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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1999 Commission file number 1-10360
CRIIMI MAE INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1622022
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
11200 Rockville Pike
Rockville, Maryland 20852
(301) 816-2300
(Address, including zip code, and telephone number,
Including area code, of registrant's principal executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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Name of each exchange on
Title of each class which registered
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Common Stock New York Stock Exchange, Inc.
Series B Cumulative Convertible New York Stock Exchange, Inc.
Preferred Stock
Series F Redeemable Cumulative New York Stock Exchange, Inc.
Dividend Preferred Stock
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment to this Form 10K. [ ]
As of March 15, 2000, 62,353,170 shares of CRIIMI MAE Inc. common stock
(voting) with a par value of $0.01 were outstanding. The aggregate market value
(based upon the last reported sale price on the New York Stock Exchange on March
15, 2000) of the shares of CRIIMI MAE Inc. common stock (voting) held by
non-affiliates was approximately $61,807,108. (For purposes of calculating the
previous amount only, all directors and executive officers of the registrant are
assumed to be affiliates.)
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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CRIIMI MAE INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business ......................................................................... 1
Item 2. Properties.........................................................................22
Item 3. Legal Proceedings..................................................................22
Item 4. Submission of Matters to a Vote of Security Holders................................31
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters...........31
Item 6. Selected Financial Data............................................................33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................36
Item 7A. Quantitative and Qualitative Disclosures About Market Risks........................48
Item 8. Financial Statements and Supplementary Data........................................50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................50
PART III
Item 10. Directors and Executive Officers of the Registrant.................................51
Item 11. Executive Compensation.............................................................53
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................58
Item 13. Certain Relationships and Related Transactions.....................................60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8K....................61
Signatures
Exhibit Index
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE
WORDS "BELIEVES," "ANTICIPATES," "EXPECTS," "CONTEMPLATES" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. STATEMENTS
LOOKING FORWARD IN TIME ARE INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K 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 UNDER THE HEADINGS "RISK FACTORS" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SET
FORTH BELOW. 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
for its own as well as third party securitized mortgage loan pools.
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 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 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.
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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. 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" and Note 15 of the Notes to Consolidated Financial Statements.
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 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
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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 "BUSINESS-Effect of Chapter 11 on REIT Status and Other Tax
Matters-Taxable Income Distributions" 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 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
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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 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
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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 "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 "BUSINESS-Resecuritizations," "BUSINESS-Loan
Originations and Securitizations" and Notes 5 and 6 of the 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.
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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. 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 securities. 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, 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 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 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 believed its market knowledge and real estate expertise allowed 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 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
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.
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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).
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 approximately 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. See
"BUSINESS-Resecuritizations" and "BUSINESS-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 of the 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 by interest
rate caps, a form of interest rate protection agreement. Interest rate caps
provide protection to CRIIMI MAE to the extent interest rates, based on a
readily determinable interest rate index, increase above the stated interest
rate cap, in which case CRIIMI MAE would receive payments based on the
difference between the index and the cap. These payments would serve to reduce
the interest payments due under the variable-rate financing facilities. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and Notes 9 and 10 of the 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 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, variable-rate 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
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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 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 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 "LEGAL PROCEEDINGS" for
information 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 was
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,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and Notes 5, 9 and 10 of the 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
8
<PAGE>
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. 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. 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 of the 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 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").
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 CRIIMI MAE'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 DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital Resources"
and Notes 6 and 9 of 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 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. 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 $32.0 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.
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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, 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. 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 also 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 approximately $28 billion and $31 billion,
respectively. 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 $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
approximately $174.1 million of CMBS loan workouts. As of December 31, 1999,
CMSLP was designated as the special servicer (or sub-special servicer) for
approximately 4,978 commercial mortgage loans, representing an aggregate
principal amount of approximately $27 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 fee and float income, the master servicer
typically
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has more direct and regular contact with borrowers than the special servicer. As
of December 31, 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 of loans
excludes loans that are both direct and master serviced by CMSLP, 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 contractual 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.
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
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(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 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 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 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. For a discussion of the Employee
Retention Plan as it relates to named key executives of the Company, see
"EXECUTIVE COMPENSATION-Employment Agreements."
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THE PORTFOLIO
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- Average as of 12/31/99 Calculate Fair 12/31/99 12/31/98
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 7.0% 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.
(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
"LEGAL PROCEEDINGS". 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.
(5) Refer to Note 8 of the 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 of the Notes
to Consolidated Financial Statements, resulted in the creation of CMBS, of
which the Company sold certain
13
<PAGE>
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 of the 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%
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>
14
<PAGE>
- -------------------------------
(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" 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 CRIIMI MAE's 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.
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 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.
15
<PAGE>
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 of the Notes to Consolidated
Financial Statements for further discussion.
RISK FACTORS
The following risk factors address risks relating primarily to the
Company and its operations during the pendency of the bankruptcy. Because it is
not possible to predict the outcome of the Chapter 11 filing and there can be no
assurance as to when or if the Company will resume business activities that it
has suspended during the bankruptcy, the following discussion does not address
risks relating to the resumption of the Company's Subordinated CMBS acquisition,
loan origination or securitization programs. Reference is made to the Company's
Plan and Proposed Disclosure Statement for risks related to the Recapitalization
Financing and to confirmation and consummation of the Plan, which are generally
not addressed below.
EFFECT OF BANKRUPTCY FILING; ABILITY TO CONTINUE AS A GOING CONCERN
Since filing for bankruptcy, CRIIMI MAE has suspended its Subordinated
CMBS acquisition, origination and securitization operations, but continues to
service mortgage loans through CMSLP. Accordingly, the Company's results of
operations during the pendency of the bankruptcy are expected to differ
materially from the Company's performance prior to the bankruptcy. Moreover,
depending upon when and if any of these activities are resumed by the Company,
the Company's future performance will differ materially from its present
operations.
The Company's ability to resume the acquisition of Subordinated CMBS,
as well as its loan origination and securitization programs, depends to a
significant degree on its ability to obtain additional capital and emerge from
bankruptcy as a successfully reorganized company. The Company's ability to
access the necessary additional capital will be affected by a number of factors,
many of which are not in the Company's control. These include the cost 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 current and future debt securities and
credit facilities, results
16
<PAGE>
of operations, leverage, financial condition and business prospects. The Company
can give no assurances as to whether or when it will obtain the necessary
capital or the terms upon which such capital can be obtained.
On March 31, 2000, the Debtors filed their Plan and Proposed Disclosure
Statement with the Bankruptcy Court. The Plan 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.
Merrill Lynch and 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 April
26, 2000 on the Proposed Disclosure Statement filed by the Debtors.
On December 20, 1999, the Unsecured Creditors' Committee filed its own
plan of reorganization and disclosure statement, which generally provided for
the liquidation of the assets of the Debtors. Such plan and disclosure statement
were amended on January 11, 2000 and February 11, 2000. 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.
At this time, it is not possible to predict the outcome of the Chapter
11 filing, in general, nor its effects on the business of the Company or on the
claims and interests of creditors and shareholders. In addition, the Company's
independent public accountants have issued a report expressing substantial doubt
about the Company's ability to continue as a going concern.
RISKS RELATING TO THE NECESSARY RECAPITALIZATION FINANCING
Consummation of the Plan is conditioned upon, among other matters,
the Company obtaining New Debt and completing the CMBS Sale. 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 substantially all of the New Debt, there can be no assurance
that the Company will complete the CMBS 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 of the Notes to
Consolidated Financial Statements for a discussion of certain CMBS sold in
February 2000 constituting a portion of the CMBS Sale.
RISK OF LOSS OF REIT STATUS AND OTHER TAX MATTERS
See "BUSINESS-Effect of Chapter 11 Filing on REIT Status and Other Tax
Matters" for a discussion.
TAXABLE MORTGAGE POOL RISKS
See "BUSINESS-Effect of Chapter 11 Filing on REIT Status and Other Tax
Matters" for a discussion.
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.
17
<PAGE>
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 Company's 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 remain constant. In
such an event, the market price of the common stock may decline to reflect the
actual or perceived 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.
SUBSTANTIAL INDEBTEDNESS; LEVERAGE
The Company has substantial indebtedness. As of December 31, 1999, the
Company's total consolidated indebtedness was $2.0 billion, of which $926
million was recourse debt to the Company (i.e. not match-funded debt), and
stockholders' equity of $219 million. This high level of debt limits the
Company's ability to obtain additional financing, reduces income available for
distributions to the extent income from assets purchased with the borrowed funds
fails to cover the cost of the borrowings, restricts the Company's ability to
react quickly to changes in its business and makes the Company more vulnerable
to economic downturn.
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
18
<PAGE>
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 amount 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 any 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.
RISK OF FORECLOSURE ON PLEDGED CMBS
Additionally, changes in interest rates, as well as changes in market
spreads, may cause the value of the Company's CMBS portfolio to decrease. A
decrease in the market value of these assets may cause lenders to seek relief
from the automatic stay provision of the Bankruptcy Code to foreclose on the
collateral or take other action.
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 fully 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 "LEGAL PROCEEDINGS"
for descriptions of such litigation 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
19
<PAGE>
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.
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 real estate securing the outstanding 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 mortgage loans.
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 "BUSINESS-Risk
Factors-Limited Protection from Hedging Transactions" for further discussion.
20
<PAGE>
BORROWING RISKS
A substantial portion of the Company's borrowings is, and is 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 will be collateralized
by first-priority liens and security interests in certain assets, and will be
subject to a number of terms, conditions and restrictions 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 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 including, without
limitation, scheduled principal and interests 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 Internal Revenue Code) to repay borrowings, there can be no assurance that
it will be able to maintain compliance with the REIT Provisions of the Internal
Revenue Code regarding asset and source of income requirements.
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.
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.
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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.
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS
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
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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 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 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
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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.
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.
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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 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
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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
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
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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.
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 "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 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
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similar provisions afforded to Merrill Lynch in its most recent stipulation. See
"LEGAL PROCEEDINGS-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 "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 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
28
<PAGE>
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 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.
29
<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 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 $2.5 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.
30
<PAGE>
Of the $1.25 billion of remaining claims approximately $1.0 billion
is carried on the balance sheets. The Debtors believe they have substantial
defenses to each of these three claims and that the ultimate allowed amount
of the disputed claims, if any, will be insignificant, although there can be
no assurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders to be voted on during
the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
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 2,020 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.
31
<PAGE>
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 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).
On March 31, 2000, the Company filed its Plan. 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 of the Plan 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 of the Plan. 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 of the
Plan, 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 of the Plan 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.
32
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
TAX BASIS ACCOUNTING
<TABLE>
<CAPTION>
For the years ended 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
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.
33
<PAGE>
ACCOUNTING UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
<TABLE>
<CAPTION>
For the years ended December 31,
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) -- -- --
--------- --------- --------- --------- ---------
(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 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 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
34
<PAGE>
Sale. The Company entered into an agreement in February 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.
<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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K. This data should be read in conjunction
with the consolidated financial statements and the notes thereto.
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis contains statements that may be
considered forward-looking. These statements contain a number of risks and
uncertainties as discussed herein and in Item 1 of this Form 10-K that could
cause actual results to differ materially.
RESULTS OF OPERATIONS
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.
36
<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
37
<PAGE>
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.
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 it 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 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 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.
38
<PAGE>
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 CRIIMI MAE, CM Management and Holdings II.
<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
39
<PAGE>
sold servicing rights for $4.2 million resulting in a gain of $4.2 million for
tax purposes which was included in equity in earnings in 1998. Partially
offsetting the 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 "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.
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 of the 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
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 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".
40
<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 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 Banc One Mortgage Capital Markets,
LLC, 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 are 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.
41
<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
value ("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, is 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
42
<PAGE>
market conditions, including interest rate movements, these losses could
materially increase or decrease in subsequent reporting periods. The Company has
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, CM Management
and Holdings II.
<TABLE>
<CAPTION>
REORGANIZATION ITEM 1998
- ---------------------------------------------- ----------
<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 of the
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
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.
43
<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.
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
44
<PAGE>
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 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 December 31, 1999, CRIIMI MAE had secured financing agreements
with GACC, Lehman ALI, Inc., First Union, Merrill Lynch, 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 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. 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.
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 FHAs and GNMAs 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 $159.0 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 is 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, which
was approximately $159 million.
45
<PAGE>
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. See "BUSINESS-The Plan of Reorganization" for a
discussion of the New Debt contemplated under the Plan.
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 "BUSINESS-Effect of Chapter 11
Filing on REIT Status" 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. Under the Plan, no cash dividends other than a maximum of $4.1
million to preferred shareholders can be paid to existing shareholders. See
"BUSINESS-The Plan of Reorganization" for further discussion.
46
<PAGE>
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, D and F 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 FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS-Exchange of Series C Preferred Stock for Series F 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 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 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 "BUSINESS-Risk Factors-Risks Associated with Trader
Election" for further discussion. If the Company does have
47
<PAGE>
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
"BUSINESS-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.
ITEM 7A. 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.
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 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.
48
<PAGE>
ESTIMATED PRINCIPAL & 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 & 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 $ 9.1 $ 9.1 $ 109.1 $ -- $ -- $ -- $ 127.3 $ 86.0
Average Stated Interest Rate (2) 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>
- ----------------------------
(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.
49
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth
in this Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
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.,
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.
51
<PAGE>
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.
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.
MEETINGS OF DIRECTORS
During 1999, the Board of Directors met twelve times and acted by
unanimous written consent on one occasion. Each member of the Board of Directors
attended at least 80% of the meetings of the Board of Directors and the
committees on which he served during 1999. Pursuant to the Company's Bylaws, a
majority of the Board of Directors shall at all times consist of directors who
are not officers or employees of the Company and do not perform any services for
the Company other than as a director ("Unaffiliated Directors").
52
<PAGE>
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company receive no additional
compensation for their services as directors. Each 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.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee, a Compensation and Stock
Option Committee, and a Transactional 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. The Audit Committee met once in
1999.
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. The
Compensation and Stock Option Committee met twice in 1999.
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. The Transactional Committee did
not meet in 1999.
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 proceedings.
The Special Reorganization Committee met five times in 1999.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended, requires
each director and executive officer of the Company and each person who owns more
than 10% of the Company's common stock to report to the SEC, by a specified
date, his, her or its beneficial ownership of, and certain transactions in, the
Company's common stock. Except as otherwise noted, based solely on its review of
Forms 3 and 4 and amendments thereto furnished to the Company, and written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that all directors, officers and beneficial
owners of more than 10% of the common stock have filed on a timely basis Forms
3, 4 and 5 as required in the year ended December 31, 1999. Each of the four
Unaffiliated Directors filed a delinquent Form 4 reporting one transaction.
53
<PAGE>
ITEM 11. 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 $100,000 during the year ended December 31,
1999 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
----------------------- ------------------------
Restricted Securities
Stock Underlying All Other
Year Salary ($) 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 CM Management, 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 CM Management 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
54
<PAGE>
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 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 Employment Agreements provide for indemnification of Messrs.
Dockser and Willoughby to the extent provided for in the bylaws of the Company
and/or CM Management 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 CM Management.
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 CM Management 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 will be 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 CM Management 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 CM Management.
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 CM Management 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
55
<PAGE>
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.
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 CM Management 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 CM Management.
Pursuant to the Employee Retention Plan, options granted to each of the
Named Executive Officers after October 5, 1998 shall 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.
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 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 shall immediately become exercisable upon a change of control.
56
<PAGE>
The following table sets forth certain information concerning options
granted to the Named Executive Officers during the year ended December 31, 1999:
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total Options
Common Shares Granted to
Underlying Options Employees in Exercise Expiration Grant Date
Granted 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.
57
<PAGE>
The following table provides information concerning the exercise of
options during the year ended December 31, 1999 for each of the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND YEAR END 1999 OPTION VALUES
<TABLE>
<CAPTION>
Common Shares Number of Common Shares
Acquired on Underlying Unexercised Value of Unexercised In-the-
Exercise During Value Options at FY-end Money Options at FY-end
1999 Realized Exercisable/Unexercisable Exercisable/Unexercisable(1)
--------------- -------- ------------------------- ----------------------------
<S> <C> <C> <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.
58
<PAGE>
ITEM 12. 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) *
David B. Iannarone 34,929 (9)
Brian L. Hanson 37,595 (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
All Director and Executive Officers
as a Group (9 persons) 7,353,358 (1)(2)(3)(4)(6)(7)(8)(9)(10)(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 available 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 available 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 available 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 available upon exercise of presently exercisable
options or those exercisable within 60 days.
(6) Includes 1,746 shares available upon exercise of presently exercisable
options or those exercisable within 60 days.
(7) Includes 1,164 shares available upon exercise of presently exercisable
options or those exercisable within 60 days.
(8) Includes 79,635 shares available upon exercise of presently exercisable
options or those exercisable within 60 days.
(9) Includes 34,929 shares available upon exercise of presently exercisable
options or those exercisable within 60 days.
(10) Includes 37,595 shares available 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 available upon exercise of presently exercisable
options or those exercisable within 60 days.
59
<PAGE>
ITEM 13. 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
years 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.
60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
1 and 2. Financial Statements and Financial Statement Schedules
<TABLE>
<CAPTION>
Page
Description Number(s)
- ----------- ---------
<S> <C>
Report of Independent Public Accountants.......................................F-1
Consolidated Balance Sheets as of December 31,
1999 and 1998 .............................................................F-2
Consolidated Statements of Income and Comprehensive Income for the
years ended December 31, 1999, 1998 and 1997.................................F-3
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997.............................................F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997.................................F-5
Notes to Consolidated Financial Statements ....................................F-6
</TABLE>
All other financial statements and financial statement schedules have been
omitted since the required information is included in the financial statements
or the notes thereto, or is not applicable or required.
(a) 3. Exhibits (listed according to the number assigned in the table
in Item 601 of Regulation S-K)
Exhibit No. 2 - Plan of Acquisition, Reorganization,
Arrangement, Liquidation, or Succession.
a. Joint Plan of Reorganization of CRIIMI MAE
Inc. and its affiliates (incorporated by
reference from Exhibit 99(b) to the
Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
b. Amended Joint Plan of Reorganization of
CRIIMI MAE Inc. and its affiliates
(incorporated by reference to the Form 8-K
filed with the Securities and Exchange
Commission on December 27, 1999).
c. Second Amended Joint Plan of Reorganization
of CRIIMI MAE Inc. and its affiliates
(incorporated by reference to the Form 8-K
filed with the Securities and Exchange
Commission on April 7, 2000).
Exhibit No. 3 - Articles of Incorporation and bylaws.
a. Articles of Incorporation of CRIIMI MAE Inc.
(incorporated by reference from Exhibit 3(d)
to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
61
<PAGE>
b. Amended and Restated Bylaws of CRIIMI MAE
Inc. (incorporated by reference from Exhibit
4.2 to the S-3 filed with the Securities and
Exchange Commission June 9, 1997).
c. Amendment to the Articles of Incorporation
of CRIIMI MAE Inc. (incorporated by
reference from Exhibit 3(c) to the Annual
Report on Form 10-K for 1998).
d. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
150,000 shares of the Company's Preferred
Stock as "Series A Cumulative Convertible
Preferred Stock" (incorporated by reference
from Exhibit 4.1 to the S-3 registration
statement filed with the Securities and
Exchange Commission on June 26, 1996).
e. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc.
reclassifying 150,000 shares of the
Corporation's "Series A Cumulative
Convertible Preferred Stock" to authorized
but unissued shares of the Corporation's
preferred stock (filed herewith).
f. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
3,000,000 shares of the Company's Preferred
Stock as "Series B Cumulative Convertible
Preferred Stock" (incorporated by reference
from Exhibit 4.1 to the S-3 registration
statement filed with the Securities and
Exchange Commission on August 7, 1996).
g. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
300,000 shares of the Company's Preferred
Stock as "Series C Cumulative Convertible
Preferred Stock" (incorporated by reference
from Exhibit 4.1 to the 8-K filed with the
Securities and Exchange Commission on
September 23, 1997).
h. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
300,000 shares of the Company's Preferred
Stock as "Series D Cumulative Convertible
Preferred Stock" (incorporated by reference
from Exhibit 4.1 to the 8-K filed with the
Securities and Exchange Commission on August
3, 1998).
i. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
203,000 unissued shares of the Company's
Preferred Stock as "Series E Cumulative
Convertible Preferred Stock" (incorporated
by reference to the Form 8-K filed with the
Securities and Exchange Commission on April
10, 2000).
j. Articles of Amendment to Articles
Supplementary to the Articles of
Incorporation in respect of Series E
Cumulative Convertible Preferred Stock
(incorporated by reference to the Form 8-K
filed with the Securities and Exchange
Commission on April 10, 2000).
k. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
1,610,000 shares of the Company's Preferred
Stock as "Series F Redeemable Cumulative
Dividend Preferred Stock" (filed herewith).
l. Agreement and Articles of Merger between
CRIIMI MAE Inc. and CRI Insured Mortgage
Association, Inc. as filed with the Office
of the Secretary
62
<PAGE>
of the State of Delaware (incorporated by
reference from Exhibit 3(f) to the Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1993).
m. Agreement and Articles of Merger between
CRIIMI MAE Inc. and CRI Insured Mortgage
Association, Inc. as filed with the State
Department of Assessment and Taxation for
the State of Maryland (incorporated by
reference from Exhibit 3(g) to the Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1993).
n. Limited Partnership Agreement of CRIIMI MAE
Services Limited Partnership effective as of
June 1, 1995 between CRIIMI MAE Management,
Inc. and CRIIMI MAE Services, Inc.
(incorporated by reference from Exhibit 3(n)
to the Annual Report on Form 10-k for 1995).
o. First Amendment to the Limited Partnership
Agreement of CRIIMI MAE Services Limited
Partnership effective as of December 31,
1995 between CRIIMI MAE Management Inc. and
CRIIMI MAE Services, Inc. (incorporated by
reference from Exhibit 3(g) to the Annual
Report on Form 10-K for 1998).
p. Second Amendment to the Limited Partnership
Agreement of CRIIMI MAE Services Limited
Partnership effective as of January 2, 1997
between CRIIMI MAE Management Inc. and
CRIIMI MAE Services, Inc. (incorporated by
reference from Exhibit 3(h) to the Annual
Report on Form 10-K for 1998).
q. Third Amendment to the Limited Partnership
Agreement of CRIIMI MAE Services Limited
Partnership effective as of December 31,
1997 between CRIIMI MAE Management Inc. and
CRIIMI MAE Services, Inc. (incorporated by
reference from Exhibit 3(i) to the Annual
Report on Form 10-K for 1998).
r. Articles of Merger merging CRI Acquisition,
Inc., CRICO Mortgage Company, Inc. and
CRI/AIM Management, Inc. into CRIIMI MAE
Management, Inc. (incorporated by reference
from Exhibit 10(i) to the Annual Report on
Form 10-K for 1995).
Exhibit No. 4 - Instruments defining the rights of security
holders, including indentures.
a. Dividend Reinvestment and Stock Purchase
Plan between CRIIMI MAE Inc. and
shareholders (incorporated by reference from
the registration statement on Form S-3A
filed December 9, 1997).
b. Form of Indenture between CRIIMI MAE
Financial Corporation and the trustee
(incorporated by reference from Exhibit 4.1
to the S-3 Registration Statement filed with
the Securities and Exchange Commission on
September 12, 1995).
c. Form of Bond (incorporated by reference to
Exhibit 4.2 to the S-3 Registration
Statement filed with the Securities and
Exchange Commission on September 12, 1995).
d. Seven Percent Funding Note due September 17,
2031 dated September 22, 1995 between CRIIMI
MAE Financial Corporation II and the Federal
63
<PAGE>
Home Loan Mortgage Corporation (incorporated
by reference from Exhibit 4(bbb) to the
Annual Report on Form 10-K for 1995).
e. Funding Note Purchase and Security Agreement
dated as of September 22, 1995 among the
Federal Home Loan Mortgage Corporation,
CRIIMI MAE Inc. and CRIIMI MAE Financial
Corporation II (incorporated by reference
from Exhibit 4(ccc) to the Annual Report on
Form 10-K for 1995).
f. Assignment and Agreement dated as of
September 22, 1995 between CRIIMI MAE Inc.
and CRIIMI MAE Financial Corporation II
(incorporated by reference from Exhibit
4(ddd) to the Annual Report on Form 10-K for
1995).
g. Funding Note dated December 15, 1995 between
CRIIMI MAE Financial Corporation III and the
Federal National Mortgage Association
(incorporated by reference from Exhibit
4(lll) to the Annual Report on Form 10-K for
1995).
h. Assignment and Agreement dated as of the
15th day of December, 1995, by and between
CRIIMI MAE Inc. and CRIIMI MAE Financial
Corporation III (incorporated by reference
from Exhibit 4(mmm) to the Annual Report on
Form 10-K for 1995).
i. Funding Note Issuance and Security Agreement
dated as of December 15, 1995 among Federal
National Mortgage Association, CRIIMI MAE
Inc. and CRIIMI MAE Financial Corporation
III (incorporated by reference from Exhibit
4(nnn) to the Annual Report on Form 10-K for
1995).
j. Indenture Agreement dated December 20, 1996
between CRIIMI MAE QRS 1, Inc. and the
trustee (incorporated by reference from
Exhibit 4(sss) to the Annual Report on Form
10-K for 1996).
k. Form of Bond to CRIIMI MAE Trust 1
Commercial Mortgage Bonds, Class A-1
(incorporated by reference from Exhibit
4(ttt) to the Annual Report on Form 10-K for
1996).
l. Form of Bond to CRIIMI MAE Trust 1
Commercial Mortgage Bonds, Class A-2
(incorporated by reference from Exhibit
4(uuu) to the Annual Report on Form 10-K for
1996).
m. Form of Bond to CRIIMI MAE Trust 1
Commercial Mortgage Bonds, Class B
(incorporated by reference from Exhibit
4(vvv) to the Annual Report on Form 10-K for
1996).
n. Form of Bond to CRIIMI MAE Trust 1
Commercial Mortgage Bonds, Class C
(incorporated by reference from Exhibit
4(www) to the Annual Report on Form 10-K for
1996).
o. Form of Bond to CRIIMI MAE Trust 1
Commercial Mortgage Bonds, Class D
(incorporated by reference from Exhibit
4(xxx) to the Annual Report on Form 10-K for
1996).
p. Form of Bond to CRIIMI MAE Trust 1
Commercial Mortgage Bonds, Class E
(incorporated by reference from Exhibit
4(yyy) to the Annual Report on Form 10-K for
1996).
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<PAGE>
q. Form of Bond to CRIIMI MAE Trust 1
Commercial Mortgage Bonds, Class F
(incorporated by reference from Exhibit
4(zzz) to the Annual Report on Form 10-K for
1996).
r. Indenture Agreement, dated as of November
19, 1997, between the Company and State
Street Bank and Trust Company (incorporated
by reference from Exhibit 4 (aaaa) to the
Annual Report on Form 10-K for 1997).
s. First Supplemental Indenture, dated as of
November 21, 1997, between the Company and
State Street Bank and Trust Company
(incorporated by reference from Exhibit 4
(bbbb) to the Annual Report on Form 10-K for
1997).
t. Prospectus dated May 29, 1998 whereby CRIIMI
MAE Inc. from time to time may offer one or
more series of debt securities, preferred
shares, common shares or warrants to
purchase Preferred Shares or Common shares
up to an aggregate public offering price of
up to $350,000,000 (incorporated by
reference from Form S-3 on Form 8-K filed
May 29, 1998).
u. Prospectus dated July 8, 1998 whereby CRIIMI
MAE Inc. offers participation in its
Dividend Reinvestment and Stock Purchase
Plan (incorporated by reference from Form
S-3 filed on July 9, 1998).
Exhibit No. 10 - Material contracts.
a. Revised Form of Advisory Agreement
(incorporated by reference from Exhibit No.
10.2 to the Registration Statement).
b. Allonge to Amended and Restated Promissory
Note dated as of June 23, 1995 between
C.R.I., Inc. and CRI/AIM Management, Inc.
(incorporated by reference from Exhibit
10(c) to the Annual Report on Form 10-K for
1995).
c. Administrative Services Agreement dated June
30, 1995 between CRIIMI MAE Inc. and C.R.I.,
Inc. (incorporated by reference from Exhibit
10(d) to the Annual Report on Form 10-K for
1995).
d. Asset Purchase Agreement dated as of June
30, 1995 among CRICO Mortgage Company, Inc.,
CRIIMI MAE Services, Inc., William B.
Dockser and H. William Willoughby
(incorporated by reference from Exhibit
10(e) to the Annual Report on Form 10-K for
1995).
e. Asset Purchase Agreement dated as of June
30, 1995 among CRI/AIM Management, Inc.,
CRIIMI MAE Services, Inc., William B.
Dockser and H. William Willoughby
(incorporated by reference from Exhibit
10(f) to the Annual Report on Form 10-K for
1995).
f. The CRIIMI MAE Management, Inc. Executive
Deferred Compensation Trust Agreement dated
June 30, 1995 between CRIIMI MAE Management,
Inc. and Richard J. Palmer (incorporated by
reference from Exhibit 10(g) to the Annual
Report on Form 10-K for 1995).
g. Sublease dated June 30, 1995 between C.R.I.,
Inc. and CRIIMI MAE Inc. (incorporated by
reference from Exhibit 10(h) to the Annual
Report on Form 10-K for 1995).
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<PAGE>
h. Reimbursement Agreement dated as of June 30,
1995 between CRIIMI MAE Management, Inc. and
C.R.I., Inc. (incorporated by reference from
Exhibit 10(j) to the Annual Report on Form
10-K for 1995).
i. Certificate of Merger dated June 30, 1995
merging CRICO Mortgage Company, Inc.,
CRI/AIM Management, Inc. and CRI
Acquisition, Inc. into CRIIMI MAE
Management, Inc. (incorporated by reference
from Exhibit 10(k) to the Annual Report on
Form 10-K for 1995).
j. Asset Purchase Agreement dated as of June
30, 1995 among C.R.I., Inc., CRI
Acquisition, Inc. and William B. Dockser and
H. William Willoughby (incorporated by
reference from Exhibit 10(l) to the Annual
Report on Form 10-K for 1995).
k. First Amendment to Employment and
Non-Competition Agreement, dated as of
October 5, 1998, by and among CRIIMI MAE
Management, Inc., William B. Dockser and
CRIIMI MAE Inc. (incorporated by reference
from Exhibit 10(t) to the Annual Report on
Form 10-K for 1998).
l. Employment and Non-Competition Agreement
dated April 20, 1995 between CRIIMI MAE
Management, Inc. and William B. Dockser
(incorporated by reference from Exhibit
10(b) to the Annual Report on Form 10-K for
1995).
m. Employment and Non-Competition Agreement
dated June 30, 1995 between CRIIMI MAE
Management, Inc. and Frederick J. Burchill
(incorporated by reference from Exhibit
10(n) to the Annual Report on Form 10-K for
1995).
n. Employment and Non-Competition Agreement
dated June 30, 1995 between CRIIMI MAE
Management, Inc. and H. William Willoughby
(incorporated by reference from Exhibit
10(q) to the Annual Report on Form 10-K for
1995).
o. First Amendment to Employment and
Non-Competition Agreement, dated as of
October 5, 1998, by and among CRIIMI MAE
Management, Inc., H. William Willoughby and
CRIIMI MAE Inc. (incorporated by reference
from Exhibit 10(u) to the Annual Report on
Form 10-K for 1998).
p. Employee Stock Option Agreements and Stock
Option Plan for Key Employees (incorporated
by reference from Exhibit 4(c) to the S-8
Registration Statement filed with the
Securities and Exchange Commission on June
20, 1997).
q. 1996 Non-Employee Director Stock Option Plan
(incorporated by reference from Exhibit 4 to
the S-8 Registration Statement filed with
the Securities and Exchange Commission on
June 13, 1996).
r. Employment and Non-Competition Agreement
dated as of July 1, 1998 between CRIIMI MAE
Management, Inc. and Cynthia O. Azzara
(incorporated by reference from Exhibit
10(p) to the Annual Report on Form 10-K for
1998).
s. First Amendment to the Employment and
Non-Competition Agreement dated as of
October 5, 1998 by and among CRIIMI MAE
Management, Inc.
66
<PAGE>
and Cynthia O. Azzara and CRIIMI MAE Inc.
(incorporated by reference from Exhibit
10(q) to the Annual Report on Form 10-K for
1998).
t. Employment and Non-Competition Agreement
dated as of October 7, 1998 between CRIIMI
MAE Management, Inc. and David B. Iannarone
(incorporated by reference from Exhibit
10(r) to the Annual Report on Form 10-K for
1998).
u. First Amendment to the Employment and
Non-Competition Agreement, dated as of
October 7, 1998, by and among CRIIMI MAE
Management, Inc., David B. Iannarone and
CRIIMI MAE Inc. (incorporated by reference
from Exhibit 10(s) to the Annual Report on
Form 10-K for 1998).
v. Master Loan and Security Agreement dated as
of March 31, 1998 between CRIIMI MAE Inc.
and German American Capital Corporation
(incorporated by reference from Exhibit
10(a) to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).
w. Master Assignment Agreement dated as of
November 25, 1997 between CRIIMI MAE Inc.
and Lehman Commercial paper, Inc.
(incorporated by reference from Exhibit
10(b) to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).
x. Whole Loan Origination Facility Agreement
between Prudential Securities Credit Corp.,
and CRIIMI MAE Inc., dated as of June 1,
1998 (incorporated by reference from Exhibit
10 to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
y. Underwriting Agreement dated January 22,
1998 between CRIIMI MAE Inc. and Prudential
Securities Incorporated (incorporated by
reference from Exhibit 1.0 to the 8-K filed
with the Securities and Exchange Commission
on January 23, 1998).
z. Underwriting Agreement dated March 19, 1998
between CRIIMI MAE Inc. and Prudential
Securities Incorporated and Friedman,
Billings, Ramsey & Co., Inc. (incorporated
by reference from Exhibit 1.0 to the 8-K
filed with the Securities and Exchange
Commission on March 20, 1998).
aa. Amended and Restated Mortgage Loan
Origination and Disposition Program
Agreement made as of May 1, 1998 between
Citicorp Real Estate, Inc. and CRIIMI MAE
Inc. (incorporated by reference from Exhibit
10(aa) to the Annual Report on Form 10-K for
1998).
bb. Articles of Incorporation of CRIIMI MAE
Management, Inc. (incorporated by reference
from Exhibit 3(h) to the Annual Report on
Form 10-K for 1995).
cc. Bylaws of CRIIMI MAE Management, Inc.
(incorporated by reference from Exhibit 3(i)
to the Annual Report on Form 10-K for 1995).
dd. Articles of Incorporation of CRIIMI MAE
Services, Inc. as a Maryland Close
Corporation (incorporated by reference from
Exhibit 3(j) to the Annual Report on Form
10-K for 1995).
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<PAGE>
ee. Bylaws of CRIIMI MAE Services, Inc.
(incorporated by reference from Exhibit 3(k)
to the Annual Report on Form 10-K for 1995).
ff. Articles of Incorporation of CRIIMI MAE
Financial Corporation (incorporated by
reference from Exhibit 3.1 to the Form S-3
Registration Statement filed with the
Securities and Exchange Commission on
September 12, 1995).
gg. By-laws of CRIIMI MAE Financial Corporation
(incorporated by reference from Exhibit 3.2
to the Form S-3 Registration Statement filed
with the Securities and Exchange Commission
on September 12, 1995).
hh. Articles of Incorporation of CRIIMI MAE
Financial Corporation II (incorporated by
reference from Exhibit 3(q) to the Annual
Report on Form 10-K for 1995).
ii. Bylaws of CRIIMI MAE Financial Corporation
II (incorporated by reference from Exhibit
3(r) to the Annual Report on Form 10-K for
1995).
jj. Articles of Incorporation of CRIIMI MAE
Financial Corporation III (incorporated by
reference from Exhibit 3(s) to the Annual
Report on Form 10-K for 1995).
kk. Bylaws of CRIIMI MAE Financial Corporation
III (incorporated by reference from Exhibit
3(t) to the Annual Report on Form 10-K for
1995).
ll. Certificate of Incorporation of CRIIMI MAE
QRS 1, Inc. (incorporated by reference from
Exhibit 3(p) to the Annual Report on Form
10-K for 1996.)
mm. Bylaws of CRIIMI MAE QRS 1, Inc.
(incorporated by reference from Exhibit 3(q)
to the Annual Report on Form 10-K for 1996).
nn. Certificate of Incorporation of CRIIMI MAE
Holdings, Inc. (incorporated by reference
from Exhibit 3(r) to the Annual Report on
Form 10-K for 1996).
oo. Bylaws of CRIIMI MAE Holdings, Inc.
(incorporated by reference from Exhibit 3(s)
to the Annual Report on Form 10-K for 1996).
pp. Certificate of Limited Partnership of CRIIMI
MAE Holdings, L.P. (incorporated by
reference from Exhibit 3(t) to the Annual
Report on Form 10-K for 1996).
qq. Limited Partnership Agreement of CRIIMI MAE
Holdings, L.P. effective as of December 17,
1996 between CRIIMI MAE Inc., CRIIMI MAE
Services Limited Partnership and CRIIMI MAE
Holdings, Inc. (incorporated by reference
from Exhibit 3(u) to the Annual Report on
Form 10-K for 1996).
rr. First Amendment to Preferred Stock Purchase
Agreement for Series C Preferred Stock dated
May 9, 1997 (incorporated by reference from
Exhibit 10.2 to the Form 8-K filed with the
Securities and Exchange Commission on
September 23, 1997).
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<PAGE>
ss. Second Amendment to Preferred Stock Purchase
Agreement for Series C Preferred Stock dated
February 18, 1998 (incorporated by reference
from Exhibit 4.1 to the Form 8-K filed with
the Securities and Exchange Commission on
February 20, 1998).
tt. Preferred Stock Exchange Agreement between
CRIIMI MAE Inc. and MeesPierson Investments
Inc. dated February 22, 2000 (incorporated
by reference to the Form 8-K filed with the
Securities and Exchange Commission on April
10, 2000).
uu. Preferred Stock Purchase Agreement for
Series D Preferred Stock dated July 22, 1998
(incorporated by reference from Exhibit 10.1
to the Form 8-K filed with the Securities
and Exchange Commission on August 3, 1998).
vv. Certificate of Limited Partnership of CRIIMI
MAE Holdings II, L.P. (incorporated by
reference from Exhibit 10(uu) to the Annual
Report on Form 10-K for 1998).
ww. Limited Partnership Agreement of CRIIMI MAE
Holdings II, L.P. effective as of June 4,
1998 between CRIIMI MAE Inc. and CRIIMI MAE
Services Limited Partnership (incorporated
by reference from Exhibit 10(vv) to the
Annual Report on Form 10-K for 1998).
xx. Installment Note dated June 30, 1995 between
CRIIMI MAE Services, Inc. and CRI/AIM
Management, Inc. (incorporated by reference
from Exhibit 4(oo) to the Annual Report on
Form 10-K for 1995).
yy. Installment Note dated June 30, 1995 between
CRIIMI MAE Services, Inc. and CRICO Mortgage
Company, Inc. (incorporated by reference
from Exhibit 4(pp) to the Annual Report on
Form 10-K for 1995).
zz. $9,100,000 Credit Agreement dated as of June
30, 1995 between CRIIMI MAE Management, Inc.
and Signet Bank/Virginia (incorporated by
reference from Exhibit 4(qq) to the Annual
Report on Form 10-K for 1995).
aaa. Loan Note dated June 30, 1995 between CRIIMI
MAE Management, Inc. and Signet
Bank/Virginia (incorporated by reference
from Exhibit 4(rr) to the Annual Report on
Form 10-K for 1995).
bbb. Modification of Interest Rate dated August
22, 1995 for the Credit Agreement Dated as
of June 30, 1995 between CRIIMI MAE
Management, Inc. and Signet Bank/Virginia
(incorporated by reference from Exhibit
4(ss) to the Annual Report on Form 10-K for
1995).
ccc. Guaranty dated June 30, 1995 entered into by
CRIIMI MAE Inc. in favor of and for the
benefit of Signet Bank/Virginia
(incorporated by reference from Exhibit
4(tt) to the Annual Report on Form 10-K for
1995).
ddd. First Amendment to Guaranty dated September
21, 1995 entered into by CRIIMI MAE Inc., in
favor of and for the benefit of Signet Bank/
Virginia (incorporated by reference from
Exhibit 4(yy) to the Annual Report on Form
10-K for 1995).
eee. Second Amendment to Guaranty dated September
21, 1995 entered into by CRIIMI MAE Inc., in
favor of and for the benefit of Signet Bank/
Virginia
69
<PAGE>
(incorporated by reference from Exhibit
4(zz) to the Annual Report on Form 10-K for
1995).
fff. Option agreement between CRIIMI MAE Inc. and
William B. Dockser (incorporated by
reference from Exhibit No. 4(a) to the
registration statement on Form S-8 filed
January 16, 1996).
ggg. Option agreement between CRIIMI MAE Inc. and
H. William Willoughby (incorporated by
reference from Exhibit No. 4(b) to the
registration statement on Form S-8 filed
January 16, 1996).
hhh. Form of Option Agreement for Cynthia O.
Azzara, Frederick J. Burchill, Jay R. Cohen
and Deborah A. Linn (incorporated by
reference from Exhibit No. 4(d) to the
registration statement on Form S-8 filed
January 16, 1996).
iii. Form of Option Agreement for other key
employees (incorporated by reference from
Exhibit No. 4(e) to the registration
statement on Form S-8 filed January 16,
1996).
jjj. Master Assignment Agreement dated September
25, 1997 between CRIIMI MAE Inc. and Merrill
Lynch Mortgage Capital Inc. (incorporated by
reference from Exhibit 4 (eeee) to the
Annual Report on Form 10-K for 1997).
Exhibit No. 21 - Subsidiaries of the registrant.
a. CRIIMI, Inc., incorporated in the State of
Maryland.
b. CRIIMI MAE Financial Corporation,
incorporated in the State of Maryland.
c. CRIIMI MAE Financial Corporation II,
incorporated in the State of Maryland.
d. CRIIMI MAE Financial Corporation III,
incorporated in the State of Maryland.
e. CRIIMI MAE Management, Inc., incorporated in
the State of Maryland.
f. CRIIMI MAE QRS 1, Inc., incorporated in the
State of Delaware.
g. CRIIMI MAE Services Limited Partnership
formed in the State of Maryland.
h. CRIIMI MAE Services Inc. incorporated in the
State of Maryland.
i. CRIIMI MAE Holdings L.P. II formed in the
State of Delaware.
j. CRIIMI MAE CMBS Corporation incorporated in
the State of Delaware.
Exhibit No. 27 - Financial Data Schedule
a. Financial Data Schedule (filed herewith).
Exhibit No. 99 - Additional Exhibits
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<PAGE>
a. United States Bankruptcy Court Voluntary
Petition #9823115 filed on October 5, 1998
for CRIIMI MAE Inc. (incorporated by
reference from Exhibit 99(a) to the
Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
b. United States Bankruptcy Court Voluntary
Petition #9823116 filed on October 5, 1998
for CRIIMI MAE Management, Inc.
(incorporated by reference from Exhibit
99(b) to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
c. United States Bankruptcy Court Voluntary
Petition #9823117 filed on October 5, 1998
for Holdings II, L.P. (incorporated by
reference from Exhibit 99(c) to the
Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
d. Motion for an Order Extending the Debtor's
Exclusive Periods to File a Plan of
Reorganization and Solicit Acceptances
Thereof Pursuant to 11 U.S.C. Sec. 1121(d)
filed on January 28, 1999 (incorporated by
reference from Exhibit 99(d) to the Annual
Report on Form 10-K for 1998).
e. Stipulation and Consent Order regarding
Motion and Adversary Proceeding (Merrill
Lynch) entered December 4, 1998
(incorporated by reference from Exhibit
99(e) to the Annual Report on Form 10-K for
1998).
f. Supplement to Stipulation and Consent Order
Regarding Motion and Adversary Proceeding
(Merrill Lynch) entered January 6, 1999
(incorporated by reference from Exhibit
99(f) to the Annual Report on Form 10-K for
1998).
g. Stipulation and Agreed Order Authorizing Use
of Cash Collateral (German American Capital
Corporation) entered February 2, 1999
(incorporated by reference from Exhibit
99(g) to the Annual Report on Form 10-K for
1998).
h. Stipulation and Consent Order Regarding
Adversary Proceeding (Morgan Stanley and Co.
International Limited) entered on January
26, 1999 (incorporated by reference from
Exhibit 99(h) to the Annual Report on Form
10-K for 1998).
i. Stipulation and Order Regarding Proceeds
Received by the Debtor from the Sale of the
BBB Bonds (Morgan Stanley and Co.
International Limited) entered on January
26, 1999 (incorporated by reference from
Exhibit 99(i) to the Annual Report on Form
10-K for 1998).
j. Order Upon Motions for Reconsideration of
Order Extending Debtors' Exclusive Periods
entered on February 24, 1999 (incorporated
by reference from Exhibit 99(j) to the
Annual Report on Form 10-K for 1998).
k. Stipulation and Consent Order Regarding Sale
of Certain Triple B Bonds (Citicorp) entered
on April 5, 1999 (incorporated by reference
from Exhibit 99(k) to the Annual Report on
Form 10-K for 1998).
l. Supplemental Stipulation and Consent Order
Regarding Sale of Certain Triple B Bonds
(Citicorp) entered on April 5, 1999
(incorporated by reference from Exhibit
99(l) to the Annual Report on Form 10-K for
1998).
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<PAGE>
m. Stipulation and Order Regarding Proceeds
Received by the Debtor from the Sale of
Certain Triple B Bonds (Citicorp) entered on
April 5, 1999 (incorporated by reference
from Exhibit 99(m) to the Annual Report on
Form 10-K for 1998).
n. Stipulation and Consent Order Regarding
Mortgage Loan Origination Agreement with
Citicorp Real Estate Inc. entered on April
5, 1999 (incorporated by reference from
Exhibit 99(n) to the Annual Report on Form
10-K for 1998).
o. Supplemental Stipulation and Consent Order
Regarding Mortgage Loan Origination
Agreement with Citicorp Real Estate, Inc.
entered on April 5, 1999 (incorporated by
reference from Exhibit 99(o) to the Annual
Report on Form 10-K for 1998).
p. Stipulation and Order Regarding Proceeds
Received by the Debtor from Mortgage Loan
Sale entered on April 5, 1999 (incorporated
by reference from Exhibit 99(p) to the
Annual Report on Form 10-K for 1998).
q. Amended Stipulation and Agreed Order
Authorizing Use of Cash Collateral (German
American Capital Corporation) entered May
11, 1999 by reference from Exhibit 99(a) to
the Quarterly Report on Form 10-Q for
quarter ended June 30, 1999).
r. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered April 8, 1999 by reference
from Exhibit 99(b) to the Quarterly Report
on Form 10-Q for quarter ended June 30,
1999).
s. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered April 23, 1999 by reference
from Exhibit 99(c) to the Quarterly Report
on Form 10-Q for quarter ended June 30,
1999).
t. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered May 10, 1999 by reference
from Exhibit 99(d) to the Quarterly Report
on Form 10-Q for quarter ended June 30,
1999).
u. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered May 24, 1999 by reference
from Exhibit 99(e) to the Quarterly Report
on Form 10-Q for quarter ended June 30,
1999).
v. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered June 24, 1999 by reference
from Exhibit 99(f) to the Quarterly Report
on Form 10-Q for quarter ended June 30,
1999).
w. Stipulation and Agreed Order (i) Authorizing
Use of Cash and (ii) Granting Other Relief
(First Union National Bank entered August 5,
1999 (incorporated by reference from Exhibit
99(a) to the Quarterly Report on Form 10-Q
for quarter ended September 30, 1999).
x. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered July 9, 1999 (incorporated
by reference from
72
<PAGE>
Exhibit 99(b) to the Quarterly Report on
Form 10-Q for quarter ended September 30,
1999).
y. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered July 16, 1999 (incorporated
by reference from Exhibit 99(c) to the
Quarterly Report on Form 10-Q for quarter
ended September 30, 1999).
z. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered August 9, 1999
(incorporated by reference from Exhibit
99(d) to the Quarterly Report on Form 10-Q
for quarter ended September 30, 1999).
aa. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited entered September 16, 1999
(incorporated by reference from Exhibit
99(e) to the Quarterly Report on Form 10-Q
for quarter ended September 30, 1999).
bb. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered October 12, 1999
(incorporated by reference from Exhibit
99(f) to the Quarterly Report on Form 10-Q
for quarter ended September 30, 1999).
cc. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered November 10, 1999 (filed
herewith).
dd. Stipulation and Consent Order providing
Merrill Lynch Mortgage Capital Inc. with
adequate protection of its interest in the
Collateral Securities entered on December 3,
1999 (filed herewith).
ee. Stipulation and Consent Order Regarding
Adversary Proceeding (Morgan Stanley and Co.
International Limited) entered on February
24, 2000 (filed herewith).
ff. Second Stipulation and Agreed Order (i)
Authorizing Use of Cash Collateral and (ii)
Granting Other Relief among CMI, First Union
National Bank, and the Official Committee of
Unsecured Creditors of CMI. entered on March
28, 2000 (filed herewith).
gg. Stipulation of Dismissal with Prejudice of
Adversary Proceeding (Morgan Stanley and Co.
International Limited) entered on March 3,
2000 (filed herewith).
hh. Stipulation Extending Wells Fargo Standstill
(Morgan Stanley and Co. International
Limited) entered January 27, 2000 (filed
herewith).
ii. Stipulation and Order Regarding Proceeds
Received by the Debtor from the Sale of the
Wells Fargo Bonds entered on February 28,
2000 (filed herewith).
jj. Joint Disclosure Statement (Proposed) of
CRIIMI MAE Inc. and its affiliates
(incorporated by reference to the Form 8-K
filed with the Securities and Exchange
Commission on December 27, 1999).
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<PAGE>
kk. Amended Joint Disclosure Statement
(Proposed) of CRIIMI MAE Inc. and its
affiliates (incorporated by reference to the
Form 8-K filed with the Securities and
Exchange Commission on April 10, 2000).
(b) Reports on Form 8-K
Date Purpose
---- -------
September 16, 1999 To report (1) a Stock Purchase
Agreement between the Company
and AP-CM, L.L.C. dated
September 9, 1999, including
draft Articles Supplementary to
the Articles of Incorporation of
CRIIMI MAE, Inc. for Series E
Cumulative Convertible Preferred
Stock attached as an exhibit to
the Stock Purchase Agreement,
(2) a press release issued by
the Company on September 9, 1999
announcing the execution of a
stock purchase agreement between
the Company and an affiliate of
Apollo Real Estate Advisors IV,
L.P. and (3) a press release
issued by the Company on
September 15, 1999 announcing
the declaration of a dividend to
common shareholders of 1.61
million shares of a new series
of $10 Face Value Series F
Redeemable Cumulative Dividend
Preferred Stock.
September 24, 1999 To report (1) a Joint Plan of
Reorganization filed by the
Company and its affiliates,
CRIIMI MAE Holdings II, L.P. and
CRIIMI MAE Management, Inc. with
the United States Bankruptcy
Court, District of Maryland,
Greenbelt Division on September
22, 1999 and (2) a press release
issued by the Company on
September 23, 1999 announcing
the filing of the Joint Plan of
Reorganization.
November 19, 1999 To report (1) a press release
issued October 15, 1999
announcing the rescheduling of
the hearing on a motion by
CRIIMI Mae Inc. to approve
bidding protection provisions of
the recently announced Stock
Purchase Agreement (the "Apollo
Purchase Agreement") with an
affiliate of Apollo Real Estate
Advisors IV, L.P., and the
extension to November 1, 1999
for CRIIMI MAE Inc. and its
affiliates CRIIMI MAE Holdings
II, L.P. and CRIIMI MAE
Management, Inc. to file their
proposed disclosure statement
for their Joint Plan of
Reorganization- (2) a press
release issued November 2, 1999
postponing until after November
15, 1999 the hearing on the
pending motion to approve the
bidding protection provisions in
the Stock Purchase Agreement
mentioned above and (3) a press
release issued
74
<PAGE>
November 15, 1999 reporting 1999
third quarter earnings.
December 22, 1999 To report (1) a press release
issued December 3, 1999
announcing the postponement
until December 16, 1999 of the
hearing on the pending motion to
approve the bidding protection
provisions in the Stock Purchase
Agreement entered into by CRIIMI
MAE with an affiliate of Apollo
Real Estate Advisors IV, L.P. on
September 9, 1999 as well as for
the Company and two affiliates
to file the proposed disclosure
statement with respect to its
Joint Plan of Reorganization (2)
a press release issued December
8, 1999 announcing that 756,453
shares of Series F Dividend
Preferred Stock were converted
during the first conversion
period resulting in the issuance
of 6,401,443 shares of the
Company's common stock and (3) a
press release issued December
16, 1999 announcing that the
United States Bankruptcy Court,
District of Maryland, Greenbelt
Division had granted the Company
and its affiliates CRIIMI MAE
Holdings II, L.P. and CRIIMI MAE
Management, Inc. an extension
through December 23, 1999 to
file their proposed Disclosure
Statement with the Bankruptcy
Court.
December 27, 1999 To report (1) an Amended Joint
Plan of Reorganization and a
Joint 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 December 23,
1999 and (2) a press release
issued by the Company on
December 23, 1999 announcing the
filing of the Amended Joint Plan
of Reorganization and the Joint
Disclosure Statement (Proposed).
April 10, 2000 To report (1) a Second Amended
Joint Plan of Reorganization and
an Amended Joint 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 March
31, 2000 and (2) a press release
issued by the Company on March
31, 2000 announcing the filing
of the Second Amended Joint Plan
of Reorganization and the
Amended Joint Disclosure
Statement (Proposed).
April 10, 2000 To report (1) a Preferred Stock
Exchange Agreement between
CRIIMI MAE Inc. and Mees Pierson
Investments Inc. on February 22,
75
<PAGE>
2000; (2) an Articles of
Amendment to Articles
Supplementary to the Articles of
Incorporation in Respect of
Series E Cumulative Convertible
Preferred Stock on February 22,
2000; and (3) a press release
issued by the Company on
February 23, 2000 announcing the
exchange of the Company's Series
C Preferred Stock for new Series
E Preferred Stock.
(c) Exhibits
The list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)(3) above.
(d) Financial Statement Schedules
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CRIIMI MAE INC.
/S/ WILLIAM B. DOCKSER
- ------------------- ------------------------------
DATE William B. Dockser
Chairman of the Board and
Principal Executive Officer
76
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/S/ WILLIAM B. DOCKSER
- ------------------- ------------------------------
DATE William B. Dockser
Chairman of the Board and
Principal Executive Officer
/S/ H. WILLIAM WILLOUGHBY
- ------------------- ------------------------------
DATE H. William Willoughby
Director, President and
Secretary
/S/ CYNTHIA O. AZZARA
- ------------------- ------------------------------
DATE Cynthia O. Azzara
Senior Vice President, Chief
Financial Officer and Principal
Accounting Officer
/S/ GARRETT G. CARLSON, SR.
- ------------------- ------------------------------
DATE Garrett G. Carlson, Sr.
Director
/S/ G. RICHARD DUNNELLS
- ------------------- ------------------------------
DATE G. Richard Dunnells
Director
/S/ ROBERT MERRICK
- ------------------- ------------------------------
DATE Robert Merrick
Director
/S/ ROBERT E. WOODS
- ------------------- ------------------------------
DATE Robert E. Woods
Director
77
<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
F-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.
F-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.
F-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.
F-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.
<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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<PAGE>
<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
<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
<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.
<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
<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.
<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.
<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
standstill. In late November 1998, buying
<PAGE>
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.
<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.
<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
<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.
<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.
<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.
<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.
<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.
<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
<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.
<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:
<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.
<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.
<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>
<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.
<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
<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.
<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.
<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.
<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.
<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
<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
<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
<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.
<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 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.
<PAGE>
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,
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.
<PAGE>
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 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.
<PAGE>
(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 acceptances
of the plan. If a debtor-in-possession fails to file a plan during the
exclusivity period or such additional exclusivity period as may be ordered by
the Bankruptcy Court or, after such plan has been filed, fails to obtain
acceptance of such plan from impaired classes of creditors and equity security
holders during the exclusive solicitation period, any party in interest,
including a creditors' committee, an equity security holders' committee, a
creditor or an equity security holder may file a plan of reorganization for such
debtor. Additionally, if the Bankruptcy Court were to appoint a trustee, the
exclusivity period, if not previously terminated, would terminate.
<PAGE>
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.
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.
<PAGE>
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 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
<PAGE>
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
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.
<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 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.
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:
<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 "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
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.
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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.
<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
<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.
<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.
<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.
<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.
<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.
<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.
<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.
<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.
<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.
<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.
<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.
<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.
<PAGE>
EXHIBIT INDEX
3(e) Articles Supplementary to the Articles of Incorporation of CRIIMI MAE
Inc. reclassifying 150,000 shares of the Corporation's "Series A
Cumulative Convertible Preferred Stock" to authorized but unissued shof
the Corporation's preferred stock.
3(k) Articles Supplementary to the Articles of Incorporation of CRIIMI MAE
Inc. designating 1,610,000 shares of the Company's Preferred Stock as
"Series F Redeemable Cumulative Dividend Preferred Stock".
27 Financial Data Schedule
99(d) Order Extending the Debtor's Exclusive Periods to File a Plan of
Reorganization and Solicit Acceptances Thereof Pursuant to 11 U.S.C.
Sec. 1121(d) entered on February 2, 1999.
99(cc) Stipulation Extending Wells Fargo Standstill (Morgan Stanley and Co.
International Limited) entered on November 10, 1999.
99(dd) Stipulation and Consent Order Providing for Adequate Protection
(Merrill Lynch Mortgage Capital Inc.) entered on December 3, 1999.
99(ee) Stipulation and Consent Order Regarding Adversary Proceeding (Morgan
Stanley and Co. International Limited) entered on February 24, 2000.
99(ff) Second Stipulation and Agreed Order (i) Authorizing Use of Cash
Collateral and (ii) Granting Other Relief entered on March 28, 2000.
99(gg) Stipulation of Dismissal with Prejudice of Adversary Proceeding (Morgan
Stanley and Co. International Limited) entered on March 3, 2000.
99(hh) Stipulation Extending Wells Fargo Standstill (Morgan Stanley and Co.
International Limited) entered January 27, 2000.
99(ii) Stipulation and Order Regarding Proceeds Received by the Debtor from
the Sale of the Wells Fargo Bonds entered on February 28, 2000.
<PAGE>
Exhibit 3(e)
ARTICLES SUPPLEMENTARY
TO THE
ARTICLES OF INCORPORATION
OF
CRIIMI MAE INC.
CRIIMI MAE INC., a Maryland corporation having its principal
office in the City of Rockville, Montgomery County, Maryland (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: Pursuant to authority contained in Article SIXTH of the
Articles of Incorporation of the Corporation, one hundred and fifty thousand
(150,000) authorized but unissued shares of the Corporation's Series A
Cumulative Convertible Preferred Stock have been duly reclassified by the Board
of Directors of the Corporation as authorized but unissued shares of the
Corporation's preferred stock, $0.01 par value per share (the "Preferred
Shares").
SECOND: A description of the Preferred Shares is contained in
the Articles of Incorporation of the Corporation filed with the Maryland
Department of Assessments and Taxation on June 9, 1993.
THIRD: The reclassification of authorized but unissued shares
as set forth in these Articles Supplementary does not increase the authorized
capital of the Corporation or the aggregate par value thereof.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles
to be signed in its name and on its behalf by its Senior Vice President and its
corporate seal to be hereunto affixed and attested by its Assistant Secretary
this ____ day of ________________, 1999. The undersigned Senior Vice president
acknowledges that these Articles Supplementary are the act of the Corporation,
that to the best of his knowledge, information and belief all matters and facts
set forth herein relating to the authorization and approval of these Articles
Supplementary are true in all material respects, and that this statement is made
under the penalties of perjury.
ATTEST: CRIIMI MAE INC.
________________________________ By:__________________________(SEAL)
Print Name:______________________ Print Name:__________________________
Assistant Secretary Senior Vice President
[Affix corporate seal]
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<PAGE>
Exhibit 3(k)
ARTICLES SUPPLEMENTARY
TO THE
ARTICLES OF INCORPORATION
OF
CRIIMI MAE INC.
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)
CRIIMI MAE INC., a Maryland corporation (the "CORPORATION"), by and
through its undersigned Senior Vice President, does hereby certify that:
FIRST: On September 14, 1999, the Board of Directors of the
Corporation (the "BOARD OF DIRECTORS"), pursuant to Section 2-105 of the
Maryland General Corporation Law (the "MGCL") and Article SIXTH of the Articles
of Incorporation of the Corporation, duly classified 1,610,000 unissued shares
of the Corporation's preferred stock, $0.01 par value per share, into a series
of preferred stock designated "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)" and established and fixed the preferences,
conversion or other rights, voting powers, restrictions as to dividends,
qualifications and terms and conditions of redemption of such series of
preferred stock, and authorized the execution and delivery of these Articles
Supplementary to the Maryland State Department of Assessments and Taxation for
filing pursuant to Section 2-208 of the MGCL.
SECOND: The Series F Dividend Preferred Stock shall be subject
to all of the provisions of the Corporation's Articles of Incorporation relating
to the stock of the Corporation generally and shall have the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, as set by the
Board of Directors, as follows:
SECTION 1. DEFINITIONS. For the purposes of these
Articles Supplementary, the following terms have the meanings indicated:
"ARTICLES OF INCORPORATION" means the Articles of
Incorporation of the Corporation as in effect from time to time.
<PAGE>
"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 by the New York Stock Exchange or the American Stock Exchange or any
successor thereto weighted by the number of shares traded for that day or, if
that information is not available, (c) 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, as quoted by the Nasdaq
National Market System or any successor thereto.
"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 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).
"CORPORATION" means CRIIMI MAE Inc., a Maryland corporation.
"DIVIDEND PARITY STOCK" has the meaning ascribed thereto in
Section 3(a)(3).
"DIVIDEND PERIOD" has the meaning ascribed thereto in Section
3(a)(1).
"DIVIDEND RATE" means 12%.
"HOLDER CONVERSION NOTICE" has the meaning ascribed thereto in
Section 9(d)(1).
"INITIAL ISSUE DATE" has the meaning ascribed thereto in
Section 3(a)(1).
"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
Dividend Preferred Stock, $10.00.
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<PAGE>
"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
Dividend 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)(3).
"SENIOR CAPITAL STOCK" has the meaning ascribed thereto in
Section 2(b).
"SERIES A PREFERRED STOCK" means the Corporation's Series A
Cumulative Convertible Preferred Stock, par value $0.01 per share.
"SERIES B PREFERRED STOCK" means the Corporation's Series B
Cumulative Convertible Preferred Stock, par value $0.01 per share.
"SERIES C PREFERRED STOCK" means the Corporation's Series C
Cumulative Convertible Preferred Stock, par value $0.01 per share.
"SERIES D PREFERRED STOCK" means the Corporation's Series D
Cumulative Convertible Preferred Stock, par value $0.01 per share
"SERIES F DIVIDEND DECLARATION DATE" means the date on which
the Board of Directors declares a dividend with respect to the Series F Dividend
Preferred Stock.
"SERIES F DIVIDEND PREFERRED STOCK" has the meaning ascribed
thereto in Section 2(a).
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<PAGE>
"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 number of shares traded at each given price during such
period, by (b) such price, divided by (ii) the total number of shares traded
during such period.
SECTION 2. DESIGNATION NUMBER; RANK.
(a) DESIGNATION. 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 DIVIDEND PREFERRED STOCK"). The number of shares initially constituting the
Series F Dividend 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 Dividend Preferred Stock; PROVIDED, HOWEVER, that such
number may not be decreased below the number of shares of Series F Dividend
Preferred Stock outstanding at the effective time of such reduction.
(b) RANK. The Series F Dividend 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 Dividend 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 Dividend 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 (v) the Series A Preferred Stock, (w) the
Series B Preferred Stock, (x) the Series C Preferred Stock, (y) the Series D
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
Dividend Preferred Stock with respect to dividend rights and/or rights upon
liquidation, dissolution or
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<PAGE>
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 Articles Supplementary, none of the rights pertaining to
dividends and distributions, and rights upon liquidation, dissolution and
winding up attributable to the Series F Dividend Preferred Stock, may be
exercised, enjoyed or received unless the corresponding rights of the Senior
Capital Stock have been fully exercised, enjoyed or received.
SECTION 3. DIVIDENDS AND DISTRIBUTIONS.
(a) DIVIDENDS.
(1) The holders of shares of Series F Dividend
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 Dividend
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 Series F
Dividend Declaration Date. Such dividends shall be declared at such intervals as
the Board of Directors, in its discretion, shall determine; PROVIDED, HOWEVER,
that payment of the first dividend on shares of Series F Dividend 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 Corporation's Plan of
Reorganization becomes effective and thereafter not more than quarterly, as
determined by the Board of Directors (each such period being referred to as a
"DIVIDEND PERIOD"). Dividends shall be fully cumulative from the date of first
issuance of any shares of Series F Dividend 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 to holders who exercise
their conversion privilege during a Conversion Period on shares so converted.
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 Dividend Preferred Stock that may be in
arrears.
(2) Dividends on shares of Series F Dividend
Preferred Stock shall be payable in cash.
(3) Dividends paid on shares of Series F Dividend
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 Dividend Preferred Stock and all other shares of capital stock of
the Corporation ranking on parity as to dividends with the Series F Dividend
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 Dividend
Preferred Stock and the Dividend Parity Stock shall in all cases bear
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<PAGE>
to each other the same ratio that accrued dividends per share on the Series F
Dividend Preferred Stock and the Dividend Parity Stock bear to each other.
(4) The Board of Directors may fix a record date for
the determination of holders of shares of the Series F Dividend 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.
(5) Any dividend payment made on shares of the Series
F Dividend Preferred Stock first shall be credited against the earliest accrued
but unpaid dividend due with respect to shares of the Series F Dividend
Preferred Stock which remains payable.
(b) OTHER DISTRIBUTIONS. Holders of shares of the Series F
Dividend Preferred Stock shall not be entitled to receive any dividends or other
distributions except as expressly provided herein.
SECTION 4. VOTING. Holders of outstanding shares of
Series F Dividend Preferred Stock shall have the following voting rights:
(a) LIMITATION ON VOTING RIGHTS. Holders of shares of Series F
Dividend Preferred Stock shall have no voting rights except as set forth below
or as otherwise required by law.
(b) ELECTION OF TWO (2) DIRECTORS. During any period in which
dividends on the Series F Dividend 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
Dividend 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 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 Dividend 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 Dividend 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
Dividend 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).
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<PAGE>
(c) PROCEDURAL MATTERS.
(1) The voting rights of holders of shares of Series
F Dividend 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 Dividend Preferred Stock.
Unless such right has been exercised by the unanimous written consent of all
holders of Series F Dividend 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 Dividend
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.
(2) At each meeting of stockholders at which the
holders of shares of Series F Dividend Preferred Stock shall have the right, as
provided in this Section 4, 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 F Dividend 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 Dividend 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 Dividend Preferred Stock as provided in this Section 4; and
(B) in the absence of a quorum of the
holders of shares of Series F Dividend Preferred Stock, a majority of the
holders of shares of Series F Dividend 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 Dividend Preferred Stock from time to time
and place to place without notice other than announcement at the meeting until a
quorum shall be present.
(3) For the taking of any action as provided in this
Section 4 by the holders of Series F Dividend Preferred Stock, each such holder
shall have one (1) vote for each share of Series F Dividend 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.
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<PAGE>
SECTION 5. CERTAIN RESTRICTIONS.
(a) ON DIVIDENDS. If any shares of Series F Dividend Preferred
Stock are outstanding, then the Corporation shall not, other than pursuant to
Section 3(a)(3), declare, make, pay or set apart for payment or distribution any
dividends or other distributions for any period 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 Dividend 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 for the payment thereof
set apart for such payment on all shares of Series F Dividend Preferred Stock
entitled thereto.
(b) ON REDEMPTIONS, REPURCHASES AND REACQUISITIONS. If any
shares of Series F Dividend 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 for
the payment thereof set apart for such payment on the Series F Dividend
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 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) ON ACTIONS BY SUBSIDIARIES. 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 5(b), purchase or otherwise acquire such
shares at such time and in such manner.
SECTION 6. REDEMPTION.
(a) TIME; PRICE; RIGHTS UPON CALL FOR REDEMPTION. Shares of
Series F Dividend 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 Dividend 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 equal to any accrued and unpaid dividends to (and including) the date
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fixed for redemption (the "REDEMPTION DATE"). For purposes of determining
dividends due and payable in respect of shares of Series F Dividend Preferred
Stock called for redemption pursuant to this Section 6(a), the Redemption Date
shall be the last Series F Dividend Declaration Date preceding the Redemption
Date. 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 Dividend Preferred Stock called
for redemption has been duly paid or deposited in trust for the benefit of the
holders of the Series F Dividend Preferred Stock, dividends shall cease to
accrue on the Series F Dividend 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 payable
upon such redemption, without interest thereon, upon surrender of the
certificates evidencing such shares. Any monies 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 Dividend Preferred Stock so called
for redemption shall look only to the Corporation for the payment thereof.
(b) PROCEDURAL MATTERS. Notice of any redemption pursuant to
Section 6(a) shall be given to the holders of shares of Series F Dividend
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 Dividend Preferred Stock to be redeemed; (iii) the number
of shares of Series F Dividend Preferred Stock to be redeemed from such holder;
(iv) the per share Redemption Price 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 Dividend Preferred Stock are to be
surrendered for payment of the Redemption Price; and (vi) that dividends on the
shares of Series F Dividend Preferred Stock to be redeemed will cease to accrue
on the Redemption Date. If less than all shares of Series F Dividend Preferred
Stock then outstanding are to be redeemed, shares of Series F Dividend Preferred
Stock will be redeemed PRO RATA from among the holders of shares of Series F
Dividend Preferred Stock then outstanding.
SECTION 7. REACQUIRED SHARES. Any shares of Series F
Dividend 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 Dividend 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 Dividend
Preferred Stock remains outstanding.
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SECTION 8. LIQUIDATION; DISSOLUTION; WINDING UP.
(a) GENERALLY. 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 Dividend Preferred Stock as to distribution of assets upon any
liquidation, dissolution or winding up of the Corporation, the holders of Series
F Dividend 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 Dividend
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 Dividend Preferred Stock and the corresponding
amounts payable on all shares of Parity Capital Stock that ranks PARI PASSU with
the Series F Dividend Preferred Stock as to the distribution of assets upon
liquidation, dissolution or winding up ("LIQUIDATION PARITY STOCK"), then the
holders of Series F Dividend 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) EXCLUDED TRANSACTIONS. 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.
SECTION 9. CONVERSION.
(a) CONVERSION PERIOD. 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 Dividend 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 Dividend Preferred Stock convert a share of Series F Dividend
Preferred Stock into Common Stock if such conversion would result in violation
of Article EIGHTEENTH of the Articles of Incorporation. For purpose of these
Articles Supplementary, "beneficial ownership" shall be determined in accordance
with Rule 13d-3 of the Securities Exchange Act of 1934, as amended.
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(b) COMMON STOCK ISSUABLE UPON CONVERSION. The number of
shares of Common Stock deliverable upon conversion of a share of Series F
Dividend 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 Dividend
Preferred Stock and (ii) the denominator of which, subject to Section 9(c), is
the Average Price for the Pricing Period.
(c) LIMITATIONS ON CONVERSION PRICE. Anything to the contrary
contained in Section 9(b) or Section 9(d)(5) 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) PROCEDURAL MATTERS.
(1) During either Conversion Period, holders of
Series F Dividend Preferred Stock may convert their shares of Series F Dividend
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 Dividend 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 Dividend Preferred Stock pursuant hereto.
(2) 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 Dividend 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 the number of validly issued, fully paid and
nonassessable full shares of Common Stock to which the holder of shares of
Series F Dividend Preferred Stock being converted shall be entitled and (ii) if
less than the full number of shares of Series F Dividend 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
Dividend Preferred Stock evidenced by such surrendered certificate(s), less the
number
-11-
<PAGE>
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 Dividend 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 Dividend 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 Dividend 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.
(3) No fractions of shares of Common Stock shall be
issued in connection with the conversion of any shares of Series F Dividend
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
Dividend 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 Dividend Preferred Stock so surrendered.
(4) The Corporation shall at all times endeavor to
reserve and keep available for issuance upon the conversion of the Series F
Dividend 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 Dividend Preferred Stock, and to 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 F
Dividend Preferred Stock.
(5) In case of any reclassification of the Common
Stock, any consolidation of the Corporation with, or merger of the Corporation
into, any other entity,
-12-
<PAGE>
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 Dividend 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 Series F Dividend Declaration
Date preceding the date fixed for redemption; or (ii) convert each share of the
Series F Dividend 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 Dividend
Preferred Stock would have been convertible, which shall be a fraction (x) the
numerator of which is the Liquidation Value of the Series F Dividend 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 Dividend 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 Dividend Preferred Stock would have
been convertible had such share been converted pursuant to this Section
9(d)(5)(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)(5) shall similarly
apply to successive reclassification, consolidations, mergers, sales, transfers
or share exchanges.
SECTION 10. REIT STATUS. Nothing contained in these Articles
Supplementary or the Articles of Incorporation 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 Incorporation), including, without limitation, the
enforcement of the provisions of Article EIGHTEENTH of the Articles of
Incorporation and payment of dividends in the form of Parity Capital Stock or
Junior Capital Stock.
-13-
<PAGE>
SECTION 11. AMENDMENT. These Articles Supplementary 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 Dividend Preferred Stock issued and
outstanding at the time of any such amendment, revision or alteration.
-14-
<PAGE>
IN WITNESS WHEREOF, this instrument has been executed for and
on behalf and in the name of the Corporation by its officers thereunto duly
authorized on the ___ day of September, 1999.
CRIIMI MAE INC.
By:
-------------------------
Print Name:
-----------------
Title:
----------------------
Attest:
- -------------------------
Print Name:
--------------
Title:
-------------------
<PAGE>
THE UNDERSIGNED, _______________ of the Corporation, who
executed on behalf of the Corporation Articles Supplementary of which this
Certificate is made a part, hereby acknowledges in the name and on behalf of
said Corporation the foregoing Articles Supplementary to be the corporate act of
said Corporation and hereby certifies that the matters and facts set forth
herein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
By:
-------------------------
Print Name:
-----------------
Title:
----------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL
REPORT ON FORM 10-K.
</LEGEND>
<CIK> 000847322
<NAME> CRIIMI MAE INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 91,640
<SECURITIES> 1,574,128
<RECEIVABLES> 122,760
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,293,661
<CURRENT-LIABILITIES> 91,962
<BONDS> 1,982,351
0
26
<COMMON> 600
<OTHER-SE> 218,723
<TOTAL-LIABILITY-AND-EQUITY> 2,293,661
<SALES> 0
<TOTAL-REVENUES> 227,878
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 195,070
<LOSS-PROVISION> 8,000
<INTEREST-EXPENSE> 151,337
<INCOME-PRETAX> (126,529)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126,529)
<EPS-BASIC> (2.45)
<EPS-DILUTED> (2.45)
</TABLE>
<PAGE>
Exhibit 99(d)
UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
GREENBELT DIVISION
- ------------------------------------------)
In re ) Chapter 11
)
CRIIMI MAE Inc., ET AL., ) Case Nos. 98-23115 through
) 98-23117
Debtors. ) (Jointly Administered)
- ------------------------------------------)
ORDER EXTENDING THE DEBTORS' EXCLUSIVE PERIODS TO FILE A PLAN OF
REORGANIZATION AND SOLICIT ACCEPTANCES THEREOF
PURSUANT TO 11 U.S.C. Section 1121(d)
Upon the motion (the "Motion") and representations of CRIIMI MAE Inc.
("CMI"), CRIIMI MAE Management, Inc. ("Management") and CRIIMI MAE Holdings II,
L.P. ("Holdings"), as debtors and debtors in possession (collectively the
"Debtors," individually "Debtor"), in the above-captioned bankruptcy cases, for
an order extending the periods within which the Debtors have the exclusive right
to file plans of reorganization and solicit acceptances thereof (collectively
the "Exclusive Periods," individually "Exclusive Period") pursuant to Section
1121(d) of Title 11 of the United States Code (the "Bankruptcy Code") for a
period of six (6) months, filed with the Court on January ____, 1998, and upon
the record herein, and due and sufficient notice having been given, and good
cause having been shown for granting the Motion in its entirety, and pursuant to
Section 1121(d) of the Bankruptcy Code, it is hereby
<PAGE>
ORDERED, ADJUDGED AND DECREED, that:
1. The Motion is granted.
2. The Exclusive Period during which each Debtor has the exclusive right
to file a plan of reorganization is hereby extended from February 2,
1999 through and including August 2, 1999.
3. The Exclusive Period during which each Debtor has the exclusive right
to solicit acceptance of a plan of reorganization is hereby extended
from April 3, 1999 through and including October 3, 1999.
4. This Order is without prejudice to the right of each Debtor, either
individually, jointly or collectively to seek, by motion filed within
said Exclusive Periods as extended, further extensions of the
Exclusive Periods.
5. This Order is without prejudice to the right of any party in interest
to seek to shorten the Exclusive Periods or oppose any further
extensions of time.
Dated: Greenbelt, Maryland
February __, 1999
---------------------------------
Duncan W. Keir
United States Bankruptcy Judge
cc:
Stanley J. Samorajczyk, P.C.
Akin Gump Strauss Hauer & Feld, L.L.P.
1333 New Hampshire Avenue
Washington, D.C. 20036
Co-counsel to CRIIMI MAE Inc. and
CRIIMI MAE Holdings II, L.P.
2
<PAGE>
Richard L. Wasserman, Esq.
Venable, Baetjer & Howard, LLP
1800 Mercantile Bank and Trust Bldg.
Two Hopkins Plaza
Baltimore, MD 21201
Co-counsel to CRIIMI MAE Inc. and
CRIIMI MAE Holdings II, L.P.
Morton A. Faller, Esq.
Jeffrey W. Rubin, Esq.
Shulman, Rogers, Gandal, Pordy & Ecker, P.A.
11921 Rockville Pike, 3rd Floor
Rockville, MD 20852-2743
Counsel to CRIIMI MAE Management, Inc.
Martin T. Fletcher, Esq.
Whiteford, Taylor & Preston, LLP
Seven Saint Paul Street, Suite 1400
Baltimore, MD 21202-1626
Counsel, Official Committee of
Unsecured Creditors-CRIIM MAE
Management
Michael St. Patrick Baxter, Esq.
Covington and Burling
1201 Pennsylvania Avenue, NW
Washington D.C. 20044
Counsel, Official Equity Committee -CMI
Michael L. Bernstein, Esq
Daniel M. Lewis, Esq.
Arnold & Porter
555 Twelfth Street, NW
Washington, DC 20004-1206
Counsel, Official Committee of Unsecured
Creditors-CMI
Clifford J. White, Esq.
Office of United States Trustee
6305 Ivy Lane, Suite 600
Greenbelt, MD 20770
3
<PAGE>
Exhibit 99(cc)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
CRIIMI MAE INC., et al., * 98-2-3115-DK
(Chapter 11)
Debtors. * (Jointly Administered)
* * * * * *
CRIIMI MAE INC., *
Plaintiff, *
v. *
MORGAN STANLEY & CO. *
INTERNATIONAL LIMITED, Adversary Proceeding
* No. 98-1565-DK
Defendant.
*
* * * * * * * * * *
STIPULATION EXTENDING WELLS FARGO STANDSTILL
CRIIMI MAE Inc. ("CRIIMI MAE") and Morgan Stanley & Co.
International Limited ("MSIL"), by their undersigned counsel, hereby stipulate
and agree pursuant to paragraph two of the Stipulation and Consent Order
Regarding Adversary Proceeding among CRIIMI MAE, MSIL and the Official Committee
of Unsecured Creditors of CRIIMI MAE that the Wells Fargo Standstill Period
shall be extended up through and including November 30, 1999.
- -------------------------------- ----------------------------
Richard L. Wasserman, Esquire Thomas P. Ogden, Esquire
(Federal Bar No. 02784) Anne Berry Howe, Esquire
Gregory A. Cross, Esquire Barbara D. Diggs, Esquire
(Federal Bar No. 04571-G) Davis Polk & Wardwell
Venable, Baetjer and Howard, LLP 450 Lexington Avenue
1800 Mercantile Bank & Trust Bldg New York, New York 10017
2 Hopkins Plaza (212) 450-4000
Baltimore, Maryland 21201
(410) 244-7400 Of Counsel for Defendant
Morgan Stanley & Co.
Co-Counsel for CRIIMI MAE Inc. International Limited
<PAGE>
Stanley J. Reed, Esquire
(Federal Bar No. 00315)
Lauri Cleary, Esquire
(Federal Bar No. 06599)
Tamara A. Stoner, Esquire
(Federal Bar No. 08014)
Lerch, Early & Brewer, Chartered
3 Bethesda Metro Center, Suite 380
Bethesda, Maryland 20814
(301) 986-1300
Counsel for Defendant
Morgan Stanley & Co.
International Limited
2
<PAGE>
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this 10th day of November, 1999 a
copy of the foregoing Stipulation Extending Wells Fargo Standstill was sent by
first class mail, postage prepaid to:
Thomas P. Ogden, Esquire
Davis Polk & Wardell
450 Lexington Avenue
New York, New York 10017
Stanley J. Reed, Esquire
3 Bethesda Metro Center, Suite 380
Bethesda, Maryland 20814
Daniel M. Lewis, Esquire
Michael Bernstein, Esquire
Arnold and Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
Michael St. Patrick Baxter, Esquire
Covington and Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044
Clifford J. White, III, Esquire
Assistant U.S. Trustee
Office of U.S. Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
Stanley J. Samorajczyk, Esquire
Akin, Gump, Strauss, Hauer & Feld, LLP
Suite 400
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
---------------------------------
Gregory A. Cross
3
<PAGE>
Exhibit 99(dd)
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
GREENBELT DIVISION
)
In re: )
) Case Nos. 98-23115 through
CRIIMI MAE Inc. et al. ) 98-23117
) (Chapter 11)
Debtors. ) Jointly Administered -
) Under Case No. 98-23115-DK
- ----------------------------------------------)
)
MERRILL LYNCH MORTGAGE )
CAPITAL INC., )
)
Movant, )
)
v. )
)
CRIIMI MAE Inc. )
)
Respondent. )
)
- ----------------------------------------------)
STIPULATION AND CONSENT ORDER
PROVIDING FOR ADEQUATE PROTECTION
Upon the filing by CRIIMI MAE Inc. (the "Debtor") of a Motion
for Order Approving Stipulation and Consent Order Providing for Adequate
Protection, and upon the consent by Merrill Lynch Mortgage Capital Inc.
("MLMCI"), the Official Committee of Unsecured Creditors of CRIIMI MAE Inc. (the
"Creditors Committee") and the Official Committee of Equity Security Holders of
CRIIMI MAE Inc. (the "Equity Committee") to the relief set forth in this
Stipulation and Consent Order Providing for Adequate Protection (the
"Stipulation and Consent Order"), the Court finds that:
A. Proper notice hereof has been given to the United States Trustee and
to all necessary parties pursuant to Bankruptcy Rule 4001.
<PAGE>
B. The Debtor and MLMCI had previously entered into a Stipulation and
Consent Order regarding Motion and Adversary Proceeding (the "First
Consent Order") and that the First Consent Order was entered by this
Court on December 4, 1998.
C. Unless otherwise defined in this Stipulation and Consent Order, any
capitalized term used herein that is defined in the First Consent
Order shall have the meaning given to such term in the First Consent
Order.
D. Pursuant to the terms of the First Consent Order, MLMCI's security
interest has been determined to be a properly perfected, valid first
priority security interest in the Collateral Securities, subject only
to the applicable provisions of the First Consent Order.
E. After entry of the First Consent Order, MLMCI asserted that it was
entitled to certain adequate protection of its interest in the
Collateral Securities and requested that the Debtor provide it with
adequate protection.
F. The Debtor eventually agreed to provide certain adequate protection of
MLMCI's interest in the Collateral Securities. On or about September
7, 1999, the Debtor filed its Motion to Approve Stipulation and
Consent Order Providing for Adequate Protection ("Motion"). Attached
as Exhibit 2 to the Motion was a proposed Stipulation and Consent
Order Providing for Adequate Protection ("Proposed Order"), which set
forth the adequate protection the Debtor agreed to provide subject to
court approval. Another copy of the Proposed Order is annexed hereto.
2
<PAGE>
G. On September 27, 1999, the Creditors Committee and the Equity
Committee timely filed a joint objection to the Motion and to the
Proposed Order ("Joint Objection"), in which they objected to
Paragraphs 7 and 9 of the Proposed Order and asked the Court either to
deny entry of the Proposed Order or, alternatively, to enter the
Proposed Order after striking Paragraphs 7 and 9.
H. At the request of MLMCI, the Court scheduled a hearing on the Motion
and Joint Objection for November 1, 1999, at 10:30 a.m.
I. The Debtor, the Creditors Committee, the Equity Committee, and MLMCI
agreed to postpone the November 1, 1999 hearing on the Motion and
Joint Objection in order to continue discussions over a possible,
consensual resolution of the issues raised.
NOW, THEREFORE, it is ORDERED as follows:
1. PURPOSE. The purpose of this Stipulation and Consent Order is to provide
MLMCI with adequate protection of its interest in the Collateral Securities.
2. ADEQUATE PROTECTION. Except as modified in Paragraph 5 of this
Stipulation and Consent Order, all of the terms and provisions of the
Proposed Order are hereby approved and deemed "so ordered" by the Court
without entry of such Proposed Order. As a result, and without in any way
limiting the generality of the first sentence of this Paragraph 2, (a) the
Debtor is hereby directed to comply with all of the terms and provisions of
the Proposed Order as modified by Paragraph 5 hereof; and (b) MLMCI shall be
entitled to all of the benefits set forth in the Proposed Order as modified
by Paragraph 5 hereof.
3
<PAGE>
By its counsel's consent to the entry of this Stipulation and Consent Order,
MLMCI agrees to be bound by the terms and provisions of the Proposed Order as
modified by Paragraph 5 hereof.
3. RELIEF FROM THE AUTOMATIC STAY. The automatic stay created by Section
362(a) of the Bankruptcy Code is hereby modified to the limited extent necessary
to implement the terms and provisions of this Stipulation and Consent Order and
shall otherwise remain in full force and effect.
4. CONTINUANCE. All parties hereto shall jointly request the Court, by
appropriate pleading or motion, to enter this Stipulation and Consent Order
immediately. In the event this Stipulation and Consent Order has not been
entered prior thereto, then the hearing on the Motion and the Joint Objection
shall be continued to the Court's first available hearing date after December 1,
1999, which is the 6th day of December, 1999, at 2:00 p.m., at which time all
parties shall jointly request entry of this Stipulation and Consent Order. Upon
entry of this Stipulation and Consent Order, the hearing on the Motion and the
Joint Objection shall be cancelled. If this Stipulation and Consent Order has
not been entered by December 6, 1999, with time being of the essence, and
without modification acceptable to MLMCI, then all parties reserve all of their
rights as they existed immediately prior to the filing of this Stipulation and
Consent Order; PROVIDED, HOWEVER, that no hearing on the Motion and Joint
Objection shall occur earlier than December 7, 1999.
5. MODIFICATIONS TO PROPOSED ORDER. Unless otherwise ordered by the Court,
the provisions of Paragraphs 7, 8 and 9 of the Proposed Order shall be of no
force and effect. MLMCI shall not be entitled to seek any adequate protection in
addition to that provided for in this Stipulation and Consent Order or to seek
relief from the automatic stay to allow it to foreclose upon its lien and
security interest in the Collateral Securities, the Cash
4
<PAGE>
Collateral Account, or the Cash Collateral Monies unless and until (i) March 31,
2000; (ii) the Debtor fails to comply with any of its obligations in this
Stipulation and Consent Order or in the First Consent Order; (iii) a trustee or
an examiner with the power to operate the business of the Debtor is appointed
for the Debtor; (iv) an order is entered converting the Debtor's Chapter 11 case
to a case under Chapter 7 of the Bankruptcy Code; (v) the effective date of a
Chapter 11 plan for the Debtor; or (vi) the sum (the "Total Percentage") of (x)
the spread indicated by Morgan Stanley Dean Witter for generic BB rated 10-year
conduit CMBS as displayed on Bloomberg's pricing page "MSCM" plus (y) the bid
side yield on the then current 10-year U.S. Treasury Note as set forth on page
500 of Telerate as of 3:00 p.m., New York City time equals or exceeds thirteen
(13%) percent. If, after one or more of the events described in the previous
sentence of this Paragraph, MLMCI requests additional adequate protection or
files a motion for relief from the automatic stay, the Debtor, the Creditors
Committee, and the Equity Committee shall each have the right to contest MLMCI's
request or motion, and nothing contained herein shall be construed as an
admission by the Debtor, the Creditors Committee, or the Equity Committee that
MLMCI is entitled to receive additional adequate protection or relief from the
automatic stay.
6. ADDITIONAL RELIEF. MLMCI may, at any time after December 6, 1999, in its
sole and absolute discretion, notify the Debtor, the Creditors Committee, and
the Equity Committee that it is seeking a hearing to determine whether it is
entitled to the additional relief set forth in Paragraphs 7 and 9 of the
Proposed Order. The failure of MLMCI to seek such a hearing shall not in any way
waive, compromise or otherwise alter its rights to later assert or demand that
it is entitled to such benefits as are set forth in Paragraphs 7 and 9 of the
Proposed Order. The Creditors Committee and the Equity Committee reserve their
respective
5
<PAGE>
rights to oppose any assertion or demand by MLMCI that it is entitled to such
benefits as are set forth in Paragraphs 7 and 9 of the Proposed Order, and
nothing in this Stipulation and Consent Order shall impair, preclude, waive,
bar, or estop the respective rights and abilities of the Creditors Committee and
the Equity Committee to so oppose.
7. SECTION 507(b). MLMCI shall be entitled to whatever rights it may have,
if any, under Section 507(b) of the Bankruptcy Code.
8. CORE PROCEEDING. The subject of this Stipulation and Consent Order is a
"core" proceeding within the meaning of 28 U.S.C. Section 157. This Stipulation
and Consent Order is a final order of the Bankruptcy Court, immediately
appealable and valid and fully effective upon its entry.
9. CONSTRUCTION. The captions in this Stipulation and Consent Order are for
convenience of reference only and shall not affect the construction or
interpretation of any of the provisions hereof.
6
<PAGE>
Let the Clerk forward copies of this Stipulation and Consent
Order to counsel whose names and addresses appear below.
SO ORDERED this _____ day of November 1999.
---------------------------------------------
Duncan W. Keir, Judge
United States Bankruptcy Court
CONSENTED AND AGREED TO:
---------------------------------------------
David R. Kuney, Esq. MFB # 07980
BROWN & WOOD LLP
1666 K Street, NW
Washington, DC 20006-1208
202-533-1300
and
A. Robert Pietrzak, Esq.
William M. Goldman, Esq.
Andrew W. Stern, Esq.
Maria D. Melendez. Esq.
BROWN & WOOD LLP
One World Trade Center
New York, New York 10048-0557
212-839-5300
Co-Counsel for Merrill Lynch Mortgage
Capital, Inc.
7
<PAGE>
---------------------------------------------
Richard L. Wasserman, Esq. MFB#02784
Gregory A. Cross, Esq. MFB#04571-G
VENABLE, BAETJER AND HOWARD, LLP
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, MD 21201
410-244-7400
Counsel for the Debtor, CRIIMI MAE Inc.
---------------------------------------------
Michael St. Patrick Baxter, Esq. MFB# 9694
Dennis S. Auerbach, Esq. MFB# 09290
COVINGTON & BURLING
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044-7566
202-662-6000
Counsel to the Official Committee of Equity
Security Holders of CRIIMI MAE Inc.
---------------------------------------------
Daniel M. Lewis, Esq. MFB# 02998
Michael Bernstein, Esq. MFB# 10406
ARNOLD & PORTER
555 Twelfth Street, NW
Washington, DC 20004-1206
Counsel for the Official Committee of
Unsecured Creditors.
8
<PAGE>
cc: Office of the United States Trustee
6305 Ivy Lane, Suite 600
Greenbelt, MD 20770
David R. Kuney, MFB # 07980
BROWN & WOOD LLP
1666 K Street, NW
Washington, DC 20006-1208
202-533-1300
A. Robert Pietrzak, Esq.
William M. Goldman, Esq.
Andrew W. Stern, Esq.
Maria D. Melendez. Esq.
BROWN & WOOD LLP
One World Trade Center
New York, New York 10048-0557
Richard L. Wasserman, Esq.
VENABLE, BAETJER AND HOWARD, LLP
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, MD 21201
Daniel M. Lewis, Esq.
Michael Bernstein, Esq.
ARNOLD & PORTER
555 Twelfth Street, NW
Washington, DC 20004-1206
9
<PAGE>
Exhibit 99(ee)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
In re: *
CRIIMI MAE INC., et al., *
Bankruptcy No. 98-2-3115-DK
* (Chapter 11)
Debtors. (Jointly Administered)
*
* * * * * * * * * *
CRIIMI MAE INC., *
Plaintiff, * Adversary Proceeding No.
98-1565-DK
v. *
MORGAN STANLEY & CO. *
INTERNATIONAL LIMITED,
*
Defendant.
*
* * * * * * * * * *
STIPULATION AND CONSENT
ORDER REGARDING ADVERSARY PROCEEDING
Upon the consent of CRIIMI MAE Inc. (the "Debtor" or "CMI"),
Morgan Stanley & Co. International Limited ("MSIL"), the Official Committee of
Equity Security Holders (the "Equity Committee") and First Union National Bank
("First Union") to the relief set forth in this Stipulation and Order and upon
the stipulation by the Debtor, MSIL, the Equity Committee and First Union, the
Court finds that:
A. Proper notice hereof has been given to the United States Trustee, to the
Equity Committee and the Official Committee of Unsecured Creditors of CMI
(the "Unsecured Committee") and to other necessary parties pursuant to Fed.
R. Bankr. R. 2002.
<PAGE>
B. As of the date the Debtor filed its petition for relief herein, October 5,
1998, the Debtor and MSIL were parties to a Master Repurchase Agreement
dated May 8, 1998 (the "Repurchase Agreement").
C. On October 20, 1998, CMI filed this Adversary Proceeding against MSIL (the
"Adversary Proceeding"). The complaint in the Adversary Proceeding alleges,
INTER ALIA, that MSIL violated the automatic stay and sought, INTER ALIA,
turnover of the following mortgage-backed securities:
(i) certain CRIIMI MAE Commercial Mortgage Trust, Series 1998-C1, Class B
and C Certificates (collectively, the "BBB Bonds"); and
(ii) certain Morgan Stanley Capital I Inc., Series 1998-WF2, Class F, G, H,
J, K, L and M Certificates (collectively, the "Wells Fargo Bonds").
The Wells Fargo Bonds together with the Unrated Bond (as defined in
Paragraph 9 below), are collectively referred to herein as the
"Bonds."
D. Pursuant to that certain Stipulation and Consent Order Regarding
Adversary Proceeding entered by this Court on January 26, 1999, the
BBB Bonds were sold as contemplated thereby and all claims relating to
the BBB Bonds were released.
E. MSIL denies the substantive allegations of the complaint, and contends
that it is the rightful owner of the Bonds pursuant to the terms of
the Repurchase Agreement and provisions of the Bankruptcy Code, and
that it is entitled to all distributions on the Bonds.
F. The intent and purpose of this Stipulation and Order is to resolve the
Adversary Proceeding and to provide for the disposition of the Bonds
pursuant to and in accordance with the terms and conditions of this
Stipulation and Order.
G. CMI believes that the settlement reflected herein is in the best
interests of the Debtor and its estate and is justified under Rule
9019 of the Federal Rules of Bankruptcy Procedure.
NOW, THEREFORE, it is hereby ORDERED that:
2
<PAGE>
1. EFFECTIVE DATE. The terms of this Stipulation and Order shall be
effective, and the parties shall be authorized to act in accordance
herewith, from and after the earlier of (a) the date that this
Stipulation and Order shall have become final and nonappealable and
(b) the date that MSIL, in its sole discretion, shall have waived the
requirement that this Stipulation and Order has become final and
nonappealable (the date on which this Stipulation and Order becomes
effective being referred to herein as the "Effective Date").
2. THE TRANSACTION. Not later than three business days after the
Effective Date (the "Transaction Period"), MSIL shall confirm its
ownership interest in (in the Debtor's view, purchase) the Wells Fargo
Bonds and shall purchase the Unrated Bond (such confirmation and
purchase being referred to as the "Transaction" hereunder) by the
application, in accordance with paragraph 3 below, of the Agreed
Proceeds of the Transaction (as defined in Exhibit A hereto). The
Court hereby finds that the Transaction is authorized under Section
363(b) of the Bankruptcy Code and is entered into by MSIL in "good
faith" within the meaning of Section 363(m) of the Bankruptcy Code.
3. CONSUMMATION OF TRANSACTION. The Transaction shall be effectuated by
MSIL tendering to CMI and First Union written notice (the "Transaction
Notice"), which notice shall be irrevocable once given and shall be
transmitted by facsimile, that the Transaction shall be consummated
for the Agreed Proceeds (the exact amount of which shall be specified
in the Transaction Notice) on the next succeeding business day (such
next day, the "Transaction Date"). The Transaction shall be effective
as of the Transaction Date and MSIL shall, as of such date, have sole
and exclusive right, title and interest in and to the Bonds free and
clear of any and all
3
<PAGE>
claims, interests, liens and encumbrances, whether asserted by CMI or
any other party. Upon consummation of the Transaction, CMI and First
Union shall take such steps as may be reasonably necessary and shall
provide MSIL with such documents as it may reasonably request to fully
effectuate the Transaction as contemplated hereby.
(b) On the Transaction Date, the Agreed Proceeds shall be allocated
by MSIL as follows:
(i) until the MSIL Amount (as hereinafter defined) is reduced to
zero, all Agreed Proceeds shall be retained by MSIL and
applied to reduce the MSIL Amount), and
(ii) after the MSIL Amount has been reduced to zero, all further
Agreed Proceeds shall be remitted by MSIL to CMI.
(c) For purposes of this Stipulation, "MSIL Amount" at any time means
(i) $37,980,364 (the "January 1 Base Amount") which is the
agreed amount of the MSIL claim as of January 1, 2000
(including interest on MSIL's claim under the Repurchase
Agreement from October 7, 1998 through January 1, 2000 at
the pricing rate of interest (which is a non-default rate)
calculated on a 360-day-per-year basis for the actual number
of days in accordance with the Repurchase Agreement (the
"Pricing Rate") and less the amount of the distributions
received by MSIL (which amounts were credited monthly)
between October 7, 1998 and December 31, 1999 in respect of
the Bonds), plus
(ii) interest for each day after January 1, 2000 at the Pricing
Rate on the January 1 Base Amount, minus
(iii) the aggregate amount of all distributions in respect of the
Bonds received by MSIL after January 1, 2000 and prior to
the date of the Transaction.
4. HEDGE PROFITS OR LOSSES. To the extent either of CMI or MSIL has, from
time to time, entered into interest rate or other hedge agreements
with third parties with
4
<PAGE>
respect to the Bonds, each of CMI and MSIL shall be responsible for
all losses, and shall have the right to retain any profits, arising
out of any such agreements to which they are party.
5. SUSPENSION OF LITIGATION. MSIL's time to respond to the complaint
filed in this Adversary Proceeding shall be extended until 10 business
days after termination of the Transaction Period. While this
Stipulation remains in effect, no party will take any action in this
Adversary Proceeding with respect to the Wells Fargo Bonds.
6. DISMISSAL AND RELEASES. On and as of the date MSIL consummates the
Transaction, (i) CMI and MSIL (and their respective predecessors,
successors, affiliates, agents, officers, directors and employees)
shall be deemed irrevocably released from any and all claims that
were, or could have been, asserted in the Adversary Proceeding or
otherwise in connection with the Bonds and (ii) the Adversary
Proceeding shall be deemed dismissed with prejudice. CMI shall, within
five business days after the date of the Transaction, file a pleading
and take such steps as are necessary formally to dismiss this
Adversary Proceeding with prejudice.
7. OTHER TERMINATION EVENTS. The parties hereto acknowledge the MSIL (or
its designees) is currently conducting due diligence in connection
with the Bonds and therefore agree that, at any time prior to the date
that is 21 days after the date the Stipulation and Order is filed with
the Bankruptcy Court (having been signed by all of the parties
hereto), MSIL may, in its sole discretion, elect to terminate this
Stipulation and Order by delivering written notice of such termination
to CMI, whereupon (a) this Stipulation and Order shall terminate and
be void and of no further force and effect and (b) CMI will promptly
notify the Bankruptcy Court
5
<PAGE>
that, in light of such termination, the hearing will not be
proceeding. Moreover, if (x) a hearing on this Stipulation and Order
shall not have been held on or before the thirtieth day after it is
executed by MSIL or (y) the Effective Date shall not have occurred
within 10 business days after the date that the Bankruptcy Court "So
Orders" this Stipulation and Order, MSIL may, at any time thereafter
and in its sole discretion, elect to terminate this Stipulation and
Order by delivering a written notice of such termination to CMI,
whereupon this Stipulation and Order shall terminate and be void and
of no further force and effect.
8. EFFECT OF TERMINATION. In the event this Stipulation and Order is
terminated, each party shall be deemed to have reverted NUNC PRO TUNC
to its respective status as of the date and time immediately prior to
the execution of this Stipulation, and CMI and MSIL shall be entitled
to proceed in all respects as if this Stipulation and Order had not
been executed and without prejudice in any way as a result of the
negotiation or terms of this Stipulation and Order (none of which
shall be admissible in any subsequent legal proceeding).
9. UNRATED BOND. First Union holds that certain unrated bond known as the
Morgan Stanley 1998 WF2, Class N Bond (the "Unrated Bond") in a
custodial account and asserts a security interest in such Unrated
Bond. CMI, the Unsecured Committee and the Equity Committee strongly
dispute the asserted security interest of First Union. By becoming a
party hereto, First Union consents to the Transaction. First Union
shall deliver the Unrated Bond to MSIL on the Transaction Date, and,
upon consummation of the Transaction, MSIL shall have sole and
exclusive right, title and interest in and to the Unrated Bond, free
and clear of any liens, claims or encumbrances of any kind and First
Union shall neither have nor assert any claims
6
<PAGE>
of any kind against MSIL arising out of the Transaction. As
consideration for the release by First Union of any and all claims, if
any, to the Unrated Bond (which release is acknowledged by First
Union's signature affixed hereto), CMI (x) shall deposit $1.66 million
on the date First Union tenders the Unrated Bond to MSIL in a
segregated, interesting-bearing account or other investment of funds
acceptable to CMI, First Union, the Unsecured Committee and the Equity
Committee (the "Account") pending resolution of First Union's claim
and (y) acknowledges that First Union's lien claim with respect to the
Unrated Bond shall, pending further order of the Bankruptcy Court,
attach to the funds in the Account to the same extent, if any, and
with the same validity, if any, such claim had with respect to the
Unrated Bond.
10. JURISDICTION OF BANKRUPTCY COURT. MSIL reserves its rights to contest
jurisdiction and any other matter arising in the Bankruptcy Court and
CMI reserves all of its rights with respect thereto.
11. BINDING EFFECT. The terms and provisions of this Stipulation and Order
shall be binding on all parties in interest, the signatories hereto
and on any trustee appointed in this case or in any chapter 7 case to
which this chapter 11 case may be converted.
12. CORE PROCEEDING. This Stipulation and Order is a "core" proceeding
within the meaning of 28 U.S.C.157. This Stipulation and Order is a
final order of the Bankruptcy Court and is immediately valid,
effective and appealable.
13. CONSTRUCTION. The captions in this Stipulation and Order are for
convenience of reference only and shall not affect the construction or
interpretation of any of the provisions hereof.
7
<PAGE>
Let the Clerk forward copies of this Stipulation and Order to counsel
whose names and addresses appear below.
SO ORDERED this _________day of ____________, 2000.
----------------------------
DUNCAN W. KEIR
United Stated Bankruptcy Judge
8
<PAGE>
CONSENTED AND AGREE TO:
- ------------------------ ----------------------
Richard E. Wasserman, Esquire Stanley J. Reed, Esquire
(Federal Bar No. 02784) (Federal Bar No. 00315)
Gregory A. Cross, Esquire Lauri Cleary, Esquire
(Federal Bar No. 04571-G) (Federal Bar No. 06599)
Venable, Baetjer and Howard, LLP Tamara A. Stoner, Esquire
1800 Mercantile Bank & Trust Building (Federal Bar No. 08014)
2 Hopkins Plaza 3 Bethesda Metro Center
Baltimore, Maryland 21201 Suite 380
(410) 244-7400 Bethesda, Maryland 20814
(301) 986-1300
Co-Counsel for CRIIMI MAE Inc. Of Counsel:
Thomas P. Ogden, Esquire
Anne Betsy Howe, Esquire
Barbara D. Diggs, Esquire
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Counsel for Defendant
Morgan Stanley & Co.
International Limited
- ----------------------------
Michael St. Patrick Baxter, Esquire
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044
Counsel for Official Committee of Equity
Security Holders
- ----------------------------
John F. Horstmann, Esquire
Duane, Morris & Heckscher
1 Liberty Place
Philadelphia, Pennsylvania 19103
Counsel for First Union National Bank
9
<PAGE>
Richard L. Wasserman, Esquire
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Thomas P. Odgen, Esquire
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Stanley J. Reed, Esquire
3 Bethesda Metro Center, Suite 380
Bethesda, Maryland 20814
Daniel M. Lewis, Esquire
Arnold and Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
Michael St. Patrick Baxter, Esquire
Covington and Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044
Clifford J. White, III, Esquire
Assistant U.S. Trustee
Office of U.S. Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
Stanley J. Samorajczyk, Esquire
Akin, Gump, Strauss, Hauer & Feld, LLP
Suite 400
1333 New Hampshire Avenue, N.W.
Washington D.C. 20036
<PAGE>
EXHIBIT A
For purposes of the calculation of Agreed Proceeds, the "Published
Spread Report" shall mean the most recently published Morgan Stanley
Dean Witter Fixed Income Research Strategy Report entitled "CMBS" as
of the date MSIL tenders the Transaction Notice.
The Agreed Proceeds shall be $45,979,219 (a) minus $25,000 for each
basis point by which the"spread" listed for 10-year fixed rate BB CMBS
conduit bonds in the Published Spread Report exceeds 525, (b) minus
$8,145 for each basis point by which the "spread" listed for 10-year
fixed rate B CMBS conduit bonds in the Published Spread Report exceeds
815, (c) plus $25,040 for each basis point by which 525 exceeds the
"spread" listed for 10-year fixed rate BB CMBS conduit bonds in the
Published Spread Report, (d) plus $8,145 for each basis point by which
815 exceeds the "spread" listed for 10-year fixed rate B CMBS conduit
bonds in the Published Spread Report.
10
<PAGE>
Exhibit 99(ff)
UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
GREENBELT DIVISION
In re: :
:
CRIIMI MAE INC., : Bankruptcy Case Nos. 98-23115-DK
CRIIMI MAE MANAGEMENT, INC., and : through 98-23117-DK
CRIIMI MAE HOLDINGS II, L.P., :
:
Debtors. :
:
: Chapter 11
SECOND STIPULATION AND AGREED ORDER
(I) AUTHORIZING USE OF CASH
COLLATERAL AND (II) GRANTING OTHER RELIEF
This Second Stipulation and Agreed Order (the "Second Stipulation") is
entered into this 18th day of February, 2000 by and among CRIIMI MAE Inc. ("CMI"
or the "Debtor"), First Union National Bank ("FUNB"), and the Official Committee
of Unsecured Creditors of CMI (the "Creditors' Committee").
BACKGROUND
A. On October 5, 1998 (the "Petition Date"), CMI, CRIIMI MAE
Management, Inc. ("Management") and CRIIMI MAE Holdings II, L.P. ("Holdings"
and, collectively with CMI and Management, the "Debtors") commenced the
above-captioned cases by filing voluntary petitions for relief under chapter 11
of title 11 of the United States Bankruptcy Code (the "Bankruptcy Code");
B. On July 1, 1999, FUNB entered into a Stipulation and Agreed Order
(i) Authorizing Use of Cash Collateral and (ii) Granting Other Relief (the
"First Cash Collateral Order") with CMI and the Creditors' Committee. The
statements, agreements, stipulations and provisions of the First Cash Collateral
Order are incorporated herein by reference. Capitalized terms not expressly
defined in this Second Stipulation shall have the meanings which those terms
have in the First Cash Collateral Order;
<PAGE>
C. CMI, the Creditors Committee and FUNB desire to extend the terms,
agreements, stipulations and provisions of the First Cash Collateral Order to
and including March 31, 2000, subject to the terms hereof;
1. NOW, THEREFORE, in consideration of the mutual promises set forth in
the First Cash Collateral Order and in this Second Stipulation, the parties
hereto stipulate and agree and the Court finds and orders as follows:
2. REAFFIRMATION. All of the terms contained in the First Cash
Collateral Order are hereby reaffirmed and, to the extent expressly provided
herein, amended as provided in this Second Stipulation.
3. APPLICATION OF THE FUTURE FUNB ASSIGNMENT INCOME. Effective as of
January 1, 2000 and continuing each month until March 31, 2000, FUNB shall apply
the Future FUNB Assignment Income in the manner as provided in paragraph 5 of
the First Cash Collateral Order.
4. APPLICATION OF THE FUTURE CMI ASSIGNMENT INCOME. Continuing each
month until March 31, 2000, CMI shall make the payments of Future CMI Assignment
Income to FUNB and retain the Debtor's Assignment Income Share, as provided in
paragraph 6 of the First Cash Collateral Order. Use of the Debtor's Assignment
Income Share shall be limited as provided in paragraph 7 of the First Cash
Collateral Order. FUNB shall be entitled to apply the Future FUNB Assignment
Income, its share of the Future CMI Assignment Income and the Additional
Assignment Interest Shortfall in the manner specified in the First Cash
Collateral Order, as amended hereby.
5. STANDSTILL PERIOD. The termination of the Standstill Period as
provided in Section 9 of the First Cash Collateral Order is extended from
December 31, 1999 to March 31, 2000. FUNB's right to refile the Motion for
Relief (as provided in paragraph 9D of the First Cash Collateral Order) is
modified to the earlier of: termination of the Standstill Period or March 1,
2000; provided that no preliminary or final hearing is sought before March 31,
2000. The provisions allowing the taking of discovery in connection with the
Motion for Relief contained in
-2-
<PAGE>
paragraph 9D(ii) are changed from November 15, 1999 to February 17, 2000, with a
completion date of March 24, 2000.
6. TREATMENT OF THE MANAGEMENT LOAN COLLATERAL AND THE MANAGEMENT LOAN
COLLATERAL PROCEEDS. All of the provisions of the First Cash Collateral Order
relating to the Management Stipulation, the Management Loan Collateral Proceeds
and the Management Loan Collateral, including, without limitation, the
provisions of paragraph 9 of the First Cash Collateral Order are hereby
reaffirmed and the operation and effectiveness of these provisions are continued
through and including March 31, 2000.
7. TERMINATION OF THE STANDSTILL PERIOD. The rights of FUNB to
terminate the Standstill Period, as provided in Section 9 of the First Cash
Collateral Order shall continue in effect.
8. THE SAFEKEEPING SECURITIES. The following sentence is added to the
last sentence of paragraph 10 of the First Cash Collateral Order: "; PROVIDED,
HOWEVER, that notwithstanding the agreement by the Debtor, the Creditors'
Committee and FUNB not to file an action seeking the turnover of either the
Safekeeping Securities or the Safekeeping Account Income during the Standstill
Period, the Debtor may file a motion or motions to seek to sell or otherwise
dispose of any or all of the Safekeeping Securities pursuant to an order of the
Court, but only if the Debtor meets all of the conditions specified either in
(x) or (y) in the following three (3) sentences of this paragraph 10. (x) The
Debtor shall agree, in the motion(s), and request the Court to order that any
and all liens of FUNB in and rights of FUNB to the Safekeeping Securities shall
attach to cash in an amount agreed to by the Debtor, FUNB, the Creditors'
Committee and the Equity Committee of CMI, which cash shall be deposited into a
segregated account at FUNB. If the Safekeeping Securities are proposed to be
sold or otherwise disposed of for non-cash consideration, the non-cash
consideration must be acceptable to FUNB, the Creditors' Committee and the
Equity Committee of CMI, which consideration shall be deposited into a
segregated account at FUNB or solely under the control of FUNB. (y) If, after
consultation between the Debtor and FUNB, the Debtor and FUNB are not able or
willing to agree on the cash and/or non-
-3-
<PAGE>
cash consideration to be deposited with FUNB, the Debtor will be permitted to
proceed pursuant to the provisions of section 363 of the Bankruptcy Code so long
as any and all liens of FUNB in and rights of FUNB as to the Safekeeping
Securities to be sold attach solely to the proceeds of the sale of such
Safekeeping Securities. FUNB reserves all of its rights to object to such sale
or disposition under section 363. Nothing contained herein limits in any way
FUNB's right to be heard at any hearing on Debtor's motion(s) or to limit in any
way FUNB's right to respond to Debtor's motion(s).
9. The purpose of the procedures set forth herein is to preserve, to
the greatest extent possible, the status quo of all of the parties respective
rights in the Safekeeping Securities.
10. The foregoing provisions of this paragraph 10 limiting the Debtor's
ability to sell the Safekeeping Securities and preserving FUNB's rights to be
heard at any hearing on such
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
-4-
<PAGE>
sale(s) shall not apply if the sale of the Morgan Stanley Safekeeping Securities
is made in accordance with Schedule 10 attached hereto and incorporated herein
by reference.
11. All of the terms, provisions and stipulations contained in the
First Cash Collateral Order which are not modified or affected by this Second
Stipulation are hereby reaffirmed and the operation and effectiveness thereof
are continued through and including March 31, 2000.
12. The captions in the Second Stipulation are for convenience of
reference only and shall not affect the construction or interpretation of any of
the provisions hereof.
Consented to:
AKIN, GUMP, STRAUSS, HAUER
& FELD, LLP
By: ________________________________
Stanley J. Samorajczyk, P.C.
Michael S. Stamer
Mark D. Taylor (Md. Fed. Bar #013418)
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
(202) 887-4000
Co-Counsel for CRIIMI MAE
Inc.
DUANE, MORRIS & HECKSCHER LLP
By: __________________________________
John F. Horstmann, Esquire
One Liberty Place
Philadelphia, PA 19103-7396
(215) 979-1504
Counsel for First Union National Bank
-5-
<PAGE>
ARNOLD & PORTER
By: ______________________________________
Daniel M. Lewis
555 12th Street N.W.
Washington, D.C. 20004
(202) 942-5000
Counsel for Official Committee of Unsecured
Creditors of CMI
So Ordered this _________ day of _____________________ 2000
- --------------------------------------------
Hon. Duncan Keir
United States Bankruptcy Judge
-6-
<PAGE>
Exhibit 99(gg)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
In re: *
CRIIMI MAE INC., et al., *
Bankruptcy No. 98-2-3115-DK
* (Chapter 11)
Debtors. (Jointly Administered)
*
* * * * * * * * * *
CRIIMI MAE INC., *
Plaintiff, * Adversary Proceeding No.
98-1565-DK
v. *
MORGAN STANLEY & CO. *
INTERNATIONAL LIMITED,
*
Defendant.
*
* * * * * * * * * *
STIPULATION OF DISMISSAL WITH PREJUDICE
CRIIMI MAE Inc., the Debtor-in-Possession herein and Morgan
Stanley & Co. International Limited, by and through their respective undersigned
counsel, hereby stipulate and agree pursuant to Fed. R. Bankr.
<PAGE>
P. 7041(a)(1)(ii) that the above-captioned adversary proceeding (No. 98-1565-DK)
should be dismissed with prejudice.
- -------------------------------- ------------------------------
Richard L. Wasserman Stanley J. Reed
(Federal Bar No. 02784) (Federal Bar No. 00315)
Gregory A. Cross Lauri Cleary
(Federal Bar No. 04571-G) (Federal Bar No. 06599)
Venable, Baetjer and Howard, LLP Tamara A. Stoner
1800 Mercantile Bank & Trust Bldg. (Federal Bar No. 08014)
2 Hopkins Plaza 3 Bethesda Metro Center
Baltimore, Maryland 21201 Suite 380
(410) 244-7400 Bethesda, Maryland 20814
(301) 986-1300
Co-Counsel for CRIIMI MAE Inc. Of Counsel:
Thomas P. Ogden, Esquire
Anne Berry Howe, Esquire
Barbara D. Diggs, Esquire
Marshall Huebner, Esquire
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Counsel for Defendant
Morgan Stanley & Co.
International Limited
SO ORDERED this ________ day of March, 2000.
-----------------------------------
DUNCAN W. KEIR
United States Bankruptcy Judge
2
<PAGE>
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this ________ day of March, 2000,
copies of the foregoing Stipulation of Dismissal with Prejudice were mailed,
first-class, postage prepaid, to:
Daniel M. Lewis, Esquire
Arnold and Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
Michael St. Patrick Baxter, Esquire
Covington and Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044
Clifford J. White, III, Esquire
Assistant U.S. Trustee
Office of U.S. Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
Stanley J. Samorajczyk, Esquire
Akin, Gump, Strauss, Hauer & Feld, LLP
Suite 400
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
------------------------------
Gregory A. Cross
3
<PAGE>
Exhibit 99(hh)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
CRIIMI MAE INC., et al., * 98-2-3115-DK
(Chapter 11)
Debtors. * (Jointly Administered)
* * * * * *
CRIIMI MAE INC., *
Plaintiff, *
v. *
MORGAN STANLEY & CO. *
INTERNATIONAL LIMITED, Adversary Proceeding
* No. 98-1565-DK
Defendant.
*
* * * * * * * * * *
STIPULATION EXTENDING WELLS FARGO STANDSTILL
CRIIMI MAE Inc. ("CRIIMI MAE") and Morgan Stanley & Co.
International Limited ("MSIL"), by their undersigned counsel, hereby stipulate
and agree pursuant to paragraph two of the Stipulation and Consent Order
Regarding Adversary Proceeding among CRIIMI MAE, MSIL and the Official Committee
of Unsecured Creditors of CRIIMI MAE that the Wells Fargo Standstill Period
shall be extended up through and including March 5, 2000.
- -------------------------------- ----------------------------
Richard L. Wasserman, Esquire Thomas P. Ogden, Esquire
(Federal Bar No. 02784) Anne Berry Howe, Esquire
Gregory A. Cross, Esquire Barbara D. Diggs, Esquire
(Federal Bar No. 04571-G) Davis Polk & Wardwell
Venable, Baetjer and Howard, LLP 450 Lexington Avenue
1800 Mercantile Bank & Trust Bldg. New York, New York 10017
2 Hopkins Plaza (212) 450-4000
Baltimore, Maryland 21201
(410) 244-7400 Of Counsel for Defendant
Morgan Stanley & Co.
Co-Counsel for CRIIMI MAE Inc. International Limited
<PAGE>
Stanley J. Reed, Esquire
(Federal Bar No. 00315)
Lauri Cleary, Esquire
(Federal Bar No. 06599)
Tamara A. Stoner, Esquire
(Federal Bar No. 08014)
Lerch, Early & Brewer, Chartered
3 Bethesda Metro Center, Suite 380
Bethesda, Maryland 20814
(301) 986-1300
Counsel for Defendant
Morgan Stanley & Co.
International Limited
2
<PAGE>
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this ____ day of January, 2000 a copy
of the foregoing Stipulation Extending Wells Fargo Standstill was sent by first
class mail, postage prepaid to:
Thomas P. Ogden, Esquire
Davis Polk & Wardell
450 Lexington Avenue
New York, New York 10017
Stanley J. Reed, Esquire
3 Bethesda Metro Center, Suite 380
Bethesda, Maryland 20814
Daniel M. Lewis, Esquire
Michael Bernstein, Esquire
Arnold and Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
Michael St. Patrick Baxter, Esquire
Covington and Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044
Clifford J. White, III, Esquire
Assistant U.S. Trustee
Office of U.S. Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
Stanley J. Samorajczyk, Esquire
Akin, Gump, Strauss, Hauer & Feld, LLP
Suite 400
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
---------------------------------------
Gregory A. Cross
3
<PAGE>
Exhibit 99(ii)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
CRIIMI MAE INC., et al., * 98-2-3115-DK
(Chapter 11)
Debtors. * (Jointly Administered)
* * * * * * * * * * * * * *
CRIIMI MAE INC., *
Plaintiff, *
v. *
MORGAN STANLEY & CO. *
INTERNATIONAL LIMITED, Adversary Proceeding
* No. 98-1565-DK
Defendant.
*
* * * * * * * * * * * * * * * * * * * * * * * * * * *
STIPULATION AND ORDER
REGARDING PROCEEDS RECEIVED BY THE DEBTOR
FROM THE SALE OF THE WELLS FARGO BONDS
It is hereby stipulated and agreed by and between CRIIMI MAE
Inc. (the "Debtor" or "CMI"), the Official Committee of Unsecured Creditors of
CMI (the "Unsecured Committee") and the Official Committee of Equity Security
Holders of CMI (the "Equity Committee") as follows:
1. The Debtor agrees that all proceeds received by it from
Morgan Stanley & Co. International Limited ("MSIL") from MSIL's purchase of the
Wells Fargo Bonds (as that term is defined in the Stipulation and Consent Order
Regarding Adversary Proceeding that was
<PAGE>
filed in the above-captioned adversary proceeding on February 1, 2000,
hereinafter referred to as the "MSIL Stipulation and Consent Order") shall be
deposited by the Debtor in a segregated, interest-bearing account or other
investment of funds acceptable to the Debtor, the Unsecured Committee and the
Equity Committee. Such proceeds, together with all earnings thereon, are
hereinafter referred to as the "MSIL Net Proceeds."
2. The MSIL Net Proceeds can be used by the Debtor for
purposes of funding its Chapter 11 plan of reorganization.
3. Subject to the provisions of paragraph 4 hereof, the Debtor
agrees to give the Unsecured Committee and the Equity Committee not less than 30
days prior written notice through their respective counsel before the Debtor
uses any of the MSIL Net Proceeds in any manner except for Chapter 11 plan
purposes as provided in paragraph 2 above.
4. Except for plan purposes as provided in paragraph 2 above,
the Debtor agrees not to use any of the MSIL Net Proceeds without the consent of
the Unsecured Committee and the Equity Committee for the following purposes: (i)
originating commercial mortgage loans, (ii)
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<PAGE>
purchasing mortgage loans or mortgage-backed securities, or (iii) payment of
dividends.
The foregoing Stipulation is hereby SO ORDERED this ____
day of February, 2000.
------------------------------------
DUNCAN W. KEIR
United States Bankruptcy Judge
- ------------------------------------ -----------------------------------
Gregory A. Cross, Esquire Daniel M. Lewis, Esquire
Federal Bar No. 04571-G Michael L. Bernstein, Esquire
Venable, Baetjer and Howard, LLP Arnold & Porter
1800 Mercantile Bank & Trust Bldg. Thurman Arnold Building
2 Hopkins Plaza 555 Twelfth Street, N.W.
Baltimore, Maryland 21201 Washington, D.C. 20004-1202
410-244-7400 202-942-5000
Co-Counsel for CRIIMI MAE Inc. Counsel for the Official
Committee of Unsecured
Creditors
- ------------------------------------
Michael St. Patrick Baxter, Esquire
Covington and Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044-7566
202-662-6000
Counsel for the Official
Committee of Equity Security
Holders
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