized, and 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 collateralized
mortgage obligations) 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 related
lending agreements are secured by certain of the CMO-IV securities with an
aggregate fair value of approximately $43.3 million and $42.8 million as of
June 30, 2000 and December 31, 1999, respectively.
On April 5, 1999, the Company finalized an agreement by which
Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell the
remaining 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 sold these two classes of CMBS in May and October 1999. 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 has been accounted for as a financing and not a
sale. Gross proceeds from the sale were used to pay off $39.6 million of
secured debt and certain costs, and the remainder of approximately $315,000
was remitted to CRIIMI MAE. This resulted in CRIIMI MAE recognizing
fixed-rate debt for these bonds in the amount of the gross proceeds received.
See Note 6 regarding the extinguishment of this debt in connection with the
Company's Plan.
VARIABLE RATE SECURED BORROWINGS-CMBS
As previously discussed, when CRIIMI MAE purchased Subordinated
CMBS, it initially financed (generally through short-term, variable-rate
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
34
<PAGE>
borrowing agreements, as discussed below. As of June 30, 2000, 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 2000 per
the stated maturities.
As discussed in Note 5, during the six months ended June 30, 2000,
the Company paid down variable rate debt aggregating $150.5 million as a
result of the sale of certain CMBS subject to the CMBS Sale. Upon the
disposition of the remaining CMBS subject to the CMBS Sale and the Company's
interest in CMO-IV, of which there can be no assurance, it is expected that
the variable rate debt secured by such sold assets will be paid down. During
1999, the Company repaid variable rate secured debt approximating $141.2
million in connection with the sale of the CBO-2 BBB bonds and $39.6 million
in connection with the sale of the BBB bonds issued in CMO-IV.
The secured borrowing agreements are secured by certain rated CMBS
security tranches with an aggregate fair value of approximately $635 million
as of June 30, 2000 and $784 million as of December 31, 1999. 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 maximum loan-to-value
ratio is exceeded, then the lender may require the Company to post cash or
additional collateral with sufficient value to cure the perceived value
deficiency. At August 1, 2000, CRIIMI MAE had secured borrowing agreements
with respect to its CMBS securities with German American Capital Corporation,
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.
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, restricts the ability of the Company and its subsidiaries to incur
additional indebtedness, pay dividends, or make distributions in respect of
the Company's or such subsidiaries' capital stock, make other restricted
payments, enter into transactions with affiliates or related persons, or
consolidate, merge or sell all or substantially all of their assets. These
covenants are subject to exceptions and qualifications.
Under the terms of the Indenture, the Company cannot incur
additional indebtedness (except for Permitted Debt, which includes secured
borrowings, working capital lines of credit, 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.
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 requires quarterly
principal payments of $650,000 and matured on December 31, 1998. The amount
outstanding as of June 30, 2000 and December 31, 1999 was $1.3 million.
Interest on the loan is based on LIBOR, plus a spread of 1.25%.
In addition, a wholly owned subsidiary has a loan secured by
certain 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, 2000 and December 31, 1999 was $1.75
million. Interest on the loan is based on LIBOR plus a spread of 1.5%. The
property was sold to a third party
35
<PAGE>
in July, 2000 and a portion of the proceeds from the sale were used to pay
off the outstanding loan balance, and other related costs.
WORKING CAPITAL LINE OF CREDIT
In 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, 2000 and December 31, 1999, $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, 2000 and December 31, 1999, 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 63% of CRIIMI MAE's consolidated debt as of June 30, 2000.
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 the net interest margin 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 contemplates that at least 75% of variable-rate debt be
hedged. As of June 30, 2000 and December 31, 1999, 100% and 94%,
respectively, of CRIIMI MAE's variable-rate debt was hedged.
For the six months ended June 30, 2000, CRIIMI MAE's weighted
average cost of borrowing, including amortization of discounts and deferred
financing fees of approximately $5.7 million, was approximately 8%. As of
June 30, 2000, CRIIMI MAE's debt-to-equity ratio was approximately 7.2 to 1
and CRIIMI MAE's non-match-funded debt-to-equity ratio was approximately 3.0
to 1. 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.
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. If the cap qualifies for hedge
accounting treatment, the related cost, as well as gains or losses on
terminated positions, have been deferred and recognized into income over the
life of the related debt. However, with the sale of certain securities
contemplated to be sold by the Plan, certain of the Company's interest rate
caps will no longer qualify for hedge accounting. The portion of such caps
will be marked-to-market with the adjustment recorded through earnings. At
June 30, 2000, CRIIMI MAE held caps with a notional amount of $675 million of
which $659 million was used to hedge the Company's variable rate debt and the
remaining $16 million notional amount was carried at fair value with changes
in fair value reported in earnings as it no longer qualified for hedge
accounting.
36
<PAGE>
<TABLE>
<CAPTION>
Notional
Amount Effective Date Maturity Date (2) Cap (2) Index (3)
----------- --------------- ---------------- ------- ----------
<S> <C> <C> <C> <C>
$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 12, 2001 6.6875% 1M LIBOR
100,000,000 April 30, 1998 March 30, 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
---------------
$675,000,000 (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 one year.
(3) The one month LIBOR rate was 6.6419% at June 30, 2000.
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.
11. COMMON STOCK
CRIIMI MAE had 62,353,170 and 59,954,604 common shares issued and
outstanding as of June 30, 2000 and December 31, 1999, respectively. See also
Note 1 "Organization - The Plan of Reorganization" and "The Company's 1999
Taxable Income".
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 Dividend Reinvestment and Stock
Purchase Plan (the "DRIP Plan"). Subsequently, in May 1998, the shareholders
approved the issuance of up to 4.7 million common shares in connection with
the DRIP Plan. Subject to the suspension referenced below, the DRIP 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 DRIP Plan until further notice.
DIVIDENDS
During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy
Court approval (and subject to there being funds legally available for any
such dividend under state corporate law). (See Note 1-Effect of Chapter 11
Filing on REIT Status and other Tax Matters).
In September 1999, the Company declared a dividend to common
shareholders payable in shares of a new series of preferred stock designated
as Series F Redeemable Cumulative Dividend Preferred Stock with a face value
of $10 per share. The Series F Preferred Stock was convertible into shares of
common stock during two, 10-business day windows. During the first conversion
period (November 15 through November 30, 1999), 756,453 shares of Series F
Preferred Stock were converted, resulting in the issuance of 6,401,443 shares
of common stock. During the second and final conversion period for the Series
F Preferred Stock (January 21 through February 3, 2000), 263,788 additional
shares were converted, resulting in the issuance of 2,396,566 shares of
common stock. See Note 12 for further discussion.
37
<PAGE>
12. PREFERRED STOCK
CRIIMI MAE's charter authorizes the issuance of up to 25,000,000
shares of preferred stock, of which 3,000,000 shares have been designated as
Series B Cumulative Convertible Preferred Stock, 300,000 shares have been
designated as Series C Cumulative Convertible Preferred Stock, 300,000 shares
have been designated as Series D Cumulative Convertible Preferred Stock,
203,000 shares have been designated as Series E Cumulative Convertible
Preferred Stock, and 1,610,000 shares have been designated as Series F
Redeemable Cumulative Dividend Preferred Stock as of June 30, 2000. See also
Note 1 "Organization - The Plan of Reorganization" and "The Company's 1999
Taxable Income".
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
In August 1996, CRIIMI MAE completed a public offering of 2,415,000
shares of Series B Cumulative Convertible Preferred Stock, with a par value
of $0.01 per share (the "Series B Preferred Stock"), at an aggregate offering
price of $60,375,000. The Series B Preferred Stock pays 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. If the Series B
Preferred Stock votes to accept the Plan, the relative rights and preferences
of the Series B Preferred Stock would be amended to permit the payment of
dividends in cash or common stock (or a combination thereof) at the Company's
election. The Series B Preferred Stock is (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 share of Series B Preferred
Stock is convertible into 2.2844 shares of common stock, subject to
adjustment upon the occurrence of certain events. Due to certain adjustment
provisions in the Series B Preferred Stock Articles Supplementary, the
payment of the Series F Redeemable Cumulative Dividend Preferred Stock
dividend resulted in an adjustment to the conversion price such that one
share of Series B Preferred Stock is now convertible into 2.6379 shares of
common stock. The liquidation preference and the redemption price on the
Series B Preferred Stock equals $25 per share, together with accrued and
unpaid dividends. There were 1,593,982 shares of Series B Preferred Stock
outstanding as of June 30, 2000. Dividends accrued on the Series B Preferred
Stock totaled $7,587,355 as of June 30, 2000 (of which, $2,167,816 was
accrued for the first six months of 2000, $4,335,631 was accrued during 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 had the right to sell,
and such investor was obligated to purchase, up to 300,000 shares of Series C
Cumulative Convertible Preferred Stock, par value $.01 per share (the "Series
C Preferred Stock"), through June 1998 at a price of $100 per share. The
Series C Preferred Stock paid 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 Series C Preferred Stock was convertible into
shares of common stock at the option of the holder and was subject to
redemption by CRIIMI MAE. The outstanding shares of Series C Preferred Stock
were subject to mandatory conversion into common shares on February 23, 2000.
Each share of Series C Preferred Stock was convertible into common shares
based on a formula, the numerator of which was $100 and the denominator of
which was a closing trade price of the common stock within the conversion
period or the average of the closing trade prices of the common stock over
the applicable twenty-one (or such fewer number as was mutually acceptable)
day period immediately preceding the date of delivery. The liquidation
preference and redemption price on the Series C Preferred Stock were $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, another 150,000 shares of Series C Preferred Stock were
issued under this agreement, resulting in net proceeds of approximately $15
million. These proceeds were used to fund purchases of Subordinated CMBS.
During 1999, 20,000 shares of Series C Preferred Stock were converted into
653,061 common shares, resulting in 103,000 shares of Series C Preferred
Stock outstanding at December 31, 1999. Dividends accrued on the Series C
Preferred Stock as of June 30, 2000 totaled $1,094,993 (of which $138,682 was
accrued for the first half of 2000, $697,172 for 1999 and $259,139 for the
fourth quarter of 1998, but not paid to date as a result of the Chapter 11
filing). As of February 22, 2000, all of the outstanding shares of Series C
Preferred Stock were exchanged for Series E Preferred Stock. See below for
further discussion.
38
<PAGE>
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 Series D
Cumulative Convertible Preferred Stock par value $.01 per share (the "Series
D Preferred Stock") at price of $100 per share. The Series D Preferred Stock
paid 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
Series D Preferred Stock was convertible into shares of common stock at the
option of the holder and was subject to redemption by CRIIMI MAE. The
outstanding Series D Preferred Stock was subject to mandatory conversion into
common shares on July 31, 2000. Each share of Series D Preferred Stock was
convertible into common shares based on a formula, the numerator of which is
$100 and the denominator of which was a closing trade price of the common
stock within the conversion period or the average of the closing trade prices
of the common stock over the applicable twenty-one (or such fewer number as
was mutually acceptable) day period immediately preceding the date of
delivery. The liquidation preference and redemption price on the Series D
Preferred Stock were $100 and $106, respectively, per share plus an amount
equal to all dividends accrued and unpaid thereon. On July 31, 1998, 100,000
shares of Series D Preferred Stock were issued under this agreement,
resulting in net proceeds of approximately $10 million. There were no Series
D Preferred Stock converted into common shares during 1999, resulting in
100,000 shares outstanding at December 31, 1999. Dividends accrued on the
Series D Preferred Stock totaled $1,181,409 as of June 30, 2000 (of which,
$380,656 was accrued for the first half of 2000, $645,822 was accrued for
1999 and $154,931 was accrued for the fourth quarter of 1998, but not paid to
date as a result of the Chapter 11 filing). As of July 26, 2000, all of the
outstanding shares of Series D Preferred Stock were exchanged for Series E
Preferred Stock. See below for further discussion.
SERIES E CUMULATIVE CONVERTIBLE PREFERRED STOCK
On February 22, 2000, CRIIMI MAE and the holder of its Series C
Preferred Stock entered into a Preferred Stock Exchange Agreement (the
"Series C Exchange Agreement") pursuant to which 103,000 shares of Series C
Preferred Stock were exchanged (the "Series C Exchange") for 103,000 shares
of a new series of preferred stock designated as "Series E Cumulative
Convertible Preferred Stock", par value $0.01 per share (the "Series E
Preferred Stock"). On July 26, 2000, CRIIMI MAE and the holder of its Series
D Preferred Stock entered into a Preferred Stock Exchange agreement (the
"Series D Exchange Agreement") pursuant to which 100,000 shares of Series D
Preferred Stock were exchanged (the "Series D Exchange" and together with the
Series C Exchange, the "Exchanges") for 100,000 shares of Series E Preferred
Stock. The principal purpose of the Exchanges was to effect an extension of
the mandatory conversion dates, upon which the Series C Preferred Stock and
Series D Preferred Stock would have converted into common stock. Pursuant to
the Series C Exchange Agreement and Series D Exchange Agreement, the Company
has amended its Plan to provide for a new mandatory conversion date and
certain additional terms and conditions with respect to the Series E
Preferred Stock. The additional terms principally address dividend and
additional conversion matters.
Until the Company's Plan is effective, the principal terms of the
Series E Preferred Stock are as set forth below. The Series E 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 commencement of
the calendar quarter which includes such quarterly dividend payment.
Quarterly dividends payable with respect to calendar quarters and any partial
quarter will be payable in common stock. Dividends accrued on Series E
Preferred Stock totaled $258,029 as of June 30, 2000, (representing dividends
from February 23, 2000 through June 30, 2000). The Series E Preferred Stock
is not convertible into shares of common stock at the option of the holder
unless the effective date of the Plan does not occur on or before December
31, 2000. In such event, 10,000 shares of Series E Preferred Stock shall
become convertible at the option of the holder into common stock in January
2001 and in each month thereafter until the effective date of the Plan. If
the Series E Preferred Stock becomes convertible into common stock, then each
share of Series E Preferred Stock shall be convertible into common stock
based on a formula, the numerator of which will be $100 and the denominator
of which will be a closing trade price of the common stock within the
conversion pricing period that is mutually acceptable or the average of the
closing trade prices of the common stock over the applicable twenty-one (or
such fewer number as is mutually acceptable) day period immediately preceding
the date of delivery. The Series E Preferred Stock is subject to redemption
by CRIIMI MAE. The liquidation preference and the redemption price on the
Series E Preferred Stock are $100 and $106, respectively, per share plus an
amount equal to all dividends accrued and unpaid thereon.
39
<PAGE>
Once the Company's Plan is effective, amendments to the Series E
Preferred Stock relative rights and preferences, relating principally to
conversion and dividend rights and terms, would be effected, including an
increase in the dividend rate, a new mandatory conversion date and the
provision of additional conversion rights. Reference is made to the Plan,
previously filed with the SEC as an exhibit to a Current Report on Form 8-K,
for a complete description of such amendments to the relative rights and
preferences of the Series E Preferred Stock, as contemplated by the Plan.
SERIES F REDEEMABLE CUMULATIVE DIVIDEND PREFERRED STOCK
On September 14, 1999, the Company declared a dividend on its
common stock for the purpose of distributing approximately $15.7 million in
undistributed 1998 taxable income. The dividend was payable to common
shareholders of record on October 20, 1999, provided that the shareholders
maintained ownership of their common stock through the payment date. The
dividend was paid on November 5, 1999 in shares of Series F Redeemable
Cumulative Preferred Dividend Preferred Stock (the "Series F Preferred
Stock"). The 1,606,595 shares of Series F Preferred Stock issued were
approved for listing on the New York Stock Exchange and trade with the symbol
CMM-PrF, with a par value of $0.01 and a face value of $10.
Holders of record of each share of CRIIMI MAE common stock who
maintained ownership of their common stock through November 5, 1999, received
3/100ths of a share of Series F Preferred Stock (i.e., three shares of Series
F Preferred Stock for every 100 shares of common stock held). The Series F
Preferred Stock was convertible into shares of common stock during two
10-business day conversion periods. The first conversion period was from
November 15, 1999 through November 30, 1999 and the second conversion period
was from January 21, 2000 through February 3, 2000. Conversions were based on
the volume-weighted average of the sale prices of the common stock for the
10-trading days prior to the date converted, subject to a floor of 50% of the
volume-weighted average of the sale prices of the common stock on November 5,
1999. Holders of Series F Preferred Stock have no right to convert their
Series F Preferred Stock into common stock after February 3, 2000.
The Series F Preferred Stock provides for cash dividends at an
annual fixed rate of 12%. The first dividend will be paid no earlier than the
end of the calendar quarter in which a plan of reorganization for the Company
becomes effective, and no more than quarterly thereafter. If the Series F
Preferred Stock votes to accept the Plan, then the relative rights and
preferences of the Series F Preferred Stock would be amended to permit the
payment of dividends in cash or common stock (or a combination thereof) at
the Company's election. The Series F Preferred Stock is redeemable at the
Company's option after November 5, 2000 at a price of $10.00 per share plus
accrued and unpaid dividends. The liquidation value of Series F Preferred
Stock is $10.00 per share plus accrued and unpaid dividends.
During the first conversion period, 756,453 shares of Series F
Preferred Stock were converted, resulting in the issuance of 6,401,443 shares
of common stock. During the second and final conversion period (January 21
through February 3, 2000) for the Series F Preferred Stock, 263,788
additional shares were converted, resulting in the issuance of 2,396,566
shares of common stock. There were 586,354 shares of Series F outstanding at
June 30, 2000. Dividends accrued on Series F Preferred Stock totaled $517,248
as of June 30, 2000 (of which $355,721 was accrued for the first six months
of 2000 and $161,527 for 1999).
40
<PAGE>
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, 2000 and 1999.
<TABLE>
<CAPTION>
For the three months ended June 30, 2000 For the three months ended June 30, 1999
---------------------------------------- ----------------------------------------
Income Income (loss)
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income (loss)
Available to
Common Shareholders $3,742,484 62,353,170 $0.06 $(2,033,199) 53,553,161 $(0.04)
Effect of Dilutive
SECURITIES (1)
Net effect of
assumed exercise
of stock options
-- -- --
81,439
Convertible
Preferred Stock $399,246 13,929,870 $ -- --
-------- ---------- ------------ ----------
DILUTED EPS
Income (loss)
available to
Common
Shareholders and
assumed conversions $4,141,731 76,364,479 $0.05 $(2,033,199) 53,553,161 $(0.04)
========== ========== ===== ============ ========== =======
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
For the six months ended june 30, 2000 For the six months ended june 30, 1999
-------------------------------------- --------------------------------------
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 $7,778,095 61,934,051 $0.13 $11,383,750 53,553,161 $0.21
Effect of
Dilutive
Securities (1)
--------------
Net effect of
assumed exercise
of stock options - - 35,813 -- --
Convertible
Preferred Stock (1) $777,368 15,603,382 $614,680 7,606,685
-------- ---------- -------- ---------
Diluted EPS
-----------
Income available
to Common
Shareholders
and assumed
conversions $8,555,463 77,577,654 $0.11 $11,998,430 60,889,109 $0.20
========== ========== ===== =========== ========== =====
</TABLE>
---------------------------
(1) As of June 30, 2000 and 1999, respectively, the following shares of
preferred stock were outstanding: 1,593,982 shares of Series B Preferred
Stock , -0- and 103,000 shares of Series C Preferred Stock, 100,000 shares
of Series D Preferred Stock, 103,000 and -0- shares of Series E Preferred
Stock, and 586,354 and -0- shares of Series F Preferred Stock. The common
stock equivalents for the Series B Preferred Stock and the Series F
Preferred Stock are not included in the calculation of diluted EPS because
the effect would be anti-dilutive.
14. EMPLOYEE RETENTION PLAN
Upon commencement of the Chapter 11 cases, the Company believed it
was essential to both the efficient operation of the Company's business and
the reorganization effort that the Company maintain the support, cooperation
and morale of its employees. The Company obtained Bankruptcy Court approval
to pay certain pre-petition employee obligations in the nature of wages,
salaries and other compensation and to continue to honor and pay all employee
benefit plans and policies.
In addition, to ensure the Company's continued retention of its
executives and other employees and to provide meaningful incentives for these
employees to work toward the Company's financial recovery and reorganization,
the Company's management and Board of Directors developed a comprehensive and
integrated program to retain its executives and other employees throughout
the reorganization. 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 permitted the Company to approve
ordinary course employee salary increases beginning in March 1999, subject to
certain limitations, and to grant options to its employees after the Petition
Date, up to certain limits. The Employee
42
<PAGE>
Retention Plan also provides for retention payments aggregating up to
approximately $3.5 million, including payments to certain executives.
Retention payments are payable semiannually over a two-year period. The first
retention payment of approximately $909,000 vested on April 5, 1999, and was
paid on April 15, 1999. The second retention payment of approximately
$865,000 vested on October 5, 1999 and was paid on October 15, 1999. The
third retention payment of approximately $653,000 vested on April 5, 2000,
and was paid on April 14, 2000. The fourth retention payment will vest on
October 5, 2000 and is expected to be paid on October 16, 2000. Any unpaid
portion of the retention payments will become due and payable (i) upon the
effective date of a plan of reorganization of the Company and, with respect
to certain key executives, court approval or (ii) upon termination without
cause. William B. Dockser, Chairman of the Board of Directors, 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 CMM. In
addition, options granted by the Company after October 5, 1998 will, subject
to Bankruptcy Court approval, become exercisable upon a change of control.
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, 2000 and 1999. 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,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Amounts received or accrued from related parties:
-------------------------------------------------
CRIIMI Inc.
----------
Income(1) $ 189,076 $ 205,255 $ 375,484 $ 482,292
Return of Capital(2) 184,372 1,656,155 445,644 3,165,773
------------ ------------ ------------ ------------
Total $ 373,448 $ 1,861,410 $ 821,128 $ 3,648,065
============ ============ ============ ============
CRI/AIM Investment Limited Partnership (1) $ 84,119 $ 103,858 $ 178,232 $ 235,669
============ ============ ============ ============
Expense reimbursements to CRIIMI Management:
--------------------------------------------
AIM Funds and CRI Liquidating (3)(4) $ 52,209 $ 91,278 $ 99,633 $ 122,346
CMSLP (2)(3) 0 249,821 39,602 543,280
------------ ------------ ------------ ------------
Total $ 52,209 $ 341,099 $ 139,235 $ 665,626
============ ============ ============ ============
Payments to CRI:
----------------
Expense reimbursement - CRIIMI MAE(3)(5) $ 39,562 $ 48,600 $ 72,744 $ 97,376
============ ============ ============ ============
Payments to Capital Hotel Group(5)
----------------------------------
Management Fee (6) $ 21,914 $ 17,096 $ 34,698 $ 28,899
============ ============ ============ ============
</TABLE>
----------------------------------
(1) Included as equity in earnings from investments on the accompanying
consolidated statements of income.
(2) Included as a reduction of equity investments on the accompanying
consolidated balance sheets.
(3) Included in general and administrative expenses on the accompanying
consolidated statements of income.
(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) 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
43
<PAGE>
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.
(6) 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.
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 confirm and
consummate their plan of reorganization 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) the Unsecured Creditors' Committee,
(ii) the Official Committee of Unsecured Creditors in the CM Management
Chapter 11 Case (the "CMM Creditors' Committee") and (iii) the CMI Equity
Committee (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.
The Debtors' initial exclusivity period to file a plan of
reorganization ended on February 2, 1999. The Bankruptcy Court extended this
period through August 2, 1999 and again through September 10, 1999. The
Debtors
44
<PAGE>
sought a third extension of exclusivity through November 10, 1999 and on
September 20, 1999, the Bankruptcy Court entered an order (i) extending the
Debtors' right to file a plan of reorganization through October 16, 1999,
(ii) providing the Unsecured Creditors' Committee and the CMI Equity
Committee the right to jointly file a plan of reorganization through October
16, 1999 and (iii) providing that any party in interest may file a plan of
reorganization after October 16, 1999. The Debtors filed (i) a Joint Plan of
Reorganization on September 22, 1999, (ii) an Amended Joint Plan of
Reorganization and proposed Joint Disclosure Statement on December 23, 1999,
(iii) a Second Amended Joint Plan of Reorganization and proposed Amended
Joint Disclosure Statement on March 31, 2000, and (iv) a Third Amended Joint
Plan of Reorganization and proposed Second Amended Joint Disclosure Statement
with respect thereto on April 25, 2000, which plan and disclosure statement
were amended and supplemented by praecipes filed with the Bankruptcy Court on
July 13, 14 and 21, 2000. The Debtors' Third Amended Joint Plan of
Reorganization is fully supported by the CMI Equity Committee, which is a
co-proponent of the Plan. Subject to the completion of mutually acceptable
Unsecured Creditor Debt Documentation, the Unsecured Creditors' Committee has
agreed to support confirmation of the Debtors' Plan.
On December 20, 1999, the Unsecured Creditors' Committee filed its
own plan of reorganization and proposed disclosure statement with the
Bankruptcy Court. On January 11, 2000 and on February 11, 2000, the Unsecured
Creditors' Committee filed its first and second amended plans of
reorganization, respectively, with the Bankruptcy Court and its amended
proposed disclosure statements with respect thereto. However, as a result of
the successful negotiations, the Unsecured Creditors' Committee is now
supporting confirmation of the Debtors' Plan and has asked the Bankruptcy
Court to defer consideration of its plan pending approval of the Debtors'
Plan and the completion of mutually acceptable Unsecured Creditor Debt
Documentation. Accordingly, the Debtors, the CMI Equity Committee and the
Unsecured Creditors' Committee are together presenting the Debtors' Plan for
approval by all holders of claims and interests in impaired classes.
The Bankruptcy Court held a hearing on April 25, 2000 on the
Proposed Disclosure Statement. During that hearing, the bankruptcy judge
requested the filing of additional legal briefs by May 9, 2000 on two issues
raised at the hearing. The issues raised related to an objection to the
Proposed Disclosure Statement filed by Salomon Smith Barney Inc./Citicorp
Securities, Inc. and Citicorp Real Estate, Inc. (together "Citigroup"). On
July 12, 2000, the Bankruptcy Court entered an order overruling the
objections raised by Citigroup as set forth in the Memorandum Opinion and
Order filed and entered on that date by the Bankruptcy Court. The Citigroup
objections were the only objections to the Proposed Disclosure Statement
pending before the Bankruptcy Court. On July 21, 2000, CRIIMI MAE and
Citigroup reached a settlement regarding the treatment of Citigroup's claims
under the Plan. This accord resolved Citigroup's objections to the Proposed
Disclosure Statement and contemplates the dismissal of all outstanding
litigation between the parties. The Bankruptcy Court has scheduled a hearing
on August 23, 2000 with respect to the proposed ballots submitted to the
Bankruptcy Court to be sent to members of all classes of impaired creditors
and equity security holders in connection with the Plan.
Once the Proposed Disclosure Statement has been approved by the
Bankruptcy Court, the Plan will be sent together with the approved Disclosure
Statement to members of all classes of impaired creditors and equity security
holders for acceptance or rejection. Following voting on the 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 before it. 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.
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BANKRUPTCY RELATED LITIGATION
The following is a summary of material litigation matters between
the Company and certain of its secured creditors since the Petition Date. The
Company has reached agreement with certain of these creditors, as set forth
in greater specificity below.
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 in connection with 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 "Company's Distribution
Share"). 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.
On September 7, 1999, the Company filed a Motion to Approve
Stipulation and Consent Order Providing for Adequate Protection. On or about
September 27, 1999, the Unsecured Creditors' Committee and the CMI Equity
Committee filed a joint objection to the Motion. On December 3, 1999, the
Bankruptcy Court entered the Stipulation and Consent Order Providing For
Adequate Protection (the "Adequate Protection Order"), certain provisions of
which were effective retroactively. Pursuant to the Adequate Protection
Order, a segregated interest bearing debtor-in-possession account was created
(the "Cash Collateral Account") into which the Company's Distribution Share
was deposited during the months of August through December 1999. An
additional fifty percent (50%) of the Company's Distribution Share has been
deposited into such account since January and absent a further ruling by the
Bankruptcy Court, or the occurrence of certain market events detailed in the
Adequate Protection Order, will continue to be deposited into such account
through the effective date of the Plan. The Adequate Protection Order
provides Merrill Lynch with a first priority lien on the Cash Collateral
Account.
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
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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. The Bankruptcy Court agreed to a request
by CRIIMI MAE, Citibank, and the Unsecured Creditors' Committee to further
postpone the pending litigation on July 7, 1999 and again on September 10,
1999. The trial has not yet been rescheduled.
The agreements reached by the Company with Citicorp and Citibank
on March 11, 1999 were approved by the Bankruptcy Court through stipulations
and consent orders entered on April 5, 1999. One of the agreements also
provided that Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to
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. On October 8, 1999, the remaining
CMO-IV securities held by Holdings II were sold. This sale reduced the
amounts owed from Holdings II to Citicorp by approximately $22 million and
Holdings II received net proceeds of approximately $315,000. In addition,
Citibank, in cooperation with CRIIMI MAE, agreed to sell commercial mortgages
originated in 1998 under the Citibank Program, provided that the sale
resulted 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. On August 5, 1999, all but three of the
commercial loans originated under the Citibank Program in 1998, with an
aggregate unpaid principal balance of approximately $339 million, were sold
for gross proceeds of approximately $308 million. On September 16, 1999,
Citibank sold the remaining three loans, with an aggregate unpaid principal
balance of approximately $32.7 million, for gross proceeds of approximately
$27.2 million. In the case of each sale of the commercial loans, the minimum
net proceeds provision was waived by agreement of the Company, the Unsecured
Creditors' Committee and the CMI Equity Committee.
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.
A settlement was reached on July 21, 2000, among the Company and
Citigroup. The terms of the settlement agreement with Citigroup are
incorporated into the Company's Plan and provide for the satisfaction of all
Citigroup claims (including dismissal of all litigation) through the payment
of: (a) principal and interest due in connection with certain financings
provided by Salomon Smith Barney, Inc./Citicorp Securities, Inc. relating to
the bonds designated CMCMBS 1998-1 (CMO-IV) (Classes F through J and IO),
MCFI 1998-MC1 (Classes H through M) and MCFI 1998-MC2 (Classes F through K);
(b) outstanding principal, interest and expenses due in connection with a
loan provided by Citicorp Real Estate, Inc. to a Company subsidiary; and (c)
$4,000,000 in cash for all remaining claims of Citigroup, which has been
accrued on the balance sheet as of June 30, 2000. The payment to Citigroup
will come from the proceeds of the sale or refinance of the referenced bonds.
Citigroup has agreed to cooperate in connection with the sale of these bonds.
There can be no assurance that all or any portion of these bonds will be sold
or refinanced on or before the effective date of the Plan.
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;
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(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 Unsecured Creditors' Committee, the CMI
Equity Committee or First Union shall seek modification of
the adequate protection arrangements set forth in the
agreement for a period commencing upon the date 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 Unsecured Creditors' Committee has consented to
the agreement 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. On July 1, 1999, CM Management filed a motion for approval of
the agreement resolving First Union's motion for relief from the automatic
stay. On October 22, 1999, to provide the parties with more time to negotiate
a modification to the agreement, CM Management, with the consent of First
Union and the CMM Creditors' Committee, advised the Bankruptcy Court that it
would be withdrawing the motion for approval of the agreement, without
prejudice to CM Management's right to re-file once an agreement has been
reached with First Union and the CMM Creditors' Committee. The motion was
subsequently withdrawn.
On or about February 18, 2000, the Company, the Unsecured
Creditors' Committee and First Union entered into a Second Stipulation and
Agreed Order: (i) Authorizing Use of Cash Collateral and (ii) Granting Other
Relief (the "Second Stipulation"). The Second Stipulation provides for, among
other things, the following:
(i) the reaffirmation of all of the terms contained in the July
1, 1999 agreement except as expressly provided in the
Second Stipulation;
(ii) the extension from January 1, 2000 through March 31, 2000
of the provisions in the July 1, 1999 agreement relating to
use of the assignment securities income;
(iii) the extension from December 31, 1999 to March 31, 2000 of
the provisions in the July 1, 1999 agreement relating to
(i) First Union's agreement not to seek relief from the
automatic stay to foreclose on the assignment securities or
the assignment securities income and (ii) the agreement by
First Union, the Company and the Unsecured Creditors'
Committee not to seek modification of the adequate
protection arrangements contained in the July 1, 1999
agreement; and
(iv) the consummation of the Stipulation and Consent Order
Selling the Wells Fargo Bonds to Morgan Stanley, which
occurred in February 2000. See "Bankruptcy Related
Litigation-Morgan Stanley" for further discussion.
On February 22, 2000, the Company filed a motion with the
Bankruptcy Court for approval of the Second Stipulation. CRIIMI MAE, First
Union and Lehman also reached an agreement that called for the sale of seven
classes of Subordinated CMBS from First Union Lehman Brothers Series 98 C-2
the ("First Union Lehman Bonds"). The agreement was filed with the Bankruptcy
Court on March 21, 2000 for approval. On March 28, 2000, the Bankruptcy Court
approved the Second Stipulation. On April 24, 2000, the First Union Lehman
Bonds were sold. The transaction generated proceeds of $140 million, of which
approximately $113 million was used to pay the related debt owed to Lehman
and First Union. The approximate $27 million of remaining proceeds will be
used primarily to help fund the Plan.
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First Union has asserted a first priority security interest in
certain bonds that are or were in its possession, and the distributions made
on those bonds since the Petition Date, pursuant to an agreement dated as of
October 10, 1997 by and between the Company and First Union. The Company
disputes First Union's claim to a security interest in those bonds and the
distributions made thereon. The bonds in issue are (i) the Morgan Stanley
Capital, Series 1998-WF2 Class N bond, (ii) the Chase Commercial Mortgage,
Series 1998-1 Class J bond (the "Chase J Bond"), and (iii) the Nomura Asset
Securitization Corporation, Series 1998-B7 Class N bond. The Morgan Stanley
Capital Bond has been sold, and certain proceeds from the sale thereof are
being held in a segregated account in the name of First Union pending further
order of the Bankruptcy Court and resolution of the claim of First Union
thereto. On August 7, 2000, the Company sold certain CMBS to GACC for
approximately $43.8 million. The Chase J Bond composed part of the CMBS sold
to GACC. The proceeds received from the sale related to the Chase J Bond were
deposited in a segregated account in the name of First Union pending
resolution of First Union's claim of a security interest in the bonds. See
"Bankruptcy Litigation-Arrangements with other Creditors" for further
discussion of the sale of certain CMBS to GACC. If the issues between the
Company and First Union are not otherwise resolved, an adversary proceeding
will likely be commenced to resolve the dispute between the Company and First
Union with respect to the foregoing bonds and/or the distributions made on
those bonds. If First Union's claim with respect to those bonds and/or the
distributions made on those bonds is determined to be an Allowed Secured
Claim, such Claim will be treated as part of Class A2 under the Plan. If
First Union's Claim is determined to be an unsecured claim, it will be
included in the Claims subject to Class A10 under the Plan.
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 were 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 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 reached an agreement to sell the
Wells Fargo Bonds (the "Morgan Stanley Agreement"). On February 29, 2000, the
Wells Fargo Bonds were sold. Of the approximately $45.9 million in net sales
proceeds, $37.5 million was used to pay off all outstanding borrowings owed
to Morgan Stanley and the remaining proceeds of approximately $8.4 million
will be used primarily to help fund the Plan. Pursuant to the terms of the
Morgan Stanley Agreement, the Company and Morgan Stanley mutually released
any claims that they may have against each other and filed a stipulation of
dismissal with prejudice of the October 20, 1998 adversary proceeding.
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 GACC. On February 3, 1999, the Bankruptcy Court approved an
Amended Consent Order between the Company and GACC that provides for the
following: (i) acknowledgement that GACC has a valid perfected security interest
in its collateral; (ii) authority for GACC to hedge its loan, subject to a hedge
cost cap; and (iii) as adequate protection, the 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 Bankruptcy Court on May 11, 1999. The Company and GACC had negotiated a
further extension of the stipulation through September
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10, 1999, which has now expired. On June 16, 2000, the Company and GACC
signed a stipulation and agreed order selling certain CMBS to GACC free and
clear of liens, claims and encumbrances (the "GACC Sale Stipulation"), and
for the sharing of cash collateral through the sale date. On July 7, 2000,
the Bankruptcy Court approved the GACC Sale Stipulation and subsequently
amended its order and on August 3, 2000 authorized the Company to sell its
interest in the Chase J Bond and the Chase Commercial Mortgage Securities
Corporation Series 1998-1, Classes F, G, H and I bonds (the "Chase Bond
Portfolio") to GACC for an aggregate sale price of approximately $43.8
million. On August 7, 2000, the Company sold the Chase Bond Portfolio at the
stated aggregate sales price and the related variable rate secured debt of
$36.6 million was paid off. Remaining net proceeds of approximately $7.2
million will be used primarily to help fund the Company's Plan. CRIIMI MAE
also received approximately $3.8 million from GACC representing its portion
of cash collateral through the sale date.
SHAREHOLDER LITIGATION
Between October 7, 1998 and November 30, 1998, 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" or the "Court") against certain officers and directors of the Company.
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", which Complaints have since been dismissed, as discussed below.
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 alleged 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.
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).
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 failed to plead sufficient facts with the
requisite particularity to establish a claim for securities fraud under the
Reform Act. The Plaintiffs filed their Opposition to defendants' Motion to
Dismiss on September 24, 1999.
On March 30, 2000, the Court granted the Defendants' Motion to
Dismiss the Consolidated Amended Complaint and as a result entered an Order
and Memorandum Opinion dismissing the Consolidated Amended Complaint. The
Court concluded that the Plaintiffs did not substantiate their claims that
specific CRIIMI MAE officers and directors violated Section 10(b) of the
Exchange Act. The Court concluded that because the Plaintiffs failed to
substantiate their claims of a "primary violation" of Section 10(b) of the
Exchange Act, they likewise failed to substantiate a claim against the
individual Defendants as controlling persons under Section 20(a) of the
Exchange Act.
On May 1, 2000, the Plaintiffs filed a Notice of Appeal from the
Court's Memorandum Opinion and Order dated March 30, 2000. On July 10, 2000,
the United States Court of Appeals for the Fourth Circuit dismissed the
appeal by agreement of the parties.
The dismissal of this lawsuit does not dispose of other pending
lawsuits and/or claims in bankruptcy which may affect the Company, as more
fully described under other subheadings of this Note 16.
EDGE PARTNERS SETTLEMENT
In February 1996, Edge Partners, L.P. ("Edge Partners"), on behalf
of CRIIMI MAE, filed a First Amended Class and Derivative Complaint (the
"Derivative Complaint") in the Bankruptcy Court. The Derivative Complaint
named as defendants each of the individuals who served on the Board of
Directors at the time of the Merger and CRIIMI MAE as a nominal defendant.
The Company was subject to indemnity obligations to the directors under
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provisions of its constituent documents. In addition, the Company had
directors and officers liability insurance policies with a combined coverage
limit of $5 million.
Count I of the Derivative Complaint alleged violations of Section
14(a) of the Exchange Act for issuing a materially false and misleading proxy
in connection with the Merger and alleged derivatively on behalf of CRIIMI
MAE a breach of fiduciary duty owed to CRIIMI MAE and its shareholders. Edge
Partners sought, among other relief, that unspecified damages be accounted to
CRIIMI MAE, that the shareholder vote in connection with the Merger be null
and void and that certain salaries and other remuneration paid to the
directors be returned to the Company.
On June 16, 1998, the District Court approved a settlement
agreement (the "Settlement Agreement"). Under the terms of the Settlement
Agreement, the Company agreed to make certain disclosures relating to alleged
conflicts between two directors and the Company in connection with the Merger
transaction and adopted a non-binding policy relating generally to the
approval of certain interested transactions. Among other things, the
non-binding policy adopted by the Board of Directors imposes certain
conditions on the Board's approval of transactions between the Company and
any director, officer or employee who owns greater than 1% of the outstanding
common shares of the Company. Such conditions generally include: (1) approval
by written resolution of any transaction involving an amount in excess of $5
million in any year adopted by a majority of the members of the Board having
no personal stake in the transaction; and (2) in the case of any such
transaction in excess of $15 million in any year, consideration by the Board
as to the formation of a special committee of the Board, to be comprised of
at least two directors having no personal stake in such transaction.
OTHER LITIGATION
The Company is aware that an alleged shareholder, on behalf of
himself and all others similarly situated, who purchased common stock in a
registered common stock offering made by the Company in January 1998, filed a
class action lawsuit against Prudential Securities Incorporated
("Prudential") and the Company's independent public accountants (the
"Recupito Complaint") in the United States District Court for the District of
Maryland. Neither the Company nor any officer or director of the Company was
named as a defendant in this lawsuit.
The Recupito Complaint alleges generally that the registration
statement dated October 21, 1997, including a prospectus dated January 20,
1998 and supplemented on January 23, 1998, contained materially false and
misleading statements about the Company and its condition.
The Company may be subject to potential exposure to Prudential
under contractual provisions and to both defendants under applicable law.
Prudential may assert that it is entitled to indemnification from the Company
based upon an indemnification provision contained in the underwriting
agreement entered into with the Company in connection with the common stock
offering. Certain courts have held and it is the position of the SEC that
indemnification for liabilities arising under the Securities Act of 1933 is
against public policy and unenforceable.
The Company cannot predict with any certainty the ultimate outcome
of such litigation or its potential exposure to one or both of the defendants.
CLAIMS
Over 850 claims with a face amount of nearly $2.53 billion have
been filed in the Chapter 11 cases, including approximately $355 million in
unsecured claims and approximately $2.2 billion in secured claims. Many of
these claims are duplicate claims filed by the same creditor in each of the
three cases. This amount is far in excess of the approximately $1.18 billion
in liabilities identified by the Debtors in their schedules, which were filed
with the Bankruptcy Court on November 20, 1998. The Debtors have undertaken
extensive efforts to reduce the claims pool. In addition to analyzing the
claims, the Debtors have opened discussions with various creditors regarding
the withdrawal of certain claims and in some cases, have objected to claims.
The Debtors' efforts have resulted in the reduction of approximately $1.76
billion from the claims pool by means of objections, negotiated settlements
and withdrawal of claims.
Three large claims are summarized as follows: (i) the claim of
Andrew N. Friedman on behalf of a class of shareholders in the amount of $100
million (the "Claim Number 330"); (ii) the claim of the Capital Company of
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America, LLC ("CCA") for approximately $18 million (the "CCA Claim") and
(iii) the claim of GP Properties Group, Inc., for approximately $882,000 (the
"GP Properties Claim").
Claim Number 330 related to shareholder litigation against CRIIMI
MAE's officers and directors, which has already been discussed in "Legal
Proceedings-Shareholder Litigation." On March 20, 2000, the Company moved to
withdraw reference of the litigation relating to Claim Number 330 to the
United States District Court for the District of Maryland, and on March 30,
2000, CRIIMI MAE filed an objection to Claim Number 330. On April 27, 2000,
the United States District Court for the District of Maryland withdrew the
reference of the contested matter relating to Claim Number 330. On May 26,
2000, the claimant filed a statement with the District Court seeking to
withdraw Claim Number 330 on grounds that it was mooted by the disposition of
the Shareholder Litigation. On July 19, 2000, the District Court entered a
consent order disallowing Claim Number 330 with prejudice.
The CCA Claim relates to an August 14, 1998 letter of intent
between CRIIMI MAE and CCA for the purchase of subordinated CMBS. The letter
of intent included financing and due diligence contingencies. The Company's
position is that neither of these contingencies was fulfilled. After
preliminary due diligence, the Company expressed concern regarding the
quality of the mortgage loans underlying the CMBS. The Company's further due
diligence confirmed this preliminary view, and the Company exercised its
right not to proceed with the purchase because of its due diligence concerns.
CCA refused to withdraw its claim, and on August 31, 1999, CRIIMI MAE filed
an objection to the CCA Claim. The CCA Claim was filed for an amount in
excess of $17,000,000 on February 11, 1999. On October 9, 1999, CCA responded
to the objection. By letter dated January 7, 2000, CCA indicated that the
amount of its claim was $18.8 million. On March 27, 2000, CCA filed a motion
with the Bankruptcy Court revising the amount of its claim to $18.2 million.
Litigation is continuing with respect to the CCA Claim and the Company's
objection thereto. On July 26, 2000, the Bankruptcy Court entered an Order
temporarily allowing CCA's claim in the amount of $11,390,548 for purposes of
voting on the Plan. This Order did not determine the allowed amount of CCA's
claim, if any, for purposes of treatment and distributions under the Plan.
The allowed amount of CCA's claim, if any, will be determined after a full
evidentiary hearing.
The GP Properties Claim related to the Company's loan origination
program. In August and September 1998, the Company and GP Properties were
involved in a preliminary loan application process. These preliminary
processes did not give rise to a loan commitment. On October 7, 1998, GP
Properties advised the Company that it closed on alternative lending. GP
Properties refused the Company's request that it withdraw its claim, and on
October 26, 1999 CRIIMI MAE objected to the GP Properties Claim. GP
Properties did not respond to the objection on or prior to the objection
deadline. On May 9, 2000, the Bankruptcy Court entered an order disallowing
and expunging the GP Properties Claim.
The remaining claims of approximately $770 million, excluding
accrued interest, are carried on the balance sheet as of June 30, 2000. The
Debtors believe they have substantial defenses to each of the disputed claims
and that the ultimate allowed amount of these claims, if any, will be
insignificant, although there can be no assurance.
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 backed by pools of mortgage
loans on multifamily, retail and other commercial real estate and by pools of
mortgage-backed securities, backed, in turn, by loans on such properties
("Subordinated CMBS"), (ii) originating and underwriting mortgage loans,
(iii) securitizing pools of mortgage loans and pools of commercial
mortgage-backed securities ("CMBS") and to a lesser degree, (iv) direct
investments in government insured securities and entities that own government
insured securities and (v) securities trading activities. The Company's
income is primarily generated from these investments.
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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.
The following table details the Company's financial performance by
these two lines of business for the three and six months ended June 30, 2000,
and 1999. The basis of accounting used in the table is GAAP.
53
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
2000
----------------------------------------------------------------------------
PORTFOLIO MORTGAGE
INVESTMENT SERVICING ELIMINATION (1) CONSOLIDATED
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 35,392,863 $ 15,477 $ (15,477) $ 35,392,863
Insured mortgage securities 7,670,728 - - 7,670,728
Originated loans 8,210,791 - - 8,210,791
Other - 893,626 (893,626) -
Servicing income - 1,448,192 (1,448,192) -
Net gain on mortgage security dispositions 225,835 - - 225,835
Gain on originated loan dispositions 37,885 - - 37,885
Other income 1,158,273 1,213,446 (1,416,128) 955,591
---------------- ---------------- ---------------- ----------------
Total revenue 52,696,375 3,570,741 (3,773,423) 52,493,693
---------------- ---------------- ---------------- ----------------
General and administrative expenses (2,665,231) (2,963,548) 2,963,548 (2,665,231)
Interest expense (37,891,927) - - (37,891,927)
Losses on warehouse obligations - - - -
Reorganization items (5,813,642) - - (5,813,642)
Other expenses (719,394) (897,663) 897,663 (719,394)
Total expenses (47,090,194) (3,861,211) 3,861,211 (47,090,194)
---------------- ---------------- ---------------- ----------------
Net income 5,606,181 (290,470) 87,788 5,403,499
Preferred dividends accrued (1,661,015) - - (1,661,015)
---------------- ---------------- ---------------- ----------------
Net (loss) income available to common
shareholders $3,945,166 ($290,470) $87,788 $3,742,484
================ ================ ================ ================
Total assets $ 2,154,708,472 $ 23,628,650 $ (44,790,785) $ 2,133,546,337
================ ================ ================ ================
<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
Insured mortgage securities 8,489,030 - - 8,489,030
Originated loans 8,647,815 - - 8,647,815
Other - 979,299 (979,299) -
Servicing income - 1,906,579 (1,906,579) -
Net gain on mortgage security dispositions 778,608 - - 778,608
Gain on originated loan dispositions 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 expenses (3,617,040) (3,058,507) 3,058,507 (3,617,040)
Interest expense (37,308,289) (166,783) 166,783 (37,308,289)
Unrealized loss on warehouse obligation (10,871,970) - - (10,871,970)
Reorganization items (5,438,943) - - (5,438,943)
Other expenses (719,394) (500,244) 500,244 (719,394)
---------------- ---------------- ---------------- ----------------
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
---------------- ---------------- ---------------- ----------------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
2000
----------------------------------------------------------------------------
PORTFOLIO MORTGAGE
INVESTMENT SERVICING ELIMINATION (1) CONSOLIDATED
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 74,562,634 $ 29,291 $ (29,291) $ 74,562,634
Insured mortgage securities 15,467,929 - - 15,467,929
Originated loans 16,698,417 - - 16,698,417
Other - 1,661,114 (1,661,114) -
Servicing income - 2,918,439 (2,918,439) -
Net gain on mortgage security dispositions 241,312 - - 241,312
Gain on originated loan dispositions 37,885 - - 37,885
Other income 1,678,696 2,127,656 (2,525,992) 1,280,360
---------------- ---------------- ---------------- ----------------
Total revenue 108,686,873 6,736,500 (7,134,836) 108,288,537
---------------- ---------------- ---------------- ----------------
General and administrative expenses (5,803,988) (6,149,243) 6,149,243 (5,803,988)
Interest expense (75,106,879) - 0 (75,106,879)
Losses on warehouse obligations - - 0 -
Reorganization items (14,859,882) - 0 (14,859,882)
Other expenses (1,438,788) (1,029,080) 1,029,080 (1,438,788)
---------------- ---------------- ---------------- ----------------
Total expenses (97,209,537) (7,178,323) 7,178,323 (97,209,537)
---------------- ---------------- ---------------- ----------------
Net income 11,477,336 (441,823) 43,487 11,079,000
Preferred dividends accrued (3,300,905) - - (3,300,905)
---------------- ---------------- ---------------- ----------------
Net (loss) income available to common
shareholders $ 8,176,431 ($441,823) $ 43,487 $ 7,778,095
================ ================ ================ ================
Total assets $ 2,154,708,472 $ 23,628,650 $ (44,790,785) $ 2,133,546,337
================ ================ ================ ================
<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
Insured mortgage securities 17,389,338 - - 17,389,338
Originated loans 17,488,642 - - 17,488,642
Other - 1,552,054 (1,552,054) -
Servicing income - 3,520,524 (3,520,524) -
Net 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 expenses (6,251,154) (7,540,790) 7,540,790 (6,251,154)
Interest expense (73,737,219) (181,231) 181,231 (73,737,219)
Unrealized loss on warehouse obligation (6,925,495) - - (6,925,495)
Reorganization items (10,946,781) - - (10,946,781)
Other expenses (1,438,788) (1,503,206) 1,503,206 (1,438,788)
---------------- ---------------- ---------------- ----------------
Total expenses (99,299,437) (9,225,227) 9,225,227 (99,299,437)
---------------- ---------------- ---------------- ----------------
Net (loss) income 16,168,532 (2,129,025) 126,738 14,166,245
Preferred dividends accrued (2,782,495) - - (2,782,495)
---------------- ---------------- ---------------- ----------------
Net (loss) 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>
(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.
55
<PAGE>
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 SHEETS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------- --------------------
<S> <C> <C>
Assets:
Subordinated CMBS, at fair value $ 659,979,459 $ 826,897,948
Insured mortgage security, at fair value 5,232,527 5,268,982
Receivables and other assets 46,441,552 83,133,075
Restricted cash and cash equivalents 73,050,129 37,774,894
Cash and cash equivalents 65,170,671 52,114,880
Investment in subsidiaries 217,781,072 210,030,947
-------------------- --------------------
Total assets $1,067,655,410 $1,215,220,726
==================== ====================
Liabilities:
Accounts payable and other accrued expenses $ 21,383,068 $ 21,580,384
Liabilities subject to Chapter 11 proceedings 796,233,699 974,291,756
-------------------- --------------------
Total liabilities 817,616,767 995,872,140
-------------------- --------------------
Shareholders' equity:
Convertible preferred stock 23,833 26,471
Common stock 623,532 599,546
Accumulated other comprehensive income (184,516,951) (207,421,788)
Accumulated deficit (140,656,820) (148,434,915)
Additional paid-in capital 574,565,049 574,579,272
-------------------- --------------------
Total shareholders' equity 250,038,643 219,348,586
-------------------- --------------------
Total liabilities and shareholders' equity $1,067,655,410 $1,215,220,726
==================== ====================
</TABLE>
The accompanying note is an integral part of these financial statements.
56
<PAGE>
CRIIMI MAE INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 24,406,010 $ 24,736,124 $ 51,510,235 $ 54,986,974
Interest expense 15,500,940 15,288,982 31,613,535 32,092,608
------------ ------------ ------------ ------------
Net interest margin 8,905,070 9,447,142 19,896,700 22,894,366
------------ ------------ ------------ ------------
Equity in earnings from investments 1,656,794 6,233,334 5,131,982 8,568,440
Other income 878,167 643,711 1,169,690 1,030,956
General and administrative expenses (247,021) (283,432) (450,745) (424,875)
Amortization of assets acquired in the Merger (719,394) (719,394) (1,438,788) (1,438,788)
Realized loss on reverse repurchase obligation - - - -
Losses on warehouse obligations - (10,871,970) - (6,925,495)
Reorganization items:
Impairment on CMBS (1,809,062) - (5,252,821) -
Loss on Sale of CMBS (357,188) - (1,711,214) -
Impairment on REO (924,283) - (924,283) -
Other (1,979,584) (5,103,629) (5,341,521) (9,538,359)
------------ ------------ ------------ ------------
Subtotal (3,501,571) (10,101,380) (8,817,700) (8,728,121)
------------ ------------ ------------ ------------
Net (loss) income before dividends accrued or paid
on preferred shares 5,403,499 (654,238) 11,079,000 14,166,245
Dividends accrued or paid on preferred shares (1,661,015) (1,378,961) (3,300,905) (2,782,495)
------------ ------------ ------------ ------------
Net (loss) income available to common shareholders 3,742,484 (2,033,199) 7,778,095 11,383,750
============ ============ ============ ============
Comprehensive (loss) income:
Net (loss) income before dividends paid or accrued
on preferred shares 5,403,499 (654,238) 11,079,000 14,166,245
Other comprehensive income (loss) (383,304) (29,613,575) 22,904,837 (38,285,985)
------------ ------------ ------------ ------------
Comprehensive (loss) income 5,020,195 (30,267,813) 33,983,837 (24,119,740)
============ ============ ============ ============
</TABLE>
The accompanying note is an integral part of these financial statements.
57
<PAGE>
CRIIMI MAE Inc.
Note to Financial Statements
As of June 30, 2000 and 1999
(Unconsolidated)
1. BASIS OF PRESENTATION
GAAP requires that certain entities that meet specific criteria be
consolidated with CRIIMI MAE including: CM Management (Debtor), and Holdings
II (Debtor), 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. 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, 2000 and
December 31, 1999, and the unconsolidated results of its operations for the
three and six months ended June 30, 2000 and 1999.
58
<PAGE>
CRIIMI MAE MANAGEMENT INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets:
Note receivable $ 3,376,468 $ 3,376,468
Restricted cash and cash equivalents 575,094 261,729
Cash and cash equivalents 684,075 926,122
Other assets 2,878,043 2,969,939
Equity investments 12,462,733 12,794,963
------------ ------------
Total assets $ 19,976,413 $ 20,329,221
============ ============
Liabilities:
Accounts payable and other accrued expenses $ 2,870,566 $ 2,585,812
Liabilities subject to Chapter 11 proceedings 6,917,520 6,529,634
------------ ------------
Total liabilities 9,788,086 9,115,446
------------ ------------
Shareholders' equity 10,188,327 11,213,775
------------ ------------
Total liabilities and shareholders' equity $ 19,976,413 $ 20,329,221
============ ============
</TABLE>
The accompanying note is an integral part of these financial statements.
59
<PAGE>
CRIIMI MAE MANAGEMENT INC.
STATEMENTS OF NET LOSS
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income - note receivable and short-term interest income $ 97,074 $ 73,156 $ 187,817 $ 164,602
Equity in losses from investments (218,376) (73,082) (330,198) (1,537,000)
------------ ------------ ------------
Total revenue (121,302) 74 (142,381) (1,372,398)
------------ ------------ ------------ ------------
Interest expense 122,649 93,460 236,916 205,324
Depreciation and amortization 145,155 130,105 276,495 264,445
General and administrative expenses 2,015,030 2,966,019 4,564,392 5,088,867
Reorganization items 676,014 94,023 1,494,626 973,800
------------ ------------ ------------ ------------
Total expenses 2,958,848 3,283,607 6,572,429 6,532,436
------------ ------------ ------------ ------------
Net loss $(3,080,150) $ (3,283,533) $ (6,714,810) $ (7,904,834)
============ ============ ============ ============
</TABLE>
The accompanying note is an integral part of these financial statements.
60
<PAGE>
CRIIMI MAE Management, Inc.
Note to Financial Statements
As of June 30, 2000 and 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, 2000 and
December 31, 1999 and the results of its operations for the three and six
months ended June 30, 2000 and 1999, in accordance with GAAP.
61
<PAGE>
CRIIMI MAE HOLDINGS II, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------- --------------------
<S> <C> <C>
Assets:
Subordinated CMBS, at fair value $ 39,562,952 $ 38,211,075
Interest receivable 446,476 377,936
Cash 100 100
------------------- --------------------
Total assets $ 40,009,528 $ 38,589,111
=================== ====================
Liabilities:
LIABILITIES NOT SUBJECT TO CHAPTER 11 PROCEEDINGS:
Collateralized mortgage obligations $ 39,495,844 $ 39,256,952
Payables and accrued expenses 597,017 541,360
LIABILITIES SUBJECT TO CHAPTER 11 PROCEEDINGS:
Variable-rate secured borrowings - -
------------------- --------------------
Total liabilities 40,092,861 39,798,312
------------------- --------------------
Partners' equity:
Contributed capital 4,444,800 4,856,143
Accumulated other comprehensive income (4,528,133) (6,065,344)
------------------- --------------------
Total partners' equity (83,333) (1,209,201)
------------------- --------------------
Total liabilities and partners' equity $ 40,009,528 $ 38,589,111
=================== ====================
</TABLE>
The accompanying note is an integral part of these financial statements.
62
<PAGE>
CRIIMI MAE HOLDINGS II, L.P.
STATEMENTS OF NET LOSS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 796,510 $ 796,630 $ 1,593,020 $ 1,593,299
Interest expense:
Collateralized bond obligations-CMBS 937,023 145,838 1,842,902 145,838
Variable-rate secured borrowings-CMBS - 542,804 - 1,102,717
------------ ------------ ------------ ------------
Total interest expense 937,023 688,642 1,842,902 1,248,555
------------ ------------ ------------ ------------
Net interest margin (140,513) 107,988 (249,882) 344,744
------------ ------------ ------------ ------------
Other investment income 0 - - -
General and administrative expenses 0 - - -
Reorganization costs (50,394) (223,044) (103,251) (416,372)
------------ ------------ ------------ ------------
Subtotal (50,394) (223,044) (103,251) (416,372)
------------ ------------ ------------ ------------
Net loss $ (190,907) $ (115,056) $ (353,133) $ (71,628)
============ ============ ============ ============
Other comprehensive income 258,054 (2,396,210) 629,344 (3,008,070)
------------ ------------ ------------ ------------
Comprehensive income $ 67,147 $ (2,511,266) $ 276,211 $ (3,079,698)
============ ============ ============ ============
</TABLE>
The accompanying note is an integral part of these financial statements.
63
<PAGE>
Holdings II, L.P.
Note to Financial Statements
As of June 30, 2000 and 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 second quarter
Form 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, 2000 and December 31, 1999
and the results of its operations for the three and six months ended June 30,
2000 and 1999.
64
<PAGE>
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" 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 RISK FACTORS CONTAINED BELOW, IN THE COMPANY'S PROPOSED DISCLOSURE
STATEMENT (AS DEFINED BELOW) FILED WITH THE BANKRUPTCY COURT (AND WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC") UNDER COVER OF TWO CURRENT REPORTS
ON FORM 8-K FILED ON MAY 18, 2000 AND AUGUST 11, 2000, RESPECTIVELY) 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, 1999. 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,
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"), 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) backed by pools of commercial 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 of commercial mortgage loans.
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) risks related to the Recapitalization Financing under the
Company's Third Amended Joint Plan of Reorganization; (3) risk of loss of
REIT status; (4) taxable mortgage pool risk; (5) risk of phantom income
resulting in additional tax liability; (6) the effect of rate compression on
the market price of the Company's stock; (7) substantial leverage; (8)
inherent risks in owning Subordinated CMBS; (9) the limited protection
provided by hedging transactions; (10) risk of foreclosure on CMBS assets;
(11) the limited liquidity of the CMBS market; (12) pending litigation; (13)
risk of becoming subject to the requirements of the Investment Company Act of
1940; (14) possible effects of an economic recession on losses and defaults;
(15) borrowing risks; (16) the effect of the yield curve on income; and (17)
risks associated with the trader election including those referenced in "2000
Taxable Income (Loss)/ Taxable Distribution Requirements" below.
In addition to the two operating subsidiaries which filed for
Chapter 11 protection along 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 of the
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
65
<PAGE>
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.
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, creating a
value deficiency as measured by the 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, 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 has significantly reduced the number of employees in its
origination and underwriting operations. In connection with these reductions,
the Company closed its five regional loan origination offices.
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.
The Company's independent public accountants have issued a report
on the Company's 1999 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
Company's Plan of reorganization 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, 2000, the auditors' report on those financial
statements will continue to be modified to express substantial doubt about
the Company's ability to continue as a going concern.
CRIIMI MAE is working diligently toward emerging from bankruptcy as
a successfully reorganized company. On April 25, 2000, the Debtors filed
their Third Amended Joint Plan of Reorganization (as amended and supplemented
by praecipes filed with the Bankruptcy Court on July 13, 14 and 21, 2000, the
"Plan") and proposed Second Amended Joint Disclosure Statement (as amended
and supplemented by praecipes filed with the Bankruptcy
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Court on July 13 and 21, 2000, the "Proposed Disclosure Statement"). The Plan
was filed with the support of the Official Committee of Equity Security
Holders of CRIIMI MAE (the "CMI Equity Committee"), which is a co-proponent
of the Plan. Subject to the completion of mutually acceptable documentation
evidencing the secured financing to be provided by the unsecured creditors
(the "Unsecured Creditor Debt Documentation"), the Official Committee of
Unsecured Creditors of CRIIMI MAE (the "Unsecured Creditors' Committee") has
agreed to support confirmation of the Plan. The Company, the CMI Equity
Committee and the Unsecured Creditors' Committee are now all proceeding
toward confirmation of the Plan. Under the Plan, Merrill Lynch and German
American Capital Corporation ("GACC"), two of the Company's largest secured
creditors, would provide a significant portion of the recapitalization
financing contemplated by the Plan.
The Bankruptcy Court held a hearing on April 25, 2000 on approval
of the Proposed Disclosure Statement. During that hearing, the bankruptcy
judge requested the filing of additional legal briefs by May 9, 2000 on two
issues raised at the hearing. The issues raised related to an objection to
the Company's Proposed Disclosure Statement filed by Salomon Smith Barney
Inc./Citicorp Securities, Inc. and Citicorp Real Estate, Inc. (together
"Citigroup"). On July 12, 2000, the Bankruptcy Court entered an order
overruling the objections raised by Citigroup as set forth in the Memorandum
Opinion and Order filed and entered on that date by the Bankruptcy Court.
Also on July 21, 2000, the Company and Citigroup reached a settlement
regarding the treatment of Citigroup's claims under the Plan. (See Note 16
for a summary of certain material terms of the settlement between the Company
and Citigroup.) The settlement resolved Citigroup's objections to the
Proposed Disclosure Statement. The Citigroup objections were the only
objections to the Proposed Disclosure Statement pending before the Bankruptcy
Court.
The Bankruptcy Court has scheduled a hearing on August 23, 2000
with respect to the proposed ballots submitted to the Bankruptcy Court to be
sent to members of all classes of impaired creditors and equity security
holders in connection with the Plan. Once the Proposed Disclosure Statement
has been approved by the Bankruptcy Court, the Plan will be sent, together
with the approved Disclosure Statement, to members of all classes of impaired
creditors and all equity security holders for acceptance or rejection.
The Unsecured Creditors' Committee filed its own plan of
reorganization, and proposed disclosure statement, and various amendments to
each of the foregoing, with the Bankruptcy Court which, in general, provided
for the liquidation of the assets of the Debtors. However, as a result of
successful negotiations between the Debtors and the Unsecured Creditors'
Committee, the Unsecured Creditors' Committee has agreed to the treatment of
unsecured claims under the Plan, subject to completion of mutually acceptable
Unsecured Creditor Debt Documentation, and has asked the Bankruptcy Court to
defer consideration of its plan of reorganization and second amended proposed
disclosure statement.
THE PLAN OF REORGANIZATION
The Plan contemplates the payment in full of all of the allowed
claims of the Debtors primarily through recapitalization financing (including
proceeds from certain asset sales) aggregating at least $857 million (the
"Recapitalization Financing"). Approximately $275 million of the
Recapitalization Financing would be provided by Merrill Lynch and GACC
through a secured financing facility, and approximately $155 million would be
provided through new secured notes issued to the Company's major unsecured
creditors (collectively, the "New Debt"). The sale of select CMBS (the "CMBS
Sale") and the Company's interest in CMO-IV (the "CMO-IV Sale"), the proceeds
of which are expected to be used to pay down existing debt, is contemplated
to provide the balance of the Recapitalization Financing. The Company may
seek new equity capital from one or more investors to partially fund the
Plan, although new equity is not required to fund the Plan.
In connection with the Plan, substantially all cash flows are
expected to be used to satisfy principal, interest and fee obligations under
the New Debt. The $275 million secured financing would provide for (i)
interest at a rate of one month LIBOR plus 3.25%, (ii) principal
prepayment/amortization obligations, (iii) extension fees after two years and
(iv) maturity on the fourth anniversary of the effective date of the Plan.
The approximate $155 million secured financing would be effected through the
issuance of two series of secured notes under two separate indentures. The
first series of secured notes, representing an aggregate principal amount of
approximately $105 million, would provide for (i) interest at a rate of
11.75% per annum, (ii) principal prepayment/amortization obligations, (iii)
extension fees after four years and (iv) maturity on the fifth anniversary of
the effective date of the Plan. The second series of secured notes,
representing an aggregate principal amount of approximately $50 million,
would provide for (i) interest at a rate of 13% per annum with additional
interest at the rate of 7% per annum
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accreting over the debt term, (ii) extension fees after four years and (iii)
maturity on the sixth anniversary of the effective date of the Plan. The New
Debt described above will be secured by substantially all of the assets of
the Company. It is contemplated that there will be restrictive covenants,
including financial covenants, in connection with the New Debt.
The Plan also contemplates that the holders of the Company's
common stock will retain their stock. Under the Plan, no cash dividends,
other than a maximum of $4.1 million to preferred shareholders, can be paid
to existing shareholders. See "Effect of Chapter 11 on REIT Status and Other
Tax Matters" for further discussion. Subject to the respective acceptances of
the Plan by the holders of the Company's Series B Cumulative Convertible
Preferred Stock (the "Series B Preferred Stock") and the Series F Redeemable
Cumulative Dividend Preferred Stock (the "Series F Preferred Stock" or
"junior preferred stock"), the Plan contemplates an amendment to their
respective relative rights and preferences to permit the payment of accrued
and unpaid dividends in cash or common stock, or a combination thereof, at
the Company's election. The Plan further contemplates amendments to the
relative rights and preferences of the Series E Preferred Stock, relating
principally to dividend and conversion rights.
Reference is made to the Plan and Proposed Disclosure Statement,
previously filed with the Bankruptcy Court (and with the SEC under cover of
two Current Reports on Form 8-K filed on May 18, 2000 and August 11, 2000,
respectively), for a more detailed description of the financing contemplated
to be obtained under the Plan from the respective existing creditors
including, without limitation, payment terms, restrictive covenants and
collateral, and a more detailed description of the treatment of preferred
stockholders. Although the Company has commitments for substantially all of
the New Debt and has sold certain of the CMBS contemplated to be sold in
connection with the CMBS Sale, there can be no assurance that the Company
will obtain the Recapitalization Financing, that the Plan will be confirmed
by the Bankruptcy Court, or that the Plan, if confirmed, will be consummated.
The Plan also contemplates certain amendments to the Company's articles of
incorporation, including an increase in authorized shares from 120 million to
375 million (consisting of 300 million of common shares and 75 million of
preferred shares).
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 believes that it
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. Depending on the amount of any such federal
and state income tax, the Company may have insufficient funds to pay such tax
and also may be unable to comply with its obligations under the New Debt.
2000 TAXABLE INCOME (LOSS)/TAXABLE DISTRIBUTION REQUIREMENTS
Internal Revenue Service Revenue procedure 99-17 provides
securities and commodities traders with the ability to elect mark-to-market
treatment for the 2000 tax year and for all future tax years, unless the
election is revoked with the consent of the Internal Revenue Service. On
March 15, 2000, CRIIMI MAE elected for tax purposes to be classified as a
trader in securities effective January 1, 2000. Such trading activity is, or
is expected to be, in certain types of mortgage-backed securities, including
Subordinated CMBS (the "Trading Assets").
As a result of its trader election, CRIIMI MAE recognized a
mark-to market tax loss on its Trading Assets on January 1, 2000 of
approximately $478 million (the "January 2000 Loss"). Such loss is expected
to be recognized evenly over four years beginning with the year 2000. The
Company expects such loss to be ordinary.
Additionally, as a result of its trader election, the Company will
be required to mark-to-market its Trading Assets at the end of each tax year,
including the year 2000. Any increase or decrease in the value of the Trading
Assets as a result of the year-end mark-to-market requirement will generally
result in either a tax gain (if an increase in value) or a tax loss (if a
decrease in value). Such tax gain or loss, as well as any realized gains or
losses from the disposition of Trading Assets during each year, are also
expected to be ordinary gains or losses.
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Since gains and losses associated with trading activities are
expected to be ordinary, any gains will generally increase taxable income and
any losses will generally decrease taxable income. Since the Company is a
REIT which is generally required to distribute 95% of its taxable income to
shareholders, any increases in taxable income from trading activities will
generally result in an increase in REIT distribution requirements and any
decreases in taxable income from trading activities will generally result in
a decrease in REIT distribution requirements (or, if the taxable income is
reduced to zero, eliminate REIT distribution requirements).
Gains and losses from the mark-to-market requirement (including
the January 2000 Loss) are unrealized. This creates a mismatch between REIT
distribution requirements and cash flow since the REIT distribution
requirements will generally fluctuate due to the mark-to-market adjustments,
but the cash flow from the Company's Trading Assets will not fluctuate as a
result of the mark-to-market adjustments.
Any accumulated and unused net operating losses, subject to
certain limitations, generally may be carried forward for up to 20 years to
offset taxable income until fully utilized. Accumulated and unused net
operating losses can not be carried back. If a security is marked down
because of an increase in interest rates, rather than from credit losses,
such mark-to-market losses may be recovered over time. Any recovered
mark-to-market losses will generally be recognized as taxable income,
although there is expected to be no corresponding increase in cash flow.
There is no assurance that the Company's position with respect to
its election as a trader in securities will not be challenged by the IRS,
and, if challenged, will be defended successfully by the Company. As such,
there is a risk that the January 2000 Loss will be limited or disallowed,
resulting in higher tax basis income and a corresponding increase in REIT
distribution requirements.
As a REIT, CRIIMI MAE is generally required to distribute at least
95% of its "REIT taxable income" to its shareholders each year. If CRIIMI MAE
is required to make taxable income distributions to its shareholders to
satisfy required REIT distributions, all or a substantial portion of these
distributions are expected to be in the form of non-cash dividends. There is
no assurance that such non-cash dividends would satisfy the REIT distribution
requirements.
It is possible that the Company could experience an "ownership
change" within the meaning of Section 382 of the Code. Consequently, its use
of net operating losses generated before the ownership change to reduce
taxable income after the ownership change may be subject to limitation under
Section 382. Generally, the use of net operating losses in any year is
limited to the value of the Company's stock on the date of the ownership
change multiplied by the long-term tax exempt rate (published by the IRS)
with respect to that date.
See Taxable Income (Loss) below, and Notes 1 and 8 to Notes to
Consolidated Financial Statements for additional information related to the
foregoing matters.
DIVIDENDS DURING BANKRUPTCY
During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy
Court approval (and subject to their being funds legally available for any
such dividend under state corporate law). See "Effect of Chapter 11 Filing on
REIT Status and Other Tax Matters" regarding the declaration of a junior
preferred dividend with respect to 1998 taxable income and the anticipated
distribution of all or a substantial portion of its 1999 taxable income in
the form of non-cash taxable dividends. Dividends may be paid pursuant to and
consistent with the terms of the Plan, a copy of which has been filed with
the SEC as an exhibit to a Current Report on Form 8-K.
Due to the Chapter 11 filing on October 5, 1998, cash dividends
have not been paid on common or preferred shares. However, since dividends on
the Company's Series B, C, D, E and F Preferred Stock are cumulative, the
dividends payable at June 30, 2000 were accrued in the financial statements.
Dividends paid or accrued per share on the Company's common stock,
Series B Preferred Stock and Series F Preferred Stock are summarized below:
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<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
2000 1999(1) 2000 1999(1)
<S> <C> <C> <C> <C>
Common shares $-- $-- $-- $--
Series B Preferred Stock 0.68 0.68 1.36 1.36
Series F Preferred Stock 0.30 -- 0.60 --
</TABLE>
-----------------------------
(1) Due to the Chapter 11 filing on October 5, 1998, cash dividends were not
paid for the year ended 1999 on common or preferred shares. The Company
paid a dividend on November 5, 1999 in the form of junior preferred stock
to its common shareholders for the purpose of distributing approximately
$15.7 million in undistributed 1998 taxable income. See "Effect of Chapter
11 Filing on REIT Status and Other Tax Matters" regarding this dividend
and the anticipated distribution of all of the Company's 1999 taxable
income in the form of non-cash taxable dividends. However, since dividends
on the Company's preferred shares are cumulative, the dividends payable at
June 30, 2000 and June 30, 1999 were accrued in the financial statements.
In addition to the per share amounts described above, dividends
were paid or accrued on the Company's Series C Preferred Stock, Series D
Preferred Stock, and Series E Preferred Stock. Amounts payable to Series C
Preferred Stock for the six months ended June 30, 2000 were $138,682 as
dividends accrued for only a portion of this period due to the exchange of
Series C Preferred Stock for Series E Preferred Stock referenced below. This
compares to amounts paid or payable to Series C Preferred Stock for the six
months ended June 30, 1999 of $323,681. Amounts payable to Series D Preferred
Stock for the six months ended June 30, 2000 were $380,656. This compares to
amounts paid or payable to Series D Preferred Stock for the six months ended
June 30, 1999 of $290,999. Amounts paid or payable to the Series E Preferred
Stock for the six months ended June 30, 2000 were $258,029. Nothing was
payable to the Series E Preferred Stock in 1999. Amounts payable to the
Series F Preferred Stock for the six months ended June 30, 2000 were
$355,721. Nothing was payable to the Series F Preferred Stock for the six
months ended June 30, 1999.
On February 22, 2000, CRIIMI MAE and the holder of its Series C
Preferred Stock entered into a Preferred Stock Exchange Agreement pursuant to
which 103,000 shares of Series C Preferred Stock were exchanged for 103,000
shares of a new series of preferred stock designated as Series E Preferred
Stock. On July 26, 2000, CRIIMI MAE and the holder of its Series D Preferred
Stock entered into a Preferred Stock Exchange Agreement pursuant to which
100,000 shares of Series D Preferred Stock were exchanged for 100,000 shares
of Series E Preferred Stock. See Note 12 of Notes to Consolidated Financial
Statements for a further discussion of the exchange of Series C Preferred
Stock for Series E Preferred Stock, and the exchange of the Series D
Preferred Stock for Series E Preferred Stock.
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.
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 year ended December 31, 1999. The
Company anticipates distributing all of its 1999 taxable income in the form
of non-cash taxable dividends. There can be no assurance that the Company
will be able to make such distributions with respect to its 1999 taxable
income. While the Company has not finalized its tax return for 1999, should
CRIIMI MAE terminate or fail to maintain its REIT status during the year
ended December 31, 1999, taxable income for the year ended December 31, 1999
is estimated to be $37.5 million, which would generate a tax liability of up
to $15.0 million.
THE COMPANY'S 1998 TAXABLE INCOME
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On September 14, 1999, the Company declared a dividend payable to
common shareholders of approximately 1.61 million shares of a new series of
junior convertible preferred stock with a face value of $10 per share. See
Note 12 of the Notes to Consolidated Financial Statements for further
discussion. The purpose of the dividend was to distribute approximately $15.7
million in undistributed 1998 taxable income. To the extent that it is
determined such amount was not distributed, the Company would bear a
corporate level income tax on the undistributed amount. There can be no
assurance that all of the Company's tax liability was eliminated by payment
of such junior preferred stock dividend. The Company paid the junior
preferred stock dividend on November 5, 1999. The junior preferred stock
dividend was taxable to common shareholder recipients. Junior preferred
shareholders were permitted to convert their shares of junior preferred stock
into common shares during two separate conversion periods. During these
conversion periods, an aggregate 1,020,241 shares of junior preferred stock
were converted into 8,798,009 shares of common stock.
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
of the Notes to Consolidated Financial Statements for descriptions of CBO-1,
CBO-2 and CMO-IV. See also Note 6 regarding the anticipated CMO-IV sale as
part of the Plan. 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. Although it is
possible that the election by the TMPs to be treated as taxable REIT
subsidiaries could prevent the loss of CRIIMI MAE's REIT status, there can be
no assurance that a valid election could be made given the timing of a
seizure or sale of the Pledged Bonds.
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 the requirements of the Investment
Company Act.
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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, 2000, 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.
RESULTS OF OPERATIONS
2000 VERSUS 1999
FINANCIAL STATEMENT NET INCOME
Financial statement net income available to common shareholders
for the three and six months ended June 30, 2000 was approximately $3.7
million and $7.8 million, respectively, as compared to a net loss to common
shareholders of approximately ($2.0) million and net income available to
common shareholders of $11.4 million for the same periods in 1999. The
primary reasons for the changes in net earnings during these periods are
described below.
INTEREST INCOME - SUBORDINATED CMBS
Income from Subordinated CMBS decreased by approximately $3.0
million, or 8%, to $35.4 million during the three months ended June 30, 2000
as compared to $38.4 million during the three months ended June 30, 1999.
Interest income from Subordinated CMBS decreased by approximately $2.3
million or 3% to approximately $74.6 million for the six months ended June
30, 2000 as compared to $76.9 million for the corresponding period in 1999.
This overall decrease in interest income was primarily the result of the sale
of certain CMBS, the Morgan Stanley CMBS in February 2000 and the Lehman CMBS
in April 2000. This net decrease was partially offset by the following
factors: 1) the impairment on certain CMBS which results in higher yields,
and 2) an upward revision in yields on CMBS. Other than temporary impairment
was recognized as of December 31, 1999 on the Subordinated CMBS that have
been or are intended to be sold in 2000 as part of the CMBS Sale under the
Plan. The impairment
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resulted in the CMBS cost basis being written down to fair value as of
December 31, 1999. As a result of this new basis, these CMBS have revised
higher yields effective the first quarter of 2000. These higher yields
resulted in more income being recognized for financial statement purposes.
Further, yields on CMBS increased effective April 1, 2000 due to a change in
the allocation and timing of loss estimates (as discussed further below),
which resulted in additional income recognized. See Note 5 to Notes to
Consolidated Financial Statements.
Generally accepted accounting principles ("GAAP") require that
interest income earned on Subordinated CMBS be recorded based on the
effective interest method using the anticipated yield over the expected life
of the Subordinated CMBS. 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, 2000 was approximately 11.5% as compared to the anticipated weighted
average yield as of December 31, 1999 of 10.1%. These yields were determined
based on the anticipated yield over the expected weighted average life of the
Subordinated CMBS, which considers, among other things, anticipated losses
and any other than temporary impairment. Effective April 1, 2000, the Company
changed the allocation and timing of the estimated future credit losses
related to the mortgage loans underlying the CMBS. Due to the better than
anticipated performance of the mortgage loans underlying the CMBS, which has
resulted in lower credit losses than originally estimated, the Company has
revised its estimated credit losses to occur later in the weighted average
life of the CMBS than originally projected. However, the Company has not
lowered the total amount of estimated future credit losses related to the
mortgage loans underlying the CMBS. The change in allocation and timing of
estimated future credit losses to reflect a later occurrence of such losses
results in increases in projected cash flow (primarily in the form of
interest income) as of June 30, 2000, which in turn results in increases in
anticipated yields to maturity as of June 30, 2000. As a result of the
present value benefit of a revised later projected occurrence of credit
losses, the yields used to determine CMBS income have increased. As of June
30, 2000, the overall impact of this allocation and timing revision resulted
in a 29 basis point increase in total CMBS anticipated yields to maturity (24
basis point increase related to the remaining CMBS subject to the CMBS Sale
and 30 basis point increase related to the Company's retained portfolio).
These yield increases have resulted in approximately $700,000 in additional
CMBS income during the second quarter compared to income that would have been
recognized using prior unrevised yields. The Company estimates that total
CMBS income related to the Company's retained CMBS portfolio will be higher
by approximately $2 million for the period April 1 through December 31, 2000
than if the unrevised yields were used. As it is not certain when the
remaining CMBS subject to the CMBS Sale will be sold, the Company has not
estimated the dollar impact for the year. The CMBS yield increases have been
accounted for as estimates and will be applied prospectively as of April 1,
2000, the first day of the second quarter.
INTEREST INCOME-INSURED MORTGAGE SECURITIES
Interest income from insured mortgage securities decreased by
approximately $819,000 or 10% to $7.7 million for the three months ended June
30, 2000 from $8.5 million for the three months ended June 30, 1999. Interest
income from insured mortgage securities decreased by approximately $1.9
million or 11% to approximately $15.5 million for the six months ended June
30, 2000 from approximately $17.4 million for the corresponding period in
1999. These decreases were primarily due to the reduced asset base as a
result of prepayments aggregating $42.4 million subsequent to March 1999.
INTEREST INCOME-ORIGINATED LOANS
Interest income from originated loans decreased by approximately
$400,000 or 5% to $8.2 million for the three months ended June 30, 2000 from
$8.6 million for the three months ended June 30, 1999. Interest income from
originated loans decreased by approximately $800,000 or 5% to approximately
$16.7 million for the six months ended June 30, 2000 from approximately $17.5
million for the corresponding period in 1999. These decreases were primarily
due to the prepayment of originated loans aggregating $14.8 million
subsequent to March 1999.
INTEREST EXPENSE
Total interest expense increased by approximately $0.6 million to
approximately $37.9 million or 2% for the three months ended June 30, 2000
from approximately $37.3 million for the corresponding period in 1999. Total
interest expense increased by approximately $1.4 million or 2% to
approximately $75.1 million for the six months ended June 30, 2000 compared
to approximately $73.7 million for the corresponding period in 1999. These
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<PAGE>
increases were primarily attributable to the following: (1) during the second
quarter of 2000 a discount amortization adjustment of approximately $1.5
million related to the insured securities fixed-rate obligation debt due to
an increase in the estimate of future prepayment speeds. (This increase in
the estimate of future prepayment speeds is a result of these obligations
paying down faster than originally anticipated); (2) the sale of certain
investment grade bonds associated with the CBO-2 transaction in March 1999
and; (3) the sale of two remaining classes of investment grade bonds
associated with the 1998 CMO-IV transaction in May 1999 and October 1999. The
sales of these securities were treated as a financing for accounting
purposes. As such, the Company records the securities as liabilities and
recognizes the related interest expense on an ongoing basis. The fixed rate
obligations sold typically carry a higher cost than does the variable-rate
secured borrowing that it replaces. Such increases in interest expense were
offset, in part, by decreases in interest expense on variable-rate secured
borrowings, reflecting pay downs of such borrowings through asset sales,
along with a reduction in certain borrowings as a result of asset
prepayments, pay downs pursuant to agreements with certain creditors, and
refinancing of variable rate debt into fixed rate debt, as previously
discussed.
EQUITY IN (LOSSES) FROM INVESTMENTS
Equity in losses increased by approximately $150,000 during the
three months ended June 30, 2000 due to equity in losses of approximately
$26,000 as compared to equity in earnings of approximately $121,000 for the
second quarter of 1999. Equity in losses decreased by approximately $1.4
million during the six months ended June 30, 2000 due to equity in losses of
approximately $38,000 as compared to equity in losses of approximately $1.5
million for the corresponding period in 1999. Equity in losses increased
during the quarter ended June 30, 2000 versus the same period in 1999
primarily due to an increase in impairment related to certain servicing
rights of CMSLP. Such increase was partially offset by a reduction in
amortization of certain servicing rights and a small net decrease in
servicing and other fee revenues as CMSLP's servicing portfolio declined
primarily from the sale of certain CMBS subject to the CMBS Sale.
Equity in losses decreased during the six months ended June 30,
2000 as compared to 1999 primarily due to an $800,000 prepayment penalty
shortfall which occurred in 1999. Additionally, a reduction in general and
administrative expenses and amortization in certain servicing rights
contributed to the overall reduction in equity in losses during the six
months ended June 30, 2000. However, these reductions were partially offset
by a net decrease in servicing and other fee revenues as CMSLP's servicing
portfolio declined due primarily to the sale of certain CMBS subject to the
CMBS Sale.
OTHER INCOME
Other income increased by approximately $194,000 or 25% to
approximately $982,000 during the second quarter of 2000 as compared to
approximately $788,000 during the corresponding period in 1999. Other income
decreased by approximately $105,000 or 7% during the six months ended June
30, 2000. The increase for the three months ended June 30, 2000 was primarily
attributable to the timing of temporary investments. The decrease for the six
months ended June 30, 2000 was primarily attributable to a reduction in net
income associated with the Company's investment in REO.
NET GAINS ON MORTGAGE SECURITIES DISPOSITIONS
During the second quarter of 2000 and 1999, net gains on mortgage
dispositions were approximately $226,000 and $779,000, respectively. For the
six months ended June 30, 2000 and 1999, net gains on mortgage dispositions
were approximately $241,000 and $1.6 million, respectively. For the six
months ended June 30, 2000, the prepayments of mortgage securities
represented approximately 2% of CRIIMI MAE's beginning of the year portfolio
balance. For any quarter, gains or losses on mortgage dispositions are based
on the number, carrying amounts and proceeds of mortgages disposed of during
the period.
GAIN ON ORIGINATED LOAN DISPOSITIONS
During the second quarter of 2000, there was one originated loan
disposition resulting in a gain of approximately $38,000. For the same
quarter of 1999, there was one mortgage prepayment in the originated loan
portfolio resulting in a gain of approximately $59,000. During the six months
ended June 30, 2000, net gain on originated loan dispositions was
approximately $38,000 versus approximately $160,000 for the six months ended
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<PAGE>
June 30, 2000. The decreases were due to one disposition and two
dispositions, respectively, in the corresponding periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by approximately
$950,000 or 26% to approximately $2.7 million during the second quarter of
2000 as compared to $3.6 million for the corresponding period in 1999.
General and administrative expenses decreased by approximately $447,000 or 7%
to approximately $5.8 million for the six months ended June 30, 2000 as
compared to approximately $6.3 million for the corresponding period in 1999.
The decreases were primarily attributable to decreases in employment costs
from a reduced work force during these periods along with a reduction in
certain professional costs.
UNREALIZED LOSS ON WAREHOUSE OBLIGATION
During the three and six months ended June 30, 2000, the Company
recorded no loss on warehouse obligations as all of the loans under the
Citibank origination program were sold in 1999. This compares to the three
and six months ended June 30, 1999, when the Company recorded unrealized
losses of approximately $10.9 million and $6.9 million, respectively, in
connection with the Company's warehouse line with Citibank.
REORGANIZATION ITEMS
IMPAIRMENT ON CMBS. As discussed in Note 1 of the Notes to
Consolidated Financial Statements, under the Plan, a portion of the
Recapitalization Financing is expected to result from the CMBS Sale. The
remaining CMBS subject to the CMBS Sale had a fair value and amortized cost
of approximately $204 million and $198 million, respectively, as of June 30,
2000. The Company first filed a plan with the Bankruptcy Court in the fourth
quarter of 1999 and during that same quarter began marketing for sale the
CMBS subject to the CMBS Sale. CRIIMI MAE sold a portion of these bonds in
February 2000 and April 2000 and intends to enter into additional agreements
during 2000 to sell the remaining CMBS subject to the CMBS Sale, although
there can be no assurance such bonds will be sold. The Company also intends
to sell its interest in CMO-IV as part of the Plan, although there can be no
assurance that the CMO-IV Sale will be completed.
GAAP states that when the fair market value of an investment
declines below its amortized cost for a significant period of time and the
entity no longer has the ability or intent to hold the investment for the
period the entity anticipates is required for the value to recover to
amortized cost, other than temporary impairment on the investment should be
recognized. This other than temporary impairment is recognized through the
income statement as the difference between amortized cost and fair value.
Additional accounting guidance states that other than temporary impairment
should be recognized in the period the decision to sell any investment is
made if the entity does not expect the fair value to recover before the sale
date. As the Company decided in the fourth quarter of 1999 to sell the CMBS
subject to the CMBS Sale and it did not expect the value of these bonds to
significantly recover before the future sale dates, the Company has
recognized approximately $162 million of other than temporary impairment
related to these CMBS, cumulatively, through earnings through the second
quarter of 2000. Unrealized losses related to the CMBS subject to the CMBS
Sale were previously recognized through other comprehensive income in the
equity section of the balance sheet. The other than temporary impairment loss
on CMBS is a part of the reorganization items on the income statement as the
impairment was recognized as part of the reorganization.
OTHER REORGANIZATION ITEMS. During the three and six months ended
June 30, 2000 and 1999, the Company recorded reorganization items, as
summarized below, due to the Chapter 11 filings of CRIIMI MAE, CM Management
and Holdings II.
<TABLE>
<CAPTION>
REORGANIZATION ITEMS THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Short-term interest income ($ 1,434,012) ($ 237,000) ($2,438,672) ($ 469,400)
Professional fees 3,055,316 4,974,155 7,428,584 10,114,155
Employee Retention Program accrued costs 256,701 202,605 536,050 745,502
Other 845,104 499,183 1,445,602 556,524
------------ ------------ ------------ ------------
Subtotal 2,723,109 5,438,943 6,971,564 10,946,781
Impairment on CMBS 1,809,062 -- 5,252,821 --
75
<PAGE>
<CAPTION>
REORGANIZATION ITEMS THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Impairment on REO(1) 924,283 -- 924,283 --
Loss on sale of CMBS(2) 357,188 -- 1,711,214 --
------------ ------------ ------------ ------------
Total $ 5,813,642 $ 5,438,943 $14,859,882 $ 10,946,781
============ ============ ============ ============
</TABLE>
(1) The Company recognized impairment on its investment in REO as of June
30, 2000. This asset was sold in July 2000 as discussed in Note 3 and
Note 9.
(2) The Company recognized a loss of approximately $1.35 million on the
sale of the Morgan Bonds in February 2000 and a loss of approximately
$360,000 on the sale of the First Union Bonds in April 2000.
TAXABLE INCOME (LOSS)
CRIIMI MAE realized a net operating loss of approximately $18
million and $33 million during the three and six months ended June 30, 2000,
compared to tax basis income of approximately $11.9 million and $31.5 million
during the corresponding periods in 1999. Included in the net operating loss
during the three and six months ended June 30, 2000, was a realized loss on
the sale of CMBS of $2.1 million and $3.6 million, respectively. As
previously discussed, on March 15, 2000, CRIIMI MAE elected to be classified
as a trader in securities for tax purposes effective January 1, 2000. As a
result of its trader election, CRIIMI MAE recognized a mark-to-market tax
loss of approximately $478 million on its Trading Assets on January 1, 2000
(the "January 2000 Loss"). The January 2000 Loss is expected to be recognized
evenly over four years (i.e., approximately $120 million per year) beginning
with the year 2000. The Company recognized one-fourth (i.e., approximately
$30 million) of this year's portion of the January 2000 Loss during both the
first and second quarter 2000. The Company expects to continue to recognize
approximately $30 million of loss related to the January 2000 Loss in each
quarter for the next four years. (See also "2000 Taxable Income
(Loss)/Taxable Distribution Requirements" for a more complete discussion and
Note 8 for a discussion of differences between financial statement net income
(loss) and taxable income (loss)).
A summary of the estimated first half 2000 net operating loss is
as follows:
<TABLE>
<S> <C>
January 2000 Loss $478 million
LESS: Portion recognized in First Quarter 2000 (30) million
LESS: Portion recognized in Second Quarter 2000 (30) million
---------------
Balance Remaining of January 2000 Loss to be Recognized $418 million
===============
Taxable Income for the six months ended June 30, 2000 Before Recognition of $27 million
January 2000 Loss
LESS: January 2000 Loss Recognized in First Quarter 2000 (30) million
LESS: January 2000 Loss Recognized in Second Quarter 2000 (30) million
---------------
Net Operating Losses for the six months ended June 30, 2000 ($33) million
Net Operating Loss through June 30, 2000 ($33) million
Net Operating Loss Utilization 0.0
---------------
Net Operating Loss Carried Forward for Use in Future Periods ($33) million
===============
</TABLE>
(1) So long as available, net operating losses, including the allocable
portion of the January 2000 Loss, are expected to offset taxable
income on an annual basis.
The distinction between taxable income (loss) and GAAP income
(loss) is important to the Company's shareholders because dividends or
distributions are declared and paid on the basis of taxable income. The
Company does not pay taxes so long as it satisfies the requirements for
exemption from taxation pursuant to the REIT requirements of the Code. The
Company calculates its taxable income as if the Company were a regular
domestic corporation. This taxable income level determines the amount of
dividends the Company is required to pay out over time in order to eliminate
its tax liability.
SECURITIES TRADING ACTIVITIES
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During late 1999, the Company began to trade mortgage-backed
securities. In general, the Company trades in FNMA and FHLMC issued CMO
tranches, as well as AAA rated CMBS. The Company seeks maximum total return
through short term trading, consistent with prudent investment management.
Returns from such activities consist primarily of capital
appreciation/depreciation resulting from changes in interest rates and
spreads, if any, discount amortization, and other arbitrage opportunities as
well as coupon interest income. For the six months ended June 30, 2000,
trading gains and losses were immaterial; and, as of June 30, 2000, trading
assets (reflected as Short Term Investments on the balance sheet)
approximated $2.4 million.
CASH FLOW
2000 VERSUS 1999
Net cash provided by operating activities decreased for the six
months ended June 30, 2000 as compared to the six months ended June 30, 1999.
The decrease was primarily due to an increase in restricted cash as compared
to the same period last year. The increase in restricted cash was partially
offset by a decrease in receivables and other assets.
Net cash provided by investing activities decreased for the six
months ended June 30, 2000 as compared to the six months ended June 30, 1999
due to a decrease in proceeds from mortgage securities dispositions and
originated loan dispositions compared to the same period last year. These
decreases were partially offset by an increase in proceeds from the sale of
CMBS, net of associated debt. See Note 5 for further discussion of those
sales.
Net cash used in financing activities decreased for the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999 due to
a decrease in principal payments on debt obligations, partially offset by a
decrease in proceeds from debt issuances as compared to the same period last
year.
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, unsecured and other borrowings,
securitizations and issuances of common and preferred shares 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 the minimum amount required.
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 closely 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 and 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 values. 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, creating a value
deficiency as measured by the 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
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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 August 1, 2000, CRIIMI MAE had secured financing agreements
with GACC, Merrill Lynch, and Citicorp with respect to certain of its CMBS.
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. Since the Chapter 11 filing occurred, certain registered
holders withheld payments related to securities not registered to CRIIMI MAE.
As previously discussed, the Company has entered into various agreements with
these creditors. CRIIMI MAE Inc.'s restricted cash position has increased
from approximately $7 million on October 5, 1998 to approximately $73.6
million as of June 30, 2000. 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 for any specified period while the Company is in bankruptcy.
Under CRIIMI MAE's Plan, a portion of the Recapitalization
Financing is expected to result from the CMBS Sale. The remaining CMBS
subject to the CMBS Sale had a fair value and amortized cost of approximately
$204 million and $198 million, respectively, as of June 30, 2000. The Company
first filed a plan with the Bankruptcy Court in the fourth quarter of 1999
and during that same quarter CRIIMI MAE began marketing for sale the CMBS
subject to the CMBS Sale. CRIIMI MAE sold a portion of these bonds in
February 2000 and April 2000 and intends to enter into additional agreements
during 2000 to sell the remaining CMBS subject to the CMBS Sale, although
there can be no assurance that such bonds will be sold. As the Company
decided in the fourth quarter of 1999 to sell the CMBS subject to the CMBS
Sale and it does not expect the value of these bonds to significantly recover
before the future sale dates, the Company has recognized approximately $162
million of other than temporary impairment related to these CMBS,
cumulatively, through earnings through the first six months of 2000. (See
Note 5 to the Financial Statements for a discussion regarding CMBS sales
through August 2000.) The Company also intends to sell its interest in CMO-IV
as part of the Plan, although there can be no assurance that the CMO-IV Sale
will be completed.
In July 2000, the Company decided that, as part of the Plan, it
would sell the remaining $53 million face amount of assets from CMO-IV that
it currently owns. The proceeds would be used to pay down the variable rate
debt secured by certain securities from CMO-IV with any remaining proceeds
retained by the Company. Upon the sale of these assets, CRIIMI MAE will no
longer have any economic interest in CMO-IV. CRIIMI MAE, as the owner of the
issuer's equity of CMO-IV, holds the call options related to the $442.5
million (original face amount) of previously issued securities that are
currently classified as securitized debt on the Company's balance sheet. Upon
the sale of the issuer's equity, CRIIMI MAE will no longer own these call
options and, as a result, the securitization will no longer qualify as a
financing under SFAS 125. As a result, all assets (Investment in Originated
Loans and related deferred financing costs) and liabilities (Collateralized
mortgage obligations -Originated Loans and a portion of variable rate secured
borrowings - CMBS) related to the securitization will be removed from CRIIMI
MAE's balance sheet upon the sale of the issuer's equity. If the sale of
CRIIMI MAE's economic interest in CMO-IV took place as of June 30, 2000,
based on the June 30, 2000 balance sheet and estimated fair values, the
Company would recognize an approximate $24 million loss for financial
statement purposes and an approximate $23 million loss for tax purposes.
The value of the Company's Subordinated CMBS and
government-insured securities is based upon the combined yield of current
treasury rates and the current spread above treasury rates that an investor
would require in a purchase transaction. During the six months ended June 30,
2000, the required spreads above treasury rates were substantially unchanged
on a total portfolio basis. However, treasury rates decreased, generally,
from December 31, 1999 which, when combined with the required spreads,
resulted in an aggregate $13.7 million net increase in the value of the
Company's portfolio of CMBS and FHAs and GNMAs from December 31, 1999 to June
30, 2000.
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<PAGE>
The Company's ability to resume the acquisition of Subordinated
CMBS, as well as its loan origination and securitization programs, depends
first on its ability to obtain the requisite recapitalization proceeds,
obtain confirmation and approval of a plan reorganization and emerge from
bankruptcy as a successfully reorganized company, and second, on its ability
to access additional capital once it has successfully emerged from
bankruptcy. Factors which could affect the Company's ability to access
additional capital include, among other things, the cost and availability of
such capital, changes in interest rates and interest rate spreads, changes in
the commercial mortgage industry and the commercial real estate market,
general economic conditions, perceptions in the capital markets of the
Company's business, covenants under the Company's debt securities and credit
facilities, results of operations, leverage, financial condition, and
business prospects. The Company can give no assurance as to whether it will
be able to obtain additional capital or the terms of any such capital. See
Note 1 to Notes to Consolidated Financial Statements for a discussion of the
New Debt contemplated under the Plan.
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 U.S. Treasury market as well as the LIBOR
market. The Company will have an increase in the amount of interest expense
paid on its variable-rate obligations primarily due to increases in One-Month
LIBOR. The Company will also experience fluctuations in the market value of
its assets related to changes in the interest rates of U.S. Treasury bonds as
well as increases in the spread between U.S. Treasury bonds and CMBS.
CRIIMI MAE has entered into interest rate protection agreements to
mitigate the adverse effects of rising interest rates on the amount of
interest expense payable under 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 all cases is currently
above the current rate of the index, will limit 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 that portion of the CMBS. These
transactions also increased the borrowing capacity of the Company which was
used to acquire Subordinated CMBS.
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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, 5, 6, 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 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
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule (filed herewith)
99(a) Stipulation Resolving Objection to Shareholder
Plaintiffs to Debtors' Amended Joint Disclosure
Statement entered April 24, 2000 (filed
herewith).
99(b) Expedited Motion to Clarify Order Granting
Authority for Debtor to Take Necessary Actions
to Implement Sale of Brick Church Property
entered by the United States Bankruptcy Court
for the District of Maryland, Greenbelt on June
26, 2000 (filed herewith).
99(c) Order and Ruling Upon Objection to Debtors'
Second Amended Disclosure Statement entered by
the United States Bankruptcy Court for the
District of Maryland, Greenbelt on July 12,
2000 and Memorandum Opinion entered by the
United States Bankruptcy Court for the District
of Maryland, Greenbelt on July 12, 2000 (filed
herewith).
99(d) Motion for Entry of an Order Amending
Stipulation and Agreed Order Selling certain
Commercial Mortgage-Backed Securities to German
American Capital Corporation Free and Clear of
Liens, Claims and Encumbrances entered August
3, 2000 (filed herewith).
</TABLE>
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(b) REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Date Purpose
---- -------
<S> <C>
May 18, 2000 To report (1) a Third Amended Joint Plan of
Reorganization and a Second Amended Disclosure
Statement (Proposed) filed by the Company and
its affiliates CRIIMI MAE Holdings II, L.P. and
CRIIMI MAE Management, Inc. with the Bankruptcy
Court on April 25, 2000 and (2) a press release
issued by the Company on April 26, 2000
announcing (i) a request by the Bankruptcy
Judge for the filing of additional legal briefs
by May 9, 2000; and (ii) the filing of the
Third Amended Joint Plan of Reorganization and
a Second Amended Disclosure Statement
(Proposed).
</TABLE>
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Signature
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report
on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized.
CRIIMI MAE INC.
/s/ August 11, 2000 /s/ Cynthia O. Azzara
--------------------------- -----------------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer
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